GLOBAL ECONOMY: Diverting people off the road to serfdom

The Slog outlines some sensible (and some very odd) things we might be called upon to do

A comment threader at the site asked for a broader view of the global economic who, what and why last weekend. Whether this was just his polite way of saying “Enough Strauss-Kahn, already” I don’t know; anyway, he was making a good point. Since then, the spotlight has turned on another nice man, Rupert Murdoch. He too may be going south partly thanks to a global downturn. Perhaps this is too much distraction.

So yes, we need to think some more about the gathering clouds.

I have to kick this piece off by saying, without any false modesty, that I’m not an economist. Those who are truly great and practical economists in the contemporary world are very rare indeed. The complete paucity of new ideas and vision in dealing with the problems is the clearest refection of this: as the man said, “Economists are always wrong beforehand and right afterwards”. Of the two people in this league commenting at the minute, I’d say without hesitation that Wolfgang Munchhau and Martin Wolf are about as good as it gets. I also rate the FT’s Gillian Tett: she has real insights based on social anthropology – the one thing most financial observers know nothing about, and the main reason they get most things wrong. She’s not often seen in the UK edition any more because she is now the top banana in the US office. (No doubt they haven’t a clue which way to hold her up.)

My wealth managers are also very keen on Woody Brock, and from their viewpoint I can see why: he is usually right on investment predictions. But on the whole, his advice and predictions relate to macro investment calls, not overriding truths. He’s very smart on the US deficit, but his views about it are fairly Keynesian and I think he overrates the intelligence of bond dealers. But he is searingly bright, of that there can be no doubt.

Finally, the man who wrote ‘Whoops!’ – the best book about the 2008 near-miss – is John Lanchester. Many financial commentators call him cynical and simplistic, which tells you all you need to know: the bloke is a genius. I urge you to read the book: it’s as true now as it was when he wrote it.

Having said all this, nobody knows for sure what’s going to happen, and neither do I. This is because economics is (a) not a science (b) it’s tied up with sovereign fiscal behavior, which is irrational, and (c) something always comes out of left-field to change everything. In the next decade, I’d wager that solar power will make a breakthrough; but I don’t know. Nobody knows. All one can say is that if it does, everything will change – from international relations through to the Green movement and all our economic systems. Denmark, for instance, would be ruined.

However, there is a fourth reason why most people are clueless about what will happen (and what to do) and it’s important I get my bias in this area up front. This fourth reason can be summarised in two words: structure and complexity.

Structure.

To do business, most people need to raise finance. The global economy currently does this in a variety of ways, but two are dominant: via investment banks introducing large sources of capital for expansion and/or acquisition; and through the Bourse (‘stock market’) system where investment monies are provided in return for shares. The hope is that the shares will increase in value, and pay annual dividends on top as they go along. In 2011, most of the investors in Bourse-quoted companies are large institutions and hedge funds.

The problems with this structure are manifold. But the biggest ones are that ‘remote’ shareholders are in it for the money, not for the company; stock markets themselves are neurotic, corrupt, and technologically over-specced; the ripple effects of a stock market crash are usually deadly for all concerned….except those ‘smart’ investors who got out just in time; and – for me the biggest problem – there is no place in this deal for the smaller entrepreneur and/or investor.

Some smaller businesses therefore go to the retail bank, which takes deposits from you and me, and lends that money on. But investment banking being far more profitable – and most bankers not giving a toss about the renewal end of capitalism – retail banks are both too mean and too nervous to be of much use to anyone. They’re also, at the moment, too broke.

The financing of capitalism is thus unbalanced. It leads to bigger and bigger corporate entities, shareholder greed coming before new product/resources investment, and (as we’ve seen for over a decade now) financiers losing the plot by selling paper to each other rather than being the engine of real business growth. (It is for this reason that the derivatives market is ten times the size of the globe’s physical GDP. Utter madness, but there you are: a time-bomb waiting to go off).

Above all, the forced globalisation of business has meant the banking sector doing the same thing. The net results are (1) zero-sum business mercantilism (global trade competition) and (2) dysfunctional domino effects. The problem with globalism is that we will never achieve a balance between supplier country and consumer country across all product fields; and the ever-present danger that (for example) when China catches a cold, Australia dies of pneumonia….or when Goldman Sachs makes a mistake in Greece, the whole edifice collapses.

