Here, in the deep wild, day after day, I hiked many miles with no one just me, the moose, wolves and my thoughts.
Ancient Indian tradition says the birthplace of all activity is silence. Since these northern reaches of Canada are places of deepest silence, let’s push our thoughts about economics and the terrible social events that have recently been unleashed into such a tranquil place.
Envision one morning riding a horse many miles from the lodge and letting our thoughts dive deeply into the crossroads our economy faces. Years ago while doing this during a crisis and lost in this thought for miles, I realized I was more than lost in thought. I was lost in the woods! As the eve fell I knew I was in a grave situation.
This created an immediate crossroads, which really started me thinking about crises and how to survive them. Being suddenly confronted with physical risk and little protection, this was certainly a new situation to me.
I had made most of the stupid amateur mistakes any woodsman can make, wandering for hours off the trail leaving my horse, coat, compass and matches miles away. Every protection was left behind! Thinking about investing and the beauty of the woods instead of location suddenly found me bordered by deep woods and swamp, miles from anywhere or anyone and not knowing how to get back. Many crossroads suddenly had to be crossed. Immediate decisions had to be made!
What to do, stay put, plow ahead or try to retrace my tracks? The forest had nasty quirks. There were grizzlies and just that morning the valley had erupted in mournful cries from a pack of wolves. My gun had only a few bullets. Would shots attract my partner who was miles away? Would he hear? The wind had risen. The weather was turning cold. There was a chance my shots would not be heard. Should the bullets be saved for protection during a night alone in the woods?
We’ll share what happened in the wilderness later, but first on the eve of a great day, let’s look at what is going on economically around the globe that may have led to the eve of a new economic era. Fundamental economic, social, military and economic positions have reached a crossroads!
Fundamentals of Global Economics
This is a good time to look at this crossroads because the root of the problem has been friction between Christianity and Islam for over a millennium. This has not really been a religious conflict. The causes are more basic fundamentals of human nature. They are caused by a series of industrial revolutions that have been directing stock markets, global economics and the world’s political and social interaction for over 1000 years.
These revolutions have enhanced productivity in many parts of the world, especially the USA and other western nations. This shift can be summed up in seven words. Bigger markets-smaller workforces-much more wealth.
Another way to sum up this shift is to say technological shifts have empowered individuals to participate in global markets and thus enhanced their productivity. This wave of energy has been positive in that mankind has become richer materially than ever before.
Yet this dramatically increased wealth has a negative aspect as well. The prosperity has not been well spread. The wealth has created an ever-wider gap between the rich and the poor. Perhaps 400 million people have enjoyed a greatly expanded standard of life while the rest of earth’s six billion have stagnated.
The productivity has been accompanied by transparency so not only is their a growing gap between the rich and the poor but there is also a growing knowledge of this gap by the poor.
Now we are seeing enormous turmoil in society and economic markets caused by distortions created from pockets of unequal productivity created by these industrial revolutions.
To grasp this dilemma, let’s think about the history of modern society. Several hundred years ago Europe was dominated by a feudal political system. The economy was powered by agriculture based on manpower and domesticated livestock. The limiting velocity of man, of his thoughts, ideas and commerce was the speed of a horse. Fate, current and wind ruled marine travel.
Then in desperation over manpower shortages caused by a series of plagues, humanity took an economic evolutionary turn. We made a giant step forward with new ideas about mechanical power. These ideas gave rise to incredible inventions such as the steam engine and telegraph.
We have moved thru seven industrial eras. The first era was feudal dominated by the stirrup and the Holy Roman Empire.
Then came five eras best described by Joseph Schumpeter, on how innovation creates industrial revolutions altering the way we live, work, earn and keep money. He described five great economic eras that began in the late 1700s:
Era #1: 1785-1845-fueled by water power-60 years. Textiles and iron works were the backbone of growth industries.
Era #2: 1845-1900-fueled by steam-55 years. Railways and steel provided the main growth in this era.
Era #3: 1900-1950-fueled by the internal engine-50 years. Electricity and chemicals provided the major growth.
Era #4: 1950-1990-fueled by electronics-40 years. Petrochemicals and aviation were the innovations which became mainstream in this period.
Era #5: 1990-current-fueled by digital networks- 30 years+ ? Software and new media create the growth elements in this era.
We are now moving into a new era called the Imagination Era bringing with it changes that may help resolve the crisis we face now.
