A Fundamentally Flawed Perspective
Several global institutions have been designed to impose a top-down management structure for these complex economic and political relationships. Similar to state and federal regulatory bodies within a country, they are commissioned to “alleviate” inherent instabilities that arise from the operations of a complex, dynamic system. Needless to say, they have predictably failed at this goal even more miserably than the central governments of nation-states. The global credit (complexity) bubble is currently in the process of imploding due to its inherent Ponzi dynamics. As is the case with any Ponzi scheme, it can only be maintained if new entrants continue buying into it, but most economic actors (individuals, corporations and governments) are now saturated with debt as their cash flows have stagnated or declined (they can barely afford to pay down existing debts, let alone take on new debt). Multiple claims to existing real wealth are destroyed as the bubble implodes and our societal systems, which are mal-adapted to credit contraction and slow/negative growth, begin to experience immense destructive pressure. This process is quite evident in the Euro-zone, where entire “sovereign” states are quickly descending into utter insolvency despite the newly-formed credit facilities of the ECB and IMF (the latter recently decided to eliminate the borrowing cap on their facility in a final act of desperation).
Neo-Keynesians’ House of Cards
Our Disingenuous “Saviors”
- How will the domestic banks react as their debts are paid down with freshly printed money? Will they be concerned about inflation?
- What about institutional investors currently holding cash and treasuries as their primary assets? Will this new stimulus spark a "risk on" mentality where assets/commodities are bid up and treasuries are dumped for cash to invest in risk plays? Can the Fed soak up all of these dumped treasuries and keep interest rates from rising and consuming a large part of government revenue (which would turn us into a much bigger Greece)?
- What about our foreign creditors who will see others dumping treasuries while debts incurred to buy their cheap goods are being paid back with printed money? It is true that there will be much more debt overhang than money printed in the stimulus program, but hyperinflation is not so much an economic event as a sociopolitical one (internal or external loss of confidence in government institutions).
- How much moral hazard will be created by such a significant bailout of debtors and creditors? Is current moral hazard already so high that marginal additions to it will be insignificant, or will it push us to a point where people, corporations and their politicians will refuse to ever abandon the current Ponzi system?
Another interesting policy idea is printed monetary stimulus and tax cuts for households combined with central bank monetization of treasury debt to offset lost tax revenues and keep interest rates stable. The federal income tax could be greatly reduced or even eliminated, and monetization could make up for the revenue shortfalls that result. This particular idea was actually mentioned by Ben Bernanke when speaking about Japan’s prolonged deflation and possible policy responses in a similar situation. Of course, with another idea designed to maintain the path of modern civilization comes more troubling questions (and all of the questions above still apply) :
- As the dollar is devalued from printed stimulus and debt monetization, how will other major economies stuck in deflationary traps react to appreciating currencies and decreasing exports?
- Follow up: Exactly how ugly can a trade war between major economies get?
- How much stimulus will have to be applied before consumers and investors heal their scars, pull the cash out of mattresses and start spending/investing again?
- Will the government pay back its expanded deficits with printed money, and if so what does this mean for the prospects of real or perceived inflation?
- What will occur when “organic” growth has restarted and we attempt to unwind the drastic monetary policy interventions that have been undertaken? How do we restore our tax revenues in an acceptable way?
In light of these unanswered questions and others not asked yet, it appears that the more “innovative” suggestions offered to solve our predicament are still underestimating our complex, global society’s unpredictable reactions to various manipulations at the margin. Similar to the mainstream policies heavily criticized earlier, they certainly tend to ignore the tougher questions regarding what we will do to create a more sustainable society once we are successful in restarting economic growth for the time being. In all fairness, that issue is much broader in scope and more complicated to properly analyze, but it should always be lingering in the background. Taking into consideration all of the above criticisms of policies that attempt to maintain economic complexity, it is hard not to conclude that greatly reduced complexity is the only path to sustainability. There may not be anything “wrong” with our desire to maintain the complex systems we have evolved up to this point in time, except the fact that this desire may not be compatible with the laws of nature.
“If you throw a ball straight up into the air, you can predict with certainty what its general behavior will be. It will rise with decreasing velocity, then reverse direction and fall down with increasing velocity until it hits the ground. You know that it will not continue rising forever, nor begin to orbit the earth, nor loop three times before landing. It is this sort of elemental understanding of behavior modes that we are seeking with the present world model. If one wanted to predict exactly how high a thrown ball would rise or exactly where and when it would hit the ground, it would be necessary to make a detailed calculation based on precise information about the ball, the altitude, the wind, and the force of the initial throw. Similarly, if we wanted to predict the size of the earth's population in 1993 within a few percent, we would need a very much more complicated model than the one described here.”With the above example, the authors are in essence describing a complex, dynamic system whose specific behaviors are unpredictable. The global economy certainly fits into this category, and of course it is entirely based on our current supply of energy/resources or the loosely estimated future supply we have borrowed against. This latter aspect of complexity represents the top of our global economic pyramid that is in the process of breaking down via “financial crises”, but more on that later. Our task here is not to determine exactly how the system will behave in the near future, but to take a bird’s eye view of general trends between multiple interacting variables. This perspective is something our current leaders, media pundits and mainstream academics fail to account for, and that’s why many of their “solutions” fall way short of achieving anything sustainable and are many times extremely destructive. We desperately need a fresh, new perspective on our current economic predicament before we can figure out the best ways to navigate through it.
Standing On the Brink of Release
We Can Survive With No Regrets