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Musings Report 2024-13 3-30-24 The Known Unknowns and the Unknown Unknowns
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The Known Unknowns and the Unknown Unknowns
Donald Rumsfeld, Defense Secretary during President Bush's disastrous "war of choice" in Iraq, famously observed: "There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."
Unfortunately for the U.S. and Iraq, Bush and his team ignored the known knowns and blundered into the very quagmire they hubristically claimed they would avoid. ("We don't do quagmires.")
In other words, it's not just the unknown unknowns that can sink us, ignoring the known knowns and breezily dismissing the known unknowns are equally effective.
Which brings us to predictions about the next decade, roughly 2025 to 2034.
On the one hand we have giddy predictions of a new "Roaring 20s" fueled by trillions of dollars being invested in reshoring critical industries, the transformation of our economy from hydrocarbons to electricity and of course, AI making everything and everyone fabulously more productive, enriching us all.
Less giddy but still optimistic is the expectation of a "muddle through" decade where progress is uneven and the forces that delivered decades of rapid, low-inflation growth continue to weaken.
As I've repeatedly observed, the past 25 years of rapid, low-inflation global growth was the result of globalization (specifically, the emergence of China) which "exported deflation" to developed economies by reducing the costs of goods and services (call centers in the Philippines, etc.). This allowed central banks to create vast sums of new currency, inflating assets but leaving the real-world inflation of goods and services bubbling along at 2% to 3%.
All that has changed: globalization as a deflationary savior is spent (China has inflation now, too) and financialization--the endless expansion of credit and leverage--is no longer being offset by globalization, and so the inevitable result of ballooning credit and money supply--inflation--is now manifesting globally.
Costs of food, for example, have risen 20%+ in the past three years. This isn't an issue for the wealthy, of course, but it's consequential for the bottom 80% and dire for the bottom 50%.
I've hazarded a third forecast: a decisive conflict between expanding credit / leverage--which has inflated asset bubbles that have widened inequality to the point that it's destabilizing the social order globally, as well as fueling inflation--and the need to preserve currencies from the ruin of accelerating inflation by limiting currency/credit creation.
Once credit dries up and becomes dear, the assets inflated by easy credit and the issuance of new currency crash, wiping out what I call "phantom wealth"--ephemeral wealth that arose not from increasing productivity but from monetary expansion / manipulation.
Inflation is more properly understood as the devaluation of "money:" as inflation accelerates, the value of "money" (currency issued by Treasuries and central banks) decays to near-zero. Since currency is the foundation of the economic / political / social order, its destruction leads to economic / political / social disorder and upheaval.
Once trust in currency is lost, trust in the economic / political / social order is also lost. As herd animals, humans don't respond rationally to loss of trust, disorder and upheaval. We tend to identify those responsible for our suffering, and being hierarchically organized primates, the obvious target for wrath / revenge is those at the top of the wealth-power pyramid: the leadership and the wealthy.
I also see wealth-power inequality as the iceberg we've already struck, but since the ship is not yet visibly sinking, the fatal gash below the waterline is being ignored.
Lastly, I foresee consequences from our disruption of systems we don't understand, from pollinators and coral reefs to social and economic forces we mistakenly believe we understand completely.
Viewing these predictions through Rumsfeld's filters--known knowns, known unknowns and unknown unknowns--what do we come up with?
How reshoring, energy transition and AI will play out in the real world is a known unknown: maybe it all works perfectly and we get the "Roaring 20s" scenario, or maybe it's a mixed bag and we get the "muddle through" scenario. Or the diversion of resources and cash to large-scale investments tips the economy into stagflation.
What is a known known is investing on the scale necessary to move the needle will divert trillions of dollars from consumption and speculation to actual investment. If it's no longer possible to "print" the extra trillions needed to invest due to embedded inflation, then consumption will decline as money is diverted from consumption to investment and inflation continues eating away the purchasing power of "money."
