What Could Go Right?
May 23, 2022
Our economy is not resilient or antifragile, it's a fragile sand
castle of debt and denial.
What could go off the cliff that hasn't already gone off the cliff? Rip-roaring inflation, check.Hot war in Europe, check. Global food crisis, check. Semi-permanent supply-chain snarls, check. Geopolitical blackmail, check. Semi-permanent energy scarcities / supply issues, check. Geopolitical tensions through the roof, check. Public discontent, check. Extreme political partisanship, check. Hard-landing recession already baked in, check. Shrinking corporate profits, check. Extremes of weather, check. Investor sentiment is in free-fall, check. Confidence in the political and financial systems' ability to navigate all of the above is tumbling into the abyss, check.
Other than all that, everything's going great.
None of this is terribly surprising to those of us who questioned the wisdom of making doing more of what's failed spectacularly the default "solution" to every problem. But thanks to the The Contrarian Curse, now that everyone is profoundly bearish, I'm wondering: what could go right?
Though it may seem that the answer is "very little," a surprising number of things could go right. The first is a sharp recession: yes, that would be a big positive.
All sorts of extremes of stimulus, over-ordering, consumption catch-up and manic speculation are not actually healthy, despite boosting short-term "growth." One reason why inflation is rip-roaring is enterprises and consumers were no longer price-sensitive: people want what they want and pony up the dough for overpriced rent, overpriced resort rooms, overpriced used cars, etc.
The conventional narrative is this is all pent-up demand that must be met, regardless of price. But recessions tell a different story: when you can't afford the sky-high rent, you move to a cheaper locale. When you can't afford sky-high resorts, you cancel the vacation. When chicken wings become more expensive than other kinds of meat, you give up chicken wings.
Extremes of stimulus, borrowing and consumption have pushed capacity beyond what's sustainable. Can every big city support hundreds of high-end eateries? If not, then reducing capacity is healthy, as painful as it is for marginal enterprises to close.
A variety of idealistic policies have been revealed as failures. These painfully obvious failures enable a change of course to more realistic, affordable solutions.
Consider the policy narrative that the way to wean ourselves from hydrocarbons is to stop investing in hydrocarbons. What's missing, of course, is reducing hydrocarbons without funding and planning a transition to other energy sources means the economy will not make the transition. Getting rid of hydrocarbons doesn't magically create substitute sources of energy. Those have to be constructed, at great expense, before you can reduce hydrocarbon consumption.
Despite the focus on higher prices, our economy is still larded with immense waste. Just unplugging chargers and devices not in use would save up to 5% of the nation's electricity consumption. A large percentage of food is thrown away or left to rot. Millions of low-mileage vehicles are idling in congestion, each transporting one person.
If prices were truly high, a wide variety of time-honored methods to reduce waste and improve efficiency would be reinvigorated. The easiest way to reduce expenses is waste nothing. We're far from that ideal.
The systems we depend on are accustomed to expanding regardless of inefficiency or cost. A recession that slashed consumer spending, enrollments, permits, tax revenues, etc. would provide what's been missing for decades: the discipline of aligning expenditures with revenues.
Institutions have avoided the pain of slashing expenditures by jacking up tuition, student fees, property taxes, business license fees, utility fees, income taxes, etc. Private monopolies continually raise prices, supremely confident that consumers can't cancel the service because there are no alternatives. But people find ways to cancel monopoly services anyway, once they're faced with hard choices.
Being forced to stop borrowing more money as a "solution" and having to align expenditures with revenues will greatly strengthen the economy. Although Martian lenders may demand their quatloos (see below), you can't get blood from a stone and enterprises that default will clear the system of zombies that were only kept alive by rolling over debt at lower rates of interest.
As for interest rates rising--the non-wealthy been paying high rates of interest for years. Credit card interest is 15% and up, student loans 6% and up--what difference does it make that the Federal Reserve raised interest rates from near-zero? None.
The lenders who charge us 15% will now have to pay a few percentage points for their previously-free money. Oh, boo-hoo. The spread between lenders' costs and what they charge consumers will narrow, but it's not like consumers were able to borrow at Fed Fund Rates anyway.
As for mortgage rates rising, the popping of the housing bubble will improve housing affordability.
The solution to supply-chain insecurity and geopolitical blackmail is obvious: incentivize the reshoring of production and supply chains. Which is more important, corporate profits to make the wealthy even wealthier, or National Security, as in food security, resource security, production security and supply-chain security? Globalization is insecurity, blackmail and vulnerability.
How about a zero corporate tax rate on all products and services made entirely in the U.S., with exemptions for materials unavailable domestically? How about a one-month permit process for new mines instead of a decade-long travesty of a mockery of a sham of regulatory friction and regulatory capture?
An economy that has lost the discipline of aligning expenditures with revenues and the ability to place national security above profits is not healthy. Borrowing more money rather than eliminating friction, waste, fraud and useless regulatory burdens has severely weakened the economy. Our economy is not resilient or antifragile, it's a fragile sand castle of debt and denial.
incentivizing the lost discipline of aligning expenditures with revenues is the only way to transform a fragile economy into an adaptive antifragile economy. Debt that can't be paid will be dematerialized, one way or the other.
The Big Problems And Crash Dynamics Of The Spring/Summer 2022 Housing Market Crisis, Simplified (1:08 hr)
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