Collapse, No. Huge Losses, Guaranteed
by Gary North: Fired!
I did a search
on Google for "economic collapse" and "2011." I got over 7 million
I read a
short piece on the probability of social collapse. The author
argues that complex systems require more energy. At some point,
there is not enough energy to sustain the system. Then it collapses.
is implicitly based on the second law of thermodynamics, which teaches
that energy moves from kinetic (stored) energy to dissipated energy,
never to return. The system moves from complex back to simple. It
moves from low entropy to high entropy. It moves from order to disorder.
became popular briefly in 1983 when far-left gadfly and perpetual
co-author Jeremy Rifkin co-authored a book titled Entropy:
A New World View. He argued that the world's economy is
running out of energy, so the environment cannot sustain economic
growth, and therefore the U.S. government must intervene to stop
economic growth. He surely called on the correct institution to
stop economic growth. No other institution comes close in this specialization.
You can buy
a used copy of this book on Amazon for a penny. It's overpriced.
I wrote a book
refuting Rifkin in 1988, Is
the World Running Down? You
can read it free here.
argument from entropy must always define the system under consideration.
Energy may be obtainable from outside the system at some price.
Second, the argument must also make estimates regarding the rate
of entropic decay within the system. Any discussion of a collapse
should be specific on these two factors. It must also specify why
there must be a tipping point, as distinguished from erosion, as
when a room cools. Water freezes at zero degrees centigrade. But
why is society like water?
In his great
Action, Ludwig von Mises argued that it is always a conceptual
error to explain social arrangements and their outcomes in terms
of the categories of physical science. Human action is not the equivalent
of physics. Inanimate objects do not act. They are acted upon. So,
Mises argued, the social theorist should discuss society in terms
of the outcomes of responsible individuals who seek to better their
condition. Modern economics is universally taught in terms of pseudo-physics.
There is a funny line that gets to the point. "A good economist
is reincarnated as a physicist. A bad economist is reincarnated
as a sociologist." Bad as sociology is, I would rather be a sociologist
explaining economics, such as Max Weber, than a disappointed would-be
physicist, such as Paul Samuelson. Weber read and respected Mises'
great essay, "Economic Calculation in a Socialist Society." Samuelson
dismissed Austrian economics. He
was the first influential economist to promote the idea of economic
science as a subdivision of thermodynamics.
AND INCREASING COMPLEXITY
of society is an increase in efficiency, based on (1) an increase
of capital, (2) an increase in the division of labor, (3) an increase
in specialization, and (4) a better use of decentralized knowledge.
As societies advance, they increase in complexity. This is the very
essence of social order.
social question is not "more complexity vs. less complexity." The
question is the origin of the complexity.
Why is this
question important? Because of the cause of increasing complexity:
increasing capital. This is what funds the production process. It
does so by adding complexity, meaning specialization. This capital
must be replaced constantly by new investing. If the replacement
capital is withdrawn, the specific capital market declines. It does
if the market for the output of specific capital collapses, the
specific capital market collapses. But why should a final market
collapse? Because of a collapse in final demand. Usually, this is
because of a widespread overnight change in taste. But this is very
rare. People at the margin change their tastes. Existing users do
not. The iPhone may replace the Blackberry, but this will take years.
It pays entrepreneurs
to forecast such changes in final demand. If a capital market is
really free, then entrepreneurs can buy and sell. The capital markets
will adjust. There is no collapse of the markets. Some rise; some
fall. (This is the economists' version of the only known law of
sociology: "Some do. Some don't,")
The less free
any capital market the more government intervention
the more likely a collapse. This is why the origin of social complexity
is so important.
The free market
makes far better use of knowledge in society than central planning
does. This was F. A. Hayek's argument in his crucial 1945 essay
on knowledge in society. It appears as chapter 4 of his book, Individualism
and Economic Order (1948). He argued that the lure of profit
induces people who possess accurate and highly specific knowledge
to make it available to others who can put it to good use in serving
The main economic
problem we face today is the widespread use of Keynesian central
planning by government bureaucrats and central bankers. Keynesianism
has increased the level of government subsidies to various parts
of the economy. This has made economic systems more fragile. They
are being tinkered with by committees of government experts. Here,
we can have something that resembles collapse. The best case in
recent history is the USSR. But the Keynesian system is not Soviet-like
in its intensity. It is a middle-of-the-road policy. It can lead
to serious economic disruptions, and it has. But to speak of outright
economic collapse is misleading.
The free market
compensates for bad policies. Better (profit-seeking) knowledge
is constantly being substituted by individuals for poor (bureaucratic)
knowledge. This process happens at the margin, "little by little,
line upon line." This means that economic losses produce individual
allocation responses that benefit customers.
collapse. Liberty doesn't.
All talk about
all large, complex systems using too much energy, which in turn
causes an unexpected collapse, is inherently statist. It implies
that the free market has created a self-destructive social order.
It implies that liberty of association and the right of contract
have created a sociaty-wide accident waiting to happen.
creates very large accidents that are waiting to happen. Keynesian
black swans are very large and fly very high. It is best to stay
out from under them.
