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Musings Report 2018-52 12-29-18 The Crisis of 2025
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Welcome to December's MUS (Margins of the Unfiltered Swamp)
The last Musings of the month is a free-form exploration of the reaches of the fecund swamp that is the source of the blog, Musings and my books.
The Crisis of 2025
While many fear a war between the nuclear powers or the breakdown of civil order, I tend to think the Crisis of 2023-26 is more likely to be financial in nature.
While war and civil breakdown are certainly common enough in history, global/nuclear war has been avoided in recent history, largely because wars are typically launched by those who reckon they can win the war. Launching a nuclear strike against a nation with the ability to launch a counterstrike (from submarines, for example, and missiles that survived the first strike) guarantees the destruction of whatever concentrations of population and assets the attacker may have.
The breakdown of civil order has not occurred in developed-world nations for quite some time, as central states can marshal military forces to restore order and issue / borrow money to buy the compliance of the restive populace.
Financial crises, in contrast, remain a constant feature of the modern era, and developed-world nations are perhaps even more vulnerable to financial disorder than developing nations.
As I've often noted, systems tend to follow an S-Curve of rapid expansion followed by slower growth during maturity and culminating in stagnation, decline or collapse.
Successful economies generate a double-bind once they reach the stagnation-decline phase: the populace (and capital) both expect strong permanent growth as a birthright, and they see the previous boost-phase and maturity phase as evidence that the economy "should" continue delivering outsized returns on capital and widespread prosperity essentially forever.
They are willing to accept a temporary slowdown / decline as part of the process of prosperity, but their patience quickly runs out if outsized returns and general prosperity aren't forthcoming.
The stagnation phase has many causes: a reduction in resources or depletion of soil/water resources; a sustained shortage of energy or a sharp rise in the cost of energy; stagnating productivity, and the rise of parasitic elites, insiders who feather their nests at the expense of the many.
All of these factors act as friction in the system, and eventually the system is unable to sustain the parasitic elites, high returns on capital and general prosperity.
Any political elite that delivers the bad news that prosperity is over risks being overthrown or voted out of office, and so the ruling elites seek to extend high returns on capital and general prosperity by any means available.
Since they are the parasitic elites, eliminating that source of friction is off the table. Restoring depleted soil/water/energy resources is not possible, and wresting control of others' resources to exploit is problematic: using force might trigger a wider war, so buying others' resources is the safer answer.
Modern states create new currency by either digital "printing" or borrowing the money into existence. There is little political resistance to creating new money to buy others' resources, generate high returns on capital and deliver direct transfers of cash to the populace via "make work" employment, social welfare, Universal Basic Income, etc.
You see the double-bind: the ruling class must deliver outsized returns on capital and general prosperity, and the only way they can do so is to create new money rather than new wealth, something that is beyond their power.
Depending on the wealth and productivity of the existing economy, the world may accept this new money as having value for a time. But as the need for more currency increases, ruling elites start to "print" or borrow new currency in excess of what the economy actually generates in income and value.
Eventually the world catches on to the stealth devaluation of the money, and trust in the value of the currency drops, slowly at first and then precipitously.
In developed economies, the ruling elites protect their own incomes and power, and those of capital, as the owners of capital are part of the ruling elite. The net result of this is rising income/wealth inequality as the few increase their share at the expense of the many.
(Thomas Piketty characterized this process as a higher rate of return on capital than on labor.)
In the U.S., the political "solution" to stagnation and inequality is QE for the People: increased infrastructure and social welfare spending, benefits that are now costly being subsidized by the state (healthcare, higher education) and Universal Basic Income.
The proponents rarely question the bloated cost structure of these protected industries, which benefit entrenched elites (i.e. parasitic elites) at the expense of the overall economy.
Proponents of QE for the People have convinced themselves that essentially unlimited sums of new money can be created and distributed without generating inflation, since all the newly created trillions will be boosting "aggregate demand," i.e. more consumer demand for more of everything, including resources that are depleted/scarce.
This belief that creating and distributing trillions in new money isn't inflationary is necessary to suppress common-sense objections based on the inevitability of inflation.
Since the ruling elites have no other choice, they will embrace QE for the People and generate new money with abandon.
I am guessing the political movement demanding QE for the People will come to power by 2021. The money creation will begin in earnest and a few years later, inflation will start rising, much to the surprise of proponents of QE for the People.
Now the proponents and the ruling elites are trapped: they can't withdraw all the benefits ("free money") of QE for the People, nor can they reverse runaway inflation without drastically reducing the creation of currency.
Various politically expedient policies will be tried--wealth taxes, the issuance of a new currency, perhaps even a state cryptocurrency--but none of these can possibly reverse the underlying dynamics.
The currency devalues and then collapses, along with the "wealth" that it represented.
That's the crisis of 2025 I foresee.
From Left Field
China’s War on Pollution Will Change the World-- but they'll have to make limiting pollution more profitable than creating pollution....
I've Paid $18,000 To A $24,000 Student Loan, & I Still Owe $24,000 (via Maoxian)
The Best Books of 2018: Bloomberg: Our annual list of what some of the most powerful people in finance were reading this year is heavy on the drawbacks of technology. (via Maoxian)
I’m a Developer. I Won’t Teach My Kids to Code, and Neither Should You.
The Empress of Facebook: My Dinner with Sheryl Sandberg (via Maoxian)
Welcome to our Modern Hospital Where if You Want to Know a Price You Can Go f*** Yourself (via Maoxian)
Four Days Trapped at Sea With Crypto’s Nouveau Riche
American Entrepreneurs Who Flocked to China Are Heading Home, Disillusioned (via Adam T.)
Worsening costs, taxation, tech transfer and regulation prompt foreign-owned businesses to throw in the towel. "How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?" former U.S. Treasury Secretary Henry Paulson asked at a November conference in Singapore.
Deep fake technology outpacing security countermeasures
When will Russia stop behaving like the enemy of Western Europe?
The French Protests Do Not Fit a Tidy Narrative
The yellow vest protests are more nuanced than American pundits want to admit
Everything you know about the Gospel of Paul is likely wrong
"The desire for safety stands against every great and noble enterprise." Tacitus
Thanks for reading--
charles |
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