I wrote this article about the inevitable collapse of world economies in mid-2009. However, as the US government stimulus took effect, there was increasing optimism and an article like this seemed untimely. Here it is now, slightly updated.
I am not an economist and I have little interest in statistics. This is an instinctive view.
The most rigid structures, the most impervious to change will collapse first.
ECKHART TOLLE, A New Earth
A compassionate perspective–For ten thousand years, since the advent of agriculture, and possibly even before that, mankind has developed an ego, individually and collectively. An ego is the image of who we are in thought, and the beliefs we create around the image. Humanity’s collective ego has propelled a continuing program of control, through religion and culture and spirituality and technology and ecology and economy and social institutions.
photo credit: NASA Goddard Photo and Video
Humanity’s rigid structures are burgeoning at the seams, and perhaps the most troublesome are economic trends.
Economic Trends: In short, the heaping piles of IOUs far exceed the monetary base in most sovereign nations. The economic options for nations are to increase taxation and reduce spending, or print money or borrow money. This means high volatility over the next few years. Economies will rapidly shrink, with intermittent temporary reflationary surges.
Institutionalized dukkha–Buddhism’s first noble truth says dukkha, dissatisfaction, is inherent in the individual and collective human mind. Economically, this manifests as the feeling of lack—the lack of money and the lack of things. And so we always want more. Consumers have to consume more, corporations must grow in size and profits, institutions must grow in power and reach, economies must scale, debt must always grow, the GDP must always grow. The goal is always to get more.
The ultimate tragedy is that everything that is life is devalued into a means of maximizing material value. “Everything” includes the earth and her natural resources, the biosphere, human life (labor, wars), beings (cruelty to fellow animals), society (continually adapting to the economy), religion as means of control, and even spirituality which is often commandeered for achievement and validation.
A Short History of Money – There have been various means of exchange: barter, gold and other precious metals, credits, IOUs, seashells, and representational money. Representational money is the system we have now. Money represents bank credit. It has no inherent value; it is valuable only by consensus. This is called fiat currency.
Debt-driven economy: In old Europe, as villages prospered, they gave their gold to the local goldsmith for safekeeping. People often came to him to borrow gold and paid back with interest, which he shared with depositors to incent more deposits. The goldsmith soon discovered that he can loan money by simply giving out promissory notes, instead of the actual gold. These promissory notes became a means of exchange. Then he got even a bolder idea and decided to loan out more money in promissory notes than he actually held in gold. And it worked! It would continue to work until everyone demanded all their deposits back at the same time—this is called a run on the bank. It might have made sense to outlaw the practice of loaning money that didn’t exist, but at the time of European expansion, it was so profitable that it was instead regulated and legalized.
The Federal Reserve in US, for example, is a private, for-profit bank, not a government institution, which loans out money that doesn’t exist.
Money is debt. Money is not created by the market. Money is created when a bank makes a loan. If all loans were called in at the same time, there would be just enough money in circulation to pay back the loans, but not enough to pay the interest, and so the money supply must always grow to cover the debt and interest, and the debt must always grow to increase the money supply. Money is always chasing itself.
Money is money by fiat. Money was backed by gold for a long time. In 1972, the US removed the gold backing. Now, in the US money is a fiat currency; that is, it is money by decree. There is nothing backing up money except the social consensus that it has value.
American hegemony in decline:
- The US has a national debt of 12 trillion dollars, and unfunded liabilities of 106 Trillion, against a GDP of 18 Trillion. (Each US citizen owes $40,000 and is liable in the future for $360,000). Every year, The US collects 2 Trillion in taxes, and spends 3.5 Trillion. The yearly deficit of 1.5 Trillion is borrowed through US Treasuries and bonds.
- The US GDP consisted of 70% consumer spending, much of it financed from home equity loans and expansion of easy credit card debt. With market value of real estate down, credit very tight, and high unemployment, it is unlikely that that consumer spending will balloon to these levels again.
- In an absurd trade spiral, the US voraciously consumes goods from China, and borrows the money for the consumption also mainly from China. Essentially six Asians work hard to keep one American fat, and loan him money so he can pay them.