Each era greatly empowered massive new numbers of individuals, an empowerment that led to entire new classes. The working middle-class was born. This empowerment allowed the working class to rise from feudal subservient positions to positions of economic and hence political influence.
Much of the world’s population became much richer, but these changes were accompanied by turmoil caused by periods when the old order had not let go and the new order had not taken hold. Many forces came into play and there were struggles for dominance to establish order.
Forms of this turmoil were WWI, the massive economic recession of the 1930s, WWII and the Cold War. Wars and recession are signals that the economic-social structural order is breaking down, but that a new order has not yet taken control.
Serious things go wrong. Such breakdowns often lead to enormous conflict such as wars. Major wars accompany great social, political and industrial change and bring out the most competitive aspects of society. This speeds up change.
One industrial revolution powered by the radio, telephone, television, internal combustion engine and production line was emerging when WWI hastened this growth along. By the end of WWI entirely new forms of production, communication and democracy had developed. This growth again led to massive economic improvements. Standards of living again rose dramatically higher than before.
But the reform brought about by WWI had not been complete. Many pockets of inefficiency and poverty remained packed between the areas of growing wealth. These corruptions led to additional turmoil in the 1930s. Another serious global economic recession occurred, which helped fuel a breakdown in many democracies (Germany shifted to fascism-Russia went directly from feudalism to communism). This cycle of turmoil led to WWII.
We should note the improvements that had taken place over the past 100 years were enormous. Those who did even moderately well by this time had lifestyles beyond even the wildest imaginations of the wealthiest of a century ago. A moderately well off business person could travel further, learn more, eat better, communicate more effectively and be more productive than the wealthiest of kings of just a century ago.
Even at the height of the 30s Depression, most were enormously better off than their ancestors.
WWII helped refine the next industrial revolution and hastened the era that brought the computer. This revolution became driven by communication and knowledge.
But there were still distressing pockets of inefficiency. For example the communal centrally planned economic-political system in the Soviet Union remained distorted. This created continual tensions between the Russian empire and the democratic world, that we called the cold war. This led to further conflicts played out in Korea, Vietnam, Afghanistan and Africa where the proponents of the two main philosophies used petty, local conflicts to shift their philosophical struggle into armed conflict. We could call this entire cold war era WWIII.
Finally in the 1980s this war was won by the West and the process of that conflict helped a new industrial revolution dramatically refined by the PC, Internet and mobile telephone, etc. This change has once more enormously increased the power of the common man.
This never-ending cycle repeats again and again. Problems lead to ideas. Ideas to invention. Inventions are applied. This leads to more personal empowerment. Personal empowerment leads to demographic change, and this change leads to shifts in politics. Then the stresses and distortions caused by the growth and change creates enough pollution, stagnation and disruption to nullify or dramatically reduce the benefits of the change. These new problems create ideas, and the cycle is off again.
The evolution of mankind is a history of millions of these microevolutions taking place one after the other and side-by-side. These immeasurable ripples and waves struggle and blend forming into larger tides of human action and growth. We can observe these waves at a multitude of levels-local, regional, global. We can look at them in many ways, economically, socially, politically, and archeologically. Such analysis can help us understand what is happening now and how this can affect our wealth.
Stock Market Fundamentals: Incorrect Alignment
The fundamentals of this evolution have brought many problems in emerging nations over past years. Some distortions are hangovers from even before the first industrial revolution. These distortions have reached the state where they spill into the global political, military and economic scene today.
The Middle East is one of these global economic fulcrums, and its distortions create a dire need for structural reform.
Understanding structural problems may help us understand how long the problem will last and whether or not attempts to peacefully solve these problems will work.
The fundamental problems are of alignment. A perfect evolutionary cycle that rarely takes place requires growth in at least seven social-economic areas.
#1: Productivity in all areas of Commerce
Dramatic differences in the growth of these seven areas produce distortions. The distortions generate all types of environmental, social, political, economic congestion and pollution.
We can see congestion in these areas as well as in emerging countries all over the world.
Emerging countries have been brought into the global economic community and have slowly been wooed into western materialism through the lure of commerce. McDonald’s, Coca Cola, GM, etc. are slowly subverting the many unique ways of life, which have had thousands of years of history on this planet.
This is not necessarily bad news but the crux of the problem is that though these societies are in some ways submitting to the West, there are forces within each which resist this absorption. This creates an internal struggle within the evolutionary process.
In addition not all wealth that is created in this evolution is spread throughout the societies. These emerging nations contain huge pockets of enormous poverty exposed to how good life could be. These pockets become breeding grounds of dissent for opposing forces of evolution.
