Sources of information: blogs versus politicians
Is it all we can do was to lie down before the approaching juggernaut of economic and social collapse?
'Juggernaut' comes from a Sanskrit word meaning 'lord of the universe' and is one of the forms of Krishna. At one temple devotees were thought to cast themselves under the wheels of a massive chariot carrying statues of Krishna as a deliberate act of devotion. Or perhaps they just slipped.
I am no kind of expert at all, but judgement is always about ranking opinions more knowledgeable than one’s own, and, sometimes, one has to nail one’s colours to the mast if only to allow others to steer clear.
The sources of information now are numerous and range from blogs to politicians. At one extreme many blogs, though of independent mind, are so overwhelmingly concerned to complete their own interpretive scheme that they are sometimes little concerned to identify which specific triggers of change are likely to occur first. Yet, in their defence, one must recognise that there is too much variability in the world, too many possibilities of both negative and positive feedback, too much irrational behaviour, and then the occasional small piece of enlightened rationality, too many unforeseen circumstances both benign and malignant, too complex a web of inter-connectedness in the political-economic structure we have erected, for anyone to know exactly what is going to happen and when.
On the other hand, information from those actually involved in trying to move the levers of power is highly compromised. Is ever a politician willing to lose office for the sake of telling the electorate something it needs to know, or do they all, like Vince Cable, believe that the marginal results they personally achieve in office completely outweigh public understanding?
Underlying instabilities
Beneath it all, at the level of historical perspective, it is not difficult to identify major and largely inexorable trends that threaten our current way of life: climate change; environmental degradation; population increase; natural resource depletion; increase of social/economic complexity; decline of state competence; decline of democratic control. Our cleverness, busy-ness and short-sightedness in coping with the here and now give us an amazing capacity for ignoring the ground beneath our feet and also for maintaining our balance, but there are good reasons for thinking it cannot go on much longer.
Which of these instabilities is most likely to hit us first, if not hardest? In my view it is the increase in social/economic complexity and more specifically the implosion of our financial system.
The only system that works?
When one posits a financial or economic collapse people tend to react that capitalism will go on for ever, that it is the only system that ‘works’, that there is no alternative system. Whether or not it is the only system that works is hardly worth debating. There certainly have been and are other social economic systems, but nothing to rival the scale of capitalism. Capitalism certainly works in its way, and it has a unique capacity to facilitate and accelerate economic growth. In our lifetimes it has produced unprecedented economic growth. People nowadays, in claiming that capitalism will go on and on, mostly identify it with precisely that phase that we have recently experienced. Capitalism inherently requires constant expansion. It is a pyramid structure, subject always to periodic collapse. It can restart after collapse, but there is no inevitability that it will regain the former level of activity and prosperity.
The collapse of capitalism? The view from the top of our pyramid
There have been capitalist booms and busts in the past, and there are always minor fluctuations in the ascents and even descents. Yet it is clear that we now stand at the peak of an economic pyramid whose summit is of historically unprecedented height.
The foundations of our pyramid were laid in the industrial revolution. It was thereafter fuelled by the western world’s colonial expansion or its settlement of new continents and dispossession of the native inhabitants. After 1930 it was further boosted by an exploitation of the earth’s material resources on a scale and with a rapidity totally unprecedented. Things were flagging a little by the time of World War 2, but reconstruction helped, and when, in the 1970s, resource limitations were beginning to be felt, trade globalization achieved essentially a recreation of the benefits of imperialism for the developed economies without the necessity for legal or physical occupation. However the engines were essentially decelerating and the final, brilliant boost from the 1980s onwards was the development of massive international financial expansion and deregulation.
That financial turbo-charging of our economy is what tottered in 2008 and is still threatening to collapse. In fact it cannot avoid collapse.
