In the last post I made the point that the America centered global system faces diminishing returns in it's attempts to expand that system. Another way of saying this is it has reached it's limits to growth. Any attempt to expand will cost more than the benefits that growth provides and eventually it will be forced to stop growing. I also said that it is a system which must grow in order to keep going. Once it stops growing then the system is in crisis. The economy today exhibits this growth crisis in so many ways. It's not too much to say all the indicators are screaming that the crisis is at heart one of growth. As of a few minutes ago, the screaming originated from the geopolitical realm in all sorts of ways, but the basis is this: The irresistible force of the growth imperative is slamming into a wall of resistance in the form of a natural wealth zero sum game.
This is the monster thesis of our times and what this humble blogger seeks to show. By studying this we can make sense of the inflection point.
Zero sum games are familiar enough. Every time you take your paycheck over to a buddy's house for a night of poker you are engaging in a zero sum game. The winner wins the exact sum that the loser loses. The size of the pot is limited by the size of the paychecks of all the buddies and does not shrink or grow. Pillage is another zero sum game. The pillaged lose an equal amount in wealth, misery, and death as the pillagers win in loot, good times, and status. The pot in this instance is limited by how much of the highest value stuff the pillagers can carry away.
Natural wealth is the useful pre-existing stuff that becomes valuable in money terms after it has been removed from the place it was found, usually the ground. In addition to this, natural wealth refers to everything nature does that makes life possible (services), such as plants exhaling oxygen, or grass growing to feed cows. So you could say natural wealth is all the "free" stuff before a dollar is ever used to drag it into the economy. All economic activity stems from this initial natural resource input. For many of the resources we humans depend on, the zero sum game is a one way flow from nature to the economy.
The economic zero sum game that I'm talking about involves the flow of available resources feeding into the global economy. The flow, or rate of flow, is time dependent. It is the amount of resources available on the market in a given period of time. As the word"flow" indicates, there is constancy to it. Over the entire period of the Industrial Age, resource flow has, on average, steadily increased.
Today the flow is in jeopardy. If it is not in fact slowing down it is more expensive to maintain that flow. American shale oil is the best example of a slowing flow rate. The cost of extraction is high and the depletion rate is fast compared to the past. The flow rate of shale oil puts the lie to the Saudi America myth. If it were truly like Saudi oil it would already have been used because Saudi oil is cheap and easy. Another sign of the slowing rate of flow is found in minerals such as copper. Copper miners are digging more and more rock out of the ground to extract less and less copper. This takes more energy to do and so is sensitive to the cost of oil as well. Putting both these trends for copper and oil together you have doubly more expensive resource inputs for economic use.
More expensive resources make it harder for economies to grow. Currently the world economy is not growing. The reason is that growth costs too much, as is evident in the swelling mound of digital debt money. Debt is a claim on the future. Money is created by issuing debt. A growing debt means people expect the future economy to be bigger. If the future economy is not bigger, or isn't even as big as people thought it would be, then a debt bubble forms. It might be useful to think of it as a money bubble with too much money chasing too few good goods. When expectations of a bigger future are not met, people can't pay back their debt, or their debt repayment takes all their money for reinvestment, and the economy doesn't grow. It can be effectively argued that the global economy has a thirty year old debt bubble. In 2008 it nearly popped.
A common analogy to make regarding the economy is to think of it as a pie. This pie is magical, though, because it grows. The pie growing magic spell's lease has ended and so now the pie has stopped growing. This, however, has not stopped people from trying to increase their own share of the pie. Some are successful and some are not. The successful ones, like the U.S., succeed at the expense of another, whose piece of pie shrinks. Think about the European Union, whose share of the pie is shrinking. The U.S. is taking a share of pie that used to belong to the European Union. The U.S. uses for it's currency the U.S. dollar, the world's reserve currency. Every single natural resource except tea (British Pound) is valued in and paid for using the U.S. dollar. The ability of the Fed to strengthen or weaken the dollar is a very big advantage for the U.S. economy, a power the EU does not really have. In a not-growing pie scenario, this matters a lot.
I found two good commentaries in the Automatic Earth's Debt Rattle news feed today to illustrate the zero sum nature of today's global economy. The first by the now familiar Ambrose Evans-Pritchard. Spanish wages have dropped to such a degree that it's car manufacturing plants are having a boom. These Spanish factories are taking jobs from other Eurozone economies whose wages are higher. Spain wins, the others lose. The second is from some wag writing for CNBC who at once describes the policy and political-economic global trade situation very well and demonstrates amply why you should never listen to what economists say. It's the political season here in America and so the trade deficit will at some point be brought up. It matters not at all whether anyone has any idea what to do about it let alone determine why it's like that to begin with. Everyone agrees it's bad. This Michael Ivanovitch talks about trade surplus/deficit in terms of "losing" such and such a percent of GDP, or "stripping" GDP from the rest of the world. Trade between nations, for all it's ballyhooed economic multiplier effect, is, on the balance sheet, a zero sum endeavor.
Ivanovitch seems to think that balancing trade is something likely to happen. Something must be done, after all. But the U.S. getting a trade balance with Germany and/or China runs into two major problems. The first is that these economies are successful because they are such big trade surpluses. The shaving off of GDP from other countries is how they have grown in the past, more so for China but still true for both. The second reason is that these two countries, as well as nearly every other country in the world, has stopped growing. Germany is being taken down with the rest of the EU due to it's trade surplus and China's boom has imploded, in no small part to the fact that Chinese consumers don't buy enough things. So who does the U.S. sell exports to?
The U.S. economy is the last man standing and it's debt-fueled consumption is what makes the world economy turn. But we humans are in a bind because we have an increasing scarcity of natural resources and a money system that wants to shed money. In other words, money wants to track the decline in the resource wealth it represents. This is the bubble in it's starkest sense. How we respond is anyone's guess but the zero sum games of gambling and pillaging resources would be a disastrous way to go. What we see around us is a dying economic system. It's logic has
reached it's furthest extent and is now so addled by debt and other constraints that it can
hardly continue. With QE we are effectively mining the future to maintain the present. At some point it will stop and it will be in crisis.
The nature of the crisis will be deflationary because people will be unable to
repay debt and so the debt (money) will disappear. When people see money disappear a powerful emotional response tends to follow, if I can be allowed a little understatement.
Some cheerful headlines for you:
The main problem with QE:
Financial Toxins
This one relates to the post "Russia and the Falling price of Oil". Might be a good one for Victoria "Fuck the EU" Nuland to read.
Arctic Sea Ice
More people getting energy wrong and losing money because of it.
Speculators
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