In chess, the endgame is when there are few pieces left on the board and no more than fifty moves left to the end of the game. In other words, the end is clearly in sight but not yet resolved.  A chess game can end in only a few ways – checkmate, when one side takes control of the other, and is therefore the victor, a resignation, when one side concedes defeat, or a draw, which usually means that both sides have suffered such losses that neither side appears to be able to gain control.

We are now, in my view, entering the economic endgame for the United States. The black side is the ruling oligarchy of the United States (the “two-party system”) and its various representatives and agencies around the world. The white side is everyone else. Do I exaggerate? I don’t think so. It is an epochal game, the end of an empire. Did you think it would last forever? Empires don’t. Once the empire stops expanding, then it is just a matter of time until the regime is weakened for one reason or another, and then loses control. Let’s look at the top 10 in the empire market share (peak % of world GDP controlled) list for modern times.

The black side has been running the U.S. economy as a Ponzi scheme since domestic savings collapsed along with the end of the Cold War in the mid 1980s. Economic growth since that time has been the result of massive debt, which has grown from approximately 200% of national income to approximately 500%. The black side knows full well (“It’s the economy, stupid”) that its legitimacy is dependent on the economic well-being of the American consumer. Having exhausted the creditworthiness of American consumers and corporations, the black side is now turning to its last resort, the creditworthiness of the dollar and associated sovereign debt. So long as buyers will accept dollars and Treasury debt at high valuations, the black side can continue to attract the new money which is the lifeblood of a Ponzi scheme. Since consumer and corporate spending is hampered by their inability to increase their debt, the government is using that new money to step in, both consuming directly, in their place, and providing them with money to fund their consumption. That is the black queen, the last piece in the game, after that is lost there is no recovery. That is why we are now entering the endgame.

We have recently seen the Bernie Madoff Ponzi scheme collapse. Even a mainstream “economist” like Paul Krugman realizes that the U.S. is running a Ponzi scheme (“Decade At Bernie’s“), although he does not grasp its origins, causes, extent or history.

By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.

Unfortunately, that’s a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.

Like Bernie’s clients, the holders of US debt will end up with nothing. The debt cannot be repaid or serviced, the income just isn’t there. So we know the two possible outcomes are repudiation of the debt – default – or devaluation of the debt through massive inflation – hyperinflation. That brings us to the end of the game. The black side loses. The only question is how long it can delay the inevitable, and that is a question of confidence and credibility that is virtually impossible to answer. How long can the black side continue to entice new money?

In chess, winning or losing is a clear event. In political economy, it is a process without a clear beginning or end, except in retrospect. However, we can enumerate a few “victory conditions” that will enable us to tell that the game is over.

• Economic restructuring. We can look at the Latin American example for ideas. Potential examples include currency devaluation or reissue, inflation indexing of payments or incomes, soveriegn debt issued in foreign currencies, recourse to the IMF, asset seizures, foreign exchange restrictions, import duties and restrictions, withdrawal from GATA and other free trade agreements, and so forth.
• Shrinkage of empire. Troops withdrawn from foreign bases, support for regimes withdrawn, reduction or elimination of foreign aid, especially military, cessation of military adventurism, reduction of defense spending and so forth.
• Institutional restructuring. Much of the fall is due to Federal institutions such as Fannie and Freddie, the Fed and the Treasury department, as well as the privately owned banks and brokers. Major reorganizations and changes here will be an important tell. Nationalization of various industries, especially financial services, is likely. Public agencies will be restructured several times, most likely, as the black side thrashes, but this is a sign of weakness.
• Political turbulence. At some point, political alternatives will emerge and break the black side’s grip over the country. Hopefully, the alternatives will be peaceful, but, as the precedents suggest, this is far from a given. “Uneasy lies the head that wears a crown,” as the bard observed.
• Economic normalization. The game is really over when the economy assumes a healthy profile, if even at a very low level of economic activity. That means savings of 10% of GDP, or more, without substantial state deficits, positive real interest rates and a stable currency.

In the meantime, our challenge is to navigate the rocks, shallows and whirlpools between here and there. Good luck.