https://ourfiniteworld.com/2020/09/23/reaching-the-end-of-early-stimulus-whats-ahead/
Reaching the End of Early Stimulus – What’s Ahead?
Many people thought that COVID-19 would be gone with a short
shutdown. They also thought that the world’s economic problems could be
cured with a six month “dose” of stimulus.
It is increasingly clear that neither of these assumptions is
correct. Despite the claims of epidemiologists, our best efforts have
never been able to reduce the number of newly reported COVID-19 cases
for the world as a whole for any significant period of time. In fact,
the latest week seems to be the highest week so far.
Figure 1. Chart of worldwide COVID-19 new cases, in chart prepared by Worldometer with data through September 20, 2020.
At the same time, the economy, despite all of the stimulus, is not
doing very well. Airlines are doing very poorly. The parts of the
economy that are dependent upon tourism are having huge problems. This
reduces the “upside” of economic recovery, pretty much everywhere, until
it can be corrected.
Another part of the world economy doing poorly is clothing sales. For
example, many fewer people are attending concerts, weddings, funerals,
out-of-town business meetings and conventions, leading to a need for
fewer “dressy” clothes. Also, with air travel greatly reduced, people
don’t need new clothing for visiting places with different climates,
either. Most clothing is bought by people from rich countries but made
by people in poor countries. This cutback in clothing purchases
disproportionately affects people who are already very poor. The loss of
jobs in these countries may lead to an inability to afford food, for
those who are laid off.
Besides these difficult to solve problems, initial programs set up to
help mitigate job losses are running out. What kinds of things might
governments do, if they are running short of borrowing capacity, and
medical solutions still seem to be far away?
In Section A of this post, I outline what I see as some approaches
that governments might take to try to “kick the can down the road” a
while longer, as well as some general trends regarding near term
outcomes.
In Section B, I explain how our current problems seem to be related
to the more general “overshoot and collapse” problems of many prior
economies. I show that historically, these overshoot and collapse
situations seem to have played out over a number of years. In many ways,
the outcome might look more like “overshoot and decline” than
“overshoot and collapse” from the point of view of an observer at the
time.
In Section C, I explain two different types of “breakage” we can
expect going forward, if we are really dealing with an overshoot and
collapse situation. In the first, oil production is likely to fall
because of the collapse of some of the governments of oil exporters. In
the second, the international trade system breaks down because of
problems with the financial system and countries no longer trusting each
other’s currencies.
[A] Ideas for “Sort of” Addressing the Economic Problems at Hand
The following are a few ideas regarding possible mitigation approaches, and the expected results of these attempted solutions:
[1] Programs to keep citizens in their homes will likely be extended.
Mortgage repayment programs will be extended. Renters will be allowed
to stay where they are, even if they cannot afford the rent.
[2] New programs may be added, allowing those without adequate income
to pay for electricity, heat, water and sewer connections. These
programs may be debt-based. For example, homeowners and renters may be
given loans to pay for these programs, with the hope that eventually the
economy will bounce back, and the loans can be repaid.
[3] More food bank programs will be added, with governments buying
food from farmers and donating it to food banks. There is even an
outside chance that people will be given loans so that they can “buy”
food from the food bank, with the hope that they can someday repay the
loans. All of these loan-based programs will appear to be “cost free” to
the government, since “certainly” the crisis will go away, and
borrowers will be able to repay the loans.
[4] Loans to students will increasingly be put in forbearance, to be
repaid when the crisis is over. Auto loans and credit card debt may be
also be put into forbearance, if the person with the debt has inadequate
income.
[5] Even with all of these actions, families will tend to move back
together into a smaller total number of residences. This will happen
partly because citizens won’t want to be burdened with even more debt,
if they can avoid it. Also, older citizens won’t want to move into
facilities offering care for the elderly because they know that COVID
restrictions may limit who they can have contact with. They will much
prefer moving in with a relative, if anyone will take them in return for
a suitable monthly payment.
[6] As extended families move in together, the total number of
housing units required will tend to fall. Prices of homes will tend to
fall, especially in areas where citizens no longer want to live.
Governments will encourage banks and other mortgage holders to look the
other way as prices fall, but as homes are sold, this will be
increasingly difficult to do. In many cases, when homes are sold, the
selling prices will fall below the balance of the debt outstanding.
Governments will pass laws not allowing financial institutions to try to
obtain the shortfall from citizens, at least until the crisis is over.