Financial instability and collapse
In the past few decades financial transactions internationally have outgrown trade in physical goods and services by several orders of magnitude. For banks the financing of trade and industry is now a very minor part of their activity and profit generation. Even a manufacturing company, such as Porsche, may make more money from financial transactions than physical production. Such financial transactions are ‘rent seeking’ activities that draw money out of the productive economy without generating wealth.
Such activity requires constant acceleration to avoid collapse. It is achieved by private finance’s destruction of state regulation, escape from state taxation and by a constant expansion of debt-based trading. Because financial trading has so enormously outstripped economic growth, this debt is backed by vastly overvalued assets (see sub-prime etc) and complicated financial insurance (see AIG etc) for which there are insufficient funds to meet eventual claims. Because the financial system is so complexly and inextricably inter-connected, financial trading insurance is far riskier than insuring casual risks such as theft or illness. In fact it is inherently unsustainable, but it is intended to underwrite the whole international financial edifice.
Banks are uniquely allowed to fictionalise their accounts. Governments, spurred on by the big international accounting firms, have recently allowed them to value their assets not according to what they might fetch on the open market (‘mark to market’), but according to what their computer models value them at if certain inconveniences and ‘disruptions’ to the market were removed – such as the fact that there are no willing buyers for their assets (‘mark to model’). Add to that all banks’ use of complicated corporate structures in tax havens, and their accounts become totally opaque.
The credit crunch was the panicked recognition of all banks that not even they could trust the solvency of their fellows. The immediate crisis was averted by state intervention but virtually every bank remains insolvent if any half-realistic valuation is placed on its assets. Since the credit crunch we have seen a series of government sponsored ‘stress tests’ applied to the commercial banks. These they have all passed, but in some cases (see Ireland) only weeks later they have required massive further state support.
Reactions and remedies
State governments have not only lost control of the financial system but their own financial ministries and advisers have become completely infiltrated by the financial classes (‘regulatory capture’). Nevertheless there is genuine alarm, even panic, at the instability of the financial system. (That is what explains the complete capitulation of the Liberal Democrats to the expenditure cutting agenda once they were admitted to coalition government.)
Governments seek to shore up the financial system by a combination of not always compatible measures.
The immediate reaction has been, and still is, to transfer the liability for much commercial bank debt via government to the tax-payer, either by guarantee or by buying bank debt at optimistic valuations. Quantitative easing injects massive amounts of liquidity into the economy through the banks, where it almost entirely remains, used not for productive investment, but for commodity speculation (see food prices and Middle East unrest). Regulatory control is fiercely resisted but governments are trying to impose higher liquidity requirements on the banks, which will make them ‘safer’, but will also reduce both their profitability and their lending capacity.
These measures may help shore up the financial system but they do nothing for the productive economy, whose fortunes come a very poor second in government priorities (see ‘Main Street’ versus ‘Wall Street’). Our economic system, as David Cameron might like to put it, is broken – and no-one knows how to fix it. It is all too complex and inter-connected. China is not the new economic paradigm; it is the last gasp of the old one.
Public burdens
Ironically, as globalisation fails, because third-world countries begin to resist the imposition of exploitative terms of trade upon them, the burdens imposed by non-democratic institutions such as the IMF and central banks are increasingly directed at first-world publics. Commercial bank debts are transferred to governments, who must then cut public spending, increase taxation or transfer it from corporations to individuals (see VAT increase and ‘internationally competitive’ corporation tax) and suppress wages and labour negotiating rights (see Wisconsin). When nations are severely distressed financially, many of these measures are effectively dictated by the IMF and other funding governments in contradiction to the inclinations and commitments of the democratically elected government. The IMF has an explicit policy of reducing labour costs in all European countries.
