The Snowcrash Scenario

1. What is the Snowcrash Scenario
Neal Stephenson's novel Snowcrash takes place in the near future, after hyperinflation has destroyed the value of the dollar, everybody has simply quit paying taxes, the government has thus become ineffectual and basically disbanded, and the US has become anarcho-capitalist. Life goes on without government. People live in gated communities, with private security agencies. Corporations still sell goods and services (including now, police protection and roads) and hire people. By some accounts, anarcho-capitalism has worked much better in Somalia than anything the Somalians had before, or most of the rest of Africa has had since, and starting in an advanced country like the US, anarcho-capitalism might work remarkably well, as discussed from an academic perspective in David Friedman's classic: The Machinery of Freedom (also highly recommended). Stephenson's vision is generally described as "distopic", but if you think about it, in the novel, most people's lifestyles aren't so different from the boom times in 2006, except with no tax burden, no nanny state, and more personal weapons. But leaving aside questions of utopia or distopia, my point is: its become strangely plausible that we will wake up one day and find ourselves in Stephenson's vision, like it or not.

2. When is the Snowcrash Scenario (ie when does the Government run out of money).
The current US debt held by the public is under $7 Trillion or around 50% of GDP. It's been higher (as a share of GDP) as recently as the 90's. But the Feds are going to run a deficit of close to $2T this year, maybe more if congress keeps spending, and, unless the economy recovers bigtime, at least $1T for the following years until something stops them. Obama's announced plan to cut the deficit assumes a vibrant economy and is a firm guaranty that even if we have one, the deficit won't be less than $.5T in 2012. Readers of my essays, eg here and here, will readily understand why I project that actions like the stimulus are going to hamper economic recovery. France had double digit unemployment for most of the last few decades; if you were to turn the US into France when the economy was doing well, we'd have double digit unemployment too. If you do it in a recession, all bets are off. The economy has strong restoring forces, as a general rule, but the financial markets are not projecting optimism.

At the moment, most of the rest of the developed and the developing world is, economically, in even worse shape than we are. The US is the oldest and most stable state, and its debt is regarded as the most (maybe the only) secure investment out there. So the US gov't can borrow at very low rates. The question is, how long that continues.

Lets say, to take one plausible scenario, that two years from now the debt is $11T and the economy has shrunk 4%. At this point, creditors have to be getting worried about the US govt's income stream. Is the US gov't still borrowing at low rates? At some point, interest rates have to rise. 70% of the debt is long term, so it takes a while for higher interest rates to push up the deficit. But its compounding. And its got positive feedback. More deficit is going to imply, higher interest rates, and higher interest rates are going to imply more deficit. If the govt winds up paying 10% on a $10T debt, thats $1T by itself. And markets are forward looking. In the 1970's when interest rates rose, debt was only about 30% of GDP, and we weren't running deficits any where near this size. It won't be sustainable this time around.

At some point after that, you run into the additional problem that, right now, in addition to the $7T debt held by the public, there's also $4T debt held by the Social Security Administration. According to the Treasury, the present value of future income streams minus promised payments is -$7T for SS and -$36T for Medicare . This means, if you live another ten or twenty years, you certainly won't see all the social security you've been promised, or hardly any of the medicare. On the other hand, this isn't stopping the politicians from continuing to extend benefit promises even further, and it seems plausible these deficits will continue to be ignored by the politicians, voters, media, and even the financial markets until the baby boomers start retiring en masse.

My overall conclusion is: we don't see snowcrash in the next few yrs, but sometime 5-10 is possible.

3. To Every Action, A Greater Reaction
There's a well known observation about ecosystems: screw with one at your peril. They are complex dynamic systems. Push one off its equilibrium, and it runs off to some other one which may be far away, with unintended consequences. Economies (in a broad sense, including societies) are complex dynamic systems too, but with some differences that make meddling even more problematic. Left to their own devices, they find a local optimum, not just an equilibrium, so when you hold one off its optimum, its almost guaranteed to find something worse. Also the actors are thinking, motivated agents, who push back on whatever you try to force. So, remarkably often, you wind up actually achieving the opposite of your ends. Ban drugs? You get more crime, harder drugs, arguably more addicts. Fight a war on poverty? You get inner city slums. Try to stimulate the economy by spending Other People's Money? You get a worse recession or depression. Its almost as if an eye for an eye is natural law.

Obama is pushing to greatly increase government. His actions may wind up, via the reaction principle, greatly decreasing it.



Eric Baum
Last modified: Fri Feb 27 07:35:04 EST 2009