Category: Commodities, Trade and Geopolitics

The project of European Union, and its single currency experiment, were politically an attempt to unite fractious nations in order to put an end to a history of horribly destructive conflict. Economically, the goals were to scale up governance in Europe, to transition from the national to the transnational level in order to wield more power as a larger trading block. As such it was very much in line with the global trend of the last thirty years towards scaling up almost everything. However, as we have observed before, such expansions are inherently fragile and self-limiting:

This in-built need to expand, sometimes to the scale of an imperium in the search for new territory, means that the process is grounded in ponzi dynamics. Expansion stops when no new territories can be subsumed, and contraction will follow as the society consumes its internal natural capital….

….A foundational ingredient in determining effective organizational scale is trust – the glue holding societies together. At small scale, trust is personal, and group acceptance is limited to those who are known well enough to be trusted. For societies to scale up, trust must transcend the personal and be grounded instead in an institutional framework governing interactions between individuals, between the people and different polities, between different layers of governance (municipal, provincial, regional, national), and between states on the international stage.

This institutional framework takes time to scale up and relies on public trust for its political legitimacy. That trust depends on the general perception that the function of the governing institutions serves the public good, and that the rules are sufficiently transparent and predictably applied to all. This is the definition of the rule of law. Of course the ideal does not exist, but better and worse approximations do at each scale in question.

Over time, the trust horizon has waxed and waned in tandem with large cycles of socioeconomic advance and retreat. Trust builds during expansionary times, conferring political legitimacy on larger scale forms of organization. Trust takes a long time to build, however, and much less time to destroy. The retreat of the trust horizon in contractionary times can be very rapid, and as trust is withdrawn from governing institutions, so is political legitimacy. Continue reading “The Death of Democracy in a Byzantine Labyrinth”

The video Sunshine and Eclipse is a must see for anyone interested in economic history, and in the psychology of economics in the real world (as opposed to the ivory tower of modern neo-classical economics). The documentary is describing Canada in the period between 1927 and 1934, in other words, in the euphoric phase of the Roaring Twenties bubble and the credit implosion of the 1930s.

It is of far broader interest than Canada, however. It is fascinating to look at the insatiable optimism of the Twenties, the commodity boom, the expansion of trade and the sense that human beings had overcome adversity and created ever-lasting prosperity. In fact, the Roaring Twenties were simply a rediscovery of leverage, as are all credit bubbles. Continue reading “Then and Now: Sunshine and Eclipse”

Chris Martenson recently posted a rebuttal to the deflationist take on commodities – Commodities Look Set to Rocket Higher. In contrast, our deflationary view here at The Automatic Earth, written at the end of August, is encapsulated in Et tu, Commodities?. To recap, our position is that commodity prices are coming off the top of a major speculative episode and consequently have a very long way to fall.

That is how speculative periods always resolve themselves. We argue, however, that this does not mean commodities will be cheap, even at much lower prices than today, given that the implosion of the wider credit bubble will cause purchasing power to fall faster than price. This means affordability worsening even as prices fall. Continue reading “October 3 2011: Commodities and Deflation: A Response to Chris Martenson”

Our most consistent theme here at The Automatic Earth has been the developing deflationary environment and the knock-on effects that will follow as a result. Now that the rally from March 2009 appears to be well and truly over, it is time to revisit aspects of the bigger picture, in order for people to prepare for a full-blown liquidity crunch. October 2007-March 2009 was merely a taster.

As we have explained before, inflation and deflation are monetary phenomena – respectively an increase and decrease in the supply of money plus credit relative to available goods and services – and are major drivers of price movements. They are not the only price drivers, to be sure, but they are usually the most significant. People generally focus on nominal prices, when understanding price drivers is far more important. A focus merely on nominal price also obscures what is happening to affordability – the comparison between price and purchasing power.

We have lived through some 30 years of inflationary times, since the financial liberalization of the early 1980s under Reagan and Thatcher initiated the era of globalization. Money freed from capital controls was free to look for opportunities worldwide, and the resulting global economic boom greatly increased trade, resource consumption, financial interconnectedness and the multiplier effect for monetary expansion. Continue reading “Et tu, Commodities?”

As the world has become a smaller and smaller place over the last few decades, we think less about the differences between locations. Global trade has allowed us to circumvent many local constraints, evening out surpluses and shortages in a more homogenised world.

We have a just-in-time world built on comparative advantage, in the name of economic efficiency. Under this economic principle, every location should specialise in whatever activity it executes most efficiently and the resulting products from all areas would then be traded. The idea is that all will then be better off than they would have been had they attempted to cover all bases themselves for reasons of self-sufficiency. Continue reading “The Rise and Fall of Trade”

In the light of events in Greece, I want to address the structure and prospects for the eurozone, and specifically how the structure pre-determines the prospects. Talk about long term austerity measures in southern Europe by no means covers a worst-case scenario.

All aggregate human structures at all degrees of scale are essentially predatory. They all convey wealth from a necessarily expanding periphery towards the centre, where wealth is concentrated. The periphery may be either forced or enticed to join the larger structure, but that does not affect the outcome. Such structures are all inherently self-limiting, as the fundamental dependence on the buy-in of new entrants grounds them in Ponzi dynamics. Continue reading “The Imperial Eurozone (With All That Implies)”

Thomas Homer-Dixon has written an interdisciplinary tour-de-force integrating the many challenges facing industrial civilisation into an elegant conceptual framework. That framework – catagenesis – applies an understanding of natural cycles of growth, breakdown and renewal to the present and the future of our global society. Our prevailing complacency is based on trust in our science to give us the knowledge, our markets to give us the incentives, our democracy to give us the social resources and our brains to give us the ingenuity necessary to solve our increasingly complex problems. However, that blind trust may be misplaced given the array of tectonic stresses facing our civilisation and raising the risk of synchronous failure. Continue reading “The Upside of Down: Catastrophe, Creativity and the Renewal of Civilisation”