Monday, September 17, 2007

Why there will be a Fast Crash and not a Slow Decline

"Confidence in a secure tomorrow makes life brighter today."
Radio ad for a financial services company

The economy, whether the local community economy, the national economy, or the global economy, is based on one commodity, and that commodity is not oil. It is confidence.

Whether a person, a corporation, or a government, we borrow against tomorrow's income to buy unneeded baubles and trinkets today. We accept being a consumer society because we have confidence that our economy, as well as our standard of living, will continue to grow. How else can one explain the plethora of useless new products brought on the market each year and willingly snapped up by sheeple consumers with only a little needed encouragement from Madison Avenue via their wide-screen, high-definition television sets?

That confidence is based on an assumption of perpetual growth,which economists and government leaders persist in putting forward as a given. A sudden loss of confidence has been the reality check that has brought on every economic downturn in history, from a small, hardly-noticed and quickly-forgotten double-digit decline on the stock market to a catastrophic global market collapse such as happened in 1929. If the basis for that confidence is not as quickly restored, which it was not in 1929 even though the potential still existed then to do so, then a comparatively rapid economic implosion ensues.

For those to whom this is news, you haven't been paying attention. For those who are ensconced in their state of denial and reject this reality, I will paraphrase a song;

"If you don't know it by now, You will never, never, never know it....."

How can confidence so quickly disappear? Usually the answer is because the confidence ran way ahead of reality and the market got badly over-extended. There was no valid reason for the high degree of confidence that existed.

"Confidence is the feeling you have before you fully understand the situation."
Source unknown

Confidence, by its very nature, is essentially irrational. It is not based on knowledge but rather on faith that something you wish to be true actually is true. There is never a proper amount of confidence. Just as a sudden loss of confidence can spell doom for an economy, an excess of confidence, particularly a sudden irrational surge of confidence, can over-extend an economy, keep it running too hot for too long. When it does eventually falter it turns what should have been a softening into a recession, a recession into a depression. And people's confidence in our present economy and culture has been far too high for far too long. This has been achieved by a coordinated, intentional effort on the part of government, business and industry to keep people ignorant of the soon-to-be-encountered constraints to continuing the growth economy. When that confidence does finally weaken - when people finally understand the reality and the fallacy of the beloved perpetual-growth economy - it will drop suddenly and dramatically and we will have a hard and devastating crash.

Almost all corporate earnings estimates and targets are based on that assumption of growth. Most companies today are so highly debt-leveraged that it takes a minimum of 2% growth just to service that debt. That has nothing to do with confidence. That is just cold, hard reality. If a company does not achieve enough growth to service its debt then the debt grows, requiring even more corporate growth to service it. It is a vicious cycle-down to bankruptcy.

Those government, business and industry leaders (TPTB) who manipulate people's confidence are constantly playing a balancing game. In a perpetual-growth economy, they want to keep confidence growing slightly ahead of what is reasonable in anticipation and expectation that conditions will improve to meet those expectations. By that time, of course, they want expectations to be moving out ahead to the next level of expectation. In order to play this game they must always have information one step ahead of the pack, must know whether the higher expectations can reasonably be achieved. When information comes to them that suggests they cannot, they must manipulate events to lower people's expectations to fit the new attainable.

The danger arises when the information being used to manipulate people's confidence is not accurate. Then the manipulators do not reasonably know that the higher expectations can not be met. They fall into a trap of their own ignorance (business managers never like to pass negative information up the line). The degree of backlash they are exposed to is dependent upon the degree to which those expectations are wrong (confidence can be almost as easily lost when the reality is significantly better than promised - wrong is wrong) and the degree to which it affects those whose confidence has been manipulated. The greater the discrepancy, the greater the backlash. They are also dependent on their ability to make up that discrepancy in the future. If they can, and continue to grow, confidence quickly comes back and is maintained. If TPTB are still dealing with bad information and promise to make up the discrepancy and continue growth when, in reality, things continue to worsen, the severity of the backlash, when it occurs, increases. If TPTB lower their estimate there is, likewise, a reduction in confidence based on the perception that they are not in control and only reacting to changed circumstances after the fact. If estimates are reduced and the results still fall short then there is a major loss of confidence. Not only are TPTB not in control but cannot even react and keep up with the changes around them. A loss of confidence of this magnitude can cause a complete collapse. Enron, Worldcom, Northern Telecom, are all excellent examples of this type of collapse. The anger, incrimination, and rapid collapse are all the inevitable outcome of such extreme manipulation of confidence and the inability to control the environment upon which that confidence critically depended.