- The US is holding back unemployment (U-6 number) at 17% (it was 25% during the Great Depression)
- Almost all states and local governments are bankrupt or underfunded.
- The problems in the residential real-estate market will be exacerbated by increasing foreclosures and problems in commercial real estate market.
- Even with the massive injection of money stimulus and 0% loans, there are increasing signs of deflation and decreasing confidence.
International economies on the decline: Japan will continue her austerity and devaluation of currency. Sovereign debt will overwhelm Iceland, Greece, Ireland, Dubai, Portugal, Italy, and Spain. The UK will institute severe austerity measures. The Eurozone will likely collapse. China is waking up a deluge from an housing bubble burst. There are warning signs of bubbles in Canada and Australia. India will face inflation and continued corruption.
Early 2010, wagging the dog: So, if these insurmountable problems are real, why has the stock market rebounded, the dollar held, and gold and oil remained reasonable and even rallied? What happened?
What happened is a massive injection of money, the largest humanity has ever seen, from the government and the Federal Reserve, through holding the interest rate at 0%, quantitative easing, bail-outs, and stimulus spending. This is of course not sustainable.
The US economy will collapse in 2010 – 2015. This will cause an unraveling of the internal social fabric, and will have international consequences as the balance of power shifts.
Deflationary Depression is the likely scenario. The injection of government money should have caused inflation, even hyper-inflation, because that is what happens when the volume of money increases without corresponding increase in goods and services. However, there is no velocity to the money–that is money is not moving around. This is a sign of deflation. Prices will drop and stagnation will continue or get worse.
Other risks include: peak oil, deficit, debt, unfunded liabilities, commercial real estate risk, credit card debt risk, the US government’s decreasing ability to borrow money, underfunded State and local governments, an economy highly dependent on consumption, the inevitable end of government stimulus, the structure of the debt-driven economy itself, and rapid alterations in the social and class fabrics.
The US gets in a major war every decade—because it can. Eisenhower was prescient in his warning about the military-industrial complex. This decade will be no different. Likely areas of new wars might be the expansion of the Afghanistan war to Pakistan, war with North Korea, or war with Iran.
Fear. There will be trouble in Pakistan, Saudi Arabia, Yemen, Israel and other restive countries. Terrorism will rise. The Mumbai terrorist attacks were relatively inexpensive and “easy”—executed by a very small, radicalized, brainwashed teams of young desperate men with no special training and no special goals except to incite fear.
Humanitarian crisis: There will be desperation in the poorest and most troubled areas, such as Pakistan and the Middle East.
Backlash in the US: The trend to go big in the US will reverse. Everything about the US is too big: our bodies, houses, cars, consumption, materialism, debt, military, government, wars—this will begin to reverse in a trend to go small and local.
Survivalism will go mainstream.
We can expect political leaders to do exactly the wrong things. This is not a cynical statement about politicians. People want quick recovery and so political solutions will always be quick-fixes of spending or control. International sentiment swings between conservatism and progressiveness, but neither can address the basic failure. Pain will be addressed by stimulus spending, and any new initiative will be burdened by special-interest compromise. When the effect of any stimulus dissipates, what remains is still the same faulty economy, laden with even more debt.
Deflationists and inflationists, democrats and republicans, regulators and free market economists, socialists and capitalists will debate endlessly. People will point the finger at the unabashed greed of Wall Street and Wall Street will blame the voracious consumption of the public, and everyone will blame the government.
Governments will barely be able to contain themselves in the rush to print money. Distressed local governments may experiment with new and absurd ways to garner taxes, perhaps by levies on such things as owning pets, and pleasure items, such as alcohol and sex and nicotine, and discretionary items such as gasoline. There may be movements to bring underground economies to the legal surface so it can be taxed—areas such as barter, prostitution, gambling, and marijuana.
The temptation to expand the two wars the US is already fighting, or to use her bankrupt but still lethal military within her own boundaries will be too great. Wars prime the economy.
An opportunity for awakening: I am not minimizing the suffering that can ensue from an economic collapse, There will be desperation, uncertainty and suffering, but from these can rise the opportunity for individual elegance and spiritual awakening.