That is the beginning and end of my opposition to globalism. It’s based far more on efficiency than ecological factors for me: it’s a daft idea, and it doesn’t work – except for this recurring 7% of folks who just keep getting richer and richer. China knows this too – which is why its aim is self-sufficiency, not global economic domination.

The overwhelming problem with globalist mercantilism is running the damn thing: it is so economically and politically complex, agreement is at best too slow and at worst too late.

Complexity

We have a G20 supposedly looking after things. Five years ago it was the G7. Even as the G7, it never did any more than issue airy platitudes. Today’s G20 is an unwieldy joke riddled with economic and political contradictions. The fact is that various trends in banking, Third World economic competition, and Western debt have been obvious since the 2003-4 period. The G20 has sucked its teeth, shaken its collective head, and done diddly-squat…except persuade itself it rescued the world from disaster in 2008. Since then, it has in turn achieved nothing radical, large or obligatory enough to stop the whole thing happening again sooner rather than later.

I understand the G20 also speaks highly of me, but I couldn’t confirm that. The IMF is an even bigger joke, in that it has only one policy (cut all spending and sell everything) – nowhere near enough capital to make much of a difference anyway, and is headed by Christine Lagarde. If you read the musings of the PIMCO CEO Muhammed El-Arian, you will learn more in five minutes about the dangers and pitfalls of the next decade than you would if you spent the whole of that same decade talking to Lagarde.

The more global an economy, the more complex models become. I have no faith in economic or fiscal models, and no desire to listen to the tramline drivel spouted by those who load and interpret them. That so many Western governments are still guided by this nonsense is deeply concerning; but more important  than any of that is the agenda of each of those governments – which always make a nonsense of the models.

I think I’m close to being an expert on Russian Middle East policy. There are all kinds of long-winded and confidential reasons why that is, but Russia alone is a bewildering labyrinth of cross, double-cross, Putin, Medvedev, energy mind-games, the mafia, billionaire oligarchs, and cyber-tactics. Working out what the real Russian motivation is any more – or who’s really running the show – is a full-time job….and you can still be hopelessly wrong.

I also think I’ve called Chinese policy in Black Africa well. But I’ve predicted the events, not the goal. I think it’s all part of the self-sufficiency/cheap labour thing; but while the Chinese mind is something I know a fair amount about, internal Chinese politics make Russia’s nest of scorpions look like an abacus.

The idea that anyone can grapple with such complexity and run a New World Order is megalomaniacal hubris on a par with that enjoyed by Adolf Hitler. But that remains the key to understanding what could happen over the next ten years: human over-confidence, or what I call The Babel Syndrome.

What is really going on here?

Whatever the world looks like in 2021, you can be reasonably certain it will be a reflection of the more emotionally driven human brain cortex (I think it’s the right hemisphere, but I can never remember) that has been in control for 98% of human history.

This bit of the brain is wired to produce the most obvious behavioural features of our species:

The need for cooperative packs of a manageable size

The need to control most of the pack from the top

The emergence of incompetent headcases to run the pack

The need to hate, compete against, and preferably wipe out other packs

A tendency to cultural and economic paranoia

A dislike of big, overcrowded environments

The desire to reproduce at every available opportunity

The willingness to believe any old tosh, and reject the blindingly obvious, in order to deny the approach of pain

The ability to forget pain, and adapt to new circumstances, remarkably quickly

The preference of over 85% of people to potter about, totter off for a drink, or have fun with the family, rather than found a business

The emergence of the unbalanced 5% determined to run everything, and make the 85% unhappy as part of their own futile pursuit of happiness – which they call ‘money’.

The willingness of the 10% in between to plan the railway timetables, build the palaces, fire the employees, bend the truth, and run the concentration camps necessary to ensure the elite’s survival.

Many will see this as appalling evidence of my Hobbesian pessimism, but they’d be wrong: the key fact above is that there are 85% of us, and only 15% of them. The key ‘problem’ is the preference of that overwhelming majority for a quiet life. But adaptation very quickly to new circumstances is part of that – and it doesn’t have to have a negative impact. When left to form a pack of manageable size and aspirations, Man’s cooperative side comes to the fore.

This in turn explains my commitment to individual independence within a mutual community. Not as the answer for everyone: but definitely as another sector which I believe should eventually be more common and influential than multinationalism. My mutual and community obsessions are not about local flower shows and brewing nettle wine; they are about independence from controlling Big State and the vagaries of what some other idiot is doing in Thailand. This and only this can give us back real control over our own destiny.