The world is full of pockets that resist change and use poverty and old hatreds in this resistance. Hatred dies slowly. Animosity ripples in waves generation after generation. This is happening in social stress points all over the world-the Middle East, Northern Ireland, Cypress, Bosnia, etc. We even still see vestiges of this from the War Between the States.
The problem is compounded because much of the emerging world prior to WWI was rural. Much of the economy was agrarian. The political system was mainly feudal. After WWII this ended as emerging countries accepted democratic, capitalistic political-economic models. They jumped directly from pre- industrial revolution systems into industrialized models and a huge majority of the farming population moved into cities for employment in factories.
There was little their political-social-legal system to evolve along with changes in their capitalistic economies.
Europe and North America worked painfully through the first industrial Revolution. These regions had time for leaders of industry and their work forces to develop understandings. Unions grew and fought with industrialists to make them share in the benefits of the increased productivity. Numerous political scandals helped voters learn how to be better participants in the political process. Bank failures, recessions and depressions helped refine the financial structure and separate it from the political process. Many generations of work, savings and effort built capital bases and taught lessons on how to be capitalists. The various aspects of the evolutions of European and North American were able to grow alongside each other. Two wars helped forge understandings between the nations. This is not to say the growth has been neither perfect nor uniform. Far from it. Many struggles have pulled again and again. Nor is this to say that the European and North American systems are perfect today. Far from it as well! Too many politicians are still inept and corrupt. Too many economic restrictions still exist. Too little is invested in education. Too little morality is exercised. Too few have equal opportunity, etc.
But much of the emerging world was dumped into the capitalist mold and punched out as dyed in the wool capitalists almost overnight. After WWII, huge injections of capital and loans came from the IMF, World Bank and Western bankers. This and an insatiable demand for cheap goods in Europe and North America shot the Asian economies up like rocket ships.
Europe and North America crawled into capitalism, beginning with sailing vessels and covered wagons. They grew into railroads and steamships and grew more into giant cargo vessels and airplanes. Then they grew into computers and modern communications, etc. In comparison emerging nations were blasted directly into the latest revolutions without the base of experience and capital.
The Eastern economies rose at incredible rates. The IMF and Western financial industry stood like guards to make sure the emerging nations who borrowed money acted like good capitalists. However the social and political aspects of these societies were not allowed to grow.
The democratic political systems in emerging nations have been far from developed. Much of their population is just one or two generations away from the farm, serfdom and illiteracy. These emerging middle classes struggle just to keep up with its growing affluence. One can hardly expect them to be adept at citizenry and political understanding. Most emerging democracies have been run by benevolent dictators, many not as benevolent as thought. In other cases the first national leaders, true men of courage have retired or passed away. Power struggles have risen. Original national visions and goals have faded or been lost. Political infighting, corruption and graft reign. Corruption in some emerging nations has grown so rampant it has passed beyond the national domain and become international. Americans have seen this taint even in the White House as international interests have become big political contributors.
The problem with unchecked political corruption is that it corrupts totally. Graft, handouts and rip offs grow. Top politicians, their children and cronies become fabulously rich. This makes the economy enormously inefficient. Contracts are not given to the most efficient contractors, but to the contractors willing to pay the highest bribes under the table (often the least efficient contractors). Money lent and invested in this inefficient way to build infrastructure does not create enough capital assets to increase productivity to service debt, give a return on investment and increase the standard of living of the country. The cash instead flows out of the country into politician’s hidden bank accounts.
Distortions between political and economic evolution in emerging countries have not allowed enough of the loans and investments received to be put to work. In addition money, which actually made it past the outstretched hands of politicians and bureaucrats, has not been used as effectively as it should because of one other dilemma.
This other dilemma is the gap between the ability of the workforce and the technology on hand. When a society is able to evolve slowly, the workforce learns how to use applications of technology in efficient ways. Take, for example, the use of computers in the U.S. Merri and I can run a business with over 22,000 readers in 82 countries with two computers which each cost less than $2,000. If we were to buy used equipment, we could probably run our business with $500 worth of equipment. We have learned this fact through trial and error and through repeatedly spending too much on technology. Now we know how to get the most out of our capital goods. We can resist the lure of bigger, faster more powerful, more expensive computers. A successful work force is made up of hundreds of thousands, even millions of businesses with this type of experience all gained at the school of hard knocks.
