Envisioning Economic Collapse Part 3

Parts 1 and 2 of envisioning economic collapse were thought experiments dealing with economic shocks. No distinctions were made between crisis and collapse. Four years later we find the American economy in the midst of a slow motion crisis and facing the very real prospect of collapse. Not only that but talk of America breaking up into separate countries has gone from unread tomes by policy analysts (see Who We Are by Samuel Huntington) and obscure (in America) Russian commentators to the editorial pages of the Wall Street Journal.

Whats going on?

In a nutshell debt, of a very particular quality and character. According to the Congressional Budget Office the country is on the verge of a fiscal crisis. To "save the economy" the federal government not only passed the TARP but the federal reserve took action by purchasing mortgages and other securitized products and/or making loans against them as collateral. These actions in a vacum would not have precipated such a dismal outlook but after decades of deficit (starting with the Carter Administration) spending they have pushed the country to the aformentioned brink of a fiscal crisis.

This is only compounded on a local level where the muncipal debt of states, cities, parrishes, counties, towns and whatever other governing body allowed to assume debt has borrowed to the hilt. The idea of a state bankruptcy law has been making the rounds in congress and numerous exposes' have been penned chronicling the issues facing Illinois, California, New York and other local governments. As governments are forced to raise taxes and provide fewer services simultaneously; their populations decrease lowering revenues and forcing them closer to default.

According to Meredith Whitney, 2011 will be the year of reckoning.