How I Learned to Love the Debt

By John Mauldin



That means the rules of investing we have come to know over the last 50 years are likely—as in very, very likely—to change. But we should generally do fine as long as we change our own investment strategies accordingly.

Ben Hunt over at Epsilon Theory recently riffed on Stanley Kubrick’s 1964 masterpiece, Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb. He did a great parody with it called, Modern Monetary Theory: How I Learned to Stop Worrying and Love the National Debt.

Source: Wikimedia

Could we actually see Modern Monetary Theory in the US? Lacy Hunt in his latest quarterly explains how it is theoretically possible for the Treasury Department to issue zero maturity, zero interest bonds to the Fed, which would then deposit dollars into the Treasury bank account. This would, at a minimum, create inflation and possibly hyperinflation. To say it would be destructive is like comparing an ocean breeze to a category five hurricane. It would in fact be a financial disaster of biblical proportions.

I don’t believe it will happen that way, though. We will instead run up debt the old-fashioned way: Japanification and massive amounts of quantitative easing. Let’s look at how that might play out.

The Financial Times has a very helpful graph using Congressional Budget Office data showing the deficit as a percentage of GDP, both in the past and forecast for the next 10 years. (You can see the underlying CBO report here.)

When you realize that the GDP is well over $20 trillion now, and the CBO projects the GDP to grow, this chart visually understates the reality of growing deficits. Let’s look at another helpful chart, which actually shows the dollar amount of the projected deficits.

Source: CBO

Basically, the projection is an average annual deficit of $1.2 trillion per year for the next 10 years. But there are a few caveats.

First, let’s assume away the real world. To give the CBO their due, they only assume 2.3% GDP growth, very mild unemployment growth, and roughly 2% inflation.

But here’s the kicker. Well, actually there’s two. They assume no recession and they make no allowance for the roughly $400 billion per year in off-budget expenditures that I described last week.

The off-budget expenditures mean that, even without a recession, the debt will rise $1.6 trillion per year for the next decade. That means the national debt will be $40 trillion by 2029.

If, as I expect, there is a recession, we will reach that $40 trillion number sooner, sometime in 2026 through 2028. The deficit in a recession will be a minimum of $2 trillion per year and maybe much higher than those suggested above.

There will be some token movement to reduce spending, but it won’t make much difference because “mandatory” spending (a euphemism for Medicare, Social Security, and other entitlement programs plus interest on the debt) plus defense spending overwhelms so-called “discretionary” spending. Here’s the CBO chart (again in terms of GDP because the absolute numbers would scare you).

Source: CBO

Even if we could cut some discretionary spending, the deficits would still be huge as there is no constituency for cutting entitlement programs. We will talk about why growth will actually slow under such a scenario in a later letter. Today’s question is, where will we get the money to pay for this spending?

Answer: The Treasury Department will sell bonds and run up the debt. That’s a given. Then there will be a recession, as there always is, and then the Federal Reserve will take interest rates down to the zero boundary (otherwise known as financial repression and the devastation of savers), followed by unprecedented amounts of quantitative easing… just like Japan has done.

Again, this isn’t the end of the world, at least if we pursue it that way. Full-on MMT would be much, much worse, and if I seriously expected it, I would be preparing to ride out a hyperinflation scenario. But I do not think that will happen.

Is it possible? Sure. The most dangerous thing for investors is to not imagine what could go wrong with their basic thesis (hat tip Ben Hunt).

Right now, my base case is for a more or less deflationary world. We will explore that and some alternatives at the conference this year (which is sold out, but you can still get a Virtual Pass here).

Monetary Hockey Stick

Now let’s think how we got here. The response to the last crisis setup the next one. A lot happened in 2007–2009, during which we endured a recession that left little chance for reflection. Now we have that chance.

Those in authority back then faced enormous pressure to “do something.” Letting nature take its course may well have been the best strategy, but it couldn’t happen that way in our political system. They had to act.

(Sidebar historical note: there was a Crash/Depression in 1920–1921. You never read about it. President Warren Harding simply did nothing and let prices and markets clear. It was all over by mid-1921, and we got the Roaring 20s. No Fed or government intervention, except the Fed did raise interest rates to 7% after inflation World War I, so they get a share of the blame. And there was the gold standard, so no QE was available. Back to our world…)

In 2008–2009, we got things like TARP—the Troubled Asset Relief Program that used $431 billion of your money to buy loans that banks no longer wanted on their books. The government eventually sold most of them, as well as equity warrants received from participating banks, so the net cost came out much lower. But that wasn’t a sure thing.

What we now forget is that TARP helped banks that weren’t even banks before that point. Goldman Sachs, Morgan Stanley, and numerous other broker-dealers and insurers hurriedly got bank charters specifically so they could be part of TARP. The government welcomed it, too. That’s the kind of unpredictable change I described last week.

