Are We Heading for Hyperinflation or Deflation? - At Philosophical Crossroads
Economics / Global Financial System Dec 01, 2007 - 06:07 AMBy: Brian_Bloom
For some unfathomable reason, the human mind tends to think in terms of extremes. For example: “Death or Glory”, “Success or Failure”, “Accelerating growth or Collapse”.
Thus, the questions being asked in today's financial world seem to be revolving around whether we are facing “hyperinflation or depression”. All of which begs the questions: Why does it have to be at one or the other extreme? Why can't there be something in between? Alternatively, why can't there be a paradigm shift which renders the very question irrelevant?
If one thinks in terms of millennia, then the essential differences between today and (say) 9,500 BCE (which is when modern humans began to band together in societies), are:
- There are far more people around today
- Our accumulated knowledge seems to be far greater – particularly in the realms of technology
- Our behavioral predisposition towards “fight or flight” and/or “power over others” seems to have remained fairly constant
If we could somehow work out a way of quantifying the value of all the accumulated knowledge, wisdom and expertise, my guess is that on a per capita basis the value will have risen over the millennia. We are not operating in a closed system as regards knowledge. We have progressed.
From a material perspective, if we look at the system as a whole, our material standards of living have probably risen (in those circumstances where they have risen) at the expense of the environment. On balance, there has probably been no change to the overall material quantum, although how one would go about quantifying that I would have no idea. It just “feels” right that the physical system on earth as a whole is closed, and will therefore always remain in balance.
If this is true, then the question arises as to whether we can continue to be profligate wastrels. Will this behaviour at some point in the indeterminate future cause the balance to tip – where the environment suddenly begins to take back that which it has been so freely giving up to now?
In one tiny corner of this bigger picture, in a space the notional size and importance of a pinprick, we have some people focusing on whether the world economy is going to enter an exponential blow-off phase, or whether we are facing a world-wide economic depression. Very few of those same people seem to be focusing on the high probability that all of humanity may have arrived at what could be described as a bifurcation point in its evolutionary development.
The immediate issue, in this analyst's mind, is not whether we will see the economy exploding or imploding. It is whether humanity has the wisdom to understand that we are facing an opportunity for an evolutionary leap forward (if we choose the correct path), or extinction (if we choose the incorrect path). I happen to believe we are going to choose the correct path, because the visibility of that path is rapidly emerging.
Let's think about the world economy in conceptual terms for a few minutes.
The population of the “Industrialised World” is around 1.3 billion people, and these people have a relatively high standard of living. If we take the usual 80:20 rule of thumb, then 80% of the wealth generated on the planet will be enjoyed by 20% of its people.
Let's say that the world economy generates a GDP, in round numbers, of $45 trillion.
80% of that will flow to 1.3 billion people who will enjoy an average annual income of around $27,700 per year.
The remaining 20% of the total will be spread amongst the balance of 5.3 billion people who are having to survive on around $1,700 a year, on average.
There seems to me to be something fundamentally unbalanced about that, and Nature typically doesn't tolerate imbalances. Somehow, the scales will be rebalanced.
Now we need to focus on the fact that Peak Oil was caused by the 20% “haves”, and Global Pollution was caused by the 20% “haves”, and Environmental Rape was perpetrated by the 20% “haves”.
We also need to focus on the fact that China (population 1.3 billion) and India (population 1.1 billion) are supposedly emerging to “drive” the world economy.
Are we really so devoid of mental capacity that we cannot see the disconnect here? There is no way on God's Earth that the environment will support the same profligate behaviour on the part of 3.7 billion people that it demonstrably could not support for 1.3 billion.
One of two things has to happen (Of course there is a spectrum of possibilities, but let's look at the extremes to understand the issues). Either:
- There has to be a reallocation of resources so that the standards of living in the West fall dramatically whilst the standards of living in the East rise modestly. (Which will very possibly give rise to World War III as the “haves” fight to keep what they have), or
- We have to change our behaviour on a structural level. There will need to be a paradigm shift in our ways of thinking and behaving. In short, we will need to progress beyond the Neanderthal behavioural paradigm
It is essentially this dichotomy which has been occupying the spare capacity of my mind over the past 45 odd years. How will humanity cope when it finally runs out of wriggle room? Is it inevitable that we will just die out? Practically speaking, what could we do to ensure a continuation of our evolutionary path?
Surprisingly, the answers are not particularly complex, but their implementation will require a dramatic shift in attitude.
But first things first. The question of whether or not we are facing a Bull Mark et or a Bear Mark et is, in my view, moot. If we have reached the bifurcation point – which I am increasingly convinced we have – then it really doesn't matter. Under these circumstances, the important question is whether people like the current US Presidential hopefuls have what it takes to lead us through the necessary changes. The answer, unfortunately (and objectively) is a resounding “no”.
The reason is that modern politicians are typically not leaders. They are followers – of public opinion. They monitor the pulse of the electorate, and pander to the wants of society as opposed to its needs. Politicians tell you what you want to hear so that you will vote for them. For decades our leaders have been following rather than leading. That's one reason why the world is in such a mess. We haven't been sufficiently forward looking.
So where does that leave us?
Well, let's go off at a tangent for a moment.
