Resource Insights: 08/01/2019

Complex interdependencies imply that a few critical points of failing could lower the entire global system. Korowicz focuses on the banking system in which money and power have become highly concentrated. Reliable payment systems are what make worldwide trade and logistics possible. If rely upon those systems reduces (as it did by the end of 2008) and can’t be restored, that’s it for the global trading system.

Historically unprecedented indebtedness among households, businesses, and government authorities has triggered private credit creation, on which the development of the global economy is dependent, to sputter. Those that can borrow don’t want to for dread that the economy may continue to be sluggish, intimidating their careers or businesses. Those who find themselves too indebted to borrow more are focused on repaying debt or simply deciding to default. We are in a personal debt deflation that threatens the very balance of the worldwide financial system which is subjected to so many bad or possibly bad loans.

Our current system is now structured to respond not proportionally to any surprise, but with increasing acceleration and with outcomes that appear outside given the original insult. The economic models that policymakers are using derive from very thin conditions experienced because the end of World War II and don’t take into account the extreme stresses now evident in the world economy. Such models have so far failed to clarify the severe nature of the crash (that they didn’t anticipate) and the persistence of the subpar recovery despite historically unprecedented stimulus, both fiscal and monetary.

Nor have these models resulted in policies that have effectively dealt with the fragility of both the financial and physical economy. Resource constraints, particularly an apparent plateau in the worldwide rate of essential oil creation from 2005 onward, is challenging the development paradigm upon which our major systems are premised.

These systems, financial and otherwise, are designed to be steady under conditions of consistent growth. Without that growth, their stability is unlikely to carry up. One example is the credit and banking system that depend upon consistent economic growth to allow repayment of loans. That growth in turn depends on expanding energy supplies imperative to economic activity. Possibly the most disturbing conclusion Korowicz comes to is that the type of collapse he envisions will not be reversible.

Too much of the world’s critical infrastructure, both public and private (commercial) will be impaired by extended shutdowns. Trust in payment systems will be eliminated and impossible to regenerate. Many businesses will simply shut down for insufficient funds or customers and not be around to restart if conditions improve.

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Essentially, there’s a point of no comeback that could put the world overall economy into a new equilibrium that is far less networked and global than it is today and that it’ll be all but impossible to come back. This is the reason, of course, why authorities officials have made Herculean initiatives (with public money, of course) to keep carefully the world’s economic climate going. But they have only given it stimulants, when what’s needed is surgery.

Naturally, those who control both financial system and the politicians who control it are resisting that surgery since it could make them less rich (even if it would save them and us by causing the machine more steady). While much of Korowicz’s analysis is convincing and nuanced, I can’t help but think he is overestimating the possibility of the wrenching collapse.