The International Banker

 

“As “free” market capitalism breaks down in a postgrowth era, command economies will be the logical fallback — both China and Russia already have hybrid state-capitalist economies, and as China extracts itself from the economic crisis its last few decades have guaranteed it, it’ll move further into a command economy direction. Markets will doubtless continue to function, but they’ll be manipulated more and more openly to produce the results governments desire, and a growing fraction of real economic activity will go off-book or be reduced to subsistence activities and local exchanges detached from market forces.”

“The timing of the turn into contraction is complex, not least because it’ll be papered over by the manipulation of abstractions for a good long while. I expect it to happen one country or region at a time, with some maintaining growth while others begin to contract, but the tipping points are to my mind likely to cluster around 2030.”

John Michael Greer – The Ecosophia

 

Apologies for the delay in posting on FI. I’ve been busy with domestic projects and distracted by the US mid-term elections and Brexit chaos which have all diverted me from writing a FI post in the last couple of months.

This will be my final post for 2018 before I return after New Year to review (what looks to be a mixed performance!) of my 2018 forecasts and look at my crystal ball into what might likely occur in 2019.

I’m going to take you on a journey into our near future.

There is a group of small islands, called Jersey, Guernsey, Sark and Alderney which are close to France. They are known as the Channel Islands.

World Atlas

 

Economic and demographic challenges, principally a contracting population, a low birth rate and an aging society, are leading to an economic death spiral for the majority of these tiny islands. Sark, until recently the last feudal outpost in Europe, is facing a major crisis as young people leave the island, businesses close and the island faces looming bankruptcy.

To make things worse, the dysfunctional island government has entered into a serious dispute with the company which provides electricity to the island. The costs of ensuring that power is supplied are high and the locals have to pay considerably more then other islanders as a consequence. Whilst a last-minute agreement was reached in the last few days, there is still a real possibility that the lights could go out in Sark within months, making the world’s First Dark Sky island truly dark.

The economic implications of a contracting population, in particular a working-age population, is what interests me because it will be the fate of much of the core of our industrial civilisation within a decade. The forecasting company GEFIRA have a superb map showing how much of Europe is already shrinking and the same trend is occurring in East Asia, the Russian Federation and other parts of our core industrial civilisation.

GEFIRA No 27 newsletter

 

In Guernsey, where the economy has never recovered from the economic crisis of 2007/2008, the population is shrinking and housing prices have dropped 12.6% since a peak in 2014.

Alderney is facing an even worse economic death spiral. According to the Jersey Evening Post, a local Jersey newspaper “house prices in Alderney, for example, have fallen by around 40 per cent from their peak (nearly 20 per cent of houses in Alderney are unoccupied”. I recently visited Guernsey and Sark and you can smell the stench of economic and demographic death. Businesses closed, sale signs aplenty outside properties, a lack of young people (and if they are around, they are unhealthy, uneducated and shabbily dressed); the overall impression leaves you feeling depressed, even if the islands still have a special charm to them.

For those who have read their Greer books, they should not be surprised. In Greer’s book The Ecotechnic Future, he writes that the most isolated areas will be cut-off first from the benefits of industrial civilisation as rising costs lead to the gradual phasing out of services, goods and electric power to the most remote areas. In the American context, it will be the isolated rural areas of America which will see funding on the maintenance of roads shrivel up and die, the hospitals, police stations and fire stations closed and finally the power will be shutdown, permanently making these areas off-grid. Greer warns that once the lights go off, these areas of America will be dangerous, unstable and unwelcome places for visitors.

I see a similar process for isolated islands like the Channel Islands which will increasingly be cut-off by the UK government and major corporations as the costs of supplying, maintaining and preserving the benefits of industrial civilisation become untenable in the coming decades. Greer tentatively forecast that the rural areas of North America will see the power cut-off by the 2030’s, approximately a century after electrification expanded beyond the cities, towns and growing suburbs to the American countryside.

Many experts say that immigration is the solution to this primarily demographic challenge and in part they are correct. The island of Jersey, which has a more liberal approach to immigration from predominately central-east European countries, has benefited from an influx of young, skilled and hard-working workers who culturally “fit” within a predominately white and nominally Christian population.

The German experience since 2015 is a belated warning that not all immigrants are the same and a mass influx of largely uneducated young men from the Muslim world hasn’t worked so well. Culturally, these migrants have struggled to integrate into a world very different from their conservative, patriarchal and Muslim backgrounds. Many are still unemployed and of those that have found jobs, they are largely unskilled labour, not the future teachers, engineers and plumbers Germany so desperately needs as the baby boomer generation retires.

Compared to the Polish migrants who flocked to western Europe after the accession of the ex-Warsaw Pact states, who were educated and hard-working with academic backgrounds, it is equivalent to comparing apples and oranges. A balanced, prudent and qualitative immigration policy can mitigate against the challenges of an ageing and shrinking population but the wider mega-trends of climate change chaos, resource scarcity and the coming mega-migrations remain.

The end of economic growth is inevitable given the shrinking resource base of our global economy, the massive and growing debts and the rising costs caused by accelerating climate change. I have explored these issues in a number of posts, including “winter is coming”, “the sleepwalkers” and “Islamic Volkerwanderung”.

I concur with Greer’s analysis that around the year 2030 will be the tipping point for the majority of the world to enter into demographic and economic contraction (although some areas will be earlier, like Guernsey and Sark, and others later). The economic consequences of the end of growth and a shrinking population will be declining housing prices, growing fiscal pressures on governments to find enough money to fund services and pay pension obligations, weakening demand for goods and services within the real economy which will have a knock-on effect on companies.

A world of permanent economic contraction, likely within 15 years or so, will be a world where it will be abnormal for businesses to make a profit, a shrinking consumer base will spend less on goods and services and shares on the global bourses will have to adapt their assumptions on the real value of companies big and small. Global debt markets, both corporate and sovereign, will need to start factoring in whether in a post-growth era, will these bonds be repaid. Once the full-scale ramifications of the end of growth are realised by financial markets, the inevitable re-pricing of these markets could be violent and hugely disruptive.

On the flip-side, I also expect that so-called “free markets”, whether it is sovereign bonds, the FTSE 100 or the corporate debt market, will be increasingly manipulated by central banks and literally owned by the central banks themselves to keep up the pretense for as long as possible. For those readers who think I am exaggerating, note that the Bank of Japan currently owns nearly 75 per cent of the Japanese exchange-traded fund (ETF) market.

In the longer term, the capitalist system as we know it will end given the “limits to growth” megatrends, something that the German military predicted in their peak oil report which I covered here. The rise of the Eastern giants, China, India and Russia will see the emergence of hybrid economies which will command the distribution of economic resources once globalisation either implodes or fades away in the coming decades.

So, to conclude, the coming end of economic growth, in part triggered by the demographic shifts going in in the cores of our industrial civilisation, will lead to a fundamental reset of economic relations within a generation. This is the biggest story going on and it is barely registered by our media, political and economic elites.