A Realist Looks at the Year Ahead

By David L. Brown

Good morning everyone. If you woke up this morning (as I presume you did since you are reading this) you were probably surprised to learn that we have entered a New Year, Anno Domini 2009. I certainly was, but then these things have been sneaking up on me for a long time so I should have expected something like that.

Anyway, Happy New Year.

Now it’s time for the completely de rigueur Review of the Past Year, followed by Predictions of Things to Come.

First, let’s review a few highlights from Star Phoenix Base during the year just ended.

On January 2, 2008 in an essay titled “Looking Ahead to a Very Different Future,” I wrote: “Most predictions of the future rely on the old tried-and-true (and desperately false) technique of looking backward, then extending the trendlines of the past into the future. In some cases that has worked, but the technique has little chance of accurately predicting the future from our present position. The reason is that we are reaching the end of an era of rapid growth built on depletion of non-renewable resources.”

We wrote about ethanol and how turning food into fuel was a terrible mistake. We wrote about the climate change denial that has become even more strident in recent months. We noted the likely return of inflation and even its evil twin stagflation. And we hammered several times on the mistaken economic assumption that any commodity that is depleted will be replaced by something just as good.

In June I predicted a financial crisis that would probably lead to a new Great Depression. That may have seemed extreme back then, but how about today? Oh, wait, no problem, the government bailouts will surely prevent anything like that from happening. (Nevermind that investors have lost trillions of dollars and the world’s capital markets have declined by nearly 50 percent. That can’t be important, can it?)

In early July I predicted the impending demise of General Motors, writing: “the entire American auto industry seems to be in a downward spiral from which there may be no return. But it is almost inconceivable how fast the bad news has been coming.” Yeah, and it kept coming didn’t it?

In September I suggested that the financial crisis could be bad news for the “financial elite,” the ultra-rich. Didn’t seem likely those smart people would get caught off-base…until along came Bernie Madoff, the new Robin Hood who stole from the rich to give to…well, we aren’t sure where the money went.

Also in September I wrote about how “insourcing” was bringing manufacturing and jobs back to the U.S. More on that later.

In October I stated that “Much of today’s ‘money’ is a phantom, something that exists in computer networks and can flit around the globe at the press of a key. It is a fiction, a mere cloud of bits and bytes, and there is where the trouble starts.” We have seen that playing out at defunct or struggling financial institutions around the world. We have been living on the back of an imaginary economy where money isn’t real, but something based entirely on trust. There is an old saying of Ronald Reagan’s, originally used in the context of Soviet disarmament: “Trust, but verify.” Too many people trusted that their “money” actually existed, and too few verified. Again, Bernie Madoff is the poster child for what happened. One might expect that Bernie was not the only charlatan loose in the financial world and I expect that far more examples will emerge.

Also in October I wrote about the freeze of international trade due to the credit crunch. We don’t hear much about that, but it is a huge and growing problem. More on that below.

In November I shook off my previous mode of thinking, pessimism, and embraced realism. That was a liberating decision. You can read my thinking on this in the essay titled “Realism: The Emerging New World Order,” November 28, 2008. I concluded with this:

We see our once and future leaders acting as would-be saviors of the old world order advocating putting trillions of dollars into failed institutions in the apparent hope that if only those outdated corporations and other entities can be put back on their feet, things will return to “normal.” Well, here’s a hot tip: There is no more “normal” any more. “Normal” fell out of the nest some while back and was replaced by its evil twin, “Abnormal”. The idea that we can somehow transform the “abnormal” present back into the “normal” world we once knew is an impossible dream, a vain hope, and a disaster in the making. No, Humpty is well and truly broken and to spend trillions trying to glue and patch and stitch him back together is a foolish and pointless exercise in futility.

Notice that in my new “realism” mode I was not saying that everything was hopelessly screwed up, but only that mistakes were being made. That change would have to take place. That’s the realist’s view, to see things as they are and to reject wishful thinking.

