Guest Post: Why Expansionist Central States Inevitably Implode

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Expansionist State is on the path to insolvency and systemic political crisis.

The S-Curve usefully charts the gradual development, explosive rise and eventual stagnation and collapse of complex systems. Remarkably, natural phenomena such as the spread of bacteriological diseases and financial dynamics both follow S-Curves as they mature, stagnate and collapse. I have described the dominant dynamic of our era (1981-present), financialization, with the S-Curve: Financialization's Self-Destruct Sequence (August 16, 2012)
The S-Curve also helps us understand why the Expansionist Central State is doomed to inevitable implosion/collapse. This chart displays the key dynamics:
In its initial "boost phase," State investment in the low-hanging fruit of public infrastructure offers a high yield. Examples include rural electrification, the rapid expansion of the railroad system, the construction of the Interstate Highway system, and the publicly funded research and development of science and technology that enabled the basic protocols and software infrastructure of the world wide web.
These investments of public tax revenues acted as multipliers of private investment and leaps in productivity.
We can see in the chart that modest fiscal deficits when public monies are leveraging fast growth in the overall economy have little consequence, for tax revenues are climbing more or less alongside State expenditures as the economy rapidly expands.
The key dynamic in State spending is this: the allocation of public capital is intrinsically a political process, not a market or communal process. Thus politically powerful cartels and guilds will secure State funding for their vested interests, and potentially higher-value investments will go begging.
This is the opportunity cost of any financial decision: the opportunities left behind in the decision-making must be weighed along with the purported benefits of the chosen avenue of spending.
As the State expands its share and control of the economy, this political allocation of capital and national income also expands. As the State grabs an ever-larger share of the economy and extends its Central Planning to every layer of the economy, the "best game in town" inevitably becomes lobbying the State for funds and perquisites.
Private investment decisions start being made on the basis of State subsidies and tax loopholes rather than market-based metrics. This dynamic is especially pernicious: not only does the State increasing choose to fund projects with diminishing returns as a result of political allocation, the State's expansion of command and control distorts private investment as well.
The Expansionist State thus distorts the investment decisions of the entire economy, public and private. Households don't buy a home because it is a fruitful investment, they buy it to obtain the mortgage interest deduction. Corporations buy medical-supply companies because they see Medicare as low-risk cash-cow, and so on.
State expenditures cease to yield productive returns as spending increasingly goes to politically favored cartels. Did the billions of dollars spent on the B-1 Bomber in the 1980s yield a weapons system that provided leverage amd dominance? No, it was a horrendously costly and inefficient jobs project, with the defense cartel skimming millions of dollars off a program that had been terminated by those who realized the money would be better spent on other defense needs.
Has higher education improved dramatically as a result of the vast increase in spending on higher education? Has the health of American improved dramatically as a result of the vast increase in spending on healthcare? The answer in both cases is obviously no. Increasing spending simply increases systemic friction and unproductive skimming.
Central State spending has reached the point of negative returns: money is dumped into cartels but the yield on the investment is near-zero. This is the point of stagnation, where spending keeps rising but tax revenues are no longer keeping pace because the State has become an enormous drag on the economy.
Political allocation of the national income knows no bounds. Politically, there are never any limits. If tax revenues aren't keeping pace, then the State must borrow increasing sums of money to fund its spending. Politicians and their State fiefdoms/private-sector masters, the cartels of finance, defense, healthcare, education, construction, etc. are screaming for more funding; where it comes from is secondary to easing the political pain.
So the political class raises taxes on all but the parasitic class (finance) and wealthy cartels and corporations buy loopholes and exclusions to the new taxes. The burden falls on higher income households, who then have less to invest in the private sector.
We are at the inflection point indicated on the chart where the lines cross, just before the crisis: tax revenues are lagging spending in an enormous structural deficit; the State dominates the economy and its spending cannot possibly be contained, due to the political promises made to entitlement constituencies, fiefdoms and cartels, and the drag of unproductive State spending has sent the economy into systemic decline.
Each constituency, cartel and fiefdom is convinced that they are acting in their own best interests in demanding more State funding and subsidies. As a result, they are blind to the consequence of everyone becoming dependent on the Expansionist State: the collapse of a system that is now yielding a highly negative return on State spending.
When State spending is expanding faster than tax revenues (which are a function not just of tax rates but of economic expansion) and the underlying productive (non-State, non-finance) economy, then the gap can only be filled by borrowing money. This works until the interest on the fast-rising debt begins to crowd out spending on entitlements and other politically protected programs.
Progressives assume all State spending is productive; this is clearly a false assumption. Some State spending may be productive, but when it is allocated by a corrupting political process, the inevitable outcome is most State spending devolves to unproductive transfers from the politically weak to the politically powerful.
Tweaking tax policy or raising the debt ceiling will not change any of these dynamics.The Expansionist State is on the path to implosion (insolvency) and collapse, i.e. a political crisis. If we understand the core dynamics of the Expansionist Central State--the political allocation of scarce national income to favored constituencies and cartels--we understand why this process is inevitable.
France offers an illuminating example of this path to implosion and collapse, but every Expansionist Central State from China to the U.S. is also on the same path. France, the Hidden Zombie in Europe (Mish).
I describe these dynamics in more detail in my book Resistance Revolution Liberation: A Model for Positive Change.