When a workforce is drop kicked from a rural agrarian society into a fast paced, urban industrial economy; the foundation of experience does not exist. The workforce is more likely to get the best state of the art, expensive capital equipment that it is not trained to efficiently use. Even if the background existed to properly use the capital goods, there would still be a drop in efficiency because the equipment exceeds the workforce demands.
These many little factors add up to a huge drain through which the business infrastructure of the emerging nation has eroded to a point where it cannot service its foreign debt. When the economy of a country (or region) reaches this stage, massive deflation in the standard of living must occur often accompanied by default on debt. The problem can only be resolved by increasing money supply (which causes the currency to devalue) or through massive borrowing. Now we are seeing each of these events take place.
Also the economies of the U.S. and Europe have not grown as they should. In an ideal world, all the aspects of the U.S., Japan and Western Europe would evolve at such a pace where each created better and better value-added products for one another. This would make these nations so wealthy their rising standards of living would allow them to buy more and more goods from emerging markets. These richer and richer world leaders would be able to buy the world into prosperity.
This wonderful theory has hit several glitches.
Japan, began suffering a decade ago from a weakness in the political, social and many other economic aspects of its evolution. Japan has given lip service to democracy since WWII. The reality has turned out that many of the same practices before the war remained in place after the war. The system has remained full of graft, corruption and has been heavily influenced by crooks. Before the war, the Emperor was at least a moral figurehead even though the underworld ran the military. After the war, the Emperor was stripped of his power, and the crooks focused on influencing politicians and business leaders as well as the military.
Japan did many things wrong as it headed into the modern industrial world. It adapted a keiretsu system tying the major banks and businesses into huge powerful interlinked units. This is very effective when times are good. However, this created an unstable situation. When times turn bad and one company has problems, the whole structure can collapse.
North America learned this clear back in the thirties. U.S. and many western banking laws now prevent such financial incest.
Japan also developed a cradle-to-grave employment strategy based on the same feudal mode that had existed before the war. This system reduces worker mobility and encourages inefficiency. This system disempowers the individual.
European problems have added to these difficulties as well. Europe (beginning in France and then England) is where the first industrial revolution began. Slowly, slowly all the areas of these societies (technology, education, morality, political, economic, etc.) have moved forward. Over the centuries, there have been many glitches and distortions leading to political scandals, religious outrages, trade wars, military wars, revolutions, etc. But each of these events sped along this process of evolution in the end.
Thus in the late 1980s when the third industrial revolution really started shifting into high gear, Europe was ready to evolve. At that point Europe was running behind the U.S. on the economic curve, with growth just barely ahead of recession.
Since that time Europe’s economies have improved but (except in the U.K.) never really caught on fire like in the U.S. There are several reasons why.
First, Europe lacks the cohesiveness of the U.S. Though the European market is larger than the North American, despite the EU initiative it is divided by numerous languages, incredible variations of rules, regulations, customs and histories.
To complicate this matter, in 1991 the Soviet Union’s centralized economic system disintegrated. Centralism is the antithesis of the third industrial revolution (as is the Japanese Keiretsu system). This system is totally unsuited to empower the individual. When the Soviet Union broke apart, Europe had to take the time and spend money to bring the Eastern European nations into the third industrial arena. This has proven difficult because parts of this area, such as Russia had no background in democratic capitalism whatsoever. Other areas, such as East Germany, Poland, The Czech Republic and Hungary had been thriving capitalistic communities, but after 50 years of centralism, they had fallen enormously behind.
This has placed Europe in the unenviable position of having to give large amounts of its self-reduced spending power to these emerging nations which would then use this money least efficiently!
So emerging markets have been borrowing money like crazy which they probably cannot pay back (without phenomenal growth). Japan is an economic basket case and Europe has its difficulties too.
All that has been left to power this economic expansion of the global community has been the U.S. stock market bubble and confident U.S. consumer.
One More Problem
Since the end of WWII, mankind’s path has been increasingly shaped into a mold created by the United States of America. The world’s history over this time has been and continues to be dictated by a struggle between all other cultures and lifestyles versus that of the US.
The US began by beating the Nazis and Japan militarily. In the process, they also coaxed Britain and Europe to adopt the US style. Then the US waged the Cold War with Russia. That victory came in 1991 when the Berlin Wall fell and the Soviet Union disintegrated. Another battle is being fought as the US tries to seduce China into the US mold through trade. Now let’s share the most important fact about the past.
