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Stupidity and the Global Financial Crisis Part Two

By Cameron Leckie - posted Wednesday, 5 January 2011


Who knows when these circumstances will reach crisis point, but for the purposes of our thought experiment September 2011 will do nicely, a neat three years on from round one of the GFC.

What exactly triggers the crisis is both unpredictable and unimportant for our purposes. Let’s pretend that the oil price has spiked to record highs and the default of a sovereign nation has caused widespread bank failures and the near freezing of credit around the world.

The world’s leaders will respond to such a crisis, so let’s consider two global responses, the first of which I have called "lullabies and boondoggles", the second "bitter sweet medicine". 

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Lullabies and Boondoggles

In the "lullabies and boondoggles" scenario, as the crisis unfolds, leaders around the world meet to determine how to solve the "financial crisis." The response is a not very imaginative repeat of the circa 2008 solution, either borrowing or effectively printing more money through quantitative easing, to act both as a stimulus for future economic growth and maintain the flow of credit that keeps the economy functioning.

Massive government stimulus and cheap credit for the "too big to fail" banks results in the economy stabilising - at least on the surface. There is even a modest recovery in the stock market and commodities. The obedient and unquestioning mainstream media builds a meme of economic recovery.

Unfortunately true recovery and growth cannot be fuelled solely by debt. True growth would depend on the production of real goods of real worth that contribute to real GDP. Increased resource costs are putting the brakes on the production of real goods, so the debt-fuelled recovery is confined to speculation on the stock exchange, some investment in goods produced in countries with low labour costs, and the production of various synthetic financial instruments of limited value in the real world.

Consequently Main Street seems to have missed out on the recovery with un- and under-employment remaining troublingly high, foreclosures on the increase and house prices falling. Whilst consumer goods such as iPODs continue to get cheaper, the necessities of life, such as food, water, power and fuel, are becoming increasingly expensive as resource costs rise and labour costs drop.

To make matters worse, the so-called recovery is punctuated by another series of crises in the years ahead. The timeframe between each crisis reduces whilst the impact increases. Fiscal stimulus appears to have less and less effect, at least for those at the bottom of the food chain or on the peripheries of the global economic system.

For those at the top, even though their numbers are getting smaller, their wealth and power increases. The anger of the masses, sick of more taxes, reduced services and the increasingly unbelievable rhetoric of the political leadership builds and spills over leading to civil unrest, revolutions and in some cases civil war.

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Bitter Sweet Medicine

In the "bitter sweet medicine" scenario, the world’s leaders agree that solving a problem largely caused by too much debt won’t be solved by more debt. They also acknowledge that the world’s resources are finite, no matter what contemporary economic thought suggests, and the requirement for limitless growth that underpins our current financial system is incompatible with a finite planet.

The world’s leaders decide to radically restructure the global financial system. Banks assets are "marked to market" resulting in the failure of most of the "To big to fail" banks, fiat currencies are phased out and replaced with currencies backed by precious metals and energy and the banking system moves towards 100% reserve requirements.

The results are tumultuous. Initially unemployment sky rockets, asset prices plummet and international trade suffers a dramatic drop. Despite this, the world’s leaders remain firm.

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About the Author

Cameron Leckie has a Bachelor Science and a Graduate Diploma in Education. Employment experience includes a range of management positions both in Australia and overseas in the telecommunications industry. He is a member of the Australian Association for the Study of Peak Oil and Gas (ASPO Australia). Since finding out about peak oil in 2005, he has written extensively on the topic and in particular, its impact on the aviation industry.

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