Calm Before the Tempest?

by on July 11, 2022

Is it beyond conception that the core actually strengthens for a length of time before the unraveling reaches it?

Let’s start by stipulating the obvious: no one knows the future, and most of the guesses–oops, I mean forecasts–will be wrong. Arguing about the forecasts now won’t make any difference as to which ones are correct and which ones are wrong. Time alone will tell.

That said, here’s a scenario that fits the dynamics I see as most consequential: Core-Periphery and the demise of the waste is growth / financialization / globalization model as the reigning model of how the global economy should work.

Core-periphery dynamics are pretty simple: unraveling starts on the periphery and seeps toward the core. The core actually strengthens in the process as capital and talent seek havens where they’re treated well, and the core became the core by treating capital and talent well.

The periphery responds to the unraveling of financialization / globalization by tightening its grip on whatever capital and talent is still available, incentivizing the flight of capital and talent to the core.

A great many people think there are many core economies. In my analysis, there is only one, due to the qualifying requirements: 1) issues a reserve currency, i.e. not pegged to another currency 2) liquid global markets for securities, debt, commodities, etc., i.e. anyone anywhere can trade in size in the core markets 3) transparent market and governance mechanisms, i.e. no overnight devaluations, expropriations, capital restrictions, etc. 4) diverse economy not dependent on exports or imports for its well-being and 5) ease of flow: capital, talent, enterprises and employees all have essentially unlimited freedom of movement within the core.

We can argue about which nations qualify as core but it won’t change the outcome. Capital and talent will make their own decisions about risk, safety, exposure to devaluation and expropriation and where the odds of being treated fairly are highest. It’s a good exercise to put yourself in the shoes of a manager of a $10 billion fund and go through the decision tree of where to put this $10 billion to preserve its purchasing power first and foremost, and secondarily generate a return.

Would you really gamble $10 billion on a 15% return on the bonds of Timbukthree, whose currency has fallen 20% against the U.S. dollar this year? Or Timbukfour, which is dependent on exports of commodities in a shrinking global economy? Or Timbukfive, which is dependent on imports of commodities and exports of consumer goods in a shrinking global economy?? If you answer “yes,” you’re not actually playing like you are responsible for $10 billion.

As the periphery unravels financially, it also unravels politically and socially. Bordering states are at risk of destabilizing, and any entity with large exposure to the unraveling debt or markets starts unraveling, too. The destabilization spreads to second-tier nations whose exposure to the dynamics of unraveling are structural.

As all these dominoes fall, eventually those closest to the core also crumble, and then core itself is finally destabilized.

Humans have an interesting talent for adjusting to new circumstances, i.e. habituating to new conditions. Those households consuming 14,000 gallons of fresh water a month may well scream that they can’t possibly get by on 12,000 gallons, but then if circumstances change and all the water we have is what we can carry in buckets a kilometer over rough terrain, we find that we can live on the few gallons we can carry a kilometer.

The amount of waste in developed economies is beyond easy measure. It’s estimated 40% of all food in the U.S. is wasted. Energy, food and fresh water have been treated as if low cost and abundance were birthrights rather than brief explosions of excess. While we’re screaming about energy costs, empty buildings are brightly lit, water taps are left running and one individual per idling vehicle in a traffic jam frets about rising costs.

When the 1989 Loma Prieta earthquake closed the Bay Bridge across San Francisco Bay, the main artery between San Francisco and the East Bay, economic doom was predictably predicted. Yet people quickly managed via extra BART (subway) trains that rain beneath the Bay and carpools with four people per vehicle rather than one occupant.

Is it possible that all the predictable predictions of economic doom are somewhat exaggerated by the thrill of sensationalism and projections of past trends, as if people can’t possibly make consequential adjustments to their behaviors and consumption?

Systems have constraints, and so there are limits on what adjustments can be made without altering the structure, but in many cases, we’re far from reaching limits on basic conservation work-arounds.

Is it possible that things will prove less dire than currently expected? It seems little credence is being given to the potential to adjust to new conditions.

Is it beyond conception that the core actually strengthens for a length of time before the unraveling reaches it? In my crystal ball, it seems not just possible but likely. This will be the calm before The Tempest, when the unraveling reaches the core and structural changes are finally required.

Recent podcasts/videos:

Tectonic Shift of Mercantilism Revalued (Gordon Long, Macro-Analytics, 42 min)

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