Here at Compounding Fractures, we consider ourselves fans of accountability. Dr. Mattson and I discussed, in the wake of the 2008 Great Financial Crisis, the moral hazard of, for instance, letting bankers get away with blatant fraud. This principle extends not just to prosecution, but also to people taking responsibility for their actions in a public manner. For instance, when it becomes obvious that tax cuts for the rich don’t grow the economy, and just drive up government debts and deficits, it would be nice to see those pushing the idea resign from whatever position of public responsibility they hold, walk into the sunset, and never be heard from again. So in the spirit of accountability, I thought it might be worth examining the projections made in last year's post about positive reconstruction.
As I noted in the original post kicking off the series, I did not think the exact scenario would come to pass. The Positive Reconstruction Scenario outlined trends to keep an eye on, trends which might indicate whether we are even on the path towards positive reconstruction as all of this *gestures broadly* falls apart. And make no mistake, *this* is most certainly falling apart. One way or another, we here in the US, and likely a number of other countries around the world, are most certainly in for a reconstruction of the political economic order. All the remans to be seen at this point is whether that reconstruction will be largely positive, or negative. But more on that later. For now, let’s examine the trends.
In the opening post, I suggested the bad economic policies of the current regime would push unemployment to 5% by the end of 2025. Officially, unemployment sat at 4.4% at the end of the year. Setting aside the problem with the short term unemployment rate vs labor force participation and long-term unemployment numbers, our prediction was too high. That said, the last twelve months of BLS jobs numbers appear to be, shall we say, methodically wrong. Each jobs report number has been revised down, with a number of months yielding negative jobs numbers when they’d previously been reported as positive. In other words, who knows? Maybe we are actually at a 5% unemployment rate? Taking a metaphor from baseball, the umpire called a third strike after changing the size of the strike zone. This makes it difficult to know when to swing the bat and when to leave it on your shoulder, because the strike zone becomes whatever the umpire’s boss decides it is.
Okay, the regime can cook our books internally, but not so with exchange rates, right? I speculated that the dollar would drop a full 15% in value against the standard basket of currencies. While the dollar certainly did drop by more than that against currencies like the Euro, Peso, Krona and Real, to name a few, it didn’t drop nearly as much against other major currencies like the Yen and Canadian dollar. Against the full basket, the dollar index dropped from 108 in January 2025 to 98 by December, a drop of roughly 11% overall. I’ll grant that isn’t the full 15%, but it stands in stark contrast to the administration's claims the dollar would be stronger as a result of tariffs and trade wars. This one is a bit of a foul ball. We made contact with the ball, but it didn’t end up where it should; the dollar didn’t fall as far as expected.
Another specific claim that proved, thankfully, inaccurate, was the suggestion that a certain major US city would see its immigrant mayor deported and the city erupt with anti-ICE violence as a result..I’ll be glad to hold that L for now, though this administration hasn’t been above threatening political opponents with denaturalization and deportation, so I wouldn't trust them NOT to deport a legitimately elected mayor. After all, they’ve arrested sitting members of Congress and virtually declared war on a decent sized American city in December of 2025. On second thought, maybe my guess on intent, as opposed to the specific facts, wasn’t exactly wrong. In the post about 2025, I did say I expected to see a large-scale assault on an American city by ICE in late 2025, which did happen. It just didn’t happen to NYC, but Minneapolis instead.. To continue the baseball metaphor, this prediction would be a hit that didn’t go how you expected, like hitting for an infield sacrifice fly, but ending up safe on first after all.
To sum up, the 2025 predictions were a mixed bag. At this point, we have a questionable strike zone, a foul ball, and a runner on base. Nothing hit out of the park, but as of my first draft of this post, indicators appeared largely moving along the lines of a positive scenario. But I wrote the first draft three weeks ago. Which leads us to today. Nowhere in the positive reconstruction scenario did I think or even suggest the current administration would be stupid enough to start a war which threatens to send oil over $150 a barrel and cause a global depression. I genuinely expected the administration to focus on clamping down on internal dissent and thoroughly cooking the books before turning their aggression outward. This drastic escalation does not bode well for a positive reconstruction of America’s political economy. Indeed, the game has been delayed due to a thunderstorm, which will make a complete mess of the field.