But these fiscal and regulatory surprises pale in comparison to the Federal Reserve’s unprecedented monetary actions.

Rate cuts were only part of it and not the most important, but they were huge. In August 2007, they cut Fed Funds a quarter-point from 5.25% where it had stayed for some time. A year later, it was down to 2%, and soon was effectively zero. Compare that to the current cycle, which spent four years raising the rate from that effectively zero level to the present 2.5%.

The Fed is perfectly capable of moving rates far more aggressively than we have seen recently, and in either direction. But the bigger and even more aggressive policy move was in asset purchases, which included but weren’t limited to quantitative easing.

When the crisis hit, the Fed by law could only buy certain kinds of assets: Treasury securities, bank debt, federally-backed mortgage securities, and the like. They didn’t change the rules but instead stretched them far beyond what anyone envisioned could ever happen.

That hockey-stick jump in the Fed’s balance sheet assets wasn’t on anyone’s radar, but it happened. The Fed then added several more rounds before finally topping out and recently beginning to exit.

Was any of this the end of the world? No. The markets absorbed it all and even performed well. In fact, markets performed well because they absorbed all this craziness. In that lies the seed of our next cycle.

Killer Debt

Recently I sent Over My Shoulder members a Swiss newspaper interview with my friend William White. Bill is former chief economist with the Bank for International Settlements and my favorite central banker. He speaks with unusual candor. (He’ll be at the SIC, by the way, and you can hear him by getting a Virtual Pass).

In discussing the current move to loosen policy, the reporter asked, “How did we end up in the debt trap?” Bill’s answer:


In the Great Recession, we had both fiscal easing (TARP, expanded safety net programs, etc) and monetary easing (lower rates, asset purchases, QE). The result, exactly as Bill said, was sharply more government debt and private sector debt.

That may seem counterintuitive, since recessions supposedly bring deleveraging. That happened, but not uniformly. Some deleveraged while others added more, and the latter group was much larger. And the Fed’s vast liquidity injections enabled it.

Bill went on to explain that debt problems are about solvency, but central banks provide liquidity. A fractional reserve banking system has a lender of last resort in order to avoid collapse in a bank run. Bailing out borrowers who can’t repay is not its mission or its talent.

Nonetheless, under pressure to act, the Fed and its peers did what they could: throw money in all directions, hoping some of it would stick. Some of it did, too. The new liquidity found its way into assets whose prices then rose, enabling more borrowing, driving asset prices higher again, and here we are.

According to the Institute for International Finance, global debt was $244 trillion as of Q3 2018. More than half of it was financial and non-financial corporate debt. About 27% ($65 trillion) was government debt (not counting unfunded liabilities, which are huge).

Source: Bloomberg

Household debt was the small category and hasn’t grown that much in the US.
Here’s a closer look via the New York Fed’s quarterly survey.

You can see in the chart how US households retrenched in the recession, then began slowly adding more debt in 2013 and after. Mortgage debt is still slightly below its pre-crisis peak.

Corporations did not limit themselves like families did. Here’s nonfinancial corporate debt growth for that same period (2003–2018).

Source: St. Louis Fed

The recession (shaded area) had almost no effect on corporate debt growth, which continued merrily higher. Note that this is only securitized debt; much more exists on private books. You could argue that the added debt is not so dramatic as a percentage of GDP, which also grew in this period. That’s true, but it’s also riskier debt. The proportion of bonds at junk or near-junk status has grown significantly.

I’ve quoted several times now my friend Peter Boockvar’s statement, “We no longer have business cycles, we have credit cycles.” His point: Falling asset prices won’t be a result of the next recession; they will cause the next recession. And asset prices will fall when the free-flowing credit that pushed them so high recedes, which it is doing right now thanks to the Fed’s two-factor experiment of simultaneously hiking interest rates and reversing QE. (Peter will speak at the SIC, too, by the way. Get your Virtual Pass.)

The Fed is now at least pausing that experiment and appears set to reverse it later this year. I fear they are acting too late. The latest corporate earnings news and lots of other data suggests the cyclical weakening has begun. The next marker will be some high-profile debt defaults, probably among lower-rated issuers. I don’t know who: WeWork, Tesla, name your favorite. But somebody is going to run out of cash and find themselves unable to refinance for the 97th time. And then the real fun will begin.

Dominoes Dropping

Years ago, I started calling Japan a “bug in search of a windshield.” I was certain their economy would go splat as they ran huge government deficits, cratered their own currency, and had the Bank of Japan buy every financial asset that wasn’t nailed down.

Well, the Japanese have enthusiastically implemented all those policies. I’m not going to say it worked… but the bug hasn’t yet hit the windshield. Other governments and central banks have noticed, too.

