At some point, the foreigners that have been lending money to the United States start to worry about whether they are going to be paid back. They lose confidence in the dollar and it falls against other currencies: 10%, 20%, 50%. The US government still has to borrow $50B each month to fund its deficit; now it has to offer higher and higher interest rates to get those loans: 10%, 20%, 50%. As always, businesses and consumers have to pay even higher interest rates than the government.
Imported goods become much more expensive, driving inflation to 5%, 10%, 20%. Consumer confidence falls, and consumer spending—which accounts for two-thirds of GDP—contracts. Businesses are priced out of the capital markets; expansion and hiring are out of the question. As consumers stop buying, businesses lay off staff. Unemployment climbs: 5%, 10%, 20%.
Millions of consumers with adjustable-rate mortgage and credit card debt find themselves crushed between soaring interest payments, unemployment, and price inflation. Banks foreclose on houses and then try to sell them, but even people with money and jobs aren't buying houses—not with interest rates over 20% and the economy collapsing all around them. The housing market craters.
To Bush, none of this is a problem: it is an opportunity to grab more power. As interest rates approach 100%, he asks for—and gets—"emergency powers" from Congress. It's a grab bag: more police powers, economic controls, a military draft (soft-pedaled as a "national service" requirement); but the most important provision takes control of the banking system and the money supply away from the Federal Reserve Board and gives it directly to the president.
With control over the banks and the money supply, Bush no longer needs to borrow money: he simply credits dollars to government accounts that need them. It's like printing money, but more convenient, because he doesn't actually have to run printing presses. As Bush pumps more and more money into circulation, high—but ordinary—inflation becomes hyper-inflation. People start quoting the inflation rate in percent per month, then percent per week, and finally percent per day.
Bush tries to suppress hyper-inflation domestically by applying wage and price controls. This works...superfically...for a while. It also creates black markets for all goods and services. People scrambling to feed their families suddenly find themselves on the wrong side of the law. The government uses its new police powers to round up otherwise law-abiding citizens, herding them variously into prisons, labor camps, or the military.
At the same time, the dollar becomes worthless in foreign exchange. OPEC reprices oil in Euros, and all foreign suppliers demand payment in hard—i.e. non-dollar—currencies. Domestic businesses begin keeping their books in Euros, even as they transact in incessantly depreciating dollars.
Coming into the 21st century, the US was financing its trade deficit primarily by selling
Now, no one will buy US debt, and assets are being picked up at fire-sale prices. No one wants our services with the economy in chaos: foreign students stop enrolling in American universities; foreigners withdraw money from American banks. The value of our intellectual property turns out to be broadly tied to our success as a society: now that we are failing, foreigners aren't so interested in hearing our music or watching our sit-coms. In short, we have little of value to sell.
Without foreign exchange, the US can no longer import oil. With two-thirds of our oil supply gone, the actual price of oil becomes nearly irrelevant: there just isn't enough to keep the country running. Air travel shuts down; auto, truck, and rail traffic is sharply reduced; electricity becomes unreliable. Without fuel and fertilizer, farm production falls.
The federal government tries to manage the economy through its wage and price controls, but these are increasingly divorced from reality. No one can live on official wages; nothing is for sale at official prices. The net effect of the market controls is to drive what remains of the economy off the books and underground.
As official employment collapses, so does the federal government's primary source of revenue: payroll withholding taxes. The government can pay its debts and its entitlements (e.g. social security, Medicare) in now-worthless dollars. However, it can't generate enough real revenue to run its operations.
The federal government hasn't asserted military control over the states since the Civil War. Since then, its power has flowed from the fact that it
At this point, no one is paying much attention to rules—federal or any other kind—and the bulk of GDP is in the underground economy, where the government can't get at it. The federal government starts to become irrelevant.
The economy continues to deteriorate. Consumers band together to save costs. People drive in car pools. Neighbors form "house pools", crowding together in a single home in order to save heating costs. Churches provide moral support and organizational structure for communities that are trying to cope.
