Saturday, August 11, 2012

Mulling It Over

John Michael Greer had another thought-provoking post this week, and I am still mulling it over. This is actually his second response to a paper by David Korowicz, which I am still in the process of reading. The first time around, JMG had this to say:

Korowicz argues, if I may oversimplify his careful prose, that the current global financial system is a tottering mess that could come apart at the seams in no time flat, and it’s under stress already from a variety of factors, including peak oil. If and when it comes apart, he suggests, the entire structure of letters of credit and currency flows that supports global trade in little luxuries like enough food to eat could quite readily come apart also, producing a fiscal cardiac arrest that could shatter supply chains and bring most nations’ economies to a screeching halt in a matter of days or weeks.

Is this a plausible scenario? It’s considerably more than that, for a close equivalent happened in late 1932 and early 1933 in the United States.... as banks folded one after another, the basic trust that makes a credit-based economy function evaporated; nobody could be sure if the bank that received their deposits or their loans would still be there the next day, bank runs followed, and the whole economy shuddered to a halt....

Could that happen again, on a global scale? You bet. It’s the sequel, though, that didn’t get into Korowicz’ analysis. Faced with the imminent reality of national collapse, the US government did not sit on its hands, which is what those with the capacity to do something are always required to do in fast collapse theories. Instead, it temporarily nationalized the entire American banking system, declared that all assets held by the banks were owned by the government until further notice, made private ownership of gold by US citizens illegal, and ordered every scrap of gold in the country much bigger than a wedding ring sold to the government at a fixed, below-market price, with stiff legal penalties for anybody who tried to hang onto their gold stash....Flush with seized bank assets and confiscated gold, the government poured money into the nationalized banks, which could then meet every demand for funds, stopping the panic in its tracks.

It is this argument that JMG continues in this week's post:

Korowicz is quite correct in suggesting that the current global financial system is a house of cards that could easily come crashing to the ground, taking a quadrillion dollars or so of imaginary wealth with it and dealing the world’s industrial societies a staggering blow.

It’s purely his suggestion that this could cause the global economy to freeze up, not for weeks, but for years or even longer, that strays out of the realm of realism into territory mapped out well in advance by Western civilization’s penchant for apocalyptic fantasies. In the real world, of course, governments facing sudden financial collapse don’t just sit on their hands and make plaintive sounds; they take action, and there are plenty of actions they can take ... and while it’s always popular to say "It’s different this time," I hope my readers recall how often, and inaccurately, these same words get used in the not unrelated field of speculative bubbles.

At the risk of sounding like another deranged adherent of apocalyptic fantasies, I am going to say, "It's different this time."

It's different this time because of scale. Everything is bigger and more connected and more interdependent now than it was in the 1930's; it may be a tired maxim, but true nonetheless, that the bigger they are, the harder they fall -- which is the whole concept behind 'too big to fail.' The failure of a giant creates a chain reaction that can quickly devolve into collateral damage on a previously unknown scale.

It's different this time because of the speed at which things happen now -- the current speed of international communications would have been inconceivable a few decades ago. Take, for example, the coronation of Queen Elizabeth in 1953. At that time, extraordinary measures were taken to share the event with Canadian subjects:

Millions across Britain watched the coronation live, while, to make sure Canadians could see it on the same day, RAF Canberras flew film of the ceremony across the Atlantic Ocean to be broadcast by the Canadian Broadcasting Corporation, the first non-stop flights between the United Kingdom and the Canadian mainland. In Goose Bay, Labrador, the film was transferred to a Royal Canadian Air Force CF-100 jet fighter for the further trip to Montreal. In all, three such voyages were made as the coronation proceeded.
source Wikipedia

Contrast that to someone today using a smartphone to record the Queen's Diamond Jubilee and posting it on Facebook moments later.

And last, but not least, it's different this time because of the now precarious state of governmental legitimacy, a topic which JMG also addresses at length in this week's post:

A successful political system of any kind quickly establishes, in the minds of the people it rules, a set of beliefs and attitudes that define the political system as the normal, appropriate, and acceptable form of government for that people. That sense of legitimacy is the foundation on which any enduring government must build, for when people see their government as legitimate, no matter how appalling it appears to outsiders, they will far more often than not put up with its excesses and follow its orders.

So the question becomes, if the financial sector were to fail, and if the government were to attempt to react massively and quickly enough to stave off economic collapse, would gun-toting Tea Partiers hand over their gold and allow their banks to be nationalized by an Obama administration? Or a Romney administration, for that matter? Or would we have an armed revolt just-in-time to ensure cascading disaster?

