THE UPSIDE OF THE DOWNSIDE – PART IIIC

Timing and Consequences of Phase II of the AI Megacycle

We’re still in the “Downside” portion of this series. Don’t lose heart. However unpalatable it may seem, this exploration is essential to understanding the inevitability and extent of the turmoil we face in Phase II of the AI Megacycle as the precursor to the “Upside” in Phase III. As inventor Charles Kettering, the head of research at General Motors, said decades ago: “A problem well stated is a problem half-solved.”

So far in this series, the problem has been clearly defined as the inevitability of another financial crash and great depression as the necessary precursor to positive political change required to successfully adapt to a new economy driven by the Artificial Intelligence Revolution.

· Part I advanced the basic premise of “THE UPSIDE OF THE DOWNSIDE” series:

o The Downside: We are facing economic/financial turmoil aggravated by a destructive and despotic second Trump administration bent on revenge against political opponents, rewards of added power and wealth to the donor class, “deconstructing” the federal government, and reduction in the wellbeing of the rest.

o The Upside: “Hard times” will detonate a political backlash, empowering the opposition to enact a new political agenda needed to repudiate the oligarchy, rebuild the middle class, restore democracy, reform and rebalance the government, and reconstruct the economy to meet the necessities of the new technological era.

· Part II introduced the concept of “Megacycles,” repeating episodes of economic transformation, “revolutions” triggered by new technology unfolding in three phases:

o Phase I: Exponential, technology-fueled economic growth prompting massive upward redistribution of new wealth, creating an excessive accumulation of debt, euphoric over-investment in the new technology, bubbles in financial and housing markets, and radical economic, social, and political change throughout society.

o Phase II: the bubbles burst, causing financial/economic turmoil, “creative destruction,” political backlash, and, so far, war during three complete Megacycles.

o Phase III: An era of sustained economic and financial progress adapted to the new technology.

· Parts IIIA and B: Delved more deeply into the recurring preconditions in Phase I creating the turmoil of Phase II, demonstrating the inevitable recurrence of these “hard times.”

· Now, in Part IIIC we will consider the timing and dire economic and uplifting political consequences of Phase II of the AI Megacycle, considering the reactionary policies of the incoming administration.

· Part IV and beyond: Only then can we move forward into the more pleasant subject matter, the “Upside” portion of the series, where the other half of the solution to the problem is revealed. Stay tuned.

Timing and financial/economic consequences of the second phase of the AI Megacycle:

At this point, the approaching economic and financial turbulence of The AI Revolution’s Phase II is known only to subscribers to this blog and a handful of contrarian economists, media commentators, and investment strategists on Wall Street, while Trump followers and the conventional wisdom on Wall Street remain oblivious.

Trump followers, now divided into warring Tech Bros and hardcore MAGA camps, can’t foresee the coming economic/financial crunch because of their fevered distractions of quests for personal enrichment, power, vengeance, mass deportations, concentration camps, and further exercise of grievances, hatred, fears, and other base instincts unleashed by Dear Leader. Moreover, lightly educated, low-information MAGA followers, isolated in the Fox News terrarium, not only lack exposure to contrarian thinking but also blindly believe Trump’s conjured grandiose plans for “the greatest economy in history” – or “a concept of a plan” at any rate.

The conventional wisdom’s cluelessness stems from blinding greed mixed with FOMO (fear of missing out) and “Demon Extrapolation,” the human instinct to project the recent past into the indefinite future due to an innate reluctance to contemplate change. Linear thinking in a curvilinear, cyclical world is like driving by looking in the rearview mirror. Nothing in the road immediately behind alerts drivers to a curve ahead, so they crash and burn. And just as you don’t navigate a turn in the road by calculating distance divided by speed to arrive at the time to turn, you don’t need to predict precisely when the turn will occur. It’s enough to heed the warning signs and react promptly when the stock market’s major indices start breaking down below rising trendlines of support. A stock market crash typically leads the economic/financial crunch by about 6 months and never fails to accompany the economy into the abyss.

The warning signs of the approaching danger associated with the present AI Megacycle must be taken seriously. None of the three technologically induced Megacycles during the past two centuries has failed to produce a tumultuous second phase with a stock market crash, credit crunch, major economic contraction, and war. It is a rite of passage from one technological era to the next deeply embedded in the collective psyche of humankind.

Those readers remaining unconvinced of the inevitability of the approaching turbulent Phase II of the AI Megacycle would do well to consider the present warning signs within Phase I:

• A new technology has been introduced, dramatically increasing productivity and, thereby, the creation of new wealth, launching Phase I of the AI Megacycle.

• The maldistribution of this new wealth in favor of top-income earners (in large part aided by lingering Reaganomics) has augmented vast investable fortunes which, when loaned to consumers and invested in equities and housing, have produced the following bubble-like preconditions to Phase II: (See Parts IIIA and B of this series.)

  • Dangerously high burdens of household, corporate, and government debt, leaving the economy vulnerable to retrenchment and/or “cascading defaults.”

  • Skyrocketing stock prices, reaching dangerous levels of overvaluation when coupled with euphoric overinvestment in the new technology, greed, FOMO, and low levels of fear on Wall Street, present traditional signs of an impending bear market and Darwinian shakeout within the new technology space. All that remains is for the conventional wisdom to proclaim, “This time it’s different” and “Things couldn’t be better” (ergo, they are bound to get worse).

  • Escalating high prices and rents for housing, vulnerable to collapse when owners and renters living paycheck to paycheck cannot keep up the payments when faced with high (and possibly still climbing) mortgage rates, mounting debt service burdens, and rising unemployment in an economic crisis.