If the Epstein War lasts longer than a month (and we are already two weeks in), we will likely see oil pass $200 per barrel and, more ominously, supply shocks to the global system for producing fertilizer. As of now, there’s still time for oil markets to recover. Yes, we’ve lost about 15 million barrels per day of exports from the Persian Gulf, but those tankers take weeks to get to port and unload, so we could avoid real supply shocks if exports resume tomorrow. However, that may not happen for a variety of reasons, not the least of which is that Iran has a say in how all this plays out. Right now, credible reports indicate Iran is placing mines in the Strait of Hormuz. Iranian officials have stated they might even push the conflict through the US midterm elections to make sure the regime pays a political price for their attack. So far, Iran carried out attacks on at least 11 ships attempting to run their blockade. Those don’t appear to be the actions of a power interested in de-escalating the conflict, does it?
At this point I should note that Iran IS allowing exports of their oil. This mostly means to China, but I’m sure Iran will sell to anyone with hard cash. They aren’t allowing their Gulf rivals to export their oil and gas. One wonders how long the US Navy will allow that state of affairs to continue. Over the medium term, Saudi Arabia might be able to move about 2 million barrels of oil by pipeline to the Red Sea, but that will take months, if not years to achieve, and does nothing for Iraq, Bahrain, Kuwait. So the supply shock to the global economy WILL happen sooner or later if this conflict goes on for four to six weeks. And what happens then?
Well, in 2008, oil hit $150 per barrel and played a large role in causing the 2008-09 recession, which made the unfolding Global Financial Crisis even worse than it already was. Then the oil price crashed back down to about $30 per barrel. Which sounds great, but at that point, millions of people had lost their jobs or income, so they couldn’t afford to buy oil anyway. The root of the problem is that oil and gas goes into just about every good or service produced in the industrial world. Even if petroleum products don’t literally go into a product, they contribute in some way to the creation of every good or service.
The effect will be to drive up prices for everthing, everywhere, all at once. If you think the COVID supply shocks and inflation were bad, let’s see what a six week disruption does. In fact, $200 per barrel is not unrealistic, as consumption is higher in terms of total volume than it was in 2008. And crashing the global economy may be just what Iran has in mind, considering the US sits at the center of the global economy and disproportionately benefits from it. Which also means it is disproportionately exposed to shocks to the global economy. And before you point out that the US currently imports less oil than ever these days, keep in mind that oil is a global commodity. If the price goes up outside the US, it will drive up the price domestically too, because if that price goes high enough, US oil companies WILL start exporting to the highest bidder. And even if controls on exports get slapped on exports, the US still imports about 30% of the oil we use daily. So we will have to deal with a supply shortfall or we will still have to pay more for those imports.
And what would that imply for the positive reconstruction scenario? I expect the effects to be similar to the negative reconstruction scenario, though not the dystopian one, in one key way; the economic depression which the Epstein War will probably cause, will destroy whatever credibility the US ruling class could claim. And while one might say the ruling class lost credibility some time ago, that reality hits differently when the unemployment rate tops 10% AND inflation is out of control. It's one thing to tolerate the antics of an out-of-control elite when you can still buy bread. It’s quite another to put up with the clown show when even those with jobs can’t make that last dollar stretch. While it isn’t particularly germane to today's problems, I think the lack of inflation in the wake of the GFC was one, if not THE factor, that saved the elites from pitchforks and torches at the time. Now, they do not have that security blanket.
So again, what does this imply going forward? For one, it means we can likely scrap the dystopian scenario I laid out early last year. It appears the foolishness of the ruling class is now so clearly beyond redeeming, a collective reckoning is all but unavoidable. At this point, the only question is will that reckoning play out in a positive manner or not. Will political control and economic prosperity devolve back to the huddled masses through largely peaceful means, or will that devolution happen because revolutionary violence wrenches control of the political economy of the United States away from distant elites in Washington and New York? For a guide of what that might look like, next time, we will visit the Soviet Union in the year of my birth, 1982.
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