Tuesday, February 3, 2009

The Crash and Predictions

Everyone that I know is concerned about the changes in the stock market and the government bailout. What does it mean? The answer to this question is obvious. Economic growth is slowing from its previous pace.

Why is this happening? Growth depends upon an ever increasing source of energy. The world, however, has reached peak oil. The rate or amount of oil presently pumped, roughly 85 million barrels per day, cannot increase in any appreciable manner because the pumping capacity and the resource to meet that capacity are stagnant.

Unmindful of these constraints, financial manipulators attempted to continue with a process of wealth creation. Instruments alleged to document value were bundled and sold at a profit. The population accepted this perception of wealth creation in much the same way that the coyote assumes a road in thin air as he chases the road runner. Then, the perception fails, the emperor is discovered to have no clothes, and everything crashes.

A popular banking fiction long thought to be a truth is that additional money is generated when banks loan money to customers. This idea was sustained on the reasonable basis that a valid loan with high prospects of repayment expands the assets of the bank. A loan with an expectation of repayment over and beyond the initial amount loaned to the borrower under current banking principles means that the profit amount is newly created wealth.

So accepted became this financial philosophy that lenders either became complacent or corruptly forgot the element of chance remaining in the loan situation—that the borrower might default and fail to repay the loan. When this possibility did occur to the banking world, unscrupulous, but innovative minds went to work with the issuance and sale of credit repayment guarantees. By avoiding the terminology of insurance, a ponszi scheme of mammoth proportions enveloped the entire world.

Now those schemes have collapsed in the face of the unthinkable. A curtailment of energy available for continued future growth at a rate sufficient to meet and exceed population demands has come to town. The future is not out there. It is now. Suddenly the factory planned in order to hire tomorrow's workers won't be built. As a consequence, the loans of today cannot be repaid. Further, the size of the failure has destroyed the ability, if any there was, for effectiveness of the illicit repayment guarantees. An economic debacle of unimagined dimensions is upon us.

Can the slate be wiped clean? Is it possible to eliminate the invalid loans and the ineffective guarantees and straighten out the financial mess that we face? Some say that an astronomical bailout by the government will cure these problems. Certainly the government can step in and pay these debts. Without considering whether such repayment will come at a cost of great inflation as more and more fiat money is loosed in the system, there is another question that should be asked: Can a repeat of this situation be prevented from happening in the future?

Unless the possibility of repetition can be guaranteed against, the more appropriate path would appear to be to let the market control, let this world financial crash continue as massive human suffering climbs to gigantic proportions, even at the cost of social unrest and political upheaval.

A good guess is that the future will be marked by a zig-zag downward direction as regards economic charts. That direction will also experience some temporary upturns as energy prices fluctuates. As soon as demand starts building, however, prices will rise and the rug will be jerked from under the newly rising economic tide. The plummet downward will likely continue until either population excess gets trimmed or there is a magic energy break through courtesy of the gods of technology. A smart move would be to bet on excess population trimming to happen before miracles occur which amend the laws of physics currently governing the finite resources of the world.

The current debate on stimulus versus tax cuts by government is not really relevant. Stimulus will only bring temporary relief and inflation (but may prevent social unrest). Tax cuts will do nothing but fatten already fattened wallets. Tax cuts may prevent inflation, but are also likely to encourage social unrest and political upheaval.

For the present day, everyone simply has to live for the fairly long term future on a much reduced scale or standard of living than has been the case in the past. But all is not lost. Optimism should still have a home in our hearts. David W. Orr in a commencement address to the School of Design at the University of Pennsylvania in 2007 put it this way: "Hope is a verb with its sleeves rolled up."

The challenges of tomorrow are still there. The mystery of true curiosity still exists and brings with it the wonder of innovation amidst a realization that we may truly find meaning in redefining ourselves and our civilization.