Here’s what they observe. Japan has spent decades with zero or negative rates, engaged in massive QE and boondoggle spending, gone in and out of recession, and somehow stayed on its feet. An economic boom it is not, but the country avoided the worst nightmares. That’s a “win” in the way central bankers think.

Meanwhile, Mario Draghi’s European Central Bank tried a similar strategy to the extent it could, given that the Eurozone lacks a unified fiscal authority. It seemed to be working, well enough that the ECB decided last year to end some of the extraordinary measures. But simply talking about it appears to have put the Eurozone economy into a mild flu. So now they are back on a Japan-like course.

Italy alone has so much debt it could easily become another Greece, but far larger and more difficult for the rest of Europe to rescue. Italy is already in recession, albeit a mild one (so far), but its debt load is still rising. At some point, it becomes a systemic risk to the Eurozone and EU.

And the US? As I’ve said, the Fed waited too long to start exiting from crisis-era measures. They gave the economy time to go from “dependence” on easy money to outright “addiction.” And as we all know, addictions are very, very hard to break. So now the Fed has cold feet, too. Further tightening appears unlikely. They will try to cut rates as the weakness grows more obvious, but it won’t help, and they will start digging through the toolbox for something else to try.

Whatever they do will probably surprise and alarm us. It will not have the desired effects, at least not as fast as they want. But it also won’t kill us if we prepare for it.

The dominoes are starting to drop as expected. To review…

  • The entire world is up to its ears in debt, thanks to a decade of central bank action.

  • We are late in a growth cycle that is going to end, possibly soon.

  • Whenever it does, US government borrowing needs will skyrocket higher from already astronomical levels.

  • The Federal Reserve will end up monetizing this new debt.

Working off that debt will take years, possibly decades. Hence the long, slow Japanization I’ve described. I don’t think we will endure it for 30 years like Japan has. We will instead force a worldwide default, which I’ve dubbed the Great Reset.

Beyond that lie better times. But we’ll go through hell first.

Washington DC, Dallas, and Puerto Rico

Next week, I fly up to Washington DC, to record a video with my good friend Neil Howe. I’m sure I will find a few other friends to meet with before I turn around and come back to Puerto Rico. Towards the middle of May, I will head to Dallas for the Strategic Investment Conference.

Almost every day, I have a session with some of the conference speakers and panelists, coordinating what they will say and making sure that we stay on theme. I am really pumped and almost can’t wait. While the conference is sold out, a few spots may open up on the waiting list if you want to be there. If not, the Virtual Pass is the next best thing

On Wednesday, I met with a group of very sharp investment advisors hosted by Brian Lockhart of Peak Capital Management. We talked portfolio construction and strategy. The conversation reminded me that I need to do a letter or two on that topic, plus a new indexing methodology that I suspect is going to take the world by storm. There are so many things happening in the investment world as opposed to the macroeconomic world that really should be explored.

Finally, I had dinner with Lyric Hughes Hale and some of our friends. She invited a young man in from Silicon Valley who literally watches over 5,000 Ethereum developers working to use that blockchain technology to change the world. I am a big intellectual fan of Ethereum. Lyric, who is writing a book on China (and one of the smartest economists I know), made the boldest prediction of the night. She thinks Trump will outlast Xi Jinping in office. She regaled us with stories of what’s happening on the ground in China, and if true, there really is trouble in River City. It made for a fun evening.

Have yourself a good day and get together with some friends. Shane and I get to go meet some neighbors this evening here in Dorado who have as their guest Liz Ann Sonders, chief investment strategist for Schwab, who will kick off my conference on Monday, May 13. I see more interesting conversations ahead. You have a great week!

Your thinking about portfolio construction for the future analyst,

John Mauldin
Chairman, Mauldin Economics

The Geopolitics of Deadwood: Cold War in the Black Hills

This April Fools’ Day, we pay homage to the HBO cult Western that expertly blended fact and fiction, and the city that inspired it. The long-awaited movie will be released in May.

