A worst case for the possible US government default

(This is crossposted from Google+. If you use Google+, you scan find the original here.)

Lots of people are scared about the possibility of a US government default. But I have an unusual reason that few share. And many might think me crazy for worrying about one of the things that I worry about. So I'd like to share why I think what I do before I confess to my worry.

Close to a decade ago I read a fascinating book, Wealth and Democracy by Kevin Phillips. SIt is a large book. It is a detailed book. Most of it is a detailed history of when and where great wealth was created in US history, and its effects on the political process. (In a nutshell the conclusion is that periods of great wealth are periods where the wealthy wield great political influence, and conversely periods where the wealthy have less political control saw great declines of wealth disparities.) Don't try reading it unless you can get into the idea of reading close to 500 pages from a policy wonk going on about things that happened a hundred years ago.

Of course if you are able to read it, there is a lot of interesting material there. Kevin Phillips put a lot of effort in, and knows his stuff. He also has a history of making absurd predictions that work out. For instance in 1970 he wrote The Emerging Republican Majority which made the (then) absurd prediction that white Southerners who reflexively voted against the Republicans because of their role in the Civil War, were about to switch to the Republican party. Nixon followed the strategy that Phillips outlined, and they eventually did. In 1990, when Bush Sr had the highest approval rating of any president ever, Phillips wrote The Politics of Rich and Poor: Wealth and Electorate in the Reagan Aftermath which argued that Bush was vulnerable. Clinton later said that he used it as his election plan.

So what absurd prediction did he make in Wealth and Democracy? Well here is it as best as I remember it. In the last 400 years there have been three other examples of a country that was the sole global superpower. (Spain, the Netherlands, and England.) All three followed a remarkably similar trajectory. All had a major boom that was more based on financial speculation than real production. During this bubble, actual production was outsourced to other countries. This bubble crashed. A couple of years later all three got into a foreign adventure that was supposed to be quick and easy. Said foreign adventure turned out to be much longer and more costly than predicted. Parallel to this there was a "recovery" in which average people didn't really get much ahead. During this period there was even more outsourcing of real production. That ended in a credit crisis some 7-8 years later. Following the credit crisis there was a paper recovery whose effects weren't widely felt. That was not many years later followed by a second financial crisis. After the second financial crisis there was growing outrage in the population. Followed, almost exactly 15 years after the peak, by civil war in 2 of the cases. In the case of England there was civil unrest, but it was overwhelmed by WW I. The outcome was the establishment of a third major political party, Labour.

Incidentally in all three cases one of the countries that production and industrial knowledge was transferred to eventually wound up as the next superpower. Currently the best two candidates for that next superpower role are India and China.

Remember. This was written after the dot com bust, and before the Iraq invasion. Now compare with events of the last decade.

At first I thought, "He did a lot of work, and has a good track record, so I'll not discount it out of hand but I'll keep a lot of skepticism." Ever since then things have played out as predicted, almost like clockwork. I currently see lots of potential triggers for the second financial crisis. So I think that part is likely to play out, and my main hope is that we're more like England with civil unrest than Spain and the Netherlands with an actual civil war. However I have to say that the increasing polarization of the country over the last decade has made civil war much less unthinkable to me as a possibility than it was when I first read the book.

If the next financial crisis is triggered by a political stalemate, that makes me fear that civil war is more likely. Because the event will be one which arrives with already polarized constituencies that each has has a well-articulated story for the crisis that blames the other for not being willing to (cut government|consider any kind of tax). As financial disaster is felt by all, how can tensions fail to escalate along already clearly drawn boundaries? As they escalate, where will it end?

Please, Congress, find a way to compromise. If you fail, trillions of dollars in excess interest payments is the best possible outcome we can hope for. None of us wants to see the worst. Really.