The most important thought about past economics is not how our economic history has been dominated by this struggle for the world to emerge in the US mold. The most important fact is to understand the US model is one, which our earth does not have sufficient resources to support!
In essence, mankind has been shooting for a target, which it currently does not have the resources to hit. This target is one where every person strives to gain ever-increased material efficiency and with success should gain ever-increasing material rewards. Today’s instant communication and modern transportation has created a global demand for this western model of material life. Most citizens of most nations would like their own home (with electricity, heating, air conditioning), car, TV, and a gas station just down the road. They would like to drive on modern roads so they can dine out, wear jeans or the latest fashions, spend evenings in discos or at the movies and stock large refrigerators with lots of food which can be cooked on stoves or heated up fast in microwaves, while they listen to the latest rock group on a CD boom box. When not working on Intel powered computers loaded with Windows, (attached to a fax and laser printer of course), everyone wants to communicate by phone or be traveling from a modern airport on a Boeing jet.
Slowly, slowly, relentlessly this doctrine and the desires of materialism have been pushed further and further afield. The world has been pushed, seduced, beguiled, bewitched and betrayed, all in the name of installing democracy and capitalism.
The force has been relentless and continual. Wars have been fought on almost every continent. US military forces remain in Japan, Taiwan, Korea, Middle East, Europe, even Africa. All these goodies are promised through capitalism and democracy. The rewards for accepting these two institutions are richer, better lives, greater prosperity, more money, more wealth, more things.
In the same way the European invaders of North America overran the North American natives, the concepts of democracy and capitalism for material wealth are now overrunning the world. To an extent this is at the root of the struggle which exists today between the US and nations such as Iraq, Iran, Cuba, Libya, etc. They are the last holdouts and we are seeing them shove back hard!
Everyone has to decide whether these concepts and the way they are spread are good or not. Do the ends justify the means? But the point of importance and urgency to our investments are beyond the concepts of good and bad. The point is the payoff does not exist. The payoff cannot be paid with current resources and technology. There is not enough wood, oil, water, earth and clean air to let everyone live as we do in the US.
This sad, but simple and very real fact about the past tells us much about how to act in the years ahead. These facts about the past lead us to thoughts about our future.
To sum up the global fundamentals, we should think about two gigantic forces struggling one against the other. The positive force is the added efficiency mankind has gained by shifting into a computer driven industrial revolution, which is opening a global economy. Individuals are empowered to do more, make more and have more.
The negative force is the resistance, congestion, and pollution to and from this change. Evolution takes place unequally and creates distortions. As these distortions grow, the risks of a global economic crash are higher. The growing distortions are revealed in the problem of overspending. Personal overspending has reduced western world savings to a dangerously low state and government overspending undermines the world’s entire economic system.
As the world becomes more complex, governments are spending more and more to ease rather than solve the pressures of these distortions. If savings continue to drop faster than investment needs and government spending grows, we will see a great contraction with deflation, massive unemployment and a free fall of the US dollar. This crash will make the last great depression look like a Sunday picnic.
There is an important point to understand here. Just over a year ago we were led to believe that the US government had finally tackled its deficit problem. Now we can see that the politicians have tackled nothing. They simply took credit for benefits derived from the Internet bubble which they had little to do with. US government spending actually grew and the U.S. Federal debt only fell because the growing US economy had greatly expanded tax revenues. The minute the US economy began to slow the deficit problem came back in an even worse way! Now this debt has destabilized the U.S. dollar.
This overspending does more harm to the world economy then any terrorist attack.
Now picture one more thing about the timing! November 2004.
Imagine a room, walnut paneled, carpeting of deep blue, thick, plush. The table is of polished oak, heavy and important as are the men that sit there. The tension is so thick it hangs in the air. The soft hum from the heating system goes unnoticed. These men are powerful, but right now they are also afraid and their nervousness shows as the man at the head of the table speaks. “Gentlemen the nation is closer to a monetary collapse than we would like to believe.”
Does this scene sound like one we could see in a tense melodrama at the movies? Even worse we could imagine that this is what it was like in Mexico when the peso was devalued and caused a run on markets throughout Latin America.
Think again because this scene is all too real and it took place in the United States of America at the headquarters of one of the most powerful financial institutions in the world, The Federal Reserve Bank. Over the weeks ahead we will be looking at where these fundamentals could lead us, how I survived being lost in the wilderness and how the lessons I learned then can help us survive and prosper in the economic wilderness ahead.
But for now let’s get on to the important stuff. Good holidays and Happy Christmas Eve to you!