• To these ominous portents, we must add the incoming administration’s potentially destabilizing social, fiscal, and monetary policy changes likely to trigger a bear market, credit crunch, and great depression.

  • Mass deportations would produce critical labor shortages in agriculture, food processing, construction, and hospitality, with inflationary consequences stemming from reduced aggregate supply and cost-push increases in wages in those industries.

  • Increasing tariffs would aggravate inflation by boosting the prices paid for imported goods by U.S. consumers. Higher tariffs would also trigger a trade war, as did the Smoot-Hawley tariffs in 1930, stifling international trade with a corresponding drop in production and a rise in unemployment worldwide.

  • Monetary policy can be expected to respond to inflation as it always has, with demand-killing interest-rate increases triggering an economic contraction, which, under the present circumstances enumerated above, would devolve into another great depression. I don’t share the conventional wisdom’s confidence in supposedly upgraded monetary policy tools to prevent another great depression or to recover from one. The core of stimulative monetary policy remains the expansion of the money supply by an operator seated at “The Desk” at the Federal Reserve Bank in New York tapping a keyboard, sending a significant digit followed by a string of zeros into the banking system. The added funds are likely to remain idle in extreme situations when fear paralyzes the captains of industry, masters of the universe on Wall Street, and workers wondering if their last paycheck was, indeed, their last. When the will to engage in economic activity is lacking within the public sector, the government must step in and reignite it with programs putting people back to work. (More about this in future parts of this series.)

  • The extension of tax cuts for the rich enacted during the first Trump administration, coupled with further profit-enhancing deregulation and bountiful government contracts for Trump cronies, would exacerbate income/wealth inequality with all the attendant dangers also mentioned above.

  • Trump’s aversion, or at a minimum, indifference to government solutions to societal problems, compounded by his “Schedule F” plan to replace the upper echelons of government agencies with inexperienced loyalists, heightens the likelihood of an inept government response to the looming financial crisis. Consequently, like Hoover in the early stages of the Great Depression, the Trump administration’s incompetence and inactivity would heighten the crisis.

Political consequences of the recurrence of Phase II of the current Megacycle:

The “Upside” thesis of this series, based on historical precedents, posits a radical electoral shift to the opposition in the wake of major financial/economic crises, as demonstrated by the elections of James Polk, Abraham Lincoln, William McKinley, Woodrow Wilson, Franklin Delano Roosevelt, and Barack Obama. Teddy Roosevelt snuck in there too, as a trustbusting progressive innovator presiding over a time of major reformist fervor, though within the incumbent Republican party. As James Carville correctly states in his recent apologia: “It was, it is, and it always will be the economy, stupid.”

Absent a major economic crisis, it is unlikely that Democrats will regain the power needed to enact major reforms, given the following:

· The Republican stranglehold on the media through Fox “News” and its cable TV wannabes, billionaire-controlled chains of talk radio and newspapers, and Musk-controlled X and other right-wing social media.

· Jim-Crow 2.0 voter suppression in red states, including selective mass purging of voter rolls, radical SCOTUS-approved gerrymandering, and disqualification of mail-in ballots under various pretexts. (Listen to Thom Hartmann’s masterful podcast “Will America Die Gradually Then Suddenly?”)

· A 6 to 3 majority in the U.S. Supreme Court “legislating from the bench” nakedly favoring Trump Republican and corporate interests to the detriment of Democrats and state-active liberals. In this regard, SCOTUS today mirrors the “Nine Old Men” who rejected FDR’s liberal reforms in the 1930s.

· Unconstitutional authoritarian policies promised by Trump, including prosecution of political opponents by the loyalist-administered Department of Justice and FBI; suppression of free speech and freedom of the press of those deemed “enemies of the state”; population control by the U.S. military following a declaration of a state of emergency suspending posse comitatus restrictions; control of public education favoring private, often religious, schools by dismantling the Department of Education, expanding the use of vouchers and mandating “conservative” curricula; intimidation of universities deemed “liberal”; mobilization of Trump-loyal, armed militias to suppress the opposition’s right of peaceful assembly.

Only a financial/economic cataclysm will produce the kind of massive swing in public opinion to provide the opposition with the mandate necessary to enact the radical reforms needed to repudiate the oligarchy, rebuild the middle class, restore democracy, reform and rebalance the government, and reconstruct the economy to meet the necessities of the new technological era.

However, there remains the open question of whether a groundswell of effective popular opposition can overcome Trump’s authoritarian measures cited above. The answer depends on whether, as I expect, Trump’s failure to provide relief to the MAGA faithful, compounded by the devastating effects of the crash, persuades the heavily armed MAGA militias to switch their allegiance to the opposition or, alternatively, to defend the continuance of Republican domination of government by violence. The possibility of the latter outcome raises a corollary question, namely whether, attempting to cling to power despite widespread public opposition, the Republican administration is prepared to engage in civil or foreign war. I will address this issue in the next post.

SUMMING UP: With the dominoes leading to a financial/economic crash already lined up, implementation of the incoming administration’s reactionary policies seems certain to set the cascade in motion on Trump’s watch. Trump’s lack of effective countermeasures will lengthen and deepen the resulting financial and economic collapse typical of a Megacycle’s Phase II. History tells us such a crisis would produce a political switch in favor of the opposition, in this case, the Democrats. In turn, during the next four years, the Democratic Party must reorganize itself through what I call "Multiplex Democracy": essentially a new political machine, superseding TV and social media, to recruit new members/activists, elevate new leaders, communicate, build consensus, finance operations, and ultimately mobilize the majority to take power and implement democratic, people-oriented reforms needed to right the foundering ship of state.

Stay tuned to this space.