New video with CHS and Gordon Long (25 min.): 2013 Themes:

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Supernova Born's picture

Sweet. Let's hope so.

slaughterer's picture

OT but the Russell 2000 is really crushing small cap shorts right now with a gigantic bullish divergence.  "Jan effect"

the mad hatter's picture

intriguing. how then, is the s curve reset?

forests have fires that sweep through forests overcrowded with dead trees to make way for new life. the nutrients stored in the dead tree trunks are returned to the earth which nourish the seedlings. what is the forest fire of political systems?

Supernova Born's picture

Great Q. Looking for quote from a general concerning those with the will to fight vs. those who have lost it.

The Phu's picture

Tommy J said it best: "The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants."

Flakmeister's picture

No doubt while he was planting his own seed of liberty....

Urban Roman's picture

Depression famine epidemic insurrection ... war.

DeadFred's picture

I've worked with this in bacterial cultures in the past. First the explosive exponential growth phase, then the plateau phase, and finally the terminal phase as the culture dies from swimming in its own excrement. You can restart the culture if you take a small sample early enough and add it to new nutrients but that route has risks since any scavenging contaminant organism (e.g. TBTF bank) could outgrow the desired strain in the end phase. It's best to go back to the saved starting culture for a fresh restart. It's hard to describe how bad the culture can smell toward the end.

Moral: Throw out the TBTF banks, the nanny-state and restart with the Constitution and free markets.

trav777's picture

this was a stupid article

Panafrican Funktron Robot's picture

Agree, once again, a pretty simple failure to understand the difference between real and nominal yield.  Anyone shorting markets on the basis of a fall in real yield is going to die.

Buckaroo Banzai's picture

Um, yeah, we all "hope so". Problem is, Expansionist Central States tend to kill a lot of their own people as they implode.

There isn't anything good about this.

In related news, it looks like Cuomo's gun laws are getting done. Republicans rolling over en masse. Interesting "feature" of the new law: mandatory life in prison without parole for anyone who kills a First Responder. Because we gotta protect the "First Responders" who "respond" to reports of certain types of illegal equipment, don't you know.

There are some sick, evil people in charge in New York State.

Supernova Born's picture

"There is nothing wrong with you that painful and expensive treatment can't prolong."

Accepting hospice doesn't make a terminally ill patient a quitter.

Snakeeyes's picture

Great chart!

Look at the real GDP of the US, Germany, France and Spain. All the central bank stimulus is wearing off and its down hill from here

Anusocracy's picture

When those in control of a country's economic system are thieves. they will destroy it. That means government.

