These are my notes and some reflections on what was a challenging lecture. Michelle’s well-informed and rational arguments presented a compelling view of a very bleak economic future – as well as some thoughts on what we as individuals and communities could do to survive it. Forget relying on international forums, financial reforms, bail-out packages, quantitative easing or any sort of government interventions. The lecture was in Wellington in April 2012. Since we have been in Europe, with the Greek “hung” elections and potential flow-on effects from those, Michelle’s predictions seem all the more likely.
Key assumptions
- Finance is the key driver to the downside (along with other limits to growth, but if you fall at the $ hurdle, you can’t deal with the others – resources, energy, sustainability etc)
- The current world economic situation is the largest bubble in history. Foss has researched and written about bubbles from 12thC Italy banking crisis onwards. Bubbles are inherently self-limiting – because they are not resource-based but rather resemble Ponzi/pyramid schemes, reinforcing upwards in a virtuous circle – and downwards very fast (fear-driven) in a vicious circle.
- Money is the interface between society and work – it is the operating system.
- Changes in money supply drive price (producing inflation or deflation)
- The recent bubble is about credit expansion – which means there are more claims to each piece of the wealth pie.
Analogy
Being in a bubble is like a game of musical chairs. While we’re all dancing around, no-one notices the chairs disappearing. Some who are canny sense when the music is about to stop, and grab their chairs/bit of what remains. The rest are out of luck!
Thesis
The near future (c. 2 years) will inevitably see “deflationary depression”. Things will be reduced to their “real value” – which for property and other tangible assets is likely to be (if the pattern of previous bubbles holds) a point a little below the start of the bubble. For us, that would be a mid-70’s value of things that have real value – but of course zero for things such as derivatives.
The issue is – how to manage through.
Deflationary Environment
The “vicious circle” of deflation is lower demand, leading to lower production, leading to higher unemployment, and higher taxes and user fees (to get whatever income Governments can). Individuals are quickly squeezed in that circle.
The fall in demand is because demand comes to mean not what you want, but what you can pay for – and purchasing power falls faster than price. Warning: “essentials” become least affordable, because that’s where whatever dollars there are will continue to be directed. So those prices will hold up more.
Cash is King – liquidity preserves choices.
Under pressure, we stop spending – so a higher proportion of money is “at rest” – out of circulation, and not flowing around lubricating the economy. The acute phase of this is 2-3 years; the chronic phase is greater than 3 years.
Current Situation
We’ve been here before – but we have a habit of historical forgetting – and then “rediscovering” the value of leverage.
The 1980’s saw the “new” start of a parabolic rise in credit, with financial liberalisation philosophy and practices (Thatcher/Bush) as an engine of credit expansion. The GFC of ’08 was only a warning shot: credit expansion has continued.
Europe is already showing the symptoms of the “top” of the bubble, with enormous credit contraction as the value of sovereign debt dives – for example
- Greek sovereign debt was (April ‘12) worth 10c in the dollar,
- the “musical chairs” grab for real assets in Greece, Spain etc,
- Government attempts to gather more tax, and
- serious rises in unemployment.
(Foss gave this lecture before the Greek elections of May 2012 which has highlighted the issues even more starkly).
We’ve seen housing bubbles, overleveraged banks – with a huge risk where the banks are a huge percentage of a nation’s economy (e.g. currently Netherlands and Switzerland, and previously, Iceland.)
The indicator is the increasing level of fear. Where the fear is, there the risk is. (E.G. post-lecture, bank withdrawals in Greece and Spain.) A spiral of fear forces defaults as well as exploding interest rates on sovereign debt.
Political solutions are difficult if not impossible – policy actions are always overtaken by events. (For example – last year we watched through sequential EU decisions on bail-out funds. Each was too little, too late – “whoops, stop celebrating success, we need more!”)
What next
- Deglobalisation occurs. The fear factor leads to protectionism, trade wars, “sticky” transactions (where mistrust and caution make any transaction more difficult). Local circumstances matter more than global concerns.
- The “trust horizon” contracts, with impacts on political legitimacy. Trust is replaced with surveillance, repression of dissent etc.
- People operate with shorter time horizons, discount the future, and operate within short-term crisis management.
(Carolyn’s note: important to see this in conjunction with Stephen Pinker’s work on how Trade is one of the major influences on the reduction of all types of world violence.)
The NZ situation
Foss did not claim to be an “instant expert” on the NZ situation but…. She noted:
- Our high level of household debt, and therefore our vulnerability to interest rate rises. While inflation cancels some of the impact of interest rate rises, deflation magnifies it.
- Our dependency on export trade (and imports)
- That isolation increases the impacts of booms and busts – but can also be useful because we have a very big moat: it’s very hard to asset strip us!
- Our currency is vulnerable to commodity prices – particularly as the Yen carry trade unwinds.
- Complacency. Be aware that there will be no hard information coming “top-down” because of “fear of sparking fear”, and the reality of policy lag failure.
What to do?
Bottom-up building of resilience.
We need to operate in the realm between complacency and panic – a place of “informed sense of urgency”.
Look at:
- Minimising waste to conserve energy/resources
- Change to local refining of local oil
- Be aware that money and energy are limiting factors in the use of other resources: there are limits in socioeconomic complexity
- Minimise debt and dependence on credit
- Stay liquid
- If you are liquid, buy things that will hold value, or invest in very good local businesses which will work in this environment
- Beware of banks
- Develop risk tolerance
And most importantly – build community
The maxim should be shared sufficiency, not self-sufficiency. There is strength in numbers, in pooling resources, and empowering and engaging communities. Vehicles can include time banks, local currencies, community gardens, Transition Towns, social capital building.
Relationships of trust are the foundation of society. “The state you’re in beforehand dictates your options after.” “There is no risk to being prepared.” Preparation preserves one’s freedom of action.
Grass-roots activities are much more flexible, responsive, and cheaper than central ones dependent on a collapsing tax-base.
Theory says a community of up to 150 people can be self-organising: greater than that requires systems and accountabilities. At local government level probably the most useful action is to “get out of the way” of self-sufficiency.
On Reflection
Since listening to Michelle Foss I’ve shared highlights of her thinking with (or bored silly!) a variety of folk.
Older people who’ve not “forgotten” the last major bubble, which ended in the world depression of the 30’s, find the idea of reclaiming self-sufficiency and community action very natural and self-evident. My partner Mani says that “between the wars, we always set a couple of extra places at the table. People would come in, and repay our hospitality with a bit of help around the place if they were able.”
For others, there is a hope that “wiser heads” will work out a solution. Oh dear!
For myself – my natural optimism hopes that knowledge of historical patterns might help us design a softer landing than previous patterns would predict – but my middle-of-the-night anxieties are about the potential for disaster in terms of world peace and progress. Foss’s research suggests that the Italian banking crisis of the 12 Century led directly into the Dark Ages in Europe.
I have been greatly influenced by reading Stephen Pinker’s huge survey and analysis of the historical reduction of violence of all forms – and the role of global trade relationships and consensual government in that (“The Better Angels of our Nature”). I believe (again in my optimistic mode) that we have made major sociological and psychological shifts which would make a ‘return to the Dark Ages’ scenario very unlikely – but even if we were return to the world-state of the 70’s along with a return to the world-economy of the 70’s, we would stand to lose a lot of progress.
May “the better angels of our nature” (Abraham Lincoln) guide us!
For further reading: www.theautomaticearth.org (Nicole writes under name Stoneleigh)
Carolyn Lane 