In the face of widespread systemic breakdown, everything is going to be different now

Prepare for everything to change. We are witnessing widespread systemic collapse - the accelerating, interrelated breakdown of multiple subsystems, failures of which are compounding on one another. This could be the beginning of the end.

The financial apocalypse is beginning. The several-thousand point crash in the stock market is only the first stage in a much larger process. Even Wall Street itself is starting to admit that there is much further to fall.

The South China Morning post explains that there are multiple triggers for financial crisis all firing at once, and that we are now facing the bursting of the largest financial bubble in human history. Remember from the last financial crisis that the collapse of credit markets seemed to happen very quickly. Though informed observers had been warning for months (or longer) that the situation with derivatives layered on top of mortgage-backed-securities could cause widespread credit and liquidity issues, the conventional wisdom was that this was impossible. Now, we are facing a crisis that is much worse than in 2008, or even in 1929. The situation of a dual supply and demand shock is nearly unprecedented. The dreaded stagflation, long thought to be a relic, found only in economics textbooks, is now poised to come roaring back...

The oil shock of 2020 is literally perfectly timed to deliver the killing blow to a global economy already teetering on the brink of collapse. On top of coronavirus and its attendant economic shocks, there is literally nothing in our financial-economic system that could be worse for this situation than the situation emerging in oil markets. This new price war threatens the existence of many American energy companies, and those failures will compound on top of the pain to tourism companies, airlines, and then (as consumer spending takes a dive) restaurants, retail, and other businesses, creating a perfect storm of failures that will overwhelm any policy responses.

Bond markets are in chaos, and liquidity problems are starting to appear, which means that much larger chaos is just around the corner. Once the first wave of defaults happens and creditors lose confidence, credit will evaporate, leading to many more firms losing access to the working capital they need for day-to-day operations. The problems will start in the cruise and airline industries, and cascade outward from there. Now the effects of the systemwide profligacy that took hold in recent years, with stock buybacks and dividends being used by executives to enrich themselves at the expense of the companies they were supposed to steward. Buybacks are dangerous because they starve companies of the capital needed to weather economic downturns, and we are now staring into the maw of the mother of all downturns. Cruise company Royal Caribbean, for example, spent nearly $3bn on buybacks and dividends combined, cash that could have been used to get through this difficult period of collapsing bookings. Instead, that money went to a few wealthy executives and stockholders. This begs the question, at one point do we have the right, as a society, to claw back these sorts of ill-gotten gains, and say that funds which are essentially stolen from the real productive economy should be returned to it? The answer to that question needs an essay of its own.

The problems in the repo market, which we were assured were "just plumbing problems," are now about to come home to roost. The Federal Reserve is now pledging $500bn of intervention the repo market in order to keep it functioning, up from $175bn just days ago. But we will see that the Fed has run out of options, and painted itself into a corner. Having blown up history's largest financial bubble, and cut rates next to zero, it is now racing to trap the economy in recession with 0% or negative rates.

The narrative has changed rapidly over the last few days, from the view that the coronavirus outbreak might knock a few points off of global GDP, to the view that we might actually be staring into the abyss, and that what is happening is likely part of a much larger economic collapse.

The federal government, hollowed out by Trump's wrecking-ball approach to non-governing, which comes after years and decades of decay in our health care and other systems, is making the crisis worse. Trump, who is the least-qualified person in America to lead the response, is flailing, and his every utterance makes plain that he has no plan, will not take advice from his experts, and is completely bereft of any good ideas for how to respond to these unprecedented challenges to our very way of life and the stable existence of functioning civil society.

Yes, it is that bad. We need to start considering the possibility of widespread social and economic collapse, with the failure of governments, riots, bank runs, and so on. If we do not start having this conversation now, we will wake up one day in a few months or weeks or days, and the total breakdown will be upon us. People will say, "who could have imagined this?" and the answer should be, we all could have, and should have. History goes in cycles, and we are not immune from the kinds of upheaval that previous human generations have lived through. In fact, our overly complex and interdependent systems are likely beyond repair, and are actually accelerating the breakdown.

This may sound alarmist, but it is simply a rational view of things based on the rapidly changing new circumstances. By the time COVID-19 begins to wane from the world scene, a few months or years hence, the economic damage will be so great that our global system might be beyond repair.

Our comfortable, highly technological, high-income way of life might be vanishing before our very eyes, never to return. Though the collapse of economic activity by, say, 50% is the best thing that could happen for the environment and the climate, such rapid change will lead to other catastrophic outcomes as our social systems fail and societies are plunged into chaos. If we prepare for this possibility, we might be able narrowly to avoid it. But it might already be too late...


Print