Problems in Bananastan

The Hierophant Tarot card, upside down, signifies rebellion, subversiveness, new approaches

Note: This is a free version of May you live in interesting times, Leitmotif 6: American political instability, that I have made available for a broader audience at the request of some of my paid subscribers who wanted a version to forward. The original, full version, also contains economic and market analysis that has been removed from this version.

Problems in Bananastan

Have you been paying attention to the latest political drama in Bananastan? Tensions between its two main tribes, the Hooters and the Townies, are reaching the breaking point ahead of November’s presidential election. Former President Loudt, a Hooter, seeks to take back the presidency from President Dodder, a Townie, who ousted him four years ago in a close, contested election.

Former President Loudt has been a lightning rod for long-simmering tension between the two tribes. His abrasive, often caustic voicing of many deep-seated Hootie antipathies towards various Townie subgroups and customs deeply offends Townies.¹1 But Townie fears run much deeper. His long history of dishonesty and megalomania have raised fundamental questions about his suitability as a leader and mental stability.²2 He also was dogged throughout his presidency by Townie accusations that he colluded with foreign governments to win office, accusations that he and the Hooters viewed as a witch hunt and abuse of power by Townie legislators and bureaucrats.³3 More disturbingly, many Townies believe, fanned by Mr. Loudt’s provocative quips, that he disdains the rule of law and intends to impose a dictatorship through which he will take retribution in a second term.⁴4

For their part, many Hooters see former President Loudt as merely pushing back against what they see as a systematic oppression of their culture by a Townie-dominated media and bureaucracy. Further, a large majority of Hooters believe that Mr. Loudt’s loss to Mr. Dodder resulted from electoral fraud.⁵5 Following the election, in a vain attempt to block its certification, a Hooter mob rampaged through parliament, injuring several police officers, one of whom shot and killed a rioter.⁶6 Hooter fears were reinforced by a gloating post-election report in a Townie-leaning magazine that a “shadow” syndicate of highly placed Townies in business, the press, the bureaucracy, and the judiciary had successfully conspired to rig the election by censoring news unfavorable to President Dodder, spreading disinformation, and by suppressing Hooter advertising and social media.⁷7 These claims were later validated by a trove of emails and other documents published by independent journalists who were given access to a major social media company’s filesafter a Hooter business magnate bought it following the election.⁸8

Townies, horrified by Mr. Loudt’s refusal to accept his loss and his followers’ assault on parliament, applauded when the Dodder justice ministry commenced the largest criminal prosecution in the country’s history, arresting over 1,000 Hooters, prosecuting several hundred, including one in secret, and jailing many without trial for over a year, some in solitary confinement and conditions so appalling that even leading Townies began to protest.⁹9 Townie prosecutors in various provinces also filed charges against Mr. Loudt and several of his associates for racketeering, conspiracy, election interference, attempts to overturn the election, hush money payments, and inappropriate handling of classified government documents.¹⁰10 In a decision split along tribal lines, based on a controversial interpretation of the law, a provincial high court ruled that Mr. Loudt could not appear on the province’s ballot in this year’s election; Townies in other provinces moved to do the same.¹¹11

Mr. Loudt and many Hooters decried these moves as politically motivated abuses of power and an attempt to undermine democracy.¹²12 Many Hooters have come to see jailed rioters as political prisoners.¹³13 In a move Townies interpreted as retribution, Hooters in parliament began an impeachment inquiry against President Dodder for corruption.¹⁴14

The increasing use of state power by both tribes against the other mirrors a sharp rise in animosity and distrust between the two tribes to historic levels. Super majorities in both tribes see the other as dishonest and amoral, each seeing themselves as the defenders of democracy and the opposing tribe as anti-democratic.¹⁵15 These beliefs are being reinforced by self-segregation as Townies and Hooters increasingly choose to live in separate communities and have few friends or associates in the other tribe.¹⁶16 Social media bubbles have further fortified the division as neither side is exposed to the other’s perspective on common problems.¹⁷17

The only thing that both tribes appear to agree on is that neither feels represented by or trusts the government, which both increasingly view as corrupt, disinterested and unaccountable.¹⁸18 But the fall in trust is far broader than just dissatisfaction with elected representation. Trust in a wide array of institutions, including the judiciary, the police, the press, schools, religious institutions, business, and the medical system, is at historic lows in both tribes.¹⁹19 Indeed, the only public institution that more than 50% of citizens trust is the military and even popular trust in it has fallen to a multi-decade low.

