Wednesday, April 18, 2012

The Great World Depression (2012-2020)

UPDATE (2011-01-08) : This post has quickly become the most read post in this blogs history, after being published a year ago. Since then, I have only become more convinced that my predictions are correct. I have also realized that it is pointless to keep focusing on the disasters that is coming, and much better to actually start adapting at beforehand. Thus, after this post, I encourage you to read a couple of things.

First, the new years post of 2012, where I sort of explain why I’m done with this shit (Goodbye, and hello again).

Second, I just published the first useful post on how to do things for real, instead of just droning on in the pathetic politico-economic misery we find ourselves in (Chronicles of Able Man)

Finally, if you are looking for statistics and data, just try and search. I’ve written over 3000 posts the last few years, and many show graphs of economic data supporting my conclusions. If there is something you can’t find, leave a comment and I’ll go dig. Or do some digging yourself, Google-fu is a fine sport. The conclusions are what they are, and I’ll happily see them contested, but until proven wrong, I will have to believe that I’m in fact right. I’m always happy to chat it up with any readers, there are quite a few regulars these days and more people keep popping in. If you’re one of those who ended up here by searching for economic depression-topics, then you are very welcome to say hello. I’ll be here for a long time.

[Original post below]

Before you z0ne out, WAIT. I caught you with the headline. Before you go off saying “he’s just imagining things again”, do yourself a favour. Read the following list :

A 3% interest rate hike will cause the US deficit to become larger than $2 trillion, and more than 50% of all Federal Spending will be borrowed.
A 1-2% interest rate hike will make Japan collapse. Debt servicing costs are closing in on 50% of tax revenues. Japan cannot afford just social security + interest on debt without borrowing (with ALL other spending removed)
Sweden is cheering annual growth of 6%, while personal debt levels are growing at 10% annually. Norway, Sweden, Finland, Australia and Canada need price corrections of between 25-40% on houses. All the growth is inflationary, i.e. based on debt-levels that increase at levels high above GDP growth.
Ireland and Greece are bankrupt. Portugal and Spain will be unless they change. Italy and Belgium have debt-levels exceeding 100% of GDP.
Britain has already entered stagflation, with rising prices, high unemployment and economic contraction
France and Germany can survive, but its questionable if they’ll survive the debt burden of bailing out the rest of Europe
China is overheating and has a property-bubble that defies all logic. The business cycle has already turned, and an enormous bust is underway.
India and other emerging nations are seeing massive problems with rising food prices
Eastern Europe needs to reform their entire entitlement systems, and have reoccurign problems with debt financing
Argentina, Venezuela and more south-american countries have price inflation rates of 10-25% already

We are all very much in the shit here, but you do not notice because we are in the last bubble. I warned this would happen. We are currently nearing the peak of this bubble, which means that this is about as good as it gets, before it gets worse. Look around you. Unemployment-rates are at record levels around the world, and its about to get A LOT WORSE. Interest rates have been at record lows, and unless we think that the laws of economics have been overturned, we are going to pay for this largess with record high interest rates. The buildup to the coming crisis has not been the last 2, 5 or even 10 years. It has been three decades of continuing debt financing. Debt-to-GDP in a stable economy remains stable. It does not increase exponentially.

When this bubble pops, there are no tricks left. No fancy accounting, no bailouts, no ponzi-schemes, no guarantees, no nothing. There is only bankrupcies, followed by bankrupcies, followed by bankrupcies, followed by the epic flood of paper money that will drown us all. Because they won’t stop printing. Have you ever seen those segments in action movies where they freeze time as someone fires a gun, to zoom in on the bullet, moving in slowmotion? That’s us. The gun has been fired. Our future will happen as it does in those movies. A very unorderly reversal of all things unsustainable. I do wonder, what will be left of our capital structure after such an event. There simply is no way of telling. All I can tell you is that he who is not prepared, will be blasted of the surface of the earth like a haystack hit by a tornado.

And you might be sitting there, telling yourself : It cannot possibly be this bad! There must be something we can do! And the truth is, everything has already been done. And things got worse. There are very simple economic reasons that we are in this hole. Allow me to attempt an explanation.

To put us back on a sustainable path, by which I mean a path where the economy can keep satisfying our needs of consumption at a somewhat constant pace, we need to reduce debt and increase savings. But debt is savings, you say! I save and someone else borrows! Err, no. I was supposed to be that way. But you see, what we have borrowed is not from existing savings, rather from future earnings. To fulfill all the promises made by governments and financial institutions, we have to spend an ever increasing amount of our income on paying back debt. And we have reached the debt limit (in the US you have – in Sweden we are nearly there). Thus, debt needs to be paid down or defaulted upon, and savings need to increase, to enable us to rebuild production capacity. The second problem is that the tax and regulatory burdens are too large. The economy moves to slow, and is to constrained. It cannot adapt to when things change, and therefore becomes inefficient.

A ballpark number for the less disastrous countries is that we need government reduction by 20-30% (the US is a lot worse), and to get a savings-rate of at least 15%. If we are to get through the demographic and energy problems the coming decades, we will probably need a savings rate of about 25-30%. Now, how do you go about accomplishing this? Well, unfortunately there is no way to do it fast enough that DOESN’T cause a world depression. You see, if you increase government (which has been done continously for 50 years), the fact that the private sector is shrinking is shadowed by the increase in government spending. But when you try and reverse the process, the private sector cannot immediately step in and fill the void left by less government spending. The reason for this is that governments can spend money on whatever, while the private sector only spends money on that which is profitable. Thus, a re-allocation of 30% of government spending to the private sector will either take many, many years, or initially cause a gigantic black hole in the economy. And we do not have many, many years to do it. We should have done it already.

The problem with the savings rate can be fixed easily, but painfully. Cut back on entitlement spendings, cut back on public health-care, cut back on all safety nets. These are the things that have driven down the savings rate. If we want the savings rate to go up, we must remove them. People will HATE this. Everyone and his grandmother will try to prevent it, by violence if necessary. Yet if we don’t do it, the economy is going to become an ever-shrinking pie. The private sector will start contracting from lack of capital. The simple fact is that collective welfare systems kill the underlying economy, by removing all the incitements for people to save money. In Sweden, we have partially solved this by forced savings. The reason that the Swedish economy is doing relatively well since the mid-90′s is the fact that the forced savings (retirement money) is partially funneled to the private sector, and not just spent by the government as in other countries. I cannot overemphasize how important this is. Yet it is not enough, and it still gives corrupting effects on competitiveness in the market. You grow oligopols and monopolies, by funneling large parts of the savings of a nation only to the largest companies through the stock market.

I know this all sounds like the ravings of a mad man, but consider this : Why is it impossible to support a family on one working wage nowadays? Why is it only the price of cheap consumption goods that falls, while all the necessities of life tend to get more expensive? With all the efficiency increases due to information technology, why aren’t we richer? In East Asia, they sure are richer than they were 20 years ago. Why aren’t we? All of this and more has been outlined in my first large essay, The End of Civilization. If you haven’t read it, maybe you should (a huge thanks to all those of you who took the time to do so).

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