The Imminent Singularity in the World Economy
The Imminent Singularity in the World Economy
You would think that we have more than sufficient troubles caused by global warming, pollution, resource depletion, biodiversity loss, ecosystem disruption and a few more. But there is a problem that’s not directly related to the natural world, but by a purely human construction: the financial market. Here is a discussion by Ian Schindler — maître de conference émérite (emeritus professor of mathematics) at the University of Toulouse 1, France, who proposes that we are close to a financial collapse.
By Ian Schindler
I see an immanent singularity in the world economy. I will make an attempt succinctly to explain why. I will use ideas from https://doi.org/10.1007/s41247-020-00081-4 which are really quite basic, but not widely known as they differ from (and contradict) standard neoclassical economic theory.
In 1960 the French population spent about 35% of its income on food. The cost share of food has since dropped to 18%. The above referenced article indicates that food production has been a key factor in the economic growth in France, and more generally the West, since 1960 and the end of the second world war. Note that this growth was mostly due to the unsustainable industrialization of agriculture which requires cheap natural gas and diesel.
The first course in economics should be on money creation and destruction. When one studies who creates and destroys money and for what reasons suddenly the economy makes more sense. Money creation is closely related to interest rates.
I assert that the neoclassical economists controlling interest rates understand neither economic production nor prices. They do not understand economic production because they severely underestimate the importance of energy. Steve Keen is coming out with a book soon in which he explains the history of this "energy blindness". For those interested, he speaks about it here:
. Unfortunately Keen has not read the above mentioned article. Neoclassical economists do not understand prices because they think the law of supply and demand is a law.
It is not, it is a tautology. It does not satisfy Karl Popper's principle of falsifiability (https://en.wikipedia.org/wiki/Falsifiability). It is compatible with all price and production data, nothing can be deduced from it.
Application: the effect of the sanctions against Russia were computed using the "energy blind" economic models. For the last 50 years the U.S. and Europe have been deindustrializing. The Russian sanctions have vastly increased the rate of this deindustrialization in Europe (-15% in 2022)
https://www.rystadenergy.com/news/note-from-the-ceo-reflections-on-2022,
more in 2023, but I don't have global numbers). In short, the Russian sanctions are precipitating peak oil in Europe. Back to the farmers. With high energy prices non sustainable industrial farming is less profitable. As I assert here:
https://theproudholobionts.blogspot.com/2022/07/why-agroecology-is-future-of-food.html
the future will be agroecology, but in the meantime there is a huge struggle between those who would turn to agroecology to solve problems and agribusiness which would like Europe to increase subsidies so that industrial farming can survive.
Conjecture 1: much of the inequality that has been observed recently by economists is due to money creation.
For the last few decades, central banks have added an additional task to their mandates: maintain the price of financial assets. Back in the 1990s they used to call this the "Greenspan put" because anytime it looked like the stock market was heading down Greenspan reduced interest rates enough for the stock market to recover. The practice has since morphed into a "central bank put", see https://www.goodreads.com/book/show/36204933-collusion
and
https://www.goodreads.com/book/show/58485511-the-lords-of-easy-money.
I extend the inequality to that found between different countries. For example I think the reason the U.S. which represents only 4% of the world population is able to consume 20% of the world's wealth is because the worlds reserve currency is the dollar, well actually the euro-dollar. However there are people, ignorant of the history of money, who are advocating policy which will eventually cause the euro-dollar to cease to be the world reserve currency.
Example: in the 3 years ending in March or April 2023, the Lebanese economy contracted by 50% and the Lebanese currency lost 96% against the dollar. Could such a fate occur in a Western European country? I think it is quite probable.
Conjecture 2: peak oil will coincide with peak world energy which will cause real interest rates to become negative. Note that the first order approximation of real interest rates is the interest rate minus the inflation rate. Negative real interest rates change everything.
For example, if you own a resource and real interest rates are positive, you have an economic incentive to produce your resource as fast as possible and invest the excess money you make. In the future if you need the resource you can always buy it with the money you have invested. On the other hand, if real interest rates are negative, there is an economic incentive to husband the resource and to produce the minimum necessary. In the future, if money is needed, some resources can be sold to get the money.
The current world monetary system is not well adapted to negative real interest rates. I think negative real interest rates will cause the system to collapse. It is important to think in advance of a new monetary system to replace the old one. Money has several uses. A monetary system should be conceived so that money is a means rather than an end. When money is a means, I think it is a means of human cooperation. When it is an end, it is used to establish hierarchy (see the work of Blair Fix: https://economicsfromthetopdown.com/publications/).
