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Musings Report 2021-43 10-23-21 'Money is Worth Nothing Now': Finding a Future in Farming
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'Money is Worth Nothing Now': Finding a Future in Farming
I took the title of this week's Musings from this Guardian article 'Money is worth nothing now': how Lebanon is finding a future in farming. With food in short supply and prices rocketing, a wave of new farmers are growing produce on roofs, balconies and beyond.
Let's put this in the context of 1) systems 2) supply chains 3) core and periphery and 4) the purchasing power of money.
Here's the thing about systems: they are not infinitely flexible and what the system outputs cannot be changed on demand, as the output is defined by the system's structure. To change the output, you have to change the structure of the system.
The key systemic dynamic in global supply chains is the centralization of sourcing, transport hubs and ownership in a handful of nodes. This creates systemic vulnerability. Consider the Internet. It's considered a decentralized network in which servers connect to other servers in a vast ecosystem/
But in the real world, much of the Internet is funneled through a limited number of nodes, both physical nodes at the ends of trans-ocean cables and software nodes of companies like Akamai.
What few consumers understand is how the entire global supply chain runs through a handful of nodes. The vast majority of the pork industry, for example, is owned by a handful of companies, and much of the production runs through a handful of massive meat processing plants. If even one plant is closed, the entire supply chain is disrupted.
Another systemic vulnerability is known as a dependency chain: imagine a row of dominoes, and you get the idea. If one domino falls, the entire row topples. The chain analogy is also apt: if one link breaks, the entire chain breaks.
Here's an example: newly manufactured cars sitting on lots because there's a shortage of computer chips. Why is there a shortage of processors? One issue is chips are immensely complicated to manufacture, requiring dozens of complex machines and processes, many of which need huge quantities of fresh water and a vast array of subcomponents, special materials and specialty chemicals and solvents.
If one factory makes 80% of one essential solvent, and that plant shuts down for any reason, the entire global chip supply chain is disrupted. The earthquake and tsunami in Fukushima revealed a number of such dependency chain links breaking as a single-source factory was shut down.
Manufacturing and logistics have been optimized to maximize profits, and that's led to "just in time" manufacturing and delivery. Stockpiling stuff costs money, so that's been reduced to a minimum. Having redundant suppliers is also expensive.
In other words, if maximizing profit is the goal, the resilience of the system is sacrificed, whether anyone made that decision consciously or not.
So as all these structural vulnerabilities and fragilities manifest, governments issue various demands for different results. This doesn't change the output of the system, because that would require completely rebuilding the system on a completely different level. Ownership, production and logistics would all have to be decentralized, and that takes immense amounts of capital and expertise and a long stretch of time.
Let's build a couple more semiconductor plants! Good idea. Now set aside $5 billion and a minimum of two years--longer if supply chain issues limit the availability of specialty materials, components, equipment, supplies of fresh water and so on. Four years and $10 billion might be a better estimate.
Imagine re-ordering the entire supply chain for one commodity such as pork. It's not just a matter of constructing a few more slaughterhouses. We'd need dozens or hundreds of localized meat processing plants to really change the infrastructure of the system, and this would cost a lot of money and increase the costs, as redundancy and resilience are not free.
So costs will rise for two reasons: 1) shortages cause price increases as those with the goods can charge more--basic supply-demand dynamics. 2) Adding back in what's been stripped out to maximize profits costs more, and suppliers will have to recover those costs by raising prices.
In geopolitics, core and periphery dynamics describe the controlling center as the core and the lands that owe allegiance to the core as the periphery. In a modern example, when Greece fell into a financial crisis in 2011, it was widely understood that the EU financial system's core was the German economy and the money-center banks of Germany and France, and Greece was a periphery economy.
Problems first arise in the periphery and then spread to the core. The core insulates itself by trying to ring-fence the problems in the periphery, but since everything from finance to semiconductors is now global, this ring-fencing eventually fails and the crisis spreads to the core.
Shortages appear first on the periphery, and as the dependency chains break, they spread to the core.
Financial crises follow the same dynamic: the subprime mortgage market in the U.S. (close to $1 trillion at its peak in 2008) was on the periphery of the $200 trillion global financial system, yet it very nearly collapsed the entire global financial system. The Federal Reserve quickly flooded the global system with $16 trillion in backstops, loans, guarantees, lines of credit, etc., eventually topping $28 trillion in global guarantees, plus issuing $4 trillion in new currency in the U.S.
