The Problem is Fragility

Mainstream opinion on economic conditions at present is a steaming shitheap of errors.

Deluge of hopium from ABC (sponsored by Citigroup, no joke):

Stocks closed higher on Thursday after European leaders agreed on a plan to avert a Greek default and the Commerce Department announced third-quarter gross domestic product grew 2.5 percent, boosted by higher consumer spending, allaying fears that the economy is slipping into another recession.

The Dow Jones industrial average increased about 2.9 percent to 12,209 and the tech-heavy Nasdaq increased about 3.3 percent to 2,784 at the end of the day. The S&P 500 had its biggest monthly rally since 1974, according to Bloomberg, increasing 3.4 percent to 1,285.

The GDP rate was in line with what economists were expecting. The 2.5 percent growth rate is almost triple the 0.9 percent pace of economic growth in the first half of this year, which has been far too slow to generate any job growth. Unemployment has remained stubbornly high at over 9 percent.

The thing is, high unemployment and low GDP growth (now — ahem — magically cured) are (and always were) secondary problems. They’re the things that hurt, sure — but they’re not the cause of the illness — they’re just symptoms The main problem is systemic fragility, and the failure to understand the economy from a systemic perspective, and understand the systemic risks. If the financial system (both global and national) is not resilient to shocks and the unexpected, the system will unravel under the slightest pressure. As I have repeatedly explained, the Western economic paradigm is a highly fragile for two reasons: over-dependence on foreign goods and resources controlled by hostile nations, and the pattern of interconnected financial debt that leaves the system open to collapse if just one significant player collapses:

Not only did the bailouts disable creative destruction (the engine of innovation and social progress), they also created so much debt that they have already damaged the ability of future generations to save, invest and innovate.

Worse, they did nothing to address the fundamental fragility of the system. All of that interconnected debt means the system is still fragile to a default cascade, which means that if the system is to be “saved” again, it will require more bailouts and more debt-acquisition, further eroding the ability of taxpayers to save and invest, as governments tax and inflate the currency to pay down the debt.

I expect future generations to look back on this episode as a bizarre aberration. America — surely the greatest producer and innovator in the history of human civilisation — forgot how markets work and the notion of creative destruction, forgot that an empire dependent on hostile partners (i.e. China and the Arab world) is hugely fragile, and then forgot the fact that America emerged as a superpower as a director result of its status as a great creditor and manufacturer, and that the old European empires lost their superpower status through loss of productivity and massive debt acquisition.

The beautiful thing about artificial abstract systems is that they can be remade at will, unlike ecosystems or organisms. It would be so easy — in principle — to rip up the global financial system and start again, because it’s all abstract. But there are too many vested interests — creditors want their pound of flesh, consumers and businesses want stability and fear change, and so establishment economists and thinkers will hunt ceaselessly for any kind of confirmation for the idea that the system is stabilising, that things are getting better, that things can go back to normal, that prosperity will return.

Well, prosperity may return, at least for a few short years, before the mass of interconnected leverage crumbles back into the murk from which it came. And as credit contracts (as is inevitable in a fractional reserve system) employment will slump, GDP growth will stall, and anger will rise.

The danger is that next time, the gears and wheels of productivity that hold up the abstract falsehoods of finance and consumerism will fail. I am not really a fan of Ayn Rand, but the analogy of Atlas shrugging holds true — in this case, the workshops, mines, and factories of “poorer” exporters holding upon their shoulders the parasitic mass of the consumerist Western nations. It won’t be industrialists and capitalists shrugging — it will be shipyard workers, machine operators, truck drivers, coal miners and construction workers, squeezed and dispossessed. Why should wealthy Westerners live a lavish lifestyle subsidised by the blood sweat and productivity of poorer nations? Because America has nuclear weapons? Because it invades nations that threaten to trade oil in things other than dollars? That kind of belligerence is a house of cards — it works with Third World despots, but not with an angry, politically engaged and dispossessed mob. I see it in the Occupy protests — the police can beat and brutalise protestors, but belligerence doesn’t change anything — the protestors are a hydra, cut off a head and two grow back.

The economic elite of the 20th Century learned to appease their malcontents by continuously raising the standard of living, expanding property ownership, and bringing plenty of food to tables, and new consumer goods to homes around the globe. If the economic elite of the 21st Century cannot learn to do the same I fear the malcontents will unleash hell.

 

About these ads

21 thoughts on “The Problem is Fragility

  1. Pingback: Old Hatreds Flare Up… « azizonomics

  2. Pingback: To QE, or Not to QE… « azizonomics

  3. Pingback: The Abolition of Deflation « azizonomics

  4. Pingback: The Domino Effect? « azizonomics

  5. Pingback: Motherfucking Global « azizonomics

  6. Pingback: Populism & the Fed « azizonomics

  7. Pingback: Too Fucked to Bail « azizonomics

  8. Pingback: Keynesians, Ganja & Hawaiian Shirts « azizonomics

  9. Pingback: What is Michael Heseltine Smoking? « azizonomics

  10. Pingback: The Guacamole Hits the Fan: “Ten Days to Save the Euro” « azizonomics

  11. Pingback: $29 Trillion « azizonomics

  12. Pingback: The United Kingdom of Massive Debt « azizonomics

  13. Pingback: Breaking the Banks « azizonomics

  14. Pingback: The System is the Problem « azizonomics

  15. Pingback: The System is the Problem « azizonomics

  16. Pingback: Whitewashing the Economic Establishment « azizonomics

  17. Pingback: Guest Post: Whitewashing The Economic Establishment » A Taoistmonk's Life

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s