So what I am saying is that the monetary system should be conceived so as to encourage cooperation more than to establish hierarchy. Blockchain opens up some very interesting possibilities for establishing a new monetary system. So far the monetary system that I like the best is the june or Ğ1 based on Stephane Laborde's Relative Theory of Money:
https://en.trm.creationmonetaire.info/.
A comment by Ugo Bardi.
A historical case similar, although different in several respects, to the one described by Schindler is that of the Roman Empire during its last centuries. The Roman monetary system was based on metals, copper, silver, and gold; with gold the main instrument of commerce and governmental control. They couldn’t print metals, but they could do something equivalent by mining metals and using them for coinage. So, they had a certain degree of control of their economy that was based on mining rather than printing.
We don’t know if the Romans actively tried to manage their monetary supply to avoid “gold inflation.” They may have done that, but surely the abundance of gold in Roman society is what made it possible the creation of a large empire simply because it would be used to pay the Roman armies.
It worked until metal depletion made it impossible to continue supplying the economy with metal coins. At that point, you had a phenomenon similar to the negative interest rate described by Schindler in the post above. With the mines producing gold, it was convenient to invest your gold resources in economic activities (typically, plundering your non-Roman neighbors) that you would expect to yield even more gold. But with the gold production having collapsed, that was not possible anymore. The result was that it was convenient to hoard one’s gold, possibly burying it underground. It couldn’t avoid the singularity for the Empire that collapsed in the black hole of history more or less together with having completely run out of gold. But all that buried gold made many archeologists and treasure hunters happy nearly two thousand years later. It also gave rise to the many legends of dragons hoarding gold in underground caves. I wrote a detailed post on this point in the old Seneca Blog.
These considerations show how money is a fundamental element of complex societies, and its physical (or virtual) composition shapes society. The Blockchain may create a new kind of money that will completely change how we understand money and how society will be structured around it.
I suspect certain well-placed people already know that our monetary system is about to blow up, and know the societal disruption will be epic. That would explain a few things.
People start to behave differently when they sense a pending "extinction" event on the horizon. They become more frenzied, lay aside the normal considerations they would have for the long term and throw caution to the winds, and have a greater tendency to behave more immorally. More and more these days, business and finance has come to resemble looting. People who already own more than they can ever possibly spend seem anxious to create opportunities to get their turn at the feeding trough one more time for a big score. (If we drew a behavior curve with morality on the Y-axis, I guess we'd see another Seneca Effect as doomsday approaches.)
A blockchain currency like Bitcoin, with a public ledger might have possibilities. But the official discussion is centered around Central Bank Digital Currencies (CBDCs), another thing entirely. The model being pushed is one where the currency is programmable, controllable by central authority, and perhaps even carrying an expiration date. If this is allowed to replace physical currency, it will no longer be money, but a mere ration coupon whose distribution and terms of use will be controlled by someone other than the "owner".
Thanks Ian & Ugo.
I’m glad that Ian starts with farming, the traded kind of food that must feed the cities. I am thinking of primary production of calories and the basis of the protein food chain, and something which is more than a sideline, the 'commodity' crops, fiber, energy etc. 'Feeding' the non-farming original agrarian craft economies required credit / debt / trading in goods and 'money'. There were serious problems for these systems, see references below. I note that vastly increased urbanisation (a ratio) is concomitant with industrialisation and with the expansion of modern energy-based economies, which greatly adds to the complexity.
I think JPBill's comment on this thread is correct. Somewhen around the last 'western' financial crash I obtained a curious tome which traced the history and theories of 'money', (Zarlenga 2002). I could not judge how well it was done. But I read later an IMF paper, (Benes & Kumhof, 'The Chicago Plan, 2012) which extensively cited and quoted Zarlenga and his sources. I understand Kumhof was later recruited to the Bank of England who had already issued a paper on the essentially private / not-public creation of credit/money.
FWIW a quote from Benes & Kumhof introductory history prefacing their discussion of 'The Chicago Plan'
"It was the English Free Coinage Act of 1666, which placed control of the money supply into private hands, and the founding of the privately controlled Bank of England in 1694, that first saw a major sovereign relinquishing monetary control, not only to the central bank but also to the private banking interests behind it."
PS I listened yesterday to Nate Hagens latest 'Frankly' (25 min). Some credit systems might evade the denouement better than others, but the financialised 'western' economies especially seem to face an urgent problem keeping the loot coming.