The new Brave New World

Sydney, 23.10.2016

It is well known that forecasting, no matter if reasonably short-term or longer-term, is a very dangerous game. In short term forecasts, any prediction of a status quo preservation sounds trivial and unsophisticated, whereas anyone insisting in an imminent rapid change within a reasonably short time risks looking like a total idiot if his / her prediction fails to materialise. For example, just over two years ago an ex-KGB agent (and current “historical fantasy” writer and political forecaster) Suvorov-Rezun predicted “an imminent fall of Putin’s regime within one year (by 23.07.2015)”. His arguments were …, say, creative enough, but surely the current reality is rather different … On the other hand, trying to project changes in society and technology over the scale of many tens of years is even harder, because of the dangers of overlooking some near impossible to guess discoveries of the future or unexpected demises of today’s common expectations. A classic example is the late XIX century prediction, which named the main New York City issue of the year 2000.  Due to authors’ total failure to see an explosive growth of transport technology in the first two thirds of the XX century, this main problem was predicted to be … a massive task of disposal of ever-increasing pile of horse dung (due to continuous city transport network growth). An opposite and probably more commonly known example is a 30 year old “Back to the Future II” movie, where the creators imagined such items as portable nuclear fusion reactors, flying cars and programmable food generators being not only available in principle, but also mass produced and sold to general public by … 2015. Apparently, they did not anticipate such a dramatic slowdown in the development of non-virtual technology… Now instead of the reality nuclear fusion and flying cars we have … virtual worlds of Facebook and Google.  Perhaps, some people are happy with this replacement, for others it does not really matter, but some may still be curious what went so wrong since the early 80s. Thus, before even attempting any new forecasting exercise, one should try identifying core reasons for the ongoing global crisis of slowing technological progress and miserable global growth.

The conventional wisdom of Western Democracy has many facets, but one of the shiniest of them all is a famous claim that liberalisation of economy (and related political liberalisation, e.g. immigration increases, growth of tolerance within a society and decentralisation of its administrative systems) leads to higher economic growth. Or, in other words, more democracy / liberalisation => higher growth and technological progress => more prosperity => happier society and so on. Simple as ABC, isn’t it? And believable too, to the extent that the majority of Western politicians themselves REALLY BELIEVE in this scheme as in a modern Bible of economical / humanitarian general policy. After all, the whole post-WWII historical period seemingly proves this scheme. It does, doesn’t it? Wait… But what will happen if we try to dig a bit deeper?

To start with, let me be a bit cynical and remind you behind most (if not every) successful democracy there is always a fair bit of slavery or misery of some people. This was the case for Ancient Athens and Rome democracies (pure slavery), Great Britain democracy of XVIII – XIX centuries (slavery for working classes), pre-Civil war USA democracy (pure slavery for blacks), and even current Western Democracy (slavery for third world country workers who produce most of goods for “developed countries”).  Some readers may object to the last example and argue that these third world countries are developing fast too and gaining some good benefits due to “slavering” to USA and Europe. Well, I partially agree with this: to some extend they do get benefits (if they act wisely – watch China, for example), but I am sure that similar “benefits” were available to ancient Rome salves: if they worked long and hard – they had a good chance to change their social status to “free people” and even prosper financially… But does this example justify slavery too?

In any case, let us move back to the main topic of this work – the analysis of “more democracy / liberalisation leads to higher growth” claim. In my opinion, this statement does not hold water at all… Yes, we have some post WW II liberalisation-growth / technological advances correlation, but that is about it. Ancient Athens and Rome clearly could not sustain any “democracy-enabled higher growth advantages” and collapsed under pressure of their less democratic (if not purely barbaric) neighbours. Ok, that was a long stretch to be completely credible, but, really, we should not go that far at all: look at economic growth of liberal Western Democracies in-between two World Wars – apart from a few good post WW I years, all I can see there is economic misery and disarray…  But wait, initially there WERE a few years of growth there too, weren’t there? Yes, there were, and the reason for these good years is rather clear: nations were capitalising on the resurgent demand (delayed by wartime shortages and world trade collapse) and on utilisation of some war-related technological advances for peaceful use. But by 1929 the post-war momentum stalled and the Great Depression put the Western World in a deep crisis, from which it did not really fully recovered until late WW II and post WW II period.