By Cole Altom

If you could create a community from scratch, knowing all that you know of what the land had to offer, understanding everything you understand about human nature, what would it look like? How would you create laws and rights in a place that has neither? How would you transact business? How would you instill in the community the value of the institutions that purport to serve it?
And if you decided to build these institutions, how would you maintain and promote them? To what extent would you rely on brute force as a necessary adjunct to their creation? Would you consider other means? Would the short-term benefits of your tactics outweigh the costs to your strategic interests?
Geopolitics may be the study of people in place, but what is so often ignored in the arrangement, but is just as often true, is the power of people. Not in their capacity to subjugate the lands they live on but in their competence to sustain the communities they build. Geography is fixed, more or less, but people are mutable, even mercurial. Geographic forces and features inform the decisions of those who are endowed with the responsibility to make them, but those same forces and features can’t dictate what the decisions will be. Leaders always have a choice. What happens, then, when they choose wrong?
The answers to these questions, no matter where they’re asked, form a story. And the story of Deadwood, the mining camp in South Dakota where there existed no legal authority other than the one it made for itself, is perhaps the best example of how people can fail in a place where they shouldn’t, and how in their failure they can forfeit the community they built. It’s a story of how a boomtown for the many succumbed to the wills of the few, a story of how a community came to be and how, in time, it came undone.
Deadwood is geopolitics at its rawest and most basic, for what is geopolitics if not the tale of how certain people in a certain environment fabricate something from nothing, how the decisions they make, constrained though they may be by the conditions in which they find themselves, build a society where others prosper and fail and live and die and force upon themselves, however unwittingly, the responsibility of perpetuating that community.
An Oasis in the Great American Desert
By the early 19th century, the United States, the country to which Deadwood would eventually belong, was beginning to look less like a patchwork of discomposed communities and more like a coherent nation. The central government was able to consolidate control over nearly the entire eastern seaboard, bringing all 13 colonies under one frayed banner. Yet the United States was insecure. Most of its territory lay along the Atlantic coast, leaving it vulnerable to enemy navies and amphibious attacks. The United States couldn’t guarantee its national security without a navy, and it couldn’t develop a navy without first developing and diversifying its economy. Economic development demanded expansion. With nowhere else to go, early Americans ventured west, eager to stake their claim in America’s untamed frontier.
But when they finally looked upon the lands at their disposal, they could barely comprehend what they saw: vast grasslands stretching endlessly in every direction. Though they couldn’t have known at the time, these great plains are some 2,000 miles (3,200 kilometers) long and 500 miles wide, covering an area of about 500,000 square miles, equal to roughly one-fifth of what would become the contiguous United States. The plains encapsulate at least parts of present-day Montana, North Dakota, South Dakota, Wyoming, Nebraska, Kansas, Colorado, Oklahoma, Texas and New Mexico. Much of the region is treeless, semiarid and flat, with cold winters and warm summers, with low precipitation but high humidity, given to sudden and sometimes violent swings in temperature. In time, these conditions would earn it its nickname, the Great American Desert, and though the pilgrims can be forgiven for their ignorance, this “desert” contained some of the largest and most productive arable lands on the planet. At the time, they saw it for what it was: a barrier between the settlements of the east and the promise of the west.
Yet the Great Plains are hardly uniform. Throughout much of the north, they become more monotonous and less inviting. The lands boast countless acres of short grass and stunted shrubs, located at high altitudes on the leeward side of the Rocky Mountains. The area receives a mere 15 or so inches of rain each year, nearly 80 percent of which falls between April and August. Droughts are not uncommon. The sun is unsparing, the shade is sparse.
But, on the southwestern edge of what is now South Dakota, the Northern Great Plains give way to a small but conspicuous mountain range that rises thousands of feet above the flat expanse as shadows on the horizon, a protrusion of rock covered in dark green pine trees known as the Black Hills. It is an oasis in the Great American Desert.

The hills, which run roughly 60 miles wide and 100 miles long, are enveloped by two branches of the Cheyenne River, the South Fork and the Belle Fourche, from which several creeks snake through the rock like tendrils. They carve lanky gulches and valleys across the hills, and the towns that formed here are similarly long and narrow. One such valley, known as Whitewood Valley, located in the northern part of the Black Hills where Deadwood would spring to life, is just 200-300 yards wide.