Along the way, during the 45 odd years of my contemplations and ruminations, I came to the conclusion that “gold” (the metal) was more than what it seemed to be. I have been following its progress very carefully since 1969 and have noticed that whilst it seems to act as a pressure release valve, there is far more to gold than that. Eventually, I came to ask myself what it was about gold that was special. I couldn't put my finger on it then, but it seemed to me that the ultimate driving force behind the gold price had nothing to do with economics.
By way of example, why would humanity regard gold as so important that some elements would look to it with hope, and others with fear? Why would the “have not's” regard it as important that gold should act as a beacon, and why would the “haves” consider it important that gold be relegated to a position of relative insignificance.
Let's focus on the “have not's” for the moment. Typically, it has not been the rich who have been cheering gold on. It has been thinking people. Typically, these thinking people (who are in the minority) have not been cheering for gold to rise in price because they aspire to become “haves”. It has been more subtle than that. They have been doing so out of a sense of fairness; because they understand in their guts that the “haves” have been behaving with reckless disregard for the rest of humanity. It has been more of a primordial thing – this cheering for gold.
With this as context, I believe that a meaningful break-up by the gold price into new territory (say over 600 Euros) will represent more than just a move away from fiat currencies. It will represent the beginning of a paradigm shift in society's thinking. It will represent the beginning of a new era where the “old guard” of leaders will be spat out of the system, like obnoxiously distasteful ants that have found their way into our picnic lunch and into our mouths.
Arguably, this has already happened in Australia , where our previous Prime Minister was only the second in our country's history to have lost his seat in parliament. The intelligence of the ‘average' person is rising. The public is starting to rise up in revolt. We will no longer tolerate being treated like morons – where we are routinely lied to and treated like mushrooms as a matter of course.
As an aside, I read with fascination the other day an article written by a journalist employed by The Telegraph in the UK . This journalist had been touring Middle America to get a feel for ordinary voters' attitudes towards the Presidential hopefuls, and I got that very same feeling that things are about to change in unexpected ways. There is also an obnoxious taste in the mouths of ordinary American voters. They are also fed up to the back teeth with being disrespected. It's not about “Democrats vs Republicans” anymore. It's about the amoral behaviour of politicians in general.
For example, rampant expansion by Walmart has not benefited Middle America ; and the chart below (courtesy Bigcharts.com) tells a very interesting story:
The pattern that has been emerging since 1999 may be described as a “descending right-angled triangle”. Let's take a closer look at what that means.
Over time, there has been a succession of falling tops, and the down moves have repeatedly ended at a level around the $42 mark. In the past four years, the volumes of shares changing hands has been rising but the price has essentially being traveling sideways.
Now have a look at the On-Balance-Volume chart on the daily chart going back to 2005, which is when the volume started to rise.
Net, net, around 200 million shares have been “distributed” during that time.
It follows that the $42 level may be regarded as a sort of Maginot line. If the $42 level is breached on the downside, the price could fall all the way back to $10. If that happened, an implication would be that Walmart's sales line will be contracting. This doesn't necessarily mean that the economy will go belly up. It means that, at retail level, people will be buying fewer goods.
Now why have I chosen to focus on Walmart?
I watched a documentary video a few weeks ago where Middle Americans were being interviewed about the impact of Walmart's arrival in their towns. Essentially, commercial real estate prices have plummeted, jobs, on average, have been lost and whilst prices of goods may have fallen, the ability of people to buy those goods has generally fallen as their incomes have fallen. Walmart's arrival in country towns has broadly given rise to a decrease in the standards of living of the people living in those towns. In short, whilst watching that documentary, I arrived at the conclusion that people are increasingly starting to question the value of unfettered “free” enterprise and are starting to focus on the capacity it has to inflict damage on society and the environment. That's why I was so fascinated by the Telegraph article. It confirmed that Middle Americans are anything but happy campers.
By a short step in logic, the attitudes of Middle Americans might be seen as a questioning of the values of our political leaders – that they could just stand by and encourage businesses to expand whilst they (the politicians) chanted the mantra of buoyant economy and full employment. Maybe there's more to life than “consumerism?”
And then I saw what happened to Australia 's Prime Minister in last week's elections. To me, it's all part of a pattern and from watching the behaviour of the gold price for nearly 40 years I have come to the conclusion that the gold price may be the warp in that pattern.
To me, the gold price represents a sort of litmus test regarding the mores and values of society, and the feeling I am getting is that the world may be preparing for that paradigm shift in thinking that will be a necessary precondition to choosing the “correct path” forward that I spoke about above.
The following chart is up to date at November 26th 2007 . (Courtesy http://www.gold.org/value/stats/statistics/dailyshort2000.html )
Personally, I am cheering for gold because I believe that a meaningful rise in its price will signal the end of an era of selfishness, callous disregard for others and for our environment. It will represent the end of an era of political rule by people who are not fit to call themselves the leaders of society – not because they lack the ability, but because they are generally devoid of wisdom, empathy, respect and love for the people whose interests they are supposed to be representing.
To me, the glass is half full. I see change coming. It will be painful, but it will lead to better things as our values become appropriately prioritised. I see us moving out of the testosterone addled Neanderthal era, and towards a new era where we care more about the consequences of our selfish actions.
By Brian Bloom
Author's comment : If you would like to see how the whole jigsaw puzzle fits together – such that the pathway forward becomes visible also to you – please register your interest to acquire a copy of my novel at www.beyondneanderthal.com . It is being targeted for publication towards the end of March 2008.
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