[7] Some businesses, such as restaurants without enough patrons and
colleges without enough students, will need to close. Clothing stores
without enough sales will also need to close, as will retirement homes
without enough residents. All of these closures will lead to a huge
amount of excess commercial space. It will also lead to the loss of more
jobs, raising the number of unemployed people.
With these closed businesses, the price of commercial real estate
will tend to fall. Lenders will be encouraged to “extend the loans” and
“pretend that asset prices will soon recover,” when renewing loans. Even
this approach won’t be enough in many cases, as businesses file for
bankruptcy.
[8] With fewer residences and business properties occupied, the
amount of electricity required will fall. Wholesale prices for
electricity will tend to fall, pushing ever more fossil fuel and nuclear
electricity providers out of business. Electricity outages will become
an increasing problem, as renewables become a larger share of the
electricity mix and are unable to increase supply when needed. Rolling
outages will become more common.
[9] Pensions of all kinds will become more difficult to pay.
Government programs, such as Social Security in the US, will have less
revenue to pay pensions. There are funds set aside in the Social
Security Trust Fund to cover a shortfall in funding, but these funds are
simply non-marketable US government debt. In theory, the US government
could add more debt to the Trust Fund and make payments on the basis of
this added debt. Otherwise, the US will likely need to either raise
taxes or increase the “regular” government debt level, in order to
continue to pay Social Security pensions as planned.
Private pensions, backed by bonds and shares of stock (and perhaps
other assets), will find the values of their available assets are
falling. Governments, if they are able to, will try to hide this
problem. For example, regulators may develop a new way to value assets,
so as to make pension funding shortfalls mostly disappear.
In the case of pension bankruptcy, government insurance is often
theoretically available. In the US, Pension Benefit Guaranty Corporation
provides coverage; other countries may have similar programs.
Unfortunately, this program is not set up to handle a large influx of new bankrupt plans,
without raising taxes. The problem then will be raising taxes enough so
that one year’s pension benefits can be paid, pushing the problem down
the road a bit longer.
Bank accounts have similar guarantees, with similar funding problems.
The guarantee organization has very little funds available, without
raising taxes or somehow increasing debt.
[10] Stock market prices will tend to fall, leading those who have
purchased shares using debt to want to sell quickly, pushing the stock
market down further. Currency relativities will fluctuate wildly.
Derivatives of many kinds will encounter payment problems. Many ETFs
likely won’t work as planned. Governments will try to figure out ways to
somehow mitigate these problems to the extent possible. For example,
stock markets may be closed for a time to hide the problems. Or,
additional time may be given to settle purchases, so that perhaps the
deficiencies can be corrected. Eventually, some banks may be taken over
by governments, to assure the operation of the parts deemed essential.
[11] Eventually, governments may find it necessary to nationalize a
wide range of essential businesses. These could range from trucking
companies to banks to oil companies to electricity transmission repair
companies. If the balance sheets of these companies are too bad,
governments may simply stop publishing them.
[12] These types of actions will mostly be available to “rich”
countries. Poor countries can tap their “rainy day” funds, but these
will soon be exhausted. In this case, poor countries will find that
there is little they can do unless international organizations bail them
out. Because of cutbacks in tourism and in orders of finished goods,
such as clothing, these countries are likely to encounter high levels of
unemployment. Without aid, the poorer citizens of these countries will
find it impossible to afford an adequate diet. With inadequate
nutrition, the health of low income citizens will decline, and they will
easily succumb to communicable diseases, such as tuberculosis and
malaria. Death rates are likely to skyrocket.
[B] What Happens When an Economy Outgrows Its Resources?
Most people think that the issue we are dealing with is a temporary
problem associated with a new coronavirus. I think that we are dealing
with a much worse problem: The world’s population has outgrown the
world’s resource limits. This is why our current problems look so
difficult to solve from a financial point of view. This is part of the
reason many people feel that shutting down the economy for COVID-19 is a
good choice. There are really many reasons for the shutdowns, besides
preventing the spread of COVID-19: Keeping people inside stops the many
protests related to low wages. The shutdowns appear to restore order to a
troubled system. Broken supply lines from shutdowns elsewhere reduce
raw materials availability, making it more difficult to keep production
in one part of the world operating, when others are closed.