These three companies and their principles did nothing different than other companies or even governments. They manipulate the confidence of their investors through, when necessary, manipulating the data and information that the outside is allowed to see. They use that excess confidence to fuel their growth rather than using the growth to build confidence. It is a shell game. you build yourself up to appear to be something you are not but expect to become. In all three cases, and most other cases like them, they lost control of the environment they were trying to manipulate, because they were relying on false data and assumptions, and could not deliver close enough to expectations to maintain that level of confidence.

That is the shell game being played to prop up the global, perpetual-growth economy, the shell game that requires the confidence of and buy-in by the people. There are several potential global disasters on the horizon, not the least of which is the beginning of the decline in global energy resources, most notably oil. Cheap energy has been the catalyst that has allowed TPTB to continue to build and maintain confidence in the global, perpetual-growth economy. There have been bumps in the road but no major roadblocks, and the illusion of growth has been able to be maintained globally where it may have failed locally. A great proportion of international trade, in fact, is not trade at all. It is the movement of goods and materials within the same company from one country to another. This accounts, in many instances, for as much as half the imports and exports of certain small economies, and represents over 40% of total US international trade. And much of this moving commodities (most importantly, including money) between different parts of a global corporation is done for the express purpose of tax evasion, to reduce the appearance of profit in money-making branches by saddling them with the debt of higher inventories acquired from less profitable branches. Much of the rest of that trade flowing from rich to poor nations is goods purchased with money from the WorldBank, IMF, OECD and other organizations established to foster globalization.

The illusion of wealth, the illusion of a robust global economy, can only be maintained by the continued availability of cheap energy. As long as that illusion can be maintained the general confidence of the sheeple in the economy can be maintained and that confidence can be used to fuel the pursuit of the mythical global economy that is presold and bought into by the people.

There are growing numbers of people prepared to see through the illusion and look at the ugly reality behind it. As global energy reserves begin their downhill slide more and more people each day will wake up to the reality. When a critical mass of people reach this point, and not until then, the economic house of cards will be suddenly and dramatically brought down by a massive loss of confidence that will feed on itself as the economy implodes. The crash, when it comes, will be very dramatic. The fallout will take years but the crash may only take weeks.

The above article was initially written in 2006. I thought it an appropriate time to put it in the blog.

The current run on the Northern Rock bank in Britain results from exactly the sort of loss of confidence that I speak of above. Fear of the bank's potential exposure to the US subprime mortgage fiasco and the move by the Bank of England to inject liquidity in the bank, have badly shaken investor/depositor confidence in the bank. That loss of confidence continues to deepen despite government and bank official reassurances that the bank remains solid. This could domino through the British banking industry and could even spill over into the global crisis that we have been anticipating. Only time will tell and this will have to be watched for some time.


Anonymous said...

Hi there,
Good piece and interesting that you wrote it last year. Here in London many people have privately been talking about this exact scenario too for some time. We estimated it would really get going in 2008, but the fickle nature of financial cycles got there early.

Anyway, I just wanted to correct the bit about Northern Rock's sub-prime exposure - interestingly it doesn't seem to have any. The problem arose because it couldn't raise liquidity on the money markets - 80% of its mortgages are financed in this way, unlike many other banks which rely on a wider spectrum of funding such as deposits.

So the problem has bounced sideways slightly - the fear has moved into suspecting anyone who relies too heavily on the money markets. And as far as ordinary consumers know - that could be anyone. There's lots of talk about 'who can we trust?'. Big problems ahead - this is just the tip of the iceberg...

ES, London

Anonymous said...

Very interesting piece.
I have recently started "opening" my eyes, trying to learn more about upcoming events triggered by lack of (or depletion) of energy resources, namely oil, coal.

In your piece, you mention: "This has been achieved by a coordinated, intentional effort on the part of government, business and industry to keep people ignorant of the soon-to-be-encountered constraints to continuing the growth economy."

I accept I am still naive in my understanding, so I'd like to ask: "What is the goal of this coordinated, and intentional effrort?" Because if this elite group of people know about the future, they must realize that they will also be affected. Their children will be affected. So what are they to gain by orchestrating this?

ESanchez- Mexico

Richard Embleton said...

Their being aware of what is coming is somewhat beside the point. Three key points;
1. Keeping the people ignorant keeps them reacting to the crises before TPTB are ready for it. Do a google on FEMA detention camps.
2. Being aware of the issues does not mean that they are fully cognizant of the implications. They probably believe they can retreast into their armed enclaves, and manage the powerdown and stay in power.
3. Keeping the people ignorant makes it much easier to spin false flag ttacks on Iraq, Afghanistan, possibly Iran and others in order to secure the last of the oil to support their power base.
Bottom line is, IMO, to hold on to power as firmly and as long as possible, all predicated on the belief that they will be left standing.
Ricard Embleton,
Richmond Hill, ON