Fleeing Vesuvius. Gillian Fallon
our governance and monetary policy is national (the Euro is likely to fail), but our basic needs are supplied globally, countries will be tempted to engage in predatory devaluations followed by inflations. This could occur even if governments were directly issuing debt-free money to citizens. Governments act firstly for their own citizens. In an evolving crisis, they are also likely to favor clear immediate benefits over uncertain future ones. Facing pressing immediate and projected national needs, the prospect of a continuing decline in the global productive base, and the risks of collapse in the operational fabric, governments are likely to face the following choice: maintain the value of your currency by limited issuance in the hope that it will in future be more acceptable to foreign traders, or “stealth” print money to make a grab for international assets and inputs before there is a major system failure. Furthermore, if currency crises are seen as inevitable, and hard asset barter or currency backing are likely to supersede it, then the breakup of countries’ dedication to monetary stability becomes a matter of when, not if. In such a manner, the globalizing trust dynamics that evolved in the confidence in future growth begin to break down.
Remember, we only exchange something of intrinsic value for currency if we can assume that the money we get can be exchanged later on for something else of intrinsic value. In other words, we need to be able to assume that exchange rates will be stable and that inflation will be low in the period before we spend the money again. The instability of debt money, fiat currencies and competitive devaluations all remove the basis for this assumption. Money becomes very difficult to value in space (for foreign exchange and trade) and in time (for savings and investment). We can say that it becomes opaque.
Bank intermediation, credit and confidence in money holding its value are the foundations of the complex trade networks upon which we rely. The mismatch between our dependencies upon integrated global supply-chains, local and regional monetary systems, and nationalised economic policy, which has not been a problem up to now, will become so as the monetary crisis develops. A complete collapse in world trade is an extreme but not unlikely consequence.
Even if debts are written off or inflated away, a much higher proportion of everyone’s reduced incomes will be absorbed by food and energy purchases. However, a country will only be able to import energy, food and inputs for its production processes by exporting something of equal value, because it will not be granted credit to run a trade deficit. The uncertainty about the value of money, and fears of future degradation of the operational fabric, is likely to mean that commodities such as gold, oil, grain and wood may be used as currency to settle accounts. However, this form of payment is ill suited to the complexity of global inputs.
Exports will collapse along with the level of production within a country, making it even more difficult to import energy or materials to increase production. As I explained earlier, modern economies produce almost nothing indigenously, as supply-chain breakdowns causing key production inputs to become unavailable become increasing likely. This will cause further production problems and make it likely that countries will remain trapped at a very low level of economic activity.
Moreover, because our supply-chains are so complex and globalized, local failures in monetary stability, lack of input or a failing operational fabric would propagate through supply-chain links and other national operational fabrics. In this way, localized failures quickly become globalized.
Food
Global food producers are already straining to meet rising demand against the stresses of soil degradation, water shortages, over-fishing and the burgeoning effects of climate change.27 It is estimated that between seven and ten calories of fossil-fuel energy go into every one calorie of food energy we consume. It has been estimated that without nitrogen fertilizer, produced from natural gas, no more than 48% of today’s population could be fed at the inadequate 1900 level.28 No country is self-sufficient in food production today.
The fragility of the global food production system will be exposed by a decline in oil and other energy production. It is not just the more direct energy inputs, such as diesel, that would be affected, but fertilizers, pesticides, seeds, and spares for machinery and transport. The failing operational fabric may mean there is no electricity for refrigeration, for example.
It should be clear even from the above overview that a major financial collapse would not just cut actual food production, but could result in food left rotting in the fields, an inability to link surplus production with those in need, a lack of purchasing power and an inability to enact monetized food transactions.
Our critical reliance upon complex just-in-time supply-chain networks means there is little buffering to protect us from supply shocks. In the event of a shock, unless precautions are taken, it is likely that hunger could spread rapidly. Even in a country that could be food independent or a net exporter, it may take years to put new systems in place. In the interim, the risks are severe.
The Primacy of the Necessary and Reverse Economies of Scale
We mentioned that more and more of people’s declining income will go on the most non-discretionary purchases, in particular food and energy. What does this mean for developed economies where most energy and a fair amount of food is imported, and which together employ only a few percent of a population? It means not only mass unemployment, but also a tiny amount of purchasing power chasing the declining availability of the necessities we depend upon. A similar position would exist in other countries. Imports and exports would drop rapidly. The unemployed, schooled and adapted to specialized and largely service roles in the globalized economy, would be quite at a loss for a considerable period.
In addition we would face reverse economies of scale. As the size, integration and complexity of the global economy has grown, our local well-being has become more and more dependent upon global economies of scale. Economies of scale work at every level — not just in the good you buy, but in all the components that went into making it, and so on. Similarly, all the hub infrastructures depend on globalized economies of scale. The lower unit prices have led to greater sales volumes and have also freed up discretionary income to be spent on other goods and services. Thus our purchasing power too is dependent upon economies of scale. The evolution of our economies and economic infrastructure has been predicated upon increasing economies of scale.
If the scaling-up process goes into reverse, reduced purchasing power, and the constriction in non-discretionary consumption, causes purchases to fall and unemployment to rise. Fewer goods and services are sold, which reduces economies of scale, which causes prices to rise, causing further falls in sales. The problem is particularly acute for very complex products and services with limited substitutability, and ones that have high operational costs.
For example, as fewer users can afford to replace mobile phones or computers, or use them less, the cost of the personal hardware and maintaining the network rises per user. Rising costs mean less discretionary use and so on. This is a serious matter for the operators because common IT platforms require a large number of users to keep costs per user low. In effect, the most discretionary use (say, Facebook, texting and Playstation) keeps down the cost for more important uses such as business operations, banking, the electricity grid and the emergency services. Remove the discretionary uses and the cost for businesses and critical services begins to escalate. Furthermore, large hub infrastructure has a fixed cost of operation and maintenance. Once income falls below the operating cost, the system will be switched off unless supported from outside. As government income is likely to fall greatly, this may not be possible.
Critical Infrastructure
We are deeply dependent on the grid, IT and communications, transport, water and sewage, and banking infrastructure. In general, these are amongst the most technologically complex and expensive products in our civilization. Their scale and capacity is determined by current and projected growth in economies, meaning they have high fixed costs. They are viable because there is purchasing power, economies of scale, open supply-chains and general monetary stability over the world. They both comprise and are dependent upon the operational fabric.
Because of their complexity and scale (implying high levels of entropic decay), this infrastructure requires continuous inputs for maintenance and repair. These inputs are often very complex, have limited lifetimes and require specialized