The simultaneous decline in trust in government, institutions and co-patriots of other tribes is worrying social and political scientists regarding Bananastan’s future stability.²⁰20 Social capital, or the “glue” of society, is highly related to inter-personal and inter-group trust within it. As Bananastanislose trust in one another and social institutions, that glue weakens and self-resolution of conflict becomes more difficult.²¹21 Studies suggest that low levels of social capital are incompatible with democratic governance.²²22 Plunging trust in government limits its ability to adjudicate conflict to halt the slide in social cohesion.²³23 Without these mechanisms, the potential for political violence, civil strife and even civil war increases.²⁴24

Recently, both Hooter and Townie leaders and independent analysts have begun to warn that tribal factionalism is on the verge of spilling into violence and perhaps civil war.²⁵25 Secessionist movements in provinces dominated by one tribe or the other (or minorities within provinces) have increased.²⁶26 Even a sovereign constitutional crisis has arisen between the Dodder-led federal government and a Hooter-led province over the rights of each to control immigration.²⁷27 Against this backdrop, three fifths of Bananastanis expect an increase in political violence, nearly half fear a civil war, and, shockingly, a third now believe violent insurrection is justifiable.²⁸28

Although largely confined to the fringes, both Hooter and Townie extremists appear to be actively preparing for armed conflict. The Dodder justice ministry, and Townie-leaning media and academy have focused largely on Hooter extremism, due to a long history of armed Hooter militias, terrorist attacks, the attack on parliament, and greater number of incidents.²⁹29 Worries also have grown about Hooter sympathies within the military, the sole trusted public institution: a disproportionate share of the Hooters in the parliament riot were veterans and a former general warned that a military coup was conceivable in 2024.³⁰30 Soon after taking office, President Dodder’s minister for war launched a widespread purge of suspected Hooter extremists from the military.³¹31 As with other prosecutions, however, Hooters perceive an anti-Hooter bias and point to rising incidents of Townie extremist attacks, albeit from a lower level.³²32

A top counterinsurgency expert has warned that Bananastan increasingly mirrors the typical pattern of violent insurgencies, and no one should take comfort from either violence being confined to the fringes or lower levels of Townie violence so far.³³33 He notes that in all insurgencies, violence is confined to the top 1-3% of a movement’s social “pyramid” and, while Townies lag Hooters’ armed “tip” and Hooters lag Townie’s organizing and propaganda “base,” both are moving at speed to complete their respective insurgency pyramids. Increasing numbers of Townie extremists are arming rapidly and overtly – with the seeming approval of Townie media³⁴34 – while Hooters are just as swiftly building communications and propaganda networks.³⁵35

Tribal elites on both sides, whether intentionally or irresponsibly, regularly toss matches into this tinderbox, consistent with historical evidence that elite jockeying for power often is the catalyst for civil wars.³⁶36 Both Townie and Hooter elites increasingly use dehumanizing language to describe the rival tribe, casually calling the others “deplorables”, “vermin”, “treasonous rats”, or “not even human,” and both presidential candidates have compared the other to history’s most notorious mass-murdering dictators.³⁷37

Fanned by provocative statements by Mr. Loudt, some of which he has recently backtracked from,³⁸38 elite Townie voices have grown increasingly shrill heading into the election, with increasing calls for “any means necessary” to prevent what they see as a coming Hooter dictatorship.³⁹39 A popular Townie podcaster publicly stated that even if President Dodder’s son had “the corpses of children in his basement” censoring such news was justifiable to prevent a re-election of President Loudt.⁴⁰40 Studies and surveys indicate that the caustic rhetoric from elites on both sides is having effect, both in driving intertribal tensions and in creating demand for a “tough leader who will crack down on those who undermine Bananastani values,” a view now held by sizeable majorities in both tribes, but especially Hooters.⁴¹41 Perhaps more pertinently, it is normalizing threats (and acts) of political violence. Multiple Townie celebrities have “joked” about assassinating former President Loudt, a play dramatized it, a painter fictionalized it, and the editor of a leading national newspaper was accused by a Hooter member of parliament of calling for it.⁴²42 Threats and attempted assassinations have increased, including multiple attempts on both Messrs. Dodder and Loudt.⁴³43

Power struggles among Hooter and Townie elites are not the only source of sparks with the potential to ignite political instability or violence in Bananastan. There is evidence that at least two of Bananastan’s geopolitical rivals are actively stoking tribal tensions through social media manipulation and aid to both tribal extremist groups and provincial secessionist movements.⁴⁴44 Somewhat alarmingly, in the last year, Bananastan apprehended more illegal entrants from its cross-oceanic geopolitical rival, Sinoland, crossing its Southern land border than it had in the prior ten years combined, most of them military-aged men.⁴⁵45

Surprisingly, Bananastan’s capital markets are unfazed by what appears to be a political powder keg rolling towards a white-hot election. Rising levels of political violence and public acceptance of it in a society with high and widespread animosity between the two main tribes, low levels of trust and satisfaction in government and most public and private institutions – except the military – seems to have no effect. A roaring economy has pushed Bananastan’s large, liquid stock market to new highs and is keeping the Bananastan denarius near historic highs. Perhaps more surprising, despite an historically high debt-to-GDP ratio, interest payments surging with higher global real interest rates, and a third of marketable government debt due to roll this year – with the Dodder treasury planning to increase the short-term share in its refinancings⁴⁶46 – government bond prices show little sign of distress. Term premia, though off historic lows, are still relatively low and most consider Bananastan’s debt to be “risk free.”