Free markets work because those who produce must please their customers, not use them as objects.

In today's world, there is more slavery  than ever before. But, like those in early America, the slaves are comfortable with it.

It feels right.

Shizzmoney's picture

How long can this Neo-Feudalized Central State last, however? 5 years? 20?3

I'm getting too old for this shit, and I'm 30!

Cognitive Dissonance's picture

It can last a whole lot longer than you or I think it possibly could.

Maximum frustration for all involved......except of course for the top 5%. 

Ying-Yang's picture

Charles... your chart looks like my lifetime testosterone levels. Heh.

zapdude's picture

Exactly, CD.  By all rights, things should have imploded long ago in 1933, or in 1971, or in 1987, or in 2001, or in 2008...  The laws of economics can be suspended, or rather the consequences for violating the laws of economics can be delayed, far longer than the informed observer believes possible.  This suspension / delay is possible by deception of the masses by the few in control of most of the world's wealth. 

Not sure what TPTB are waiting for -- amassing larger hoardes of gold for themselves, full implementation of a global control-grid for the masses, alien invasion, etc?

My personal belief is the next global financial crisis, which is probably on a slow boil right now, will lead to a psuedo global currency and will take us all much closer to a global government at the expense of individual liberty.

I wonder what percentage of Roman citizens were prepared and aware of the empire's vulnerable state when the city was finally sacked?  My guess is many, like today, had been lulled into apathy through bread and circuses and a vested interest NOT to view reality as it actually was.

MachoMan's picture

You have the global powers that be winning the argument, but what is necessary for this to happen?  (1) Permanent collusion among the world's largest players and states [what does game theory say about this?]; (2) the tribute payments to the mob (the masses) continuing and continuing in a manner that keeps up with the effects of monetary prolifigacy...  e.g. the collusion referenced in (1); (3) a cheap and abundant energy source other than oil that is harnessed and realizeable by the world at large (thereby stemming the rise of localization); and (4) a security apparatus that is technologically advanced enough to act as a force multiplier in the millions.

I think the push towards centralization will continue until the entire charade collapses... real world centralization will not materialize as you see it.  In reality, we already have a single world government and a single world currency...  this has proven to be quite a failure. 

zapdude's picture

All good points and I agree. 

To summarize: 

  1. In order for TPTB to pull off their grand scheme, they must have a significant level of control over global factors (you provided a good starting list) and unshakable consensus amongst their internal factions.  I believe they don't have these, since these are mere mortals and are not omniscient or completely aligned in their deep evils, and therefore will ultimately fail. 
  2. However, they are convinced they can overcome these shortcomings and will try to achieve their goals in global domination nonetheless, and in the process, millions (or billions) will likely die.  I believe we will see, perhaps soon, a fully unmasked attempt at global control beyond what we're experiencing today.  The State will strangle the Individual as it rots from within.  Instead of winners and losers, it could become "survivors" and "victims".
MachoMan's picture

Not a dispute here...  although, I think the focus is largely western...  there will be many locales, as now, that literally have no idea nor care about the machinations of power and control...  likewise, there are similar pockets even in the CONUS.

The thing about less subtle measures for control is...  they tend to cause immediate reactions not necessarily contemplated by the implementing faction.  This is why subtle control is always preferred...  you can much more closely predict the reaction with much less risk should it fail...  and, if done correctly, have significant plausible deniability should it fail.  Not so much with heavy handed authority...

If you do see more heavy handed measures for control, then we're really, really close to the end...  at this point, given the level of understanding regarding manipulative practices, if they opt for the heavy handed approach, they're incredibly desperate... 

Dick Buttkiss's picture

Right, CD, for if the USG is good at anything, it's extending and pretending.