Local extortion rackets—Mafia—appear and expand. Previously, Mafia were restricted to preying on the poor, on inner-city businesses, and on people already engaged in illegal activity, such as narcotics or gambling. In the chaos, they now find free reign to prey on everyone and everything, limited only by their geographic reach. In some places, the police manage to keep the Mafia in check; in some places they don't; in some places there doesn't seem to be much difference between the police and the Mafia.
When winter comes, chaos and confusion give way to a stark reality: there isn't enough food or heat to go around. State-level politicians step in and work to secure supplies for their constituents. No one has any money, and the markets are in a shambles, so they get on the phone and start horse-trading with their counterparts in other states.
A kind of barter economy emerges among the state governments. It's better than nothing, and it gets most of the population through the winter. However, it turns the entire economy into one big patronage system. Political power goes to those who can provide for their constituents; constituents, in turn, become dependent on individuals within government. Patronage flows all the way down the distribution chain: from the state, to cities and towns, to neighborhoods, to the guy on your street who has a "connection". Civic organizations, such as churches, schools, charities, and fraternal groups also get hooked into the flow of supplies and patronage.
The politicians in the middle of all this do not act as honest brokers. They trade goods, services, favors, influence: whatever that have for whatever they need. The effect is corrosive. Communities that came together for mutual support divide into hostile camps. Mafia that have already subverted local police forces extend their influence into state government. States jockey among themselves for position, in constantly shifting alliances and trading blocks.
When spring comes, local leaders turn their attention from the practicalities of food and fuel to the politics of demagoguery and the masses. Some begin whipping up fear and hatred of outsiders—in this case, people from neighboring states. Evangelical religious leaders preach that the world is ending—a claim that appears to be amply supported by evidence on the ground. Millions turn to religion for salvation.
Politicians try to curry favor with their constituents by addressing local hot-button issues. Some western states legalize marijuana. Some southern states outlaw abortion. The federal government makes indignant noises about this, but doesn't actually do anything.
A white-separatist group in a northwest state declares itself sovereign, and claims a large chunk territory across the Rocky Mountains and the great plains. They set up checkpoints on the roads, and begin collecting taxes from the local residents. Taxes are collected as a fraction of whatever people have: hard currency, food, fuel, weapons, sometimes vehicles. Collection is carried out—quite literally—at the point of a gun; still, it is a more or less orderly affair, and residents who pay are generally left in peace. With an established tax base, the separatists can continue to feed and arm themselves.
State police attempt to dismantle one of the group's checkpoints, but find themselves outgunned and withdraw. The governor calls out the National Guard. Most of the Guard is currently posted overseas; what remains is inexperienced and poorly equipped. In a pitched fight, they can take control of single checkpoints, but they can't hold territory, and they can't drive the separatists out of the state.
The state legislature then sues the federal government for relief under Article IV, Section 4 of the U.S. Constitution, which provides
The United States shall guarantee to every State in this Union a Republican Form of Government, and shall protect each of them against Invasion; and on Application of the Legislature [...] against domestic Violence.The President recognizes that he has to respond to this, and the obvious response is to send federal troops in to secure the state. He still controls the military, of course: over one million people in uniform. However, it's not as many as it seems.
One quarter of the military is the Navy, which is of little use in the Rocky Mountains. Another quarter is the Air Force. The Air Force could bomb the mountains—or the cities, for that matter—but that isn't what is needed. What is needed is men, on the ground, to take and hold territory.
The Army and Marines have only a half million soldiers between them, and 80% of these are in administrative, support and supply functions. In the end, there are only 100,000 soldiers who actually carry guns on the field, and these are almost entirely deployed overseas, in Europe, Japan, South Korea, Afghanistan, and—especially—Iraq.
US troops stationed overseas haven't been supplied or paid in hard currency since the dollar collapsed. Those in hostile countries fought until they ran out of something critical: food, fuel, or ammunition. Then they withdrew to surrounding, friendlier countries, abandoning most of their weapons and equipment as they went. Those in friendly countries just stayed put—but without supplies, their combat readiness is close to zero.
Earlier, the administration could have brought the troops home on Navy ships. However, it didn't want such a visible symbol of defeat, and chose to leave them overseas. The host governments are giving them food, partly in deference to the United States, and partly as a humanitarian gesture. The troops have drifted into limbo—something between POW, refugee and guest. Some are quietly deserting.
