Could a Civil War Trigger Next Economic Collapse?

Could a Civil War Trigger Next Economic Collapse?

The big question weighing on the financial world’s mind right now is whether we are in an ‘everything’ bubble. While many would say that we are, nobody has any idea when the bubble will burst or what may cause it to burst.

Looking back at history with the benefit of hindsight, we can make judgments about the causes of various economic collapses. In situations like the Great Financial Crisis, unscrupulous financial institutions were at fault for the economic collapse while a black swan event in 2020 was to blame this time.

With the amount of uncertainty in financial markets and the real economy, another black swan event would be particularly devastating for society. The amount of divisiveness currently circulating throughout the United States could evolve into a civil war and the next black swan event that causes an economic collapse.

History of a Divided Nation

According to The Fourth Turning by William Strauss and Neil Howe, the United States is currently experiencing its fourth period of extreme divisiveness that will fundamentally shape the nation.

The first period occurred in the 1770s and led to the Revolutionary War. At the time, colonists were split between support for the British and founding a new nation. Although we always refer to the American Revolution as being fought against the British, there was a simultaneous war between loyalists and patriot colonists. For this reason, colonists at the time referred to the war as a civil war. The divisiveness inside of the colonies was so extreme that violence was often carried out against other colonists and many people left urban areas to live agrarian lifestyles.

The second period occurred in the 1850s and led up to the American Civil War. This division was caused by the differences in support of slavery along with economic disparities between the North and the South.

Fast forward to the 1930s and the entire world saw a period of divisiveness that ultimately led to World War II. Most of the issues at the time revolved around economic struggles between the upper and lower classes.

These three periods of extreme unrest all led to the same outcome. Economic troubles and war.

Divisiveness Today

Today, the United States and the world are experiencing similar levels of divisiveness that led to economic troubles and war in the past.

The cost of living has been skyrocketing recently for most Americans. Rent prices, home prices, and the cost of food have all hit record-highs or are rapidly climbing. This, coupled with cerveza sickness lockdowns has created high levels of stress and emotion in the greater population.

The country is also more divided than ever by cultural and political groups. Red vs Blue. Vaccine vs no-vaccine. Safety vs freedom. Censorship vs free speech. The list goes on and on.

We are at a point where the government is telling businesses that they cannot serve a certain group of people. Where in history have we seen this before?

Just like the markets, society has a tipping point. At some point, the bubble must burst. When it does, will it bring the economy with it?

Will This Lead to an Economic Collapse?

Looking again at the history of divisiveness, we can see how these times of turmoil impacted the economy.

After the Revolutionary War in the 1770s, per capita income fell 20% in America. Amidst the Great Depression in the 1930s, real GDP fell over 30%. While these economic numbers are telling of the effects of war and divisiveness, the post-Civil War economy shows an outcome that would be devastating for modern times.

Following the Civil War, on average, nominal GDP fell by 5.9% for the next three years. But because of deflation, real GDP growth came out to nearly 0%. What if we saw 0% real GDP growth today?

This could happen in two different ways. First, a 5% nominal increase in GDP alongside 5% inflation or, a 5% decrease in nominal GDP with 5% deflation.

This second scenario would be particularly devastating for the country due to corporate, government, and household debts all being at record levels. In this scenario, if a business or household held debt while the economy experienced a drop in income and prices, their debt payments would remain unchanged, and they would unlikely be able to afford their debt service.

If the United States were to experience 0% real GDP growth in this manner following a civil war, it would lead to economy-wide defaults for businesses and households and a collapse of the economy.

While the possibility of a Civil War-induced economic collapse is uncertain, nobody expected a pandemic to destroy the economy in 2020 and you never know when the next black swan event may occur.