So there’s some background on what was discussed here during the year just passed. What do I see in the year ahead? Well, I would surely like to put on a Pollyanna persona and tell you that all the dark clouds are going to blow away and the bright Sun shine through on a new day of happiness and prosperity for Humankind. I really wish I could, but as a realist I cannot because the facts dictate otherwise.

We are being told that we can turn things around and put them back the way they were before. That, as noted in the excerpt two paragraphs above, cannot be. There is no going back to the old model because the foundations have been swept away.

Why? Many factors have converged to create this “perfect storm” of enforced change. Here are a few of them:

1 — Overpopulation. The growing numbers of humanity have continued to place demands on available quantities of food, land, fresh water and every other commodity.

2 — Unreasonable expectations. Not only are there more people in the world each day, but more have been led to expect higher standards of living. Emerging nations such as China have promised their people the equivalent of “a chicken in every pot and a car in every garage.” That was the campaign slogan of Herbert Hoover in 1928 and it was Hoover who led the nation and the world into the Great Depression.

3 — Declining resources. Not only are there more people demanding more resources, but those very resources are dropping. No matter where you look — energy, water, food, minerals — the Earth is yielding up less. The resource-population squeeze has placed the very existence of civilization in question and something was bound to have to give. It’s giving now.
4 — Fairytale Economics. The above-mentioned fact that “money” is no longer something real has led the world economy into a dead-end from which it will be difficult to extricate itself. Already we have seen trillions of “dollars” worth of fantasy “investment vehicles” evaporate like the morning dew. What was only months ago counted as vast wealth has turned into ashes and smoke. The only redeeming fact about this tragedy is that many of the “losses” are paper profits and were never “real” in the first place. The actual hard assets are non-monetary ones, and they remain. America still has its factories and infrastructure (no matter how out-dated and depreciated) and they continue to exist.

5 — Environmental Factors. Despite widespread denial, climate change is real and continuing. The future will be shaped by the need for humanity and indeed all life on Earth to adapt, if possible, to a very different environment. There will be no escaping this bullet, because it has already been fired. The greenhouse gas already released will create inexorable global change for decades and centuries to come.

So what should we expect in the year ahead. Here are a few general observations:

First, we will not enjoy a return to the spend-spend economy of recent years. Our “leaders” may attempt to entice, cajole and even threaten consumers to resume their spendthrift and credit-careless ways. To a substantial degree they will not comply. Most of us already have a lot of “stuff,” and the need to replace it with new “stuff” has suddenly fallen way down on the list of priorities. I, for one, am quite content to continue to use my eight-year-old digital TV, my paid-for 2004 Jeep Liberty, my reliable Ecco shoes, serviceable clothes, first-generation iPhone, and pre-Intel Mac computers. Many others will do the same.

Retailers are an endangered species. Not only will consumers be less likely to run to the store to charge “stuff” on their credit cards, but they will tend to shop smarter. For example, I seldom travel to a retail store these days, thanks to the wonders of Amazon Prime that offers one-click shopping with free two-day delivery. Almost everything can be purchased at attractive prices with a single click of the mouse and delivered to my door in two days at no charge. Newer cell phones feature bar-code readers that allow would-be purchasers to quickly identify nearby sources that offer the same products at lower cost. More and more, desperate retailers will be squeezed to sell at breakeven or below, and the industry cannot survive without a significant margin over cost.

American auto makers are also endangered, as has become evident, and I predict that at least two of them (GM and Chrysler) will be bankrupt within months. I have been writing about these failing companies for over two years and watched with interest as the industry blithely careened into a pit from which I do not believe they can every recover. Prediction: As  GM and Chrysler fail to turn their businesses around they will demand more bailout money and taxpayer resentment will grow. At some point these companies will have to be allowed to fail, and it is only through the purifying fire of Bankruptcy and possibly dissolution that any resolution to this mess could possibly occur.