This is precisely what happened in the 1970s, as I've taken pains to explain over the past few years: to clean up the industrial pollution destroying the environment, the entire industrial base had to be reconfigured, an enormous undertaking that took a decade of massive investment--investment with no immediate returns in productivity.
Indeed, the gains in cleaner air and water took decades to manifest, and since our measures of "growth" and economic expansion don't even measure cleaner air and water as a valuable asset or "income stream", the 1970s was written off as "stagflation:" low growth and high inflation.
In other words, maybe a decade of massive investment in needed industrial/energy reconfiguration won't generate any immediate return, and the best we can hope for is stagflation.
The problem with this scenario is we've chewed through all the buffers that existed in the low-debt 1970s. Current debt levels and their offspring, asset bubbles, are unsustainable, and so "borrowing/printing our way out of debt" is no longer an option.
Rather than live large by borrowing from the future as we do now--which is the basic dynamic of all credit--we'll have to invest current earnings in a return that is decades away, in effect sacrificing consumption today for a better, more sustainable tomorrow.
These dynamics are known knowns. So are the demise of globalization/financialization's deflationary gifts and the destabilizing consequences of wealth-power inequality. How they play out are known unknowns.
What should concern us are the unknown unknowns as we blunder into global systems and scales of manipulation we don't even perceive as unknown unknowns.
The analogy here is ecological: we blunder into ecosystems we don't really understand, and we clumsily destroy a keystone species--the species that acted as a linchpin for the entire ecosystem--which then collapses to our great surprise.
Those clinging to the giddy "Roaring 20s" or the "muddle through" forecasts have left little room for known unknowns and none for unknown unknowns. The possibility that we've already destroyed the keystones of systems we don't understand doesn't compute in these forecasts, which project a future virtually unchanged from the past 25 years of globalization / financialization.
The economic tides that lifted global growth have reversed, we've consumed the buffers that offer systemic resilience, and yet we bask in the hubristic confidence that we understand and can manipulate whatever needs to be manipulated to get the results we desire.
As Rumsfeld et al. discovered, there are overlapping paths to failure: one is ignoring known knowns, another is breezily assuming the desired results are inevitable in known unknowns, and the third is being over-confident that unknown unknowns could not possibly upset the applecart of endless expansion of credit, consumption and wealth.
Highlights of the Blog
Fire, Then Ice: Our Deflationary Future 3/29/24
Deep State Good, Total Surveillance State Even Better 3/28/24
Our Economy and Politics Are Broken 3/25/24
Best Thing That Happened To Me This Week
.Completed a laborious ceiling painting project (all edges had to be cut in by brush to a stained wood crown moulding). Note the difference between the dingy existing and the newly painted. The fresh, bright, reflective ceiling changes the entire feel of the house. Cosmetic, yes, but also transformative.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
Scientists Identify Speech Trait That Foreshadows Cognitive Decline
How a cheap, generic drug became a darling of longevity enthusiasts
The Global Elite Just Gathered at a Secretive Mini Davos
First came the Maui wildfires. Now come the land grabs: ‘Who owns the land is key to Lahaina’s future’
"Hope Is Not Lost": According To Experts, This Popular Hobby Is Wildly Beneficial For Your Brain As You Get Older--the power of making music....
23 People Share The Most Spoiled Kid They've Ever Seen (via Cheryl A.)
'I Am Not Prepared For Life' – Millennials Blame Their Boomer Parents For Not Teaching Them How To Be Responsible Adults
The young are now most unhappy people in the United States, new report shows
The Lindbergh Baby Kidnapping: A Grisly Theory and a Renewed Debate
How monopoly (ruined) Amazon: Chokepoint Capitalism ruins everything.
Living standards declining in 90% of countries — UN
What is coral spawning?
"True realism consists in revealing the surprising things which habit keeps covered and prevents us from seeing." Jean Cocteau
Thanks for reading--
charles |
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