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Musings Report 2024-44 11-2-24 TINS and the Global Economy's Cliff Dive: There Is No Substitute
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TINS and the Global Economy's Cliff Dive: There Is No Substitute
Last week, I described 10 "keystones" in the global economy which were little-understood vulnerabilities in what appears to be a robust, stable system of interlocking (i.e. tightly bound) arches: remove one single piece--the keystone--and to everyone's surprise, the entire arch collapses.
Today I want to explore why the decay of these keystones will push the global economy off the cliff: there are no substitutes that can replace them--what we can summarize as There Is No Substitute (TINS).
This runs counter to what I call the mythology of Eternal Growth, i.e. Progress, which holds that there is always a substitute for whatever once propped up the economy. If the wild fisheries have been depleted by overfishing, then we'll replace them with fish farms. If jobs in factories disappear, will replace them with white-collar service jobs.
The past century offers so many examples of substitutes arising through innovation that this process seems infinite: an even better substitute will naturally arise because the advance of technology is unstoppable. This is one of the themes of my new book, The Mythology of Progress.
But this process of substitution is not infinite or guaranteed. There are no substitutes for the keystones in the global economy that have reached diminishing returns and are sliding down the back of the S-Curve.
Many of the proposed substitutes do not fill the void left by what was depleted or lost. Fish farms don't actually replace wild ecosystems, nor do tree farms replace native forests. These may be financial substitutes, but they are not systemically functional substitutes: they can't fulfill the functions of what they're supposedly replacing.
The same illusion of substitution is manifesting in the global economy, but there are no substitutes for the expansion of the money supply and debt, commoditization and near-zero interest rates--the core dynamics of financialization and globalization--nor are there any substitutes for overcapacity and overproduction.
It's easy to claim that AI will effortlessly solve all our problems, but the reality is AI is not a systemically functional substitute for what's sliding off the cliff.
The mythology of eternal growth focuses exclusively on the benefits of technological innovation as the source of solutions to every problem. Again, there are so many examples of this that it's easy to believe this is a Force of Nature rather than an artifact of a one-time confluence of low-cost energy, new technologies and financialization that cannot be extended indefinitely because the financial keystones are crumbling.
The money supply is an overlooked keystone of growth. The money supply must expand at around 6% annually for the economy to expand by 2% to 3%. Should the money supply shrink, tech innovations are not substitutes: growth falters and the economy contracts.
The same is true of credit/debt: for the economy to expand 3%, debt must expand at much higher rates. Once the returns on expanding money supply and credit diminish, it takes $3 or more of new debt to create $1 of additional GDP/growth. As the expansion of new credit needed to move the needle reaches extremes, it takes $10 or even $12 of new credit to boost GDP by $1.
This is why global debt has exploded to $320 trillion, over three times the global GDP of about $100 trillion.
While our attention is drawn to new technologies and products, the reality is that growth isn't dependent on innovation, it's dependent on the accelerating expansion of the money supply and credit.
Expanding credit/debt only works if interest rates are so low that borrowers can afford to continually add more debt. If the interest rate is 0.1%, borrowing $1 million only costs $1,000 in annual interest. At 1%, it only costs $10,000.
At 0.1%, just about anyone with a job could afford to borrow $1 million. Just about any government could afford to borrow $100 billion.
Why can't we just continue expanding money/credit by $10 to get $1 in additional goods/services? Expanding "money" faster than the production of goods/services means more "money" is chasing fewer goods, services and assets. The inevitable result is inflation--the devaluation of all "money," i.e. a loss of purchasing power--and asset bubbles, as all this newly created money/credit chases real-world assets as the way to avoid the ravages of inflation.
Since the already-wealthy have the income and assets to borrow more at low rates of interest, they're able to outbid everyone else and snap up more income-producing assets. This competition for assets pushes prices up, generating gains and collateral, enabling the wealthy to pyramid their assets by borrowing more.
Inflation diminishes the value of wages, reducing the prosperity of workers, who can no longer afford to buy the assets (such as homes) being driven higher by the wealthy competing for assets that will outpace inflation.
Expanding money/credit inevitably pushes wealth-income inequality higher, and this eventually triggers social and economic disorder, as social mobility is reduced and a speculative euphoria driven by moral hazard--the disconnection of risk and consequences from speculation, i.e. "The Fed will always bail us out.". As long as money/credit is expanding far faster than the real economy, speculators can't lose.
But this is a self-liquidating dynamic: eventually, inflation destabilizes the economy and society, and the asset bubbles pop, leaving the debt untouched while destroying the collateral and income that supported the debt.
Interest rates rise, credit shrinks, and what was effortless to borrow at 1% become onerous at 10%: borrowing $1 million now costs $100,000 in annual interest, and few gambles / investments are worth the risk that the cost of debt service will be larger than the gains.
The same mechanisms of diminishing returns and absence of substitutes characterize globalization. Where moving production overseas reaped huge gains at the beginning, when wages overseas were low and environmental standards were nonexistent, the gains have diminished or turned negative as inflation is now global, and developing-world nations no longer want to be dumping grounds for developed-world waste. There is no substitute for the one-time gift of 25 years of deflation provided by the industrialization of China.
There are many other examples of no-substitutes within the major economies. China depended on building new housing to drive its growth for two decades, but now that there are 94 million empty homes and 120 million unfinished homes, this engine of growth is diminishing, along with the expansion of exports. There are no substitutes for what is being lost as development of new homes declines as an engine of growth: there are no substitute sources of employment, local government revenues or household asset / wealth expansion. This video is eye-opening:
China's homeowners living in unfinished apartments – BBC News (3:21 min)
Other economies depended on expanding exports, tourism, and development for their growth, and there are no substitutes for these sectors as they roll over from expansion to contraction. Consider the collapse of this massive development in Malaysia as an example of the global trend: In a Malaysian Pop-Up City, Echoes of China’s Housing Crash: Forest City was an audacious $100 billion project by a top Chinese developer. Today, the project is a fraction of what had been planned and the developer is broke.