[As an aside, I should point out that socialists, pcers, safety obsessives, and eurocrats would disagree diametrically with 100% of this. It’s good to define who your enemies are, I find.]

So in that context, what is happening on the big canvas at the moment?

A Helicopter View

What we’re seeing is the most eclectic confluence of power trends in history. And it is very much a case of ‘you wait for a bus for fifty years, and then six come along at once’. Very few of the trends, as we shall see, are mutually exclusive. The dizzying speed of the trends, almost ubiquitous incompetence, several forms of denialism, media distraction, and the emergence of serious power-losers from the mix all help to explain why nobody knows what to do – or, in many cases, has cared very much about doing anything until recently.

I would summarise these trends as follows:

* Religious fundamentalism

* The economic rise of the East, especially China

* The gathering of power and money into globalised banks and multinational combines

* The sovereign indebtedness of the West, exacerbated by huge banking bailouts

* Cyber power to discover secrets and disable communications defences

* Increased privacy invasion by the media, the State security services, and assorted info-gatherers

* Closer links between State security and media owners, especially online

* A rising global population and a growing shortage of potable water

* Overall, the end of broad consensus within developed societies.

It doesn’t take a genius to look at these developments and conclude that, overall, they spell widespread instability. But personally, I tend to distinguish between short to medium-term catalysts on the one hand, and longer-term change on the other. By far the most immediate catalysts of change are sovereign fiscal mismanagement, and the conviction of those sovereigns that the existing banking/Bourse/globalist system is just fine really….and yet must be rescued. If you think like I do, those two statements alongside each other (as a basis for decision-making) are completely delusional.

Europe ( as in the EU) is looking increasingly likely to be the first major flashpoint. A Union built on bureaucracy and controlling top-down action, it has the twin evils of poor wealth-creation and very slow decision-making. In turn, its leadership is the most cut off from its citizens since the USSR: this is leading, with gathering speed, to a socio-fiscal crisis that must now almost certainly engulf the region’s banking system, and destabilise several national regimes. Further, the fact that most of those banks are insured in America means that the crash will move across the Atlantic very quickly.

The two main currencies operating in the EU are the euro and the British Pound. There is a general distrust of currencies greater than anything I’ve experienced before, and a set of governments busy diluting their value. Coupled with a lack of self-sufficiency, this is inherently inflationary. But running as it does concurrently with the beginnings of a major global economic slump, there is no profitable GDP output with which to repay enormous debt. So more dilution of currencies will come…and thus more inflation.

What I suspect most observers don’t grasp is that this is not inflation as we’ve known it previously. Wage rises alongside falling productivity were the main culprits in the past; at the moment, compromised currencies and rising debts are the major factors. There is only one possible result at the end of this road, and this includes the UK: insolvency.

As I’ve been banging on about for ages, debt forgiveness on a grand scale is the only way to deal with this. But the engorged egos of the EU (and the IMF is no better) insist that no, it can be avoided. The main driver behind this view is their banks, none of whom want to die. Sadly, the longer this reality is ignored, the more likely they are to die.

Even without this first catalyst, the US – without absolutely drastic action – would default sooner rather than later anyway. A combo of normalised interest rates, static exports, rising unemployment costs and growing debt yields could achieve that next week if the wind suddenly blew in the wrong direction.

But in the period immediately following an European crash, a massive flight of currency investment into allegedly safe havens would occur, thus bumping up the value of the Dollar, the Swiss franc, the Aussie dollar, and perhaps even the Yuan – if it was floating fully by then, which on balance is unlikely. As all these countries depend hugely on exports, this would simply exacerbate the slump.

The US printing machines would by now be printing 24/7 at warp factor 9. Cutting to the chase, hyperinflation is unavoidable in that context.

My hunch is that, once that starts, the social consequences of doing nothing will dictate at least some degree of concerted action. The EU may no longer be capable of that, but I suspect the ‘Anglo-Saxon’ world will now get the upper hand and say, “Forgive us this day our debts, otherwise we may have to trespass against you”. It won’t be as blunt as that, obviously, but it will be clearly visible between the endless lines of diplomatic woffle.

Somewhere around this point, the sheer lack of output, transaction, trade and viable consumers around the globe will reverse the inflationary trend, and usher in terrifying deflation. I say ‘terrifying’ because once again, it will probably take the experts by surprise, and a flock of economists will disagree vehemently about whether it will happen, or why it’s happened, or what to do about it.