As local historian Watson Parker notes, “The deep valleys, plentiful streams, rich mountain meadow pastures, and the abundant pines combined with mineral resources to make the Black Hills … a land of opportunity in a time of grief and troubles.” In other words, the hills had gold, and they had the associated resources necessary to mine it. Soon it would have miners. All it needed was trouble and grief, both of which would arrive aplenty and both would, in time, call Deadwood their home.
Deadwood, however, was not their first choice for encampment. That honor belonged to Custer city, located in the southern portion of the Black Hills. In early 1876, the area in and around Custer city was swarming with thousands of prospectors, merchants, artisans, smiths, coopers, grifters, drifters and others who had endeavored to stake their claim in these promising lands. But as word of more prosperous diggings in Deadwood made its way to Custer city, these prospectors, merchants, artisans, smiths, coopers, grifters, drifters and others went north. By 1880, when the official census was taken, Custer city had only 200 or so residents left. Deadwood had more than 10,000. A nearby newspaperman said that he “had never witnessed … so sudden, so total and complete, a depopulation of an old mining camp by a rush for a new one, as was the stampede from Custer city to Deadwood in the early spring of 1876.”
Seven Nation Army
The geography of the Black Hills forged the gold that would become the obsession of prospectors far and wide, but before the arrival of white settlers, it had been the bedrock upon which one of the most iconic nations of the American frontier lived and died, a tribe of horsebound nomads whose martial acuity so angered and terrified its enemies that, according to some accounts, it would inspire them to simply refer to it as the “enemy,” or, more familiarly, the Sioux.
That’s the legend, anyway. Like so many things in and around Deadwood, legend didn’t always comport with reality. In fact, “enemy” is probably an ungenerous translation for “people of an alien tribe” that became progressively more Latinized as the Sioux intermingled with European settlers. The truth is that they were no more monolithic than any other nation. Theirs was a confederacy of seven bands and sub-bands collectively known as the Seven Council Fires that spanned the Northern Great Plains and were broadly differentiated by three divisions named for their respective dialects – Dakota, Lakota and Yankton-Yanktonai – each with their own customs and traditions. The largest and most dreaded of these council fires was represented by the Lakota, and since they occupied the lands on which the Black Hills were situated, they became the primary belligerents against the U.S. in the Great Sioux War of 1876.
They were well prepared for the fight. The Lakota were nomadic hunters, experienced in the art of war, who ranged an expanse of land from the Platte River to the Heart River, from the Missouri River to the Bighorn Mountains. Many of their leaders – Sitting Bull, Crazy Horse and Red Cloud – are among the most celebrated and most infamous in Native American lore. Citing resource scarcity, economic despair and a general dissatisfaction with white encroachment, they and countless leaders like them had been fighting the U.S. government intermittently since the 1850s and would continue to do so until 1890. Twice they proved so formidable in these wars that they forced Washington to the negotiating table, culminating in the Fort Laramie treaties of 1854 and 1868, the latter of which deeded the western portion of South Dakota, including the Black Hills, to the Sioux.
Sitting Bull and Red Cloud, however, ignored the treaties and continued to fight, undertaking new uprisings in the early 1870s – around the time white settlers discovered gold on their lands. Settlers flocked to southwestern South Dakota in clear violation of the Fort Laramie Treaty. Washington offered to buy the land but the Sioux refused, and so, in early 1876, the United States launched a military campaign to force them back onto the reservation. Though the U.S. would eventually win the Great Sioux War, the campaign suffered early defeats, once at the Battle of Rosebud and again more famously at the Battle of the Little Bighorn, provoking notions of revenge that would be one of the biggest motivating factors in Washington’s reclamation of the Black Hills.
White Fright
But it wasn’t the only factor. Rumors had circulated for decades that the hills were flush with gold, and in the summer of 1874, when Gen. George Custer was sent to reconnoiter the Sioux reservation for a suitable outpost from which his company could pacify the Indians, the rumors were confirmed. They didn’t find a fort, but they did find gold. Custer’s soldiers told tales of small but promising mineral deposits to a country that was all too eager to hear them. His failure to locate an outpost, and his subsequent failure at the Little Bighorn, sparked the gold rush of 1874.
But if Custer’s failures were the spark, the socio-economic conditions of the 1860s and 1870s were the tinder. The Civil War had torn the country apart, and it took four years and more than half a million lives to stitch it back together. Yet many of the injuries the war inflicted – indeed, some that led to war in the first place – never really healed. Reconstruction was a necessary attempt to reintegrate the South into the American body politic, but it largely failed to accomplish its mission. Its most lasting legacy was corruption, resentment and distrust at nearly every level of government.
The U.S. was, moreover, financially destitute. Back then, currency was based on specie; banks issued notes backed by precious metals. Washington didn’t have enough in its coffers to finance all the war’s expenses, so it printed money hand over fist, creating massive levels of inflation that outlasted the conflict itself. Compounding the problem was a decision made by the U.S. Congress in 1873 to demonetize silver. Once it was no longer legal tender, its value decreased dramatically. With paper money and silver worth less than they once were, gold became even more desirable.