So it took $28 trillion to stop a $1 trillion peripheral market from collapsing the global financial system.
In a more recent example, few people invested in the stock market realize how close the GameStop frenzy in early 2021 came to collapsing the stock market's order flows. In such a collapse, selling is no longer possible; the market is said to go bidless, meaning there's no buyers for what sellers want to sell.
Lebanon is a peripheral economy. The collapse of the purchasing power of its national currency hasn't caused even a ripple in the core economies. But we should take note because this is precisely how core and periphery dynamics work: nobody thought much of Greece's financial instability in 2009, but within two years European Central Bank head Mario Draghi was forced to make a seat-of-the-pants, open-ended promise to do "whatever it takes," i.e. go to any extremes to keep the crisis in the periphery from spreading to the core.
Once supplies are no longer available at any price due to the collapse of dependency chains or critical nodes failing, and/or the purchasing power of currencies eroding, the connection between money and stuff you need breaks down: having money no longer guarantees access to the stuff you need.
Governments are powerless to stop these collapses of dependency chains because it will take years and trillions of dollars to re-order global sourcing and supply chains. Central banks printing money and issuing loans will not accomplish the desired change--magically re-ordering global sourcing and supply chains--but this will shift the peripheral financial crises to the core.
Consider the far larger scale and fragility of today's financial system compared to the situation in 2008. Leverage and debt are much higher, and the global asset bubble is far larger. If it took a bare minimum of $16 trillion just to sand-bag the global financial system from a fast-moving collapse in 2008 triggered by a mere $1 trillion, how much will it take when a $10 trillion peripheral crisis unravels? $160 trillion?
Global financial assets total about $430 trillion: that's stocks, bonds, derivatives, real estate, everything. It's not plausible that the Federal Reserve or the four major central banks acting in concert could issue $160 trillion to preserve the $400 trillion asset bubble. Given the much larger scale and greater fragility of the current debt/leverage bubble, it's unlikely that $16 trillion in loans and guarantees would stop a multi-trillion peripheral crisis from spreading to the core.
The lesson from Lebanon is stark: once having money no longer guarantees access to the stuff you need, the solution is to generate the stuff you need directly rather than rely on the intermediary systems of currency and long, intrinsically fragile dependency chains that break down once a critical link or node shuts down or fails.
To paraphrase Donald Rumsfeld, we don't meet the crisis with the system we wish we had, we meet the crisis with the system we have. That should give us pause.
Highlights of the Blog
podcasts/videos:
A Nation of Imposters 10/22/21
America Is Now a Kleptocrapocracy 10/20/22
Software Ate the World and Now Has Indigestion 10/18/21
Best Thing That Happened To Me This Week
Finally finished the draft of my new book, "Global Crisis, National Renewal." It's in the editing mill, another arduous process, but I discern a faint gleam of light at the end of the tunnel. Huzzah!
From Left Field
Net Zero and Carbon Neutrality: Unscientific Myths for an US and THEM World -- magical thinking dies hard....
How the Supply Chain Broke, and Why It Won’t Be Fixed Anytime Soon-- a brief summary...
Model predicts natural COVID-19 immunity wanes fast, re-infection likely
Electricity Is the New Oil: A U.S. Strategy for the Post-Hydrocarbon World
Green bubbles threaten to pop stock markets: Magical US thinking of a Green agenda financed by endless amounts of printing-press money will only end in tears
An Inconvenient Truth About AI AI won't surpass human intelligence anytime soon: "Just about every successful deployment of AI has either one of two expedients: It has a person somewhere in the loop, or the cost of failure, should the system blunder, is very low."
Austin Is Ground Zero for a Different Kind of Neoliberalism--no idea if this is accurate...
Things do not have to run out for their scarcity to become destabilizing-- a good description of dependency chains...
Viral Loads Similar Between Vaccinated and Unvaccinated People: Survey Underscores Importance of Masks and Testing Along With Vaccines (UC Davis)
Pandora papers: ‘it’s time to pursue lawyers and accountants who enable tax evasion’--now that might actually get results....
Which Beatle remained the most humble? Photo of Paul McCartney going to work on the train... OK it could be staged but apparently it's the real deal...
The Grand Strategy of the United States (2014) -- long read, solid overview....
"With despair, true optimism begins: the optimism of the man who expects nothing, who knows he has no rights and nothing coming to him, who rejoices in counting on himself alone and in acting alone for the good of all." Jean-Paul Sartre
Thanks for reading--
charles |
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