“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
This is how bankruptcies go. They sneak up on us. Then they trap us. Making this all the more painful, there's no lack of warning signs at the start of the decline when actions can be taken to avert the final collapse. In retrospect, the collapse is seen as an inevitable consequence of bad decisions. We are not only left with a lost fortune, we are stuck with the blame as well.
What's interesting in this is that it's not only personal bankruptcies that behave in this way. It occurs in other contexts as well. All levels of social organization decline and collapse in this manner, be it corporations, nations or empires. It even happens in the extinction of species. The number of dinosaur species declined over million of years before they went extinct. A slow decline in numbers and diversity is a common precursor to extinction.
It should also be noted that collapse is only inevitable after a certain level of corruption has set in. If some corrective measure or change of path is adopted early on, collapse can be averted. However, this requires that something decisive is done, or in the case of dinosaurs, something decisive happens. The onset of corruption has to be rooted out before it becomes fatal. There has to be consolidation. That which cannot be supported over time has to go. Only that which can be sustained can be allowed to continue.
When I sold my house in Norway, I did so because of the unsustainable path I had embarked on in an attempt to keep it. I borrowed regularly with the house as security in order to pay for taxes and other costs associated with its upkeep. This looked deceptively sustainable because house prices were rising faster than the debt on my house. On paper, I was getting richer despite the increasing debt burden. It was tempting to continue the game, and do nothing. However, I realized in time that this was unsustainable. At some point, my debt would grow faster than house prices, and I might easily loose everything should there for some reason be a crack in the housing market.
I did the right thing. I sold the house and used the proceeds to pay down debt on my wife's apartment, put some cash savings in the bank, and buy gold. My timing could hardly have been better. I got out at the very top of a housing bubble. But the shock and dread that I felt during the realization of my precarious position, and the subsequent decisive action to sell the house, left me shell shocked. The abyss was frighteningly close by. I could smell the stench of disaster, something I don't want to experience ever again.
As an example of a business that took decisive actions too late, we have Norske Skog, which I was stupid enough to invest in during its decline. Had I known then what I know now, I would have recognized the hopeless position that the company was in. I would not have put a cent of my savings into it. However, willfully ignorant of the dire troubles the company was in, I kept putting money into it till the very end. The decline lasted ten years before the final collapse, which lasted for less than a week. Creditors lost their patience with the company and demanded it bankrupt, and that was the end of my investing adventures into this particular company. There was nothing left for me after ten years of patience and steady contribution.
But it should have been clear from the start that the company was doomed. It had gone on a wild spending binge in order to create "shareholder value". It took on debt in order to appear better and stronger than it was. This had the short term effect of sending its share price sky high, but the long term effect of bankruptcy. As it happens, this is exactly the sort of logic that the CEOs of many large US corporations are currently engaging in. Stock buy-backs send share prices up through debt backed spending. The long term effect will be that of Norske Skog. There will be a decade or two of decline before a final collapse. Anyone invested in US stocks is hereby warned.
Adding to the risk in US stocks is the fact that the US government itself is on an unsustainable path, and a fate similar to that which befell Rome some 1500 years ago is at hand. The US is as over-stretched, both financially and militarily as was Rome during its decline. There's also the same arrogance and refusal to deal with the situation. The US is as doomed as Rome once was. While its descent into irrelevance may take hundreds of years, there's at this point no avoiding a final collapse. The decay and corruption in Washington D.C. is simply too far gone. The federation will disintegrate, and new nations will form, as happened with Rome.
The lesson in all of this is that decline and collapse is inescapable once an unsustainable path has been chosen and remained upon for more than a short period. No amount of energy and determination will save a system that is too far gone to be saved, and we can recognize the symptoms from miles away if we bother to look. The decay can last for decades and even centuries if the system is large enough. In empires, there is a loss of population, a decay in moral fabric, and debasement of money. In companies, there's a constant need for emergency actions. In personal finance, there's the rapid rise of debt, relative to assets. Key to survival and success is the early recognition of this. Personal spending must be kept at a sustainable level, and as much distance as possible should be kept from external systems that are on a path to oblivion. Never save in anything directly related to doomed systems.
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