Not sure you're right on this one, JMG.


darius said...

Well, think about this. JMG goes on to say:
"The complex historical processes that brought thirteen diverse colonies under a single federal system, furthermore, left a great deal of power in the hands of the states. Very little of that power is used these days; repeated expansions of the originally very limited powers given to the national government have left most substantive issues in the hands of federal bureaucrats, and left the states little more to do than carrying out costly federal mandates at their own expense. Still, the full framework of independent government—executive, legislative, and judicial—remains in place in each state; state governors retain the power to call up every adult citizen to serve in the state militia; and, finally and critically, the states have kept the constitutional power to bring the whole system to a screeching halt.

You’ll find that power spelled out in Article V of the US Constitution. If two thirds of state legislatures call for a constitutional convention to amend the Constitution, the convention will happen; if three quarters of state legislatures vote to ratify any amendment to the Constitution passed by the convention, that amendment goes into effect. It’s that simple. Congress has nothing to say about it; the President has nothing to say about it; the Supreme Court has nothing to say about it; the federal government is, at least in theory, stuck on the sidelines. That power has never been used; the one time it was seriously attempted, in 1913, Congress forestalled the state legislatures by passing a constitutional amendment identical to the one for which the states were agitating, and submitting it to the state legislatures for ratification. The power nonetheless remains in place, a bomb hardwired into the Constitution.

I think he's alluding to the power we have to make changes via each state's rights once things get bad enough for the Couch Potatoes to begin to recognize the problems. For example, the fight about foods in New England has stirred a lot of folks, as has Proposition 37 in California.

I think JMG has done a remarkable job over the last several months to lay down the historical perspectives regarding what's happening today.

gaias daughter said...

Darius, I do agree that JMG has done a great job of putting things in historical perspective, and I've learned a lot from him.

The point that Korowicz seems to making is that if one of our "hubs," the financial sector being one of them, collapses (as it came close to doing in 2008), events may well overwhelm the capability of governments to intervene in a timely manner. With all the just-in-time supply chains, stocks would be depeleted within days, and we could see angry, hungry mobs, looting, and a bevy of undesirable effects that would only exacerbate the problem. If the states were to call for a convention at that point, it would already be too late. The damage would have been done.

I don't know who is right, but I do think there are differences this time around that might hamper any effort by the government to deal effectively with a crisis.

darius said...

I agree that in a sudden crisis, no state legislature could get their act together to make changes quickly. In fact, DHS has already put plans in motion for every state and local law enforcement agency to implement and enforce martial law if necessary.

I just re-read "One Second After" and the implications are scary just for the interruption of the food supply chain, never mind the rest of it.

gaias daughter said...

Darius, I've read One Second After as well -- so I know what you mean. What I learned from that book, and from watching the news, is that when faced with catastrophe (be it an act of Nature or manmade), waiting to be rescued is pure folly and wastes valuable time. I remember seeing all the people on their rooftops after Katrina -- people who thought that once the helicopters arrived, they would be saved. Those same people were dumped on highway overpasses and left to fend for themselves with no food, no water, and in blistering heat. Some of them died. And so I learned that if the unthinkable happens, be prepared to help yourself and your neighbor -- don't wait for the cavalry to arrive.

Another thing I try to keep in mind is that our people in uniform are this nation's sons and daughters. If it ever comes to martial law, our common humanity may be more important than loyalty to a potentially abusive authority. Or at least I hope so.

gaias daughter said...

As I said in the beginning, I am still working my way through Korowicz's paper. He seems to be arguing that we are in a new era of risk due to three critical factors -- the size, interdependence and complexity of our current 'keystone hubs,' the speed at which failure in one system can spread to dependent systems, and the existence of tipping points beyond which positive feedbacks would overwhelm any effort to contain cascading collapse. Once collapse occurs, he argues, we have reached a new state with virtually no chance for reversal. He offers this hypothetical failure of the financial hub: "Once the financial system contagion crosses a particular threshold, the de-stabilisation of the globalised economy will be exceedingly difficult to arrest; this point may be in as little as ten days. Once a major system collapse occurs, scale, hysteresis, entropy, loss of critical functions, recursion failure, and resource diversion is likely to ensure that the features associated with the previous dynamic state of the globalised
economy can never be recovered."