Overshoot and collapse is a problem that many smaller economies have
encountered over the years. If I am right that we are now encountering a
similar situation, there is a big change ahead. The change will not be
instantaneous, however. The big question that arises is, “Over what time
scale does such a collapse take place?” If it takes place over a number
of years, it may look more like “overshoot and decline” than “overshoot
and collapse” to those who are living through the era.
A recent partial collapse was that of the Soviet Union in 1991. The
Soviet Union was an oil exporter. Oil prices had hit a high in 1981 and
had been declining for 10 years when the Soviet Union collapsed. With
low oil prices, it had been difficult to earn enough revenue to reinvest
in new oil fields to replace the production that naturally declines as
oil is extracted. Oil, directly and indirectly, had provided many jobs
for the Soviet Union. After ten years of stress, the central government
of the Soviet Union collapsed in 1991.
Low oil prices first slowed production growth between 1982 and 1987
(Figure 2). Oil production began to decline in 1988, three years before
the government collapsed. Production gradually rose again in the early
2000s, as oil prices rose again.
Figure 2. Oil production and price of the former Soviet Union (FSU), based on BP’s Statistical Review of World Energy 2015.
What was surprising to me was the fact that consumption
of all types of energy by the Soviet Union fell at the time of the
central government collapse in 1991, even hydroelectric. The overall
level of energy consumption never bounced back to its previous level.
Figure 3. Former Soviet Union energy consumption by fuel, based on data of BP’s Statistical Review of World Energy 2018.
What happened was that many inefficient industries were forced to
close. Some of these industries were in the Ukraine; others were in
Russia and elsewhere. As they closed, less electricity and less oil and
gas were used.
The loss in energy consumption was pretty much permanent. The
manufacturing that left the Soviet Union was replaced by other, more
efficient, manufacturing elsewhere. Also, without their previous
manufacturing jobs, the people of the former Soviet Union were poorer.
They could not afford to buy cars and homes, keeping fuel consumption
lower.
Another indicator regarding the speed of collapses is the analysis
done by researchers Peter Turchin and Sergey Nefedov, regarding
collapses of eight agricultural economies from earlier periods. I
compiled the information they provided in the book Secular Cycles in
the chart shown in Figure 4. In the cycles they analyzed, the “crisis
period” seemed to last 20 to 50 years. One thing that is striking in
their analysis is that epidemics often played a major role in the
declines. As wages disparity grew, poorer workers ate less well. They
became more vulnerable to epidemics and often died.
Figure 4. Chart by author based on information provided in Turchin and Nefedov’s book, Secular Cycles.
In these early cycles, the major industry was farming. These
collapses were in the days before electricity use. In these situations,
collapses tended to play out over 20 to 50 years. Our more modern
economy, with its just-in-time supply lines, would seem likely to
collapse more quickly, but we can’t know for certain. This analysis is
thus another data point that suggests that what may be ahead could be
closer to “overshoot and decline” than “overshoot and collapse.”
[C] What May Be Ahead
[1] We are likely to experience the collapse of central
governments of several of the oil exporting nations, in a manner not
entirely different from the collapse of the Soviet Union in 1991.
Oil prices have been low for a very long time, since 2008, or at least since 2014.
Figure 5. Weekly average spot oil prices for Brent, based on data of the US Energy Information Administration.
Most OPEC oil producers seem to require prices in the $100+ per
barrel range in order to be able to fund the programs their people
expect (Figure 6). One important program provides subsidies for imported
food; other programs provide jobs. Without these programs, revolutions
to overthrow the current leaders seem much more likely.
Figure
6. Estimate of OPEC break-even oil prices, including tax requirements
by parent countries, from APICORP. Figure is from 2014.
At this point, oil prices have been below $100 per barrel since 2014,
a period of 6 years (Figure 5). Stress is increasing; OPEC producers
have cut production in an attempt to try to get prices up. Prices are
now in the low $40s.
We should not be surprised if, over the next few years, oil
production starts to fall in several areas around the world because of
internal problems. Another possible impetus for the drop in production
may be wars with other nations. Some such wars might be started simply
to try to get the price of oil up to a more acceptable level.
We have been falsely led to believe that oil is not important;
renewables can handle our needs in the future. In fact, oil is essential
for today’s farming. It is essential for transportation of goods and
services of all kinds. It is essential for the construction industry and
for mining. Researchers in academic institutions have received grants,
encouraging them to put together models regarding what could be ahead.
These models tend to be extremely unrealistic.
One of the most absurd models is by Mark Jacobson.
