Sunday, September 19, 2010

Your grandmother (but without the milk and cookies)

Nicole Foss looks like she might be your grandmother coming to reassure you about something. But instead of milk and cookies you are served a cold dose of reality. According to Foss, one of the writers on the popular finance-oriented blog The Automatic Earth, the global economy is locked into an inexorable deflationary decline that cannot be stopped by governments or central banks. And, the world is headed for a depression worse than that of the 1930s.

Believe it or not, that's the good news. The bad news is that the problems we face in the emerging depression will be aggravated by fossil fuel depletion, in particular, the onset of world peak oil production. When one questioner asked Foss when she thought we might return to even the tepid economic activity we see today, she had a one-word answer: "Never."

Her explanation is that the interaction between the ongoing collapse of contemporary finance and the development of new oil and gas fields will leave us desperately short of these critical fuels over time. The weakness in the economy will lead to low investment in exploration for new oil and gas reservoirs which will, in turn, lead ultimately to a supply collapse. The supply collapse will lead to high prices which will depress economic activity and lead to recurrent economic contractions. When the new Great Depression is done, Foss claims that the world will be a completely different place with our current institutions swept into the dustbin of history.

Foss is remarkably good at delivering her message. She delivered it in person recently in a high school auditorium near where I live. Steady and clear, she methodically lays out her case for the scenario above with such logical precision and compelling analogies that you wonder just how one would go about making even the slightest dent in it. Of course, no one knows the future. Some people make lucky guesses--sometimes called "informed" predictions. But in the end it's never clear how to tell ahead of time whom to believe during the next round of predictions.

Nicole Foss does, however, seem remarkably informed. She is at ease talking about the necessity of acquiring your own tools and growing own your food. In the next breathe she's just as much at ease explaining with stunning clarity and brevity why the current chairman of the U. S. Federal Reserve Board is an even bigger fool that you thought he was. But she does this without any sign of personal animus. Ben Bernanke isn't a bad person. He's just confused and misinformed.

And, that leads us directly to Foss's mission: To inform people so that they will have the understanding and tools to weather the coming storm and to build a community that can survive and thrive through it. She also demystifies the world of finance with unusual pithiness. The most recent financial bubble was not the result of some impenetrable, new-fangled financial instruments. Rather its roots were the same as all financial bubbles: the rediscovery of leverage. Translation: If you borrow money from someone else and speculate with it, you can make a lot more money than if you just use your own. It's a tactic that works until it doesn't. And, when it stops working, the economy goes crash.

The post-Depression generation had learned that too much borrowing leads to tears, and so they were very careful not to take on too much debt. Eventually, the people who experienced these tears died, and others took their place in the economy. The success of those who took on debt for speculative purposes attracted more people who took on debt to do the same in every field of investment. Eventually, too many people borrowed too much, and many of them were unable even to meet their interest payments. That is where we are today. According to Foss, it will be years until that excess debt is either paid or defaulted on. And, that means deflation for several years to come at least.

Is she right? No one can know until we travel some years hence. But so far, I'm having a hard time cracking her logic.


Anonymous said...

Doesn't Tainter says that collapse cannot occur in a closed world?
That is, no matter how bad things goes they keep forcibly grinding down (i.e. catabolic collapse) until the very end without a clear break down.

Henry Warwick said...

If left as is, Foss is correct. However, things change. And as they change, parameters adjust. They can adjust for the worse (viz. the Reagan era) or for the better (viz decolonisation). Her description of deflation is correct but specious. If energy and energy related commodities go up in price, then deflation stumbles - money is made to pay for it. Things that benefit from economies of scale will decrease in price esp. when you calculate in hedonics. This pulls back at inflation. I wrote a post describing what I see: a spastic economy. Not a deflationary one, not an inflationary one, but a spastic dysfunctional mess that gets messier.

Eventually nodes of collapse appear in different places, and you get shifts to transitional economies. This mess took decades to put together, it will take decades to go away.

Foss also assumes continuity of financial infrastructure (Fed, Dept. of Treasury, debt based money creation, etc.) There are no revolutions in her world. There are no changes in the political economy. She understands the crisis, she just doesn't have a vision of how to change it, to misappropriate Marx's dictum on philosophy.

Example: do what I said shortly after the crash - disband the fed, nationalise the banks. That would make the fed debt basically disappear, because the debt was loaned to the govt by banks. If the govt is the bank, then there is no fed debt. Outstanding treasury bills, yes, those are loans from other countries that must be paid. But they are comparatively trivial compared to the Federal load.

Get rid of the Fed, and take responsibility for your own money supply, and bingo: a vastly more stable situation - inflation and deflation would be direct instruments of how much money the gov't prints.

Dismantle the Empire and cut the Pentagon budget every year until it is the size of say, the Chinese military budget, within 5 years. Sell off the foreign bases to the countries they're built on. That would be good cash. A number of bases are worth several billion each.

Nationalise elections - take the private money out of the voting process.

Get rid of the electoral college.

There's a variety of simple smart things capitalism in the USA could do to pull its fat to the edge of the fire. It's not getting out of the fire - there are no solutions - there are mitigation strategies.

And don't think for a new your second that getting rid of industrialism is the end of capitalism. Capitalism started as an AGRARIAN economic system. Industrialism was just a faster way to make way more money. That it came at the expense of the living biosphere and has precipitated the sixth great extinction event is...


Geoff said...

"Things that benefit from economies of scale will decrease in price"

Economies of scale wont reduce prices in a world where energy prices are increasing, will they?

They might increase at a slower rate, but the economies of scale are dependent on energy at so many points. I'd also conclude that economies of scale are only possible thanks to abundant fossil fuel as they're reliant on cheap transport to and from centralised manufacturing locations. Expensive fossil fuels could potentially reverse the situation.

I don't disagree that we might see a spastic economy, but that would largely be thanks to our attempts to fix the various problems as they rear their ugly heads.

mattbg said...

Geoff, I think you're wrong about economies of scale being energy-dependent. It's not hard to witness how they work because, from your own experience, you should know that doing something 100 times forces you into more efficient patterns than doing something only once -- because there are time-savings to be found in figuring out a smarter way to do it when you are doing it 100 times, whereas if it's just once then it's not worth the time.

If someone is spending 10% of their time growing food for themselves, it's more efficient to have 1 person spending 100% of his free time to grow food for 10 people than to have 10 people spending 10% of their time to do the same, and idle the rest of the time.