Surely an incredible WW II event (1939-1945) changed a lot of things in this world and provided not only global destruction and suffering, but also full employment, a very fortunate low-start base for “once in ten generations” growth and amazing new futuristic technology (nuclear power, jet rockets and radars to name a few). Both winners and losers in the war were able to capitalise on these advantages for many years – for about twice as long, than after WW I. Still, by 1965 – 1970 the tailwinds of post-war boom were already waning and burdens of Cold War battles and the Space Race were a bit too much to handle for Western Democracies – towards the end of Vietnam War it looked like they were losing their plot indeed (surely with a “little help” of the Soviet Union and its friends)… It is interesting to note, that one of the most significant contributors to the eventual growth revival for the Western World was one of its most hated figures – a disgraced US president R. Nixon. It was him (and his advisors), who put the last nail in the coffin of the Gold Standard (convertibility of dollars into gold at a fixed rate) and opened a tap of rapidly increasing credit growth, which essentially was bringing the future demand back to present providing a noticeable economic growth acceleration.  The chosen strategy was very risky (the present time accelerated growth presumably was funded at the expense of a more rapid slowdown in the future), but proved to be decisive for the Cold War victory: the Soviet Block was not able to find its own competitive strategy and collapsed by early 90s. This win allowed the West to get yet another decade of post-Cold War good economic times essentially by diverting ex-defence spending for other needs and cannibalising on resources from former USSR countries and their ex-allies. But by the year 2000 even this late party was getting to its ultimate end…

The first post-Cold War warning bell came in 1998 (Asian Crisis and LTCM disaster). Then, quickly after that, the infamous dotcom crash (2001) arrived. The high-growth world as we knew it was now in a serious trouble… Of course, Western leaders and their pet economists did not give up so easily and tried to prescribe and apply a new portion of an old Nixon’s medicine: they liberalised credit growth rules even further, trying to revive an illusive economic growth by promoting clearly irresponsible lending and super-speculative financial engineering. But an application of a wrong medicine in a double (or even quadruple) dose could not do much good to the economy and it did not… The disastrous Global Financial Crisis (GFC) came rather soon (2007), almost destroying global financial markets and making it quite clear that something fundamentally different from all previous post WW II troubles has now landed this  planet and is here to stay for … a very long time.

Still, I should give current world masters a tiny bit of credit: they did almost impossible – managed to stabilise the GFC credit bubble and prevent an immediate uncontrollable economic collapse by mostly liberalisation means (e.g. by gross new government lending and massive budget overspending). They quickly realised, however, that such approach is hugely inefficient and unsustainable even in a medium-term and reverted to a more thrifty administrative method of “massive regulation and centralisation”. They are also often criticised nowadays for “too administrative (if not totalitarian :-)” economic management practices, which allegedly “are hampering growth”. But, in my opinion, these accusations are a pile of rubbish – the authorities are just adjusting to the new reality of low-growth world and are moving along the only available short-term path (their lack of any sane long-term strategy is a separate question).  The “Golden slogan” of the past: “more democracy / liberalisation leads to higher growth”, is largely ignored, … because, in general, this statement is incorrect. Even from the analysis of post WW II history, which we conducted just now, one can easily see that the above-average economic growth of the 1945 – 2007 period had more to do with:

  1. post-war (post-Cold war) boom periods [postponed demand utilisation] and
  2. the credit growth acceleration trick [utilisation of a future or borrowed demand], rather than with the liberalisation itself.

As soon as the two main growth sources were used to their limits, the above-average growth and the related technological progress stalled. Further liberalisation attempts (fuelled by Budget overspending and Quantitative Easing) could not revive it to any noticeable degree… The truth is that liberalisation simply fits /supports high-growth environment, but does not really initiate or kick-start it. Plus liberalisation-oriented management can represent a serious misfit for a low- or no-growth environment. Let me give you an interesting example from my personal experience to illustrate my point:

Back in 2006 I was involved in a major distribution optimisation project, in which my management consultancy firm was helping the NZ market leader in branded tobacco products to cut its distribution costs.  We were analysing benefits of switching from then present “liberal” (flexible and decentralised) wholesaler-based distribution system to a new “totalitarian” (i.e. totally centralised) system based on direct pre-ordered product deliveries to retailers. I should note, that due to many reasons the cigarette and tobacco market is currently in decline in NZ, although the speed of this decline is rather slow. It was estimated that in 2005 NZ wholesalers were charging our tobacco producer a healthy margin of NZ$40 million per year for their deliveries to retailers and very questionable “market development efforts”. But when a centralised logistics system (direct sales from the tobacco producer to retailers) was organised by outsourcing an entire cigarette distribution network to one major international logistics company, then the total annual distribution bill shrunk to … less than NZ$14 million (i.e. three times more efficient option)!!! Wow! What a success of a non-liberal super-centralised system! I am pretty sure the same approach would work very well for quite a few commodity products with low consumption growth, but not for, say, iPhones and iWatches. 🙂