He claims that by 2050, the world economy can operate almost entirely
using wind, solar, and hydroelectric. Unfortunately, we don’t have until
2050; world oil, coal, and natural gas supplies look likely to decline in the 2020 to 2025 timeframe because of low prices. Another problem with this approach is that there
is not very much fossil fuel to extract, because most of what appears
to be available from resource studies cannot really be extracted at the
low prices set by physics.
The underlying problem is confusion about which direction prices go,
as an economy reaches limits. Economists assume that scarcity will cause
prices to rise; the real story is that fossil fuel prices are set by the laws for physics because the economy is a dissipative structure. As the economy approaches limits, prices tend to fall too low for producers, rather than rise too high for consumers.1 The
sad truth is that we can’t even count on the continued extraction of
the small amount of fossil fuels that Jacobson assumes will exist after
2050.
[2] We are likely to see a huge change in the international
financial system and in the international trade system in the next few
years.
As long as there were plenty of resources, relative to the world
population, the optimal approach was to do as much international trade
as possible. This approach would maximize world GDP. It would also add
jobs in developing areas of the world without too huge an impact on jobs
availability in the countries moving their manufacturing to lower-cost
areas.
In the last few years, it has become increasingly evident that there
aren’t enough jobs that pay well to go around. This is really the
underlying problem with respect to the increased hostility among
nations, such as between the US and China. Tariffs are being used to try
to bring jobs that pay well back to those who need them. Strange as it
may seem, it takes fossil fuels to create jobs that pay well.
Figure 7. World Trade as a percentage of GDP, based on data of the World Bank.
Figure 7 shows that international trade was rising as a percentage of
GDP for many years, and it hit a high point in 2008. Since then it has
bounced around a little below that high point. In 2020, it will clearly
take a big step down because of all of the cancellation of trade related
to COVID-19 restrictions.
We saw earlier that commodity prices tend to fall too low for
producers. Indirectly, this means that profits tend to fall too low.
Interest rates tend to follow these low profits down, since businesses
cannot afford to pay high interest rates.
With these low profits and low wages, the financial system gets
strained. “Debt and more debt” seems to be the way to fix the system.
Growing debt at ever-lower interest rates is encouraged. These low
interest rates tend to raise asset prices because monthly payments to
buy these assets fall with the falling interest rates. Stock markets
tend to rise, even when the economy is doing poorly.
If the many strange approaches I outlined in Section A are used to
add even more debt to keep the system afloat, eventually some part of
the system is going to “break.” For example, banks will stop issuing
letters of credit with respect to purchases made by buyers that don’t
seem sufficiently creditworthy. Banks may stop trusting other banks,
especially if the banks do not really seem to be solvent. At some point,
the international financial system seems likely to start “coming
apart.” Eventually, the US dollar will stop being the world’s reserve
currency.
My guess is that a new two currency system will develop. Governments
will issue a lot of currency for local use. It will not be useful for
buying goods from other countries. Much of it will be used for buying
locally produced food and other locally produced goods.
Very little international trade will be done. Any international trade
that will be done will occur between trusted partners, at agreed upon
exchange rates. Perhaps a special currency will be used for this
purpose.
In this new world, individual countries will be very much on their
own. With very little fossil fuel, countries will tend to lose
electricity availability very quickly. Transmission lines will go
unrepaired. It will become impossible to fix existing wind turbines.
Road repair will become impossible. Electric cars will likely be as
unusable as gasoline powered ones.
There will likely be fighting about resources that are available,
leading to countries subdividing into smaller and smaller units,
hoarding what little resources they have available.
Note:
1Energy prices tend to fall too low because, as the
economy gets more complex, wage and wealth disparity tend to grow,
reflecting differences in training and responsibility. The problem
occurs because low-paid workers cannot afford to buy very large
quantities of goods and services produced by the economy. For example,
many cannot afford a car or a home of their own. The spending of
high-paid workers does not offset the loss of demand by low-paid workers
because high-paid workers tend to spend their wages more on services,
such as advanced education, which require proportionately less energy
consumption. Ultimately, the lack of demand by low-paid workers tends to
pull down the prices of oil and other commodities below the level
required by producers.
....
Add to this the quickly increasing catastrophic climate change events, growing tensions between nuclear armed powers which could easily ( almost happened already numerous times ) precipitate an extinction level event, the drastic loss of animals, fish, insects, rising ocean levels which will decimate coastlines and their human built infrastructure, etc, etc, the list of converging dire repercussions is very long.