The entire broad spectrum of world trade is endangered, too. In fact, it may already have been dealt a fatal wound by the present credit crunch. Nevermind that consumers are going to be buying less imported “stuff,” because due to the inability to obtain letters of credit exporters are facing growing difficulty in even shipping their commodities and products, much less finding buyers. Food is piling up on docks in exporting countries, shipping companies are fighting for the steeply reduced flow of goods to transport (not to mention the depradations of pirates!), and the effect will be like a row of falling dominoes that ends up in the poorest and most vulnerable parts of the world.

The phenomenon of “insourcing,” returning manufacturing and jobs to the U.S., will accelerate as these problems become increasingly serious. As Chinese, Taiwanese and South Korean factories shut down, there will be opportunities to begin rebuilding America’s manufacturing base. If we want new “stuff,” as some of us eventually will, it may have to be Made in the U.S.A. What a concept.

Which leads to the next point: The worst economic, social and political trouble will occur in the Third World. America may suffer a new Great Depression, perhaps even the Mother of All Depressions, but for the Third World it will be like a nuclear holocaust. Imagine a China without the flood of consumer items flowing abroad to yield a stream of trillions in payments coming in to support a population of well over a billion Chinese? It doesn’t have to be imagined, for that is the situation unfolding there right now. Imagine a Russia that has lost 80 percent of its stock market value and seen oil and gas revenues plummet? That is the Russia of today. Imagine an Iran or Venezuela that relied on high oil revenues to build offensive military regimes, suddenly forced to drastically adjust their national budgets. Those are the Iran and Venezuela of today.

And those are the top-end members of the third world. Those further down the pecking order, such as places in Africa, are in far worse condition. Widespread famine, civil war, anarchy as exists in Somalia and Congo will spread and deepen. Zimbabwe may no longer be an exception, but rather a harbinger of what is to come to many other failed nations.

These are among the reasons why the world economy cannot simply right itself and continue on as before. Like Caesar, we have crossed a symbolic Rubicon and there is no returning to the other shore. We can only go forward, and there be dragons. The more we attempt to patch things back together, the more possibilities will slip away and the worse the disaster will become.

Let me remind you at this point that I am not writing from the perspective of pessimism, but realism. I know, it’s sometimes hard to tell the difference. Think of pessimists as Chicken Littles, building negative expectations on flimsy or non-existent evidence (falling acorn = sky is falling). Think of realists as those who recognize the facts and draw their conclusions from reality, not fantasy. That is what I am attempting.

How fast will the changes I foresee come about? Take a look around, see what has happened just in the past few months. We have seen the entire investment banking industry collapse. We have seen the U.S. stock markets lose trillions of “dollars” of Monopoly money. We have seen the once-powerful auto industry begging on its knees for the government to give it money to continue to make the same money-losing cars and trucks that nobody wants to buy. All of these things have happened remarkably fast, almost in a heartbeat.

So, my prediction for 2009 is that it will be the year when the rock and the hard place meet. There are vast and powerful forces at work and they have yet to work their way through the world economy. Nations will collapse and growing numbers will face those Four Horsemen of Famine, War, Pestilence and Death. (Sorry, I’m just being a realist here!) And when we reach the end of the year that just began, 365 days from today on January 1, 2010, I expect that we will be looking at an entirely different world than the one we have known.

I could be wrong, the optimists may be right. I don’t expect there to be very much likelihood that everything will turn up roses, but we can always hope. But, while thinking positively, let us also hope that more people, and especially those in roles of leadership, will turn from blind optimism and empty denial to realism and begin to understand that only through completely new economic models can we begin to stabilize human civilization and pull back from the brink of disaster. We must let failing companies and institutions fail while encouraging new, efficient, and timely ones to rise up in their places.

It is my hope that in one year’s time I will be able to discuss growing evidence of a trend toward a new world based not on ever-expanding consumerism, economic growth, environmental destruction and rampant use of resources. Perhaps that new trend will include strong action to create sustainable models, and that it may take place with a new attitude of cooperation for mutual survival both of humankind and the very Planet on which we live.

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