Confronting reality

Politics of the United States now engenders such strong views, even among non-Americans, that it can be difficult to see the forest from the trees. Even those that have noticed the diseased, desiccated trees of modern American political dysfunction might miss that the entire wood lacks only a spark for disastrous conflagration. That a century and a half of stability have made America the anchor of the global polity, economy and markets makes the idea of serious political instability or civil war unimaginable. Like the perspective one gains looking at the forest from a distance, re-examining US circumstances as those of a fictitious place with a different cast of characters can reveal things our emotions or historical biases won’t allow us to see.

Contrary to the received wisdom of the chattering classes, a second presidential term for Donald Trump is not the worst outcome possible in the 2024 US election.⁴⁷47 As would be apparent to any analyst tasked with evaluating “Bananastan’s” political economy or markets, a far more disastrous outcome appears wholly feasible; i.e. that the election, or events surrounding it, precipitate a descent into serious US political instability, violence, civil war, and possible dissolution of the union. (If you believe that I’m misstating the graveness of the US situation, I encourage you to read through all of the linked articles in the 7 pages of end notes to this piece.) Such an outcome would obviously be a tragedy for the US and its peoples, and likely for the world. But it would be absolute carnage for global markets.

The US is not only the anchor of the global political order, economy and markets, and its navy the guarantor of free navigation of the seas on which global trade depends — current Red Sea problems are just the tip of the iceberg — but the yield on its debt is also the “risk-free” rate anchoring every global asset. Political instability in the US would simultaneously crush global risk appetite while robbing the world of its safe asset.

Compared to that, what does it matter for markets if President Biden or President Trump occupies the White House next year? As I wrote in Leitmotif 5, for an election result to affect markets, it must both be a surprise and shift policies in some market-meaningful fashion. Current polling suggests that either man may be elected, so it won’t be a surprise. And while I do not want to minimize the large differences between the two candidates, what market-critical policies are really going to change? “De-risking” from or tariffs on China? US deficit spending? Subsidies for onshoring? More fracking? Mr. Trump was far more willing to openly criticize the Fed, but there is little evidence that it affected their policy choices. Furthermore, markets have been convinced throughout the Biden administration that the Fed lacked the political will to raise rates or, now, to hold them higher for longer.

But of course, maybe the chattering classes are correct: Donald Trump harbors dictatorial ambitions. But dreaming and doing are two very differentthings. To effect a dictatorship Mr. Trump would require supermajorities in both houses of Congress, something that no Republican president since the 1870s has enjoyed, and which both polling and the number of “blue” states suggest has near-zero likelihood. Even then, he would need to overcome both the Federal bureaucracy and judiciary, neither of which showed any willingness to cooperate with him in his first term. Furthermore, he demonstratedin his first term that he lacks the governing competence and the political machine necessary to fill the 3,000 Executive Service appointments required to manage a vast bureaucracy.

So, for a Trump dictatorship to emerge, we’d need to assume that (1) in the last four years he’s learned how to manage 2¼ million civilian government employees, whose surveyed party affiliation leans heavily towards Democrats, and 2¼ million military personnel, whose officer corps his predecessor just purged of his sympathizers; (2) the Republican Party he has taken over, but in which he is winning only just over 50% of the primary vote, will provide him with a loyalist political machine to staff all his appointments; (3) that Republicans – and not just any Republicans, all loyalists of Mr. Trump – will sweep both houses of Congress with supermajorities in each; (4) that all of the Democratic appointees in the Federal judiciary will resign en masse, clearing a path for a (ready) slate of Trump loyalist appointees; and (5) that all US states, including all the blue ones, cooperate with the new Trump administration. I would argue that none of these are likely individually, and that their joint probability is – in precise mathematical terms – asymptotically close to zero.

US political instability in or around this year’s election is not my base case and I do not think one can put a probability on it. But a realistic read of the current US situation suggests that its probability is not small. More concretely, it is far more likely – and its market effects far more consequential – than a Trump dictatorship.

How then does one hedge US political instability? Those are insights I reserve for paying subscribers. Wouldn’t you like to be one?