As the U.S. struggled to regain its economic balance, Washington encouraged growth through speculation, especially through railroad speculation, something the desecration of the Civil War had hitherto made impossible. Banks raised millions in bonds to finance their projects. But trouble brewed in Europe, where many of the bonds had been purchased. The stock market there crashed in the early 1870s, and investors sold off what they had sunk into American railroad projects. With more bonds available than could reasonably be bought, the railroads went bankrupt, as did the banks that supported them. Many others followed suit. Businesses failed. Unemployment skyrocketed.
Thus began the Panic of 1873. The crisis had many causes – certainly more than are enumerated here – but the effect was singular: It left a lot of people impoverished, people who in their desperation to better their lives ventured into unfamiliar lands for promises of riches such that the Black Hills could provide.
By 1876, western South Dakota had ceased to be a refuge for the Sioux. The Indians still held title to the land deeded to them by the Fort Laramie Treaty, including the Black Hills, but they held it in name only – de facto ownership passed to Washington. Yet the land had not yet been incorporated into the United States. With the Sioux dispersed and the army close behind, and with the Dakota territories in legal limbo, the hills became a bastion for pioneers and profiteers, a sanctuary for the displaced and the misbegotten, a place where enterprising men and women could chart their course in ways they could not elsewhere, for the Black Hills lacked what much of the east did not: laws.
A Lie Agreed Upon
The absence of laws attracted exactly the sort of crowd one would expect it to. It drew in marauders, preachers, thieves, whores, pimps, saloonkeepers and opium merchants, a truly unsavory assortment of miscreants, none of whom was more sordid than Al Swearengen, a local purveyor of spirits whose business operations served largely as a front for his criminal enterprises. (In the early days of Deadwood, there was scarcely a difference between the two.) Shifty but silver-tongued, he became a local power broker, and his knack for forging political alliances would serve him well in the pursuit of his ultimate goal: brokering, on his terms, the annexation of the camp. Swearengen believed that bribing and blackmailing politicians would earn him more money than his current operations ever would. He believed he could more effectively game the system by being a part of the system, and nearly every move he made, many of them brilliantly executed, brought him closer to that goal.
To that end, he made friends of enemies and enemies of friends. He killed his employees when they jeopardized his arrangements and did worse to strangers. He hated government, yet he created one anyway after he learned that doing so would increase his chances of accession. (The Northwest Ordinance of 1787 granted legal rights to otherwise unclaimed land so long as it was worked and improved upon. That Deadwood was located on Sioux territory complicated matters somewhat, so, acting on the legal counsel of a corrupt magistrate from the Dakota Territory’s provisional legislature in Yankton, Swearengen formed a municipal organization whose sole purpose was to collect bribes for the legislators. It had the added benefit of legitimizing the camp’s existence.) The government was a lie, but it was a lie agreed upon.
With the formal structures for political transition now in place, Swearengen leveraged the informal ones at his disposal. He enlisted the help of the newly minted sheriff, Seth Bullock, and deputy Charlie Utter to give himself the appearance of legality; A.W. Merrick, editor-in-chief of the Deadwood Pioneer, to sway the opinions of the masses; Silas Adams, chief diplomat of the provisional legislature, to commend Yankton to his trust; Alma Garret, owner of the most productive mining operation in the camp, to strengthen himself with another pillar of support; Mr. Wu, the crime boss of the Chinese minority upon whose labor the gold mines depended; and countless other spies who together comprised an intelligence network that informed him of the camp’s activities.
So deeply did Swearengen believe that his fortunes were tied to the camp’s, and so steadfastly did he act on his belief, that he missed the emergence of a rival whose interests would challenge his own. Cy Tolliver, who opened a competing saloon and brothel, was a force to be reckoned with. He had more money and guns than Swearengen and a more polished appearance, and since his goal was not to annex the camp but to utterly dominate it for financial gain, he was unbound by the constraints that sometimes burdened his rival. He murdered children who stole from him. He tried but failed to take over the Chinese community. He propositioned the army to donate to his cause a contingent of soldiers that would serve as his private security force.
To be sure, Swearengen wasn’t above doing the same if he thought it suited his purpose. But because he wanted to get Deadwood annexed by the United States, which, unlike the camp, had laws he could someday find himself afoul of, he at least had an obligation to conduct his crimes in secret so as not to tarnish Deadwood’s reputation. Thus he forewent certain nefarious activities – including stealing Alma Garret’s claim and murdering Seth Bullock after one of their many disagreements – so that he would always have a sliver of plausible deniability and a glimmer of legality.
Despite Tolliver’s superior wealth and arms, Swearengen more or less outmaneuvered him at every turn, using all the aforementioned means at his disposal, earning Yankton’s favor by turning Adams to his cause. But Yankton favored him only for want of other options. Officials there grew suspicious of the saloonkeeper because they believed he had murdered one of their own. (And he had, for reneging on a bribe.) They went with Swearengen for now, privately hoping that when the time came to move against the camp, they would have a different fifth column. Tolliver alone couldn’t help them. But with the right backing, perhaps he could.