But methinks there's a Black Swan out there getting ready to flap its wings.

nobusiness's picture

Is every penny coming out of AAPL going into the Russell 2000?  bullshit

Flakmeister's picture

As if what is ultimately wrong with western civilization can be fixed by collapse of a few entities....

It goes much deeper than that....

mayhem_korner's picture



Only in a liberal's mind is massive and growing central state a "western civilization" concept. 

Flakmeister's picture

Do you also play a clown on other websites?

It is remarkable how often you demonstrate that you have no grasp of what other people are talking about...

mayhem_korner's picture



Just trying to bring accountability to unsubstantiated, broad-brush statements.

Flakmeister's picture

You should seriously consider looking in the mirror....

mayhem_korner's picture



Why don't you explain what you meant in your original comment on this thread instead of projecting onto me?  Would do more for your credibility than attacking others.

Flakmeister's picture

Buddy, you started with slurs, you left the high ground (not that you have *ever* held it)  If you chose to make an intelligent comment and not some knee jerk bullshit then you might have gotten the response that you seem to desire...

As for the meaning of my statement, if you cannot figure it out or at least fix your bearings on what direction I was heading then I suggest that you STFU and try to engage someone at your level of discourse or at very least learn to be polite...

falak pema's picture

dominant western civilization concept of this age : Pax Americana morph.

Does that make it less "liberal" and more digestible?

Your emphasis on accountability acquires cogent meaning in this train wreck; but we've seen so many of those in the past! 

So history rhymes or repeats and its the same nucleus of western civilization concepts/value systems and their blatant betrayals that essentially runs the world since 1492 days. 

mayhem_korner's picture



What you're really saying is the "western" concept has essentially been upended by central planning.  That statism has uprooted the basic tenets set forth by John Locke and codified by the Framers and debated in the Federalist Papers.  The penultimate distillation of "western" ideals was that which is reflected in the Constitution and Declaration.  The authors went to every length they thought possible to warn against yielding individual sovereignty to the state.

So "history rhyming" as you say is to argue that the "western" ideal has (again) fallen prey to another ideal - one espoused and lobbied for by liberals who subscribe to consolidation of power in a central regime.  You have made my point - thank you.

Dick Buttkiss's picture

Yes, mayhem, but the Federalists (more aptly named Hamiltonian Centralizers) won with a Constitution that was easily subverted to their purpose, their precious central bank having to go through a few fits and starts before it finally gained a foothold and then took control.

And yes, it's going to be ugly as the world's major powers, all expansionist states, reach their inflection points, and poof!, to the canyon floor, in classic Wile E. Coyote fashion.

This put history on the side of a massive devolution of political power, however, and in the case of the US, this means that power will devolve back to the constituent states via nullification and secession, the former having already begun the process (not just with drug decriminalization but with reverse criminalization of federal intervention -- -- while the latter merely awaits a sufficient level of default on the USG's $222 trillion in unfunded welfare obligations -- -- for the American people to say to their Union what the Soviet counterparts said to theirs: "No more."

The state can kiss my ass.

falak pema's picture

ave caesar, the original western icon! 

Don't blame it on the sons of democracy!

Your perception of western civilisaton begins in 1776...a bit short! 

And, today we are back to Caesar or what preceded : a Senate of Optimates; thats what they called the corrupt neo-cons in those days, the two hundred families who built the empire. It led to one who had fewer scruples about crossing the Rubicon into dictatorship than the club...

History may rhyme again. 

Your current (and past) perception of history is distorted. Oligarchy is not democracy. And we are in oligarchy. 

mayhem_korner's picture



neo-cons?  Your colors are gushing, Brutus... I wonder where liberals would be without labels and revisionist history.

By the way, "we" - which I assume you mean to be the U.S. - was never a democracy nor ever intended to be a democracy.

Dewey Cheatum Howe's picture

Couldn't this whole mess be modeled with a certain degree of accuracy using a Lotka-Volterra predator-prey type system of equations? When you get right down to it credit and debt should be able to be substituted for predator and prey.

mayhem_korner's picture



You leave no possibility for the intervention of discernment.  While it may be rare, it is not extinct.