As for AI solving all our problems: it is already evident that AI will not create jobs at the same rate it replaces them. Indeed, the entire "AI story" is that AI will replace not just human labor throughout the economy, it will also replace programmers and other workers in the tech sector.
There are no substitute sources of new jobs for the ones lost to AI--even as the quality of the AI replacement (chatbots, etc.) is so poor that they're not systemically functional equivalents to the human workers being replaced.
As I have explained previously, since AI tools rapidly become commodities--easily replicated, super-abundant, free or nearly free--there is no scarcity value in these tools, as every competitor also has the same tools. Stripped of scarcity value, the tools cannot generate much in the way of profit. The claim that AI will be enormously profitable is baseless.
This means the claim that we can replace wages with the trillions of dollars in profits generated by AI is also baseless: there are no substitutes for jobs--not just for the earnings created by jobs, but the positive social roles, self-worth and identity created by having useful work.
Authorities cannot create substitutes out of thin air. All they can do is "do more of what's failing," that is, push the expansion of money supply and credit to new extremes, accelerating the slide off the cliff.
This is the cognitive trap of Eternal Growth: rather than face the realities directly and manage the contraction of unsustainable extremes, the mythology of Progress / Eternal Growth leads us to embrace unrealistic or even delusional substitutes for what has no substitutes.
By promoting unsustainable, unrealistic expectations, we sow the seeds of frustration that seeks scapegoats, a very negative dynamic socially and politically.
This exploration of "there are no substitutes for keystones" helps us answer last week's questions: where to invest in the coming seven years, as the global economy slides off the no-substitutes cliff?
It certainly suggests being wary of asset bubbles and speculative frenzies, which may well be amplified as "wealth" seeks some new asset to protect itself from devaluation / expropriation. Whatever asset class gains value will naturally become a target for governments seeking revenues as their previous sources of revenues decline.
Correspondent Glenn W. suggested adding another principle to the idea of "investing in yourself": get small, which Glenn described as "own everything outright if possible and minimize the payment of 'residuals,' the monthly bills that every company on Earth wants you to pay, almost like a mafia protection racket."
To this excellent principle I would add "getting small" might also include reducing needs, wants and expenses, to get by on less, or possibly much less, and reducing exposure to risks that could destabilize one's security and day-to-day life.
Another "no substitutes" example may be the global food supply. As extremes of weather, depletion of fresh water and plant/animal diseases pressure global food production, we may find there are no substitutes for the decline in global food supply. Robots can roam the fields, but if there's no rain or too much rain, the robots are no substitute.
Localized food production may become important, even as its financial rewards have diminished due to soaring costs and regulations that favor mega-farms.
In summary, it may be wise to keep an open mind on what might become an investable solution that arises from neither AI nor another form of technological innovation but from previous solutions being modified to solve the problems arising from the crumbling of the keystones of financialization-globalization.
Highlights of the Blog
Is Social Media Actually "Media," Or Is It Something Else? 10/30/24
Welcome to the Circular Firing Squad 10/29/24
Hurrah for the Deep State 10/24/24
Best Thing That Happened To Me This Week
I received many kind comments from new Substack subscribers: thank you for the much-appreciated encouragement.
Larry L.: "Logical with great historical knowledge and application."
Justin T.: "You are a good writer and i have found your talent for challenging verbiage a test of my comprehension of the English language. thanks j.t."
Steve O.: "Your unique and thoughtful take on the issues/problems that we are facing."
Lara A.: "Hi Charles, I love your writing. Keep it up, you elitist!! Cheers from Mississippi."
What's on the Book Shelf
Shattered Sword: The Untold Story of the Battle of Midway
Simple French Food by Richard Olney
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.
Are Some Ultraprocessed Foods Worse Than Others? A new study may offer the biggest clues yet.
New Cloudflare Tools Let Sites Detect and Block AI Bots for Free.
I’m spending $200k to be in a sorority but I don’t care - I’ll make ten times that from it. (via Cheryl A.)
Generative AI Hype Feels Inescapable. Tackle It Head On With Education
I Have Studied Social Mobility for Years. Here’s How Kamala Harris Can Build an 'Opportunity Economy.' --setting aside the political angle, some good points on social capital and connections....
4 In 10 US Teens Admit Problems With Their Smartphone Usage -- meaning the actual number is 8 out of 10....
NRC Certifies First U.S. Small Modular Reactor Design--only 5 years to reach testing stage and another couple years for final approval....
Visualizing The Extreme Cost Of Training AI Models--and if it's not profitable, then what?...
Mysterious Link Between Alzheimer's And Cancer May Finally Be Explained (via Cheryl A.)
99 College Campuses Closed Over the Past Year - Is Yours Next?--enrollments down across the board, Darwinian competition for survival underway....
He Diagnosed America’s Trust Problem. Here’s Why He’s Hopeful Now.
Nuclear War Survival Skills by Cresson H. Kearny (via A S.) --book-length overview...
TikTok and Instagram are intellectual poison: These apps are refined sugars and seed oils for the mind, causing a comparable type of mental sickness as those have on the body.
"And men go abroad to admire the heights of mountains, the mighty waves of the sea, the broad tides of rivers, the compass of the ocean, and the circuits of the stars, yet pass over the mystery of themselves without a thought." Saint Augustine
Thanks for reading--
charles |
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