‘Rescue packages’, as in Greece and Ireland, are designed not to benefit the national economies directly, but first to save banks from collapse. Despite widespread public opposition to 'bailing out' 'lazy' PIGS in Germany, where Angela Merkel is caught in approaching election trap, several German banks have had highly improvident involvement with Irish banks (where regulation was lax even within its own legal requirements) and the German banks are likely to become insolvent if Ireland and/or Greece default. The Irish banks have just failed another stress test (is it the fourth?). How is it that every time these wise (and highly paid) financial people look at the Irish banks they find they missed a few score billions last time? Is it that there’s a hole in the bucket and the banks are even now creating new losses? Everyone knows Ireland will default: it is just a question of how long Germany and France can delay the inevitable. Some British banks are likely to be affected also. (Why else did UK extend its own individual loan to Ireland with money 'it did not have', even given that we're making a profit on the deal?)
European PIGS (Portugal, Ireland, Greece, Spain) can now borrow to fund their deficits, either from private bond investors or from national or international ‘rescuers’ only at rates well above even optimistic forecasts of growth in their economy. Their debts can only get worse, cuts deeper, public unrest more vociferous. The European Central Bank has signalled a forthcoming rise in interest rates (probably now slightly delayed by the Japanese disaster). European banks have total claims on Portuguese, Irish, Italian, Greek and Spanish debt of 2.4 trillion dollars. Do they really think they're going to get it all back?
In the US the housing market is in continuing decline, and the solvency of major and minor US banks still depends on overvalued mortgage-backed securities. Rising interest rates are possible (or yet more quantitative easing further increasing US debt, except that it's just again breached the congressionally approved limit) following Japanese sale of US bonds, thus increasing mortgage defaults. There is political paralysis at federal level and growing budget crises and possible bankruptcies at state and municipal level. US unemployment has just decreased sufficiently to boost not only the Dow but the FTSE as well, but few bothered to notice that the number of employed people had also dropped. Research shows almost half of the US population of working age has no full time job. Approaching a half of all US citizens are benefitting from food stamps. (The big banks administer the food stamps system and make a nice profit on it.) Meanwhile Jamie Dimon of JP Morgan Chase (‘the most dangerous man in America’ and Tony Blair’s new boss) is busy telling us all that the problem pre-2008 was too much financial regulation.
In the UK most economic indicators are turning down - growth, unemployment, housing market, consumer confidence. Inflation is up. Bank profits rise. The government’s Office of Budget Responsibility forecasts that private debt will increase massively over the next few years as public debt, maybe, declines. The full scale of cuts and transfers to the private sector, and the public anger at them, is yet to be felt.
Tipping points
The burdens placed upon the public in the first world, by political and business leaders seeking to maintain the financial system, are, in anything but the short term, insupportable, but there is no other plan. The burdens placed upon the public in the third world, by economic exploitation and commodity speculation, are equally or more immediately insupportable and contribute directly to popular uprisings in the Middle East, including the supposedly oil-rich nations. State forces have shot and killed demonstrators in Yemen, Bahrain and Syria. Saudi troops are in Bahrain.
Japan’s misfortunes threaten to destabilise the bond and currency markets. The Bank of Japan’s immediate reaction is a massive dose of quantitative easing. Industrial disruption in Japan is likely to ripple out to industry internationally. It may be worse than a shortage of batteries for iPads.
Against all this it is difficult to believe that we are not in serious and present danger of financial and economic implosion.
Deflation and depression
It will take the form of severe deflation and depression. The money supply will drastically reduce as financial debt cannot be honoured. Over 95 per cent of money in circulation is not government issued currency but debt-based money created by commercial banks.
There is certainly too much money (and debt) in the system now, but economies always over-react and there will shortly be too little. Money is necessary to facilitate human exchange of goods and services. People are unemployed in a depression not for a lack of any possible activities useful to themselves or their fellow citizens, but because the mechanics of the system for rewarding them for their work with some token they can use for obtaining goods and services they require from others has broken down. It is quite possible in a depression for farmers to be throwing away food they cannot sell, whilst nearby people are starving because they cannot afford to buy it. Neither supply nor demand are absent; just the mechanism to bring the two together.
There will still be rich people in a depression, but fewer of them and they will be more worried. There will still be a market for expensive goods, but a much smaller one and suppliers will be much more vulnerable.
