Why The Dam Can Not Break

To the world of 2024,

Today I am writing you as the year 2014 is coming to an end. I have been writing my thoughts publicly and privately for the past decade. It has been incredible to have had discussions with people around the world, brought together by a public writing. I have looked at the world through the lens of history, science, and crowd and individual behavior in regards to money and financial markets.

When the world of 2024 reads these comments, I believe we will ask the simple question, “How had entire societies come to the conclusion that doing things totally opposite at the system level than espoused at the individual level, would continue to lead to more ‘prosperity’, or at least return things to ‘normal'”?

Mises_CA_PrintingMoney Let me give you an idea that today is almost taboo and not open to public discussion in the world of money. If I were to tell you to pay down your debts, start living within your means, and saving for the future, this idea would be accepted across cultures around the world. Yet, as the greatest explosion of debt in human history has occurred in the last 6 years, we seem unwilling to consider how this could possibly have a massively negative impact on ALL of our lives in the future.

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As individuals, we espouse one set of ideas regarding debt; as societies, we accept a totally opposite set of ideas. On the individual level, we have experienced limits to debt. On a societal level, for the last few decades the idea of “unlimited debt” has been commonly accepted as the means to correct the latest financial or economic crisis.

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I am certain by 2024 this will seem very odd. In fact, it will seem complete madness that entire societies could have accepted the idea of “unlimited debt” as the solution to bringing about “stability” and this being the main idea presented as necessary in order to return our lives to “normal”.  However, you must remember that this idea has been the most widely taught idea in economics and finance, embraced by political leaders, and experienced by the public since 1971. Many people know that in 1971, the United States removed it currency, the US dollar, from being backed by gold. Said another way, we were no longer willing to exchange our paper dollars for the gold we held at the national level if another country grew fearful of our spending and debt levels and wanted gold which can not change, versus the promise to pay with even more debt backed paper (now electronic) dollars. This event opened a period in history that no one had ever seen before, and the concept of “unlimited debt”.

Consider these comments from August 15, 1971: A Date Which Has Lived In Infamy in Forbes on  August 14, 2011:

In their impossibly good book Money, Markets, and Sovereignty (2009), Benn Steil and Manuel Hinds make the point that over the last four thousand years, the only period in which humanity has not consistently based its currency in metal, specifically gold, is the last forty.

More on this in the future. For now we return to perception, which is more powerful than reality.

In 2006, I read Dr. Jared Diamond’s book, Collapse: How Societies Choose to Fail or Succeed. Ten years earlier, I would have never read such a book. The stereotype of “that’s just doom and gloom stuff ” would have stopped me. Yet, between 2000 and 2002, my personal and professional life saw enough pain from the collapse of trillions in wealth, that it lead me to seek answers from many sources, whether economic theories or studies on human behavior in crowds. Studying history was always the common theme of these discussions, as it still is today.

Consider this idea from Diamond’s book, which focuses on the environment, not finance. I believe it will help the world of 2024 to better understand the world of 2014.

The final speculative reason that I shall mention for irrational failure to try to solve a perceived problem is psychological denial. …If something that you perceive arouses in you a painful emotion, you may subconsciously suppress or deny your perception in order to avoid the unbearable pain, even though the practical results of ignoring your perception may prove ultimately disastrous.

Then Diamond uses an illustration I have used many times in the last 8 years.

Consider a narrow river valley below a high dam, such that if the dam burst, the resulting flood of water would drown people for a considerably distance downstream. When attitute pollsters ask people downstream of the dam how concerned they are about the dam’s bursting, it’s not surprising that fear of a dam burst is lowest far downstream, and increases among residents increasingly close to the dam. Surprisingly, though, after you get to just a few miles below the dam, where fear of the dam’s breaking is found to be highest, the concern then falls off to zero as you approach the dam. That is, the people living immediately under the dam, the ones most certain to be drowned in a dam burst, profess unconcern. That’s because of psychological denial: the only way of preserving one’s sanity while looking up every day at the dam is to deny the possibility that it could burst.

This seems to be the easiest way, to understand why we have one view of debt for our personal lives, and yet a totally opposing view at the societal and system level.

We have experienced two financial “dam breaks” since the year 2000 in world markets. It has impacted hundreds of millions of lives around the world. Yet, after both breaks, the consensus belief continues even today that, “unlimited debt will bring things back to normal”.

As I write more, I will share with you why I grow more confident that the world of 2024 will be much brighter and different from the world of 2014. I am not merely thinking solely about money, but about our way of life across the globe.

I know, after this post, this may sound like a person in denial. However, after reading so many stories about the pain that has come to people all over the world since the idea of “unlimited debt” began in the 1970s, I have found incredible hope in the writings the Jewish race in ancient history left our modern world today.


A Curious Mind

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