Channelling Casandra

I don't do this very often, and it'd probably be a better thing for my equanimity if I didn't do it at all, but here goes.

There are two real problems with the global economy right now.

A financial sector, a banking system, whatever you want to call it, is fundamentally a predator. Predators can't convert inorganic materials into food; some other organism has to do that, and they get food by eating those organisms. Sometimes they do this at several layers of remove, such as in an ocean ecosystem where the plants are too small to see individually and we eventually get up to blue whales, but they must eat to live, and that means eating food, and the plants are what create food, everything else is just moving it around from organism to organism.

Predator populations are sharply limited by the size of the prey population; the famous example of lemming populations in the Arctic setting the population sizes for owls, hawks, and foxes is well known, but it's obvious on its face that you can't have more predators than there is food for them to eat, or, at least, not for very long.

In an ideal world, a banking system is taking its 1% cut for facilitating import replacing activity (import replacement = actual, as opposed to fraudulent, economic growth); it's tightly controlled and its profits are forcibly limited to not much more than that 1% rate.

Pretty much all "business-friendly" (meaning "profit-maximizing") development and investment activity is the equivalent of over-grazing or a lemming population boom; it collapses, and it collapses in a way that destroys value (the money that got taken out of the various mortgage markets remains real money, with some relationship to value; by destroying the value of wide swathes of the housing sector, the amount of real value backing that money is reduced. This is why there's a deflationary direction to currency right now). It's completely indifferent to import replacement activity; it's interested only in what the peak nominal value is going to be, because that represents the amount of cash that can be extracted from the enterprise.

Do this enough, and forty or so years is plenty-enough, and the underlying substrate of import-replacing activity is full of holes: the educational standards that produce a labour force able to innovate generally are gone; the insistence that labour is an expense, rather than capital, has produced a mix of the underpaid, overworked, and desperate; the mechanisms of investment and credit exist to prevent value-add economic activity, because that activity is never profit-maximizing. (It can't be; profit maximization destroys value.)

At this point, you get—and we are presently seeing—a predator population collapse. In the process of collapsing, they eat everything they possibly can, and thereby greatly reduce the ability of the populaton that supports them to recover. (Lemmings in the Arctic operate on a roughly three-year cycle; lemmings have a 2 year lifespan. Unmediated recovery takes generational time, in other words.)

It's not enough to regulate banks. It's not enough to force their activities into simple, generally comprehensible patterns, or to limit compensation so that it rewards medium term (10 year) rather than short term (1 year) success. Profit maximization is equivalent to a predator determined to eat as much as it can, as fast as it can, and because the analogy breaks down we don't get the fat-wolves-run-slow feedback mechanisms, and we don't get the questions of if-all-you-do-is-eat-you-have-no-breeding-success; we've got potentially immortal and immense predators that grow more able to eat the more they do eat.

We've also got a lot of people absolutely, religiously, convinced that this is good; that the bigger their pile of money the more god loves them, the better a person they are, the more social status they have.

The idea that money is a collectivist distributed accounting system, and not a fundamental natural thing like gravity or sunlight, doesn't register; sometimes it is fairly spectacularly denied and you get a gold bug. This is going to make doing any of the necessary things to fix this particular mess, starting with liquidating the existing financial system(=thin out the predator population), remonetizing (certainly the US needs to do this; various other places probably need to do this, too), and creating a financial system able to invest in import replacing activity, in reliable but not maximal profits(=let's garden, instead of over-grazing our herd animals), effectively impossible.

Without that change, the predator overpopulation will keep right on destroying value until they starve, and if they're starving, most everyone else is going to be starving, too.

What that means—and this is the second real problem—is that lots and lots of vital stuff is not going to get done. The US is only somewhere between a quarter and a third of the global economy, but it's going to take all of the rest of it with it for a time.

There's no end of work to do; we need to replace the entire transportation infrastructure with something that doesn't involve fossil carbon, we need to move all those coastal cities uphill, we need to get most of the human species out of subsistence and into prosperity. But at least a fifth and more like a quarter of the people who would work, who want to work, in advanced economies aren't going to be able to; the remaining four-fifths or three-quarters aren't going to be doing anything much that's good, just staggering on under the predator load and trying to keep staggering. Not much innovation, not much import replacement, just running down the machine while the wheels still turn. Markets do not pick long term objectives worth a damn, which is, in part, why they bubble so inherently. This is certainly not going to do anything good for the folks who are trying to either go from subsistence to prosperity or to make sure their newly-obtained prosperity continues.

So, specifics?

I think it's at least 50-50 that Barak Obama will be a one term, failed president; if the US offical jobless rate is over 15% for any length of time, especially in 2011 or 2012, it's difficult to see how he could avoid this outcome. It's also difficult to see how the jobless rate isn't going to go at least that high and stay there, when policy arguments remain about how to best enable the good health of the predators.

(It's more than possibly to empirically determine what results in a real labour shortage, active and ongoing import replacement, and ecologically sane economic activity; the problem is that doing this isn't what anyone with actual power wants or is trying to do. They're trying to protect the predation mechanisms because those mechanisms are what create their power.)

The US wasn't politically stable with 20% unemployment in a plurality-agrarian economy during the Great Depression; I wouldn't want to take any bets that it's politically stable with 20% unemployment, for some value of unemployment, with a primarily service economy. If the official unemployment rate goes over 15% and stays there, I'd expect there's going to be real and prolonged political instability in the US, probably violently so. There's certainly a ton of existing rhetoric supporting violence, and it's pretty much all rhetoric that wants desperately to do things that will make the problem much worse.

Information is lost when plant closures occur; most of the knowledge about how to do something is transmitted verbally and by demonstration by the people who are doing the work. Stop doing the work, and this knowledge is lost. Starting to do new things takes time; it relies (heavily) on a willingness to adopt an empirical approach, and success requires moving responsibility and decision making down to the layer of the people doing the work. Most of the world has varying degrees of problems with those requirements, generally socially driven problems with giving people with grease under the fingernails control of the operations budget; the US has particularly bad problems with them, and the reasons housing was such a successful bubble—the work is uncomplicated and quality is almost impossible to evaluate, especially for inexperienced buyers—do not apply to much else. So innovating out of the hole is not an option.

Or, rather, innovating out the hole is not an option without profound, usually, this takes a big war, levels of social change.

Canada, internally, is in a bit less of a hole; we hung on to better banking regulation and we have less of a constituency for naked greed. We also have 80% of our economy interacting with the US, a pretty much unrecoverable traditional manufacturing sector, a disturbingly well-financed effort to create a permanent constituency for greed and ecological indifference, and absolutely zero political leadership that shows any slightest evidence of clue with respect to the core issues and how to fix them. (The last fellow who tried, Stéphane Dion, was met with a full-spectrum suppression effort by the entire width of Canadian political institutions.) So we're going over this cliff, too.