Any prediction of a collapse, or of a crisis, made with plausible evidence, inevitably invites the follow-up question of when. You see this a lot with market prognosticators as they form their views based on some model or historical precedent, and confidently declare that a crisis is brewing. Many of these predictions have fallen flat throughout history, especially since 2008, and many of these prognosticators have had to eat, not only crow, but real monetary losses as well, since they so often are players on the market who take their own advice. Of course, market creatures are short term thinkers and maybe look out ten or so years, at best, and rarely. And there is a good reason why this is the case; there is almost no way of knowing what market conditions will be in ten, or five years. Or next year. None of this is to disparage the virtue of the market because of its short-sightedness. All of us live this way to varying degrees.
For this to work, and to obviate the necessity for uncertain, longer term thinking, there has to be an expectation that the future will look like the past. For most of an individual human lifetime, this is a reasonable expectation, and what's true for an individual human can be scaled up to as large an operation as society. Even in the current time, characterized by rapid and increasingly rapid change, there is, at its heart, an expectation of stability, of the normal course of things. In economics, there is a theoretical description of what that looks like, which says there is a baseline trajectory by which an economy unfettered by government intervention will grow at. I call this the "metaphysical rate of growth". Apart from that, as is easy to see, what's good for the economist is good for the politician, of either or any party. The expectation of growth dwells within every politician, and that same cultural expectation also determines the measure of their collective worth.
All of this is to say that an expectation of economic growth is thoroughly entrenched in the way the modern person and culture thinks. Me? I'm different. I'm a bummer that way, and my job is to make more bummers in the world. Now, I say bummer for a couple of reasons. The first is that, to the extent people's emotional states are bonded to a future that growth represents, like Mars colonization, holographic vacations, or space tourism, all of which would require many, many more years of growth, an end of growth would be giving up a certain style of identity centered on future expectations. A much more grim bummer-prospect emerges from the same logic that future whiz-bang, technologically based recreation won't happen, and that is that the present isn't sustainable. Current growth is becoming current opposite of growth as we speak, and it's effects can be seen around the world.
In the quick and dirty explanation I gave in the last post on why I think the seventies was the peak of U.S. power, the main point I wanted to get across is that it was the time at which the Law of Diminishing Returns hit the scene. Before that there was what you might call "organic" growth, meaning the resource base and the build-up of previous capital could support high annual growth rates without an increase in the rate of debt accumulation. If the contemporary debt and deficit is to have any meaning, I think it derives from the expansion of a system destined never to pay for itself. This is not to say that government debt is necessarily a bad thing. It is, in fact, built into how the global system works. However, that the, essentially, incalculably massive amount of debt, which globally for public and private debt holds at a whopping $223 trillion as of last year, and, if you believe shadow banking numbers, the total dollar value of derivatives alone is $710 trillion, is so high that you have to wonder if the debt has any meaning at all.* A useful approach is to think of this debt as an expectation of the future. Apparently people believe the future someday will be on the order of 3-13x bigger than it is today, in terms of GDP and all the oil, coal, iron ore, etc., etc., etc. supplied to support it. What's more, the economy needs to be this much bigger to cover the debt and all these derivative contracts.
Debt can be carried over indefinitely and doesn't so much need to be payed off, especially government debt, but as we've seen, new debt needs to be created, increasingly via the government, in order to squeeze more growth out of the system. Additionally, the ratio between debt and GDP is widening, so you can only expect the differential will continue. From this perspective, it is clear what we are now witnessing is the death of the global system that emerged from the death of the previous system that occurred in the seventies. So what happens next?
Describing what happened in the past is hard enough, and people don't always agree on what happened. Trying to figure out what happens as information wends its way through a human mind, gets interpreted, and then acted on by that human is tough even under laboratory conditions. To say what will happen when trouble of historic proportions is thrown into the mix is nearly impossible. What is clear is that snafus baked into the cake of history are approaching. These can be defined and responded to with thoughtful intelligence and a shared sense of responsibility. On that I'll refer you back to the first three sentences of this paragraph. But, that these snafus can be defined, generally, because it does involve real things we can measure, surmise, and anticipate, then we should be able to, at least, dampen our own individual shock and surprise as the system unwinds. It's a small step, but it is not a small thing.
Somebody somewhere said once: You can either predict what will happen, or when it will happen, but never both. It's impossible to know when a trigger event will occur, or to account for all the events of a complex cause and effect web. What can be known is whether the conditions are ripe for a dramatic change. What I've talked about are two phase changes in the economic life of the industrial world. The 1970's represented the first, and we are experiencing one today. These take time to unfold. Years. Decades, even. We are now in a second phase change that extends from the first. The difference now is that this one takes us on a path down the slope of resource scarcity and an unwinding of the expectations built up from the collective experience of anyone involved in the system as an active participant. And by active I mean alive and buying things.
This system is global. I'll say it again. There is no true delineation between the French economy, the Japanese economy, and the American economy. They are different nodes of one giant financial system that impacts nearly every bit of surface area on the planet. Financial systems periodically collapse. In this way we moderns are no different from anyone in the past. The difference comes from our expectations of the future. In a similar vein, the costs of the system are global. Climate change, species extinction, soil run-off, mineral depletion, energy depletion, are all worsening, degrading the planetary systems economic life depends on. It is happening in a way that jeopardizes the stability of the system well before people really notice why.
*Derivatives are, of course, what gave the housing bubble a particularly nasty flavor and may have been what made it possible. Looked at another way, the housing bubble was simply a manifestation of a much larger global financial bubble that was (is) made possible with derivatives. Add those numbers up and compare it to global GDP of about $72 trillion and you get the sense of how much debt and speculation (or betting) is needed to keep this thing running.
Some updates on the fracking biz in America responding to falling prices.
Capex (investment) for 2015 is starting to fall.
A warning to investors that a lot of debt held by fracking companies is high risk.
Junk Bonds
And one on the high price to achieve climate stability.
Money is consumption
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