Do you remember the Marvin the Martian/Bugs Bunny cartoon where Marvin is going to blow up the Earth, because it obscures his view of Venus?
Bugs saves the day, by stealing the Eludium Q-36 explosive space modulator … which Marvin doesn’t notice until the countdown completes and nothing happens.
“Where’s the kaboom? There was supposed to be an earth-shattering kaboom!”
Predicting the future can often be like that. You can see the trend, but for one reason or another the event you’re expecting — the moment of change — seems to recede again and again.
Yet, for all that, the danger generally hasn’t receded. The only way the danger can be removed is if the causes of the trend are dealt with. Patching by dealing with symptoms does nothing to relieve the risks (indeed, the attempts often raise those).
Take our financial system. (Groucho Marx can be heard in the corner going, “yes, take it, please!”)
On a superficial level, the answer is easy. “Let the banks fail”. New ones can be created to provide the essential utility functions, and the interlocking sea of obligations in the financial world gets swept away with the failed institutions.
Step back one step. Lehman Brothers was allowed to fail (some would say, “encouraged”, although to name names would probably draw a lawsuit). But Lehman was fairly close to being a single point of failure — for the commercial paper market. These are the short-term obligations sold by corporations to make payroll, buy supplies and inventory, bridge the gaps between spending and receiving.
That, more than anything else, is why policy suddenly shifted into “protect the bankers at all costs”. The productive part of the economy had just seized up.
Of course, protecting the bankers also told them “do more of the same”. So their interlocking web of credit default swaps, collateralized debt obligations and the like continued to grow. Even more risk was taken on. (Amazing, isn’t it, what thinking that your every mistake will be funded by the taxpayer can do for risk-taking bonus-seeking behaviour?)
Enter the Eurozone crisis. You may have noticed that, in all the crisis meetings, and all the “bailouts” and plans to date, not penny (or Eurocent) one has actually gone to the people of any European country.
That interlocking mass of obligations, hundreds of times greater than the capital of all the world’s banks, has meant that every bailout has had to go to keep patching the European banking system. (Let’s not forget the draw on the rest of the world’s taxpayers, though monies shipped to Europe to hold things together there.)
But, think policy makers, we can do this! After all, Japan has been playing this game for two decades now … and nothing’s happened there, has it?
Well, hold on. Nothing had happened yet, that’s true. But Japan has been in a different situation since the March, 2011 earthquake and tsunami.
Its nuclear plant problems have led to rolling brownouts and blackouts. That has eaten into production — and Japan held it together by being a “trade surplus” nation.
But for the past fifteen months, Japan has been a trade deficit nation, and suddenly holding Japan together is getting tougher.
Another rock on which the avoidance of the disaster sat was the strength of the BRIC (Brazil, Russia, India, China) and other Asian and Latin American economies.
Double-digit annual growth rates there have come to an end. Growth is stalled in Brazil and much of Latin America. (Producers need customers, and in North America and Europe buyers are at a premium, after years of stalled performance.) India is sinking fast. China has halved. A quick look at the shipping indices shows that orders are down all over Asia.
Apparently when you globalize the pieces stay connected in bad times as well as good.
Not to mention, of course, that the productive bits that are left are choked on the debt obligations of the struggling parts. This is one of the reasons central banks in Europe and America now simply “print” money without selling government debt: the market for that much debt is supersaturated.
Ask the Spaniards how record-low interest rates for four years are working for them. Spanish bonds now require a better than 7% coupon. (Greek interest requirements are more a measure of the time value of default.) They can’t afford to place the debt, and can’t afford to do without it.
Back to the meeting table, and more patching.
Meanwhile, on the energy front, capital shortfalls (you can’t pay bupkis on deposits for years and expect a vibrant savings rate to provide new capital, can you?) are becoming legendary — and with triple-digit oil prices having killed demand, the price has now fallen to the point where you’d lose money investing in production. More patching along the bumpy plateau following the peaking of cheap oil, but making the “hold it together” job that much tougher.
So, where’s the kaboom?
Coming soon to a planet near you.
When it comes, we’ll salvage something. But life will be tougher than it is today. Expectations of the “return to normalcy” will ratchet up.
But what gets destroyed in the financial explosion will be gone, forever. With it goes a lot of the hopes for non-conventional and alternative energy production.
A new round of pressures will start to build. Welcome to the deepening phase of the Long Emergency.