Monday, June 06, 2005

Practical paranoia, part 1

I'm beginning to see more and more "chicken little" exclamations on the blogosphere - heck, I've got one myself. It dawns upon me that I'm violating one of my personal rules of behavior, and it would be a good idea to straighten out.

The rule is fairly simple. Don't just complain, start coming up with solutions. Solutions can be in the form of "how can I prevent the problem" and "how to recover from the problem", as appropriate.

As near as I can tell there are three chicken littles going on out there for us US kind of folk, though they're all rather related. These are: 1) Peak Oil; 2) Housing Bubble; 3) Extended Recession (Depression), possibly in its Stagflation form. I think in the interest of controlling length I'll post a quick summary of each and save the "what should I do" remarks for followon posts.

Peak Oil is, I'm sorry to say, a reality. It's not if, it's when. I don't think its eventual effect will be end-of-the-world, but for a while there's going to be a modicum of pain and suffering as things rebalance. In a nutshell, our demand for oil is bumping against our ability to supply oil, and every indication is that it's going to be harder and harder to sustain current demand much less the anticipated growth in demand. The consequence is rather simple: oil will be more expensive. We can't stop it, we can possibly delay it, but we had better (if we're smart) start planning what we're going to do to cope with it.

Housing Bubble. This one might not be a when. And there's every indication that even if it is a when instead of an if that it won't be (directly) a national problem - that to sorta reiterate what Greenspan and Krugman have said, it'll be a bunch of little bubbles popping, and some of those will pop others in cascade while some will remain a long time. Basically, the concern is that folk are buying houses as speculative investments instead of as property, paying a lot more than their intrinsic worth. As the number of people riding the edge get large enough they'll be unable to sustain that ride and 'dump' their properties. As those properties begin to saturate the market they'll in turn decrease the speculative worth of other properties not so close to the edge, and so on. I noted that the three scenarios can be connected. One way in which this is possible is if something drives up the interest rates. Those properties bought on the hopes/'expectations of interest remaining low enough long enough are the ones that fall when the edge moves from under their investors' feet.

Economic Doldrums. Again, an if instead of a when. Worse, there are two contradictory conditions in play. First, we need to recognize a recession, as both these problems are expanded versions of that. A recession by official measure is two or more quarters of falling GNP. That, unfortunately, tells most of us nothing. So let's break it apart a tiny bit. GNP is a consolidated measure of wealth production, measuring both individual and corporate gain. A recession is when some component is running negative. Consequently, any or all of the following can be significant contributing signals of an ongoing recession:
  • Increased Unemployment - folk are put out of work and so can't pay their bills or buy new stuff - including food and shelter.;

  • Restriction of Credit - getting loans is harder, and those who get loans face higher interest rates;

  • Price Deflation - the reverse of inflation, goods and services cost less as businesses try to sell something instead of nothing to those folk out of work (fulltime or part-time). Unfortunately, the wages of those still employed tend to follow, eventually. [A benefit to the worker is, if they recognize the upcoming drop and are able to take advantage of it is that they can make preparations for the upcoming problems - they've a short-term surplus.];

  • Increased bankruptcies - kind of obvious, of course, due to unemployment, credit, and deflation combined;

  • Reduced trade and commerce (sales of resources and finished goods and services) - intertwined above, but basically if people don't have the ability to buy, they don't buy. Of course, since the business can't keep everyone employed they let more people go which potentially reinforces this vicious circle.

Now there are lots of candidates for differentiating a depression from a recession, and none are officially recognized, so I'll take a swing at a working definition. A depression is a recession that goes on for more than a year. Most of the protections we've got in place these days will tide folk over a recession, but as it reaches a depression the resources and such just flat run out.

I also threw in another economic doldrum, one which until the 1960s was thought to be impossible - stagflation. Basically it's a recession/depression with one change - price inflation replaces price deflation. Again wages follow suit eventually, though the lag this time works against the folk still employed - for a while they're desparately playing catchup.

Now as it happens, I think all three problems have a high probability of occurring within the upcoming year. So it behooves me to say what I think folk can do to prepare and cope - and it wouldn't hurt if I followed my own advice. One small point up front, no "stack supplies in a cabin and wait out the armageddon." See, the silver lining is that I don't think any of these are the end of the world. They're just some rough upcoming years. So to my thinking any plan needs to be one that allows me to stay in the midst of civilization, maybe even making things a little better. An ideal fix is one that helps me even if my predictions are wrong - kind of like tucking away savings over a period of time.


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