Flakmeister's picture

Eh? Do you even know what he was talking about?

Titus Flavius Caesar Vespasianus Augustus's picture

I assumed that by predator he meant the drone.

Pretty sure that's the only way that query makes any sense, dude.

forwardho's picture

Or even bacterium within a finite amount of growth medium.

Urban Roman's picture

There is always a numerical solution for L-V, but it does not always end happily for the Attofoxes. +1.

Peter Pan's picture

It appears that governments have outlived their usefulness in the sense that their expenditure now produces a one off GDP return only to be followed by a string of negative returns due to their expenditures not providing ongoing positive cash flows but only interest expense on the greater debt created by deficits.

Waterfallsparkles's picture

More and More People have decided to live on the Government.  Either thru Welfare or Disability.  After all everything is taken care of for them.  Including housing, energy assistance, food, health care, etc.  They do not have a worry in the World.  They believe that the Money comes from the Government.

Who can blame them.  No one thinks that the Money they get comes from someone else paying into the Government.  Just from a Wealthy Government that prints Money at will.

As more and more People feel that it is not worth it to work and live pay check to pay check and pay into the Government for their Money to be given away to those who do not go to the effort to Work they will stop working and get on the Free Money Train.

Titus Flavius Caesar Vespasianus Augustus's picture

Way to take your eye off the ball.

The tax breaks by large corporations, in which many of them get multibillion dollar tax breaks and/or pay absurdly low effective rates, is much more a theft of the wealth of the middle class than all the SSDI phonies in the country.  Naturally, the real crooks would prefer to distract you with the prospect of the proverbial welfare mother having kid after kid and getting paid to watch The View.

Meanwhile, military contractors from Lockheed to Halliburton are absolutely ass-raping you.  They are building supercarriers too expensive to actually put into the dangers of naval battle, over-priced, ineffective jets, and $10 cans of Coke for the troops.

So while you're complaining about the easy targets you are fed, folks that effectively cost you pennies, you are being taken for hundreds, as military-industrial complex and bankster semen paints your colon an unenticing off-white.

Jesus, dude.   Get your head out of your ass.





Panafrican Funktron Robot's picture


$85 billion a month in treasury and MBS purchases.  These purchases are a tax, that we plebs are made responsible for paying.

This is a $1.02 trillion dollar tax on an annual basis.

The banks are the direct beneficiary of this tax.

Meanwhile, income security payments total $402 billion on an annual basis.  

Titus Flavius Caesar Vespasianus Augustus's picture

the treasure purchases are basically a direct tax.  the mbs purchases are an indirect tax in the form of keeping home prices artificially high to protect the banks which are now gobbling up homes by the tens of thousands, in order to rent them out to the people they foreclosed on - ofter after making tens of thousands in payments to a bank that created the money to loan it to them for their mortgage... by fucking loaning it to them.

The truth is so strange, the average bear probably can't and won't believe it.


pods's picture

Lotta words and fancy graphs to show that debt currencies issued at interest always implode.



Cognitive Dissonance's picture

Dude.......I assure you that this time it's different.   :>)

Skateboarder's picture

It actually is, not for the better but for the worse, because of the 'advanced technology' (as compared to previous civilizations) and the means of chemical pacification on a population-scale we have today.

Not to be a downer, for I have only the highest of hopes for a free dawn to come... but we is fucked son. We. Is. Fucked.

MachoMan's picture

I'm not sure that this vision will be successful this boom/bust cycle, but you may be right for the next round.  The residual technology (and experiment results) will be available for whoever decides to pick up the torch of control next go round.  The control mechanisms become more and more subtle...  and the boom/bust cycles become longer and longer.

However, that said, no one can predict how the cookie will crumble in the bust.  Anything can happen...  although, from induction, I think you are correct...  but it IS NOT a given.