It is also quite clear that a persistent low-growth environment not only requires new, more centralised and less liberal, approaches in economic management, but also leads to a significant shift of a society sentiment away from some of previously broadly accepted “progressive” concepts. Indeed, in good economic times, when jobs are plentiful and total national wealth is noticeably increasing, it is a lot easier to accept larger inflows of new migrants and refugees. In stagnation times on the other hand, the total national wealth is barely changing and any significant intake of migrants or refugees greatly annoys a substantial share of “native” population.  This “native” population can rather clearly see, that the same amount of resources and wealth is now being stretched over more people, which effectively reduces the average wealth share of each individual and leads to lower income, overcrowded public facilities, unstainable overuse of infrastructure, etc. In my opinion, in contrast to frequent mass-media claims arguing  otherwise, such anti-migrant sentiment is almost entirely due to economic rationalism and has very little (if anything at all) to do with racism, xenophobia, etc.

After giving such a long overview of the underlying reasons for the problem of low growth, it is tempting to start looking for those to blame… Indeed, who contributed most for these intensifying troublers: Nixon? George W. Bush? Obama? Or maybe just an overall flow of history itself? For me it looks tempting to condemn irresponsible policies and lack of deep strategic thinking during 1991-2007 period, when Western powers had all sufficient resources and monetary “firepower” to change the adverse direction of the situation development, but overlooked the heart of the matter, acted with arrogance and negligence and made a few amazingly stupid mistakes both economically and politically. However, the “whom to blame question” is, in my option, an issue of a secondary importance… It is far more interesting to look for potential development scenarios for the current situation.

Indeed, can we even hope to revive higher economic growth now? Honestly, I am very sceptical about the existence of any effective quick-fix cure: there are only two “drugs”, which have been used in the past with a good record of success: credit acceleration and war. Both recipes have already been tested and failed: super-charged credit growth only led to the infamous Global Financial Crisis (GFC). As far wars … limited wars were attempted in Iraq, Libya, Syria, etc. with the most disastrous results. I think that some of the current Western leaders are irresponsible enough to try something even more serious in a war-related area, but fortunately most of other potential target countries have nuclear weapons to retaliate – a reality, which cools down Western hawks considerably. The Western powers must become super-creative to find a solution to the current dead-end situation, but… Can you really imagine that the leaders like Hilary Clinton or Donald Trump may be in the least modestly creative in economics? In addition, the current world leaders are scared of any solution, which would be painful for the West in the short to medium term and persistently prefer a tactics of “delaying of the inevitable by all means” in a hope that miracle “market forces” would somehow self-resolve at least some elements of their problems. Well, time may be a good cure for broken hearts indeed, but, in general, the tactics of “everlasting delays” can never become a viable long-term solution (and just look what Ms. Janet Yellen was doing for the most of 2015 and 2016… ;-).

What will eventually happen? In short – nothing good. Ten years after the GFC has almost passed and a certain administratively enforced “stabilisation” of the financial environment is the only noticeable achievement of Western governments fire-fighting efforts. Moreover, the underlying reason for the crisis (the unsustainable credit [debt] bubble), not only has not been deflated, but has actually been encouraged to grow even further (look at the ongoing Greece debt crisis or at the ever-increasing Australian housing market bubble to get a couple of good examples). Can this route of “the administrative stabilisation of the wrong direction” be followed for much longer? Surely it can continue for a few more years, but not indefinitely… But in a short term, we will see more and more of “totalitarian” controls put in place, more and more of centralised methods of economic management being applied and will witness a substantial conservative comeback in all areas of economical and political life. When this New Order will peak and exactly how and when it will collapse, I do not know… But I am quite sure that you and me will see this collapse within our lifespans (say, within the next 15 years if you insist on the exact number) and this will not be a pretty picture…

And, at last, but not least:

Welcome to the Brave New World of new conservatism and “new” totalitarian methods of control!

They are well on their way (if not here already) you like them or not. As for Mr. Fusion home reactors… Well, wait another 30 years. Or 50. Or 100, perhaps… But never mind, just login to your Facebook or Twitter accounts – you need them more, than that stupid reactor, don’t you?



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