New backing materialized quickly, for the potential wealth that lay in the Black Hills captured the attention of someone more resourceful, more cunning and more ruthless than anyone who had yet set foot in the camp: the mining baron George Hearst, who had made a name for himself some years before striking it rich in the Comstock Lode in Nevada. Hearst’s reputation preceded his arrival, as did his chief geologist, Francis Wolcott. Wolcott was more of a political operative than a scientist, though, and his presence was central to the upheaval Deadwood would soon undergo.
So was Tolliver’s. He had appeared on Hearst’s radar some months before, when Tolliver tried to hire Chinese immigrants from San Francisco for his attempted takeover of Deadwood. He didn’t know it was Hearst’s laborers that he had tried to poach – to steal workers from Hearst was to consign yourself to death. But instead of punishing Tolliver, Wolcott recruited him, enlisting him to be funder and frontman in a scheme to covertly purchase every gold claim in the camp – which they achieved by circulating lies as to whether Yankton would honor existing claims once Deadwood was annexed.
Yankton had every intention of honoring the claims – at least, that was the arrangement the legislature had made with Swearengen. But once the legislators caught wind of Hearst’s plans, they figured it would be better to own the land outright than to settle for whatever bribes the lands might produce. So, they dispatched their county commissioner to cut out the middleman they never wanted to deal with in the first place. The commissioner brokered a deal whereby Yankton would extend the full support of the incoming government in exchange for certain lands Hearst, through Tolliver and Wolcott, had recently procured.
It was a sensible plan that if not for Swearengen’s tactical brilliance may have even worked. Realizing he was being cut out, Swearengen tricked Yankton into thinking that the Montana Territory was interested in claiming the Black Hills, and the gold therein, for its own. He engaged Seth Bullock to validate the lie. (In addition to being the local sheriff, Bullock was formerly a U.S. marshal in Montana, where he still had political connections.) He conspired with Silas Adams too, and together they concocted a story of Montana overtures that Yankton, in its greed and paranoia, had no choice but to believe. The legislators there knew the Montana gambit was probably a ruse, but dismissing it entirely was a risk they couldn’t afford to take. So, they brokered an agreement in which the camp was annexed on Swearengen’s terms, not Hearst’s – terms that included the holding of local elections that Swearengen would, as best he could, manipulate to his benefit, and terms that would pit Swearengen directly against Hearst.
Amalgamation and Capital
Early in the camp’s history, before the arrival of Tolliver and Hearst, before the Pinkertons and before elections, Swearengen duped an eastern dude into buying a bogus gold claim. To give the ploy a sense of gravity, he set up a fake buyer to try to outbid him. To give it a sense of urgency, he warned the dude that the buyer would act quickly, saying “Things sort out fast in Deadwood … while you were out winning the battle, I hope you didn’t lose the fucking war.”
It was a fateful quote and, in retrospect, a little ironic. Swearengen made his play against the agents of Yankton and got exactly what he wanted. And in doing so, he secured the camp’s well-being, however temporarily. His intentions were never entirely altruistic, of course, but his interests were largely aligned with the camp’s. It’s why he went against the Pinkertons by protecting Alma Garret and why he went against a man as powerful as George Hearst – indeed, it’s why he formed a government he had every intention of ignoring. For better or worse, his material benefit was Deadwood’s, and Deadwood’s his, so he was compelled to rally the titans of the community to his cause. When he fought, his allies fought with him – not for fear of retribution but for a sense of duty to and the mutual benefit of the community he was creating. Thus is the basis of enduring alliances.
But in winning the battle, Swearengen himself lost the war. For all his tactical ingenuity, his strategic vision was fundamentally flawed, for he never saw how important gold really was.
It was easy to overlook. Though the greater Deadwood area boasted as many as 10,000 residents in 1876, only 1,300 or so were actually employed, according to an account from a New York Times correspondent. Some were working their gold claims, others were capitalizing on industries such as hardware and sundry goods that always arise in boomtowns, but the rest of them were just milling about, waiting for fortune to find them.
Moreover, the gold claims that were being worked in the early stages of the gold rush weren’t especially productive. Estimates suggest the 15 most profitable ones yielded only about $30,000 to $80,000 worth of gold (valued at $20 per ounce). These figures exclude additional costs such as wages, timber, supplies, and so on. And many of the claims were joint ventures, so the proceeds were sometimes divvied up among their several co-owners. That kind of money was nothing to sniff at, and was perhaps enough to retire on at the time, but it was hardly the payout the prospectors had hoped for. Furthermore, most of the mines they worked were what are known as placer mines, which are meant to scrape gold deposits from the surface and the streams. Their owners were glorified and sometimes even sophisticated panners, but they were panners nonetheless. Far fewer claims proved lucrative enough to warrant the drilling and milling necessary to explore what lay beneath the surface. (The Garret claim being an obvious exception.) Lode mines were eventually built, but they required more capital than the panners could generate and depended on technologies that had yet to be invented.