Middle income people, even up to a quite high level, will suffer a drastic reduction in their wealth and purchasing power. The poor will grow and struggle. Asset values will plummet; the effective price of essentials will rise; governments will withdraw from public support.
It is not a happy prospect for furniture designer makers.
Where do furniture designer makers fit in?
These developments will affect every section of society, including furniture designer-makers, but there is a particular way in which we fit into them.
It is no accident that the ‘British craft furniture revival’ happened during the post-war boom and that it reached its climax of widespread public attention (not necessarily its largest membership) in the seventies and eighties. Our natural market is the inconspicuously rich (‘the lower edge of luxury’). That market has for many of us been augmented by more structured forms of wealth disposal amongst corporate customers (now largely faded) and the rich clients of decorators and interior designers. But those we access by piggybacking on other professionals. All of these markets and mechanisms will suffer severely in a depression.
A few of us have gained custom under our own steam from the conspicuously rich, and have done so by projecting a certain kind of extravagance of design and making. Only a few of us have the talent or aptitude to do that, and it depends in any case for its effectiveness on a level of exclusivity.
When we try to promote our group fortunes in any organised way, as FDMA intends to do, we have a tendency to lift up our eyes to this market of the conspicuously rich – in my view in vain. Even if we do not imagine every one of us can access that market, we slip too readily into the assumption that we need to emulate the characteristics of that furniture to make all of us more commercially successful.
In the coming depression there will still be some conspicuous-rich demand but it will be a contracting niche and it is hopeless to think that more of us will be able to climb in. The inconspicuously rich are going to be severely squeezed. There will be more localised markets for basic and durable items. In that situation I think it is very unwise for FDMA to take its character (or its leadership) from what has been established as the apogee of furniture designer-making in the preceding decades. Most of us are going to have to establish radically new models if we are to survive as businesses in a changed world.
There is a further, more particular way in which our group development reflects the unsustainable economy in which we are set. A significant number of us depend for a substantial part of our income on training new would be professional designer makers. I believe we are training more people than can expect to succeed in their own businesses. We are running in effect our own Ponzi scheme. Unless we have a much clearer idea than I have seen of a successful business model for furniture designer-making in the coming decades I do not think we should be actively encouraging people to join our ranks. There will be enough who do so without encouragement.
Recovery and its limits
The world will recover, though it took the best part of a decade and a world war to recover from the last depression. Capitalism will survive (probably), but it will not return to anything like the level of economic activity, of prosperity and of internationalism that we have seen in recent decades.
That is because other underlying limitations will catch up with us following financial collapse, in the form of energy deficiency, climate change, and general resource scarcity.
Oil and gas are certainly beyond their peak. The energy returned on energy invested ratio on new supplies is between a fifth and a tenth of what it was on the primary oil field discoveries. The boom may make new difficult (and very small) oil reserves look economically viable, but the failing economic recovery that rising energy prices helps bring about will mean that many of these new discoveries are never exploited.
Even if nuclear and renewable energy had the inherent capacity to substitute for our present level of energy use, which many informed people doubt, we do not, from where we are now, have the economic ability to create the massive new infrastructure required. That infrastructure would have to be created from the ‘old’ economy and from conventional energy. We have simply left it too late.
There will be other scarcities too, most notably of food and water. Water supplies are inadequate and compromised in many parts of the world (including the USA). It may be true that there is enough food in the world to feed everyone, that it is just in the wrong place, but that doesn’t remove the problem. China and India have difficulty feeding their present populations and are currently buying up enormous swathes of agricultural land from impoverished countries that are more inured to seeing their own populations periodically starve (see Ethiopia).
And modern food production is of course highly dependent on cheap energy and petrochemical inputs – and increasingly in competition for land usage with bio-fuels.
Is that a juggernaut? I think it is. Can it be stopped? I think not. Can we, as individuals in local communities or small groups, dodge it? Possibly.