Any further detail than this is pointless to be honest, because individual leaders or governments may emerge and stumble on some kind of answer. Or not.

What can we do?

Most of this is negative, I’m afraid. There are obvious things to avoid, and some bold things one can do, but most of my thoughts in this area are about survival, not income growth. For most people, wealth growth over the next five years will be impossible: defending and protecting what you’ve got is going to be the only game in town.

The usual health warnings apply: I’m not a qualified counsellor, and I’m not licensed to dispense financial advice – so you mustn’t take what follows as such. These are merely what I would do. Some of them I’ve already done.

1. Ignore financial advice emanating from a government or bank. It will be in their interests, not yours.

2. Unless you’re very wealthy and/or genuinely need to replace something, ignore slashed prices on retail durables. Consuming right now is the daftest thing you could do.

3. If you have the means, buy a property in France – and be prepared to live there for a few years, possibly longer. Reasons: prices are racing towards the bottom here, France has more agricultural land and services infrastructure than any other EU State, they will look after their own inhabitants before anyone or anything else, tax evasion is the national pastime, the drink is cheap, and the restaurant food affordable.

4. Whatever property you have, reduce your outgoings to a minimum. Take advantage of all energy schemes and grants, and get your hands on as much wood as you can.

5. If you can get your hands on gold bullion (not bank trackers) then buy it.

6. If you can define a manageable community where you live (most people can if they think about it) encourage people to meet more often with practical aims in mind. Assume that benefits will shrink and taxes will rise. Form passive resistance groups with other local communities, especially in relation to property taxes. This isn’t anti-social behaviour: your tax monies will be used to repay a debt which is unrepayable, and will be forgiven in time anyway. The sooner your country defaults, the better. Assess the total land available, and grow complementary things on it. Buy ONLY the food special offers in supermarkets. Negotiate the price of EVERYTHING in chain shops.

7. Don’t deposit money with banks beyond the absolute minimum for ease of current-account access. Keep cash on you at all times and pay cash each day when you can. Avoid frozen foods, but buy any good quality canned product on offer. Keep a good stock of rice. Form exchange groups for barter.

Isn’t this all rather Doomwatch?

No, not really. First of all, we won’t have to do this sort of thing for long. It’s possible we can avoid it altogether if the world comes to its senses quickly; but on the other hand, it does no harm to be prepared.

The thoughts expressed above are a fraction of what one could do, but the strategy has method in its apparent madness:

* To accelerate government default, and thus force reality to the fore

* To make life untenable for our banks – and help us realise they are not as vital as many insist they are

* To buy daily and thus minimise inflationary effects

* To bring multiple retailing to its knees, and shift the power balance back towards communities

* To reduce dependence on central government, and demonstrate our potential independence of it

* To minimise use of those services which will be the most prone to inflation

* To encourage community identity and rebuild the fabric of its relationships

* To undermine and perhaps even collapse the entire basis of globalism

* To encourage personal self-reliance, and community self-sufficiency.

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There’s an underlying philosophy to all this, and it goes back to the power trends I mentioned at the outset. If wealth-transfer trends are  left unchecked, we are going to sleepwalk into a world where three key things mature. First, tax demands pauperising citizens will be used to initially prop up, and then fold together, most banks into a power-set  – one completely independent of either government or individual depositors, and controlled by a tiny minority of the global population. Second, multinational online business, media owners and security services combine to bring an end to privacy. And third, the one remaining sovereign power of any influence or wealth becomes China, itself a propagator of authoritarian power and the sacrifice of the citizen to the State.

I’m not suggesting this will happen, I’m saying that a simple projection of current trends forward will produce it unless somebody or something steps in to stop the process developing further. Equally, I have long been of the opinion that the future is hardly ever simply a straight-line extrapolation of what is. But at the same time, I also believe in the power of self-denying prophecy to frighten people into changing their ways.

A banking system without depositors, for instance, would be insane – and implode quite quickly within our current financial structures. But if you read and listen to the ravings of Bob Diamond at Barclays, this is precisely what he wants to do.

I will conclude in the same vein as I began. Nobody knows what will happen….but I know what I don’t want to happen. And so I propose, when the time comes, to do everything in my tiny little bit of power to stop the nightmare of global serfdom from coming to pass.