What Swearengen failed to recognize – or recognized but ignored – was that though these claims were only modestly fruitful on their own, they collectively represented the true promise and power of the camp. Hearst was not so naive. As Wolcott noted prior to his employer’s arrival, “I look forward to showing you every aspect of what I believe soon may be truthfully described as the largest and most forward-looking gold operation in the world.” When Hearst did arrive, he described Deadwood to a subordinate thusly: “Very, very rich … for pure scale, maybe the richest find I’ve seen.” Hearst understood that the consolidation of the gold trade, not political entree, was the key to power in the camp. He knew that in a town such as Deadwood, which had no laws to speak of, wealth would facilitate political power, not the other way around.
And Hearst used his power to great effect. He purchased every remaining claim in the camp. He hired the Pinkertons to serve as his private mercenaries, intimidating those who would think about challenging him and killing those who already had. He forced Yankton to fix the elections so that local officials would be beholden to him. He vowed to install his own media agencies to spin the news his way. He accomplished, in other words, everything Swearengen had – only faster and more effectively. And he did it because he had the money and the muscle to do it. He became the despot Swearengen never could.
To be clear, there’s no evidence to suggest Swearengen ever wanted to be Deadwood’s dictator. He could have continued to strongarm Alma Garret into selling her gold claim, but he stopped as soon as he heard annexation was in the offing. He could have killed Seth Bullock, but he didn’t, determining that his services as sheriff, with political ties to Montana no less, was too valuable to forgo. He could have executed one of Tolliver’s lackeys for stealing from Mr. Wu, but instead he murdered one of his own, figuring it more important to maintain his business ties with the Chinese community than it was to start a costly and bloody war that would tear Deadwood asunder.
And there’s no reason to believe the camp needed a dictator. Thomas Hobbes would have surely noted that life in the camp was nasty, brutish and short, but not nearly so much as it was in the wilderness. Self-interested though he may have been, Swearengen proved fully capable of bringing a semblance of order and then surrendered his control by making way for elections. The camp was developing slowly, but it was still developing. That is until Hearst, that consummate prophet of capitalism, transformed the camp by enacting laws not for the people but for his own material benefit, relegating the city that Deadwood would become to a life of mercantilist servitude, a proto-colonial trough for Hearst and Yankton to feed on.
In that sense, the damage Hearst inflicted on Deadwood was irrecoverable, for it stunted Deadwood’s growth at a critical juncture in its lifespan. Time and again, history has shown that even when communities rid themselves of their masters and tear down the structures that exploit them, it can take years, even generations, to replace them with new, more equitable structures. There’s still a chance that Swearengen et al. can retake control, but even if they do, it’s merely the beginning of a long-term process to reform the community, for the community they’d be taking over is antithetical to their interests.
Imposing his will on the community, without the purchase of its people, made Hearst a villain. But in a camp like Deadwood, where lofty ideals were inimical to self-interest, the difference between villainy and heroism was always minute and was never really the point. Swearengen may not have been villainous, but neither was he heroic. He merely chose to align himself with those he believed best served his interests. His affinity for the camp, however sincere it may have been, was incidental to that decision. That he made the wrong decision places on his shoulders at least part of the blame for Deadwood’s ruination. He held the power in the community, and sometimes guilt is the price you pay for power.
Which brings us back to where we started: the power of people in geopolitics. The story of a community is at least in part a story of how people there wield power, but because all communities are imagined, so too are their instruments of power. The story of Deadwood is no exception. In 1876, gold was supreme. But to the indigenous peoples who lived in the Black Hills well before the arrival of white settlers, gold would have been as useful as the bow and arrow would have been to Hearst. In time, it became the cause of their displacement. It was the reason Swearengen came to camp, and the reason he failed to secure it.
In that sense, Deadwood is prototypically American. The city is a byproduct of a gold rush and in some ways a natural extension of the United States’ need for strategic depth. Yet it was also a consequence of ideology. Deadwood existed because white settlers set forth to tame the west, animated by the belief that their ideals, those inalienable rights and equalities they talked so much about, ought to be spread, and that a Manifest Destiny should at all costs be realized. There’s power in that belief, even if the belief is a lie, even if the place to which it brought them is imagined.
There’s also an undeniable sense of freedom evoked by that belief. But even for the citizens of Deadwood, who abided by no law for as long as they could, freedom was never absolute. They slowly surrendered it as they cohered into a community, trading liberty for the necessities of organized life. Eventually, everyone cedes freedom to a power greater than themselves – or they die trying to defy it.

Editor’s note: This analysis – and indeed the HBO series that inspired it – owes a great deal to “Deadwood: The Golden Years” by the late historian Watson Parker. It’s an excellent historical accounting, to be sure, but as a written work, it is absolutely singular. Folksy and irreverent, old-timey yet familiar, sometimes somber but always affectionate, “Deadwood” is written with the kind of fondness only a native son such as Parker can provide, and with a liveliness few other subjects demand. It is highly recommended.