Bringing troops back now is problematic: the Navy is short of fuel and seaworthy ships. Rather than try, the government constitutes new divisions with conscript soldiers, and puts them under the command of officers who were stationed state-side. Then it sends them out to secure the territory claimed by the separatists.
The conscripts are poorly equipped and trained, and openly hostile to their officers. The officers are heartsick to find themselves commanding conscript troops, fighting on American soil against other Americans. The separatists adopt the tactics of the Iraqi insurgents
The army gets bogged down; casualties mount. The separatists retain effective control of the territory. At this point, it becomes obvious to everyone that the federal government is powerless. Most of the states declare themselves sovereign. State politics suddenly become paramount.
Some states maintain more-or-less democratic governments. Some have a brief power struggle, followed by one-party rule. Some of the small, urban states are effectively controlled by the Mafia. Some of the big, rural states revert to a wild-west, frontier lawlessness.
The states start doing the things that all sovereigns do
The establishment of border controls makes explicit a problem which has been lurking in the background for some time: many of the states are not economically self-sufficient. Land-locked states need ports. Urban states need food and fuel. Agricultural states need oil and machinery. Industrial states need raw materials. States with natural resources need equipment to extract them.
A few big states, like California, Texas, and New York, have a sufficiently diversified economy and resource base to function on their own. Small urban states, like Delaware and Rhode Island, are simply not viable as independent countries. For most states, the critical problem is securing enough food to feed their people.
States formalize trading agreements with each other. These keep essential supplies flowing—for the time being. At the same time, they work frantically to establish their own sources for whatever they lack. In general, the more self-sufficient a state becomes, the more bargaining power it has with its neighbors.
States with true democratic governments pay some attention to the environment and infrastructure. Everywhere else, the environment is ruthlessly exploited and polluted, and infrastructure is left to crumble. Sewage treatment fails, leading to cholera outbreaks. No one has been vaccinated against anything in years. AIDS and tuberculosis spread. Childhood diseases return. Medical treatment ranges from poor to non-existent. When people get old, or sick, or injured, they just die.
The trading agreements between the states bind them into an uneasy confederacy. States that are particularly unhappy with their lot sometimes start border wars with their neighbors, but the system mostly holds together—for a while.
States with democratic governments try to rebuild their economies and keep peace with their neighbors. States that have devolved to kleptocracy or anarchy don't generally cause trouble, as long as the elites get what they want. States that have fallen to one-party rule cause trouble.
In one-party states, the governing parties are riven with factions. To stay on top, politicians need a power base within their party and among the people. In some cases, religious fundamentalists get control and turn the government into a theocracy; religious persecution of other factions follows. In other cases, the dominant ethnic group (usually white) grabs power and engages in balkan-style ethnic cleansing.
Every state builds up its military. In one of the mid-lands states, the ruling party looks outwards, instead of inwards, and begins a war of conquest. Driving south, it seizes oil fields in Texas, Oklahoma and Louisiana. Driving north, it occupies the Midwestern croplands, and beyond that, the industrial areas around the Great Lakes.
A single government now controls a broad swath of land running from the Gulf of Mexico to Canada, and with it, the bulk of the country's energy and food supply. It declares itself sovereign over the entire country, and makes it clear that states that resist its rule will be starved into submission.
The rural western states have few resources and few alternatives; most submit. Within a few months, the new sovereign controls half the land area of the country. The east and west coast states don't submit. After some intense debate, they decide not to wait for famine, and launch a preemptive war.
The war looks like something from the early 20th century. Few states have the wherewithal to field aircraft or tanks. Troops are rolling around the countryside in trucks and primitive armored vehicles. The logistics of keeping troops fed and supplied across thousand-mile supply lines are daunting. When fighting takes place, it typically degenerates into trench warfare. Casualties climb into the millions.
Eventually, someone gets their hands on some tactical nuclear weapons. Mushroom clouds appear over America. Fallout blows around the world. The United Nations Security Council (sans the United States) authorizes military action against the United States to stop the fighting or—at least—the use of nukes.
African countries offer to send aid.