But there are
few signs outside of fractional reserve banking that Keynesianism
has created a society at the edge of collapse. There is too much
freedom remaining for that to happen, short of biological warfare
or an EMP.
AND NET GAINS
To see what
I am getting at, let us take the recent collapse of the stock price
of Netflix. In July 2011, it hit $300. Shortly thereafter, Netflix
announced a new policy. It was going to divide its services into
two companies. One company would deliver DVDs by mail. The other
would deliver streaming video. Previously, a subscriber got both.
popped what had been a speculative bubble. Investors in July 2011
thought that Netflix was unbeatable, unstoppable, the wave of the
future. Today, the whole world knows that Netflix had a flawed business
model, and it is unlikely ever to recover to its high-flying days
of July 2011. Netflix shares bottomed in late December at $68. The
company lost 75% of its capitalized value. That, by any investor's
standard, is a collapse. Netflix investors got dumped on by a black
swan. Its recent recovery to $90 was good news for those few who
bought at $68. It is not good news for those who bought in July
This was a
replay of the company Netflix displaced, Blockbuster. Begun in 1985,
Blockbuster at its peak in 2009 employed 60,000 people. It went
bankrupt in 2010. I would call that a collapse.
had been under long-term competition from Netflix. It rented DVDs
in a store setting. Its venture into DVDs by mail, in imitation
of Netflix, was a disaster. Today, the corporate shell that remains
faces walk-in competition from Red Box. Red Box installs DVD kiosks
in high-traffic stores like Wal-Mart. It's great for these stores,
because people have to come into the stores twice within 24 hours.
The kiosks take up space that was not previously used to sell anything,
usually along a wall on the exit side of the registers. The square
footage is maybe six square feet. There is no fire insurance to
pay. Red Box rents high-rental recent DVDs that are the bulk of
was doomed by its inability to respond to competition. It had its
money tied up in real estate. The delivery of the product no longer
depends on real estate. But it could not get out of its leases.
The commercial real estate market has collapsed.
Has this had
any effect on customers? Hardly any. Customers switched. Some (like
me) canceled their DVD rental subscription. They keep the streaming
video service. Others did the reverse.
Red Box seems
to be doing well. If I want a specific DVD, I can get it by driving
five minutes. I can use the Web to check to see if it's in the kiosk.
It will cost me $1 to rent. The big cost is the time I take and
the gasoline. I'll probably ask my wife to pick it up. Or I can
rent it when I buy my veggie Subway sandwich, also sold in Wal-Mart,
which I buy at least twice a week. Then the marginal cost is my
time spent in front of the kiosk: minimal. Netflix will never get
me back. Blockbuster did not have me for at least 13 years.
So, the free
market allows collapses in response to changing customer demand.
But most customers are not harmed. The social order becomes more
complex. Because the transition is governed by profit and loss,
society comes closer to meeting customer demand. Society experiences
a net gain.
bankers are smart. They are smart. They skin the investors by skimming
off enormous bonuses. I call this "skim and skin." They are also
incompetent as managers of depositors' assets. But they do very
I wrote a story
on this recently. To see how the shares of the world's largest banks
have done, click
isn't it? Yet the poor schnooks who held onto bank shares after
2007 have yet to catch on to the game bankers play. We still see
stories in the financial media about rallies in bank shares. This
sucks in the suckers.
banks are in need of huge infusions of capital. Consider just Europe's
banking system. We
read this in Business Week. The requirement for the end
of 2012 is in the range of two trillion euros, or at least $2.7
in France, the U.K., Ireland, Germany and Spain have announced plans
to shrink by about 775 billion euros ($1.06 trillion) in the next
two years to reduce short-term funding needs and comply with tougher
regulatory capital requirements, according to data compiled by Bloomberg.
This will exacerbate
the looming recession. But the banks are trapped. They need massive
infusions of new capital. If they do not get this, they will be
forced to sell assets. To whom?
sales are impractical in the current environment," said Simon Maughan,
head of sales and distribution at MF Global UK Ltd. in London. "Every
bank is selling, and no bank is buying. It just won't work. Beyond
that, the magnitude of the cuts the banks are talking about is nowhere
near the likely required amount of deleveraging. They need to reduce
hundreds of billions more to adjust to the new world order. There
has to be a recapitalization."
Who would be
silly enough to offer banks the hundreds of billions of dollars
in capital that they need in order to decrease their vulnerability?
Only politicians. But large governments are running huge deficits,
except for Germany. Who would be so silly as to loan governments
money? Bankers. And so it goes.
be a true banking collapse? Only if the European Central bank refuses
to inflate. Will the ECB inflate? Of course. It's #1 unofficial
assignment is to save the largest banks.
prices indicate in what bad shape the West's banking system really
is. Everywhere, bankers have promoted bubbles, made huge losses
for investors, and have lived high on the hog through government
bailouts. This is not going to change. The bankers are running the
show. They pocket the profits, leave little for shareholders, and
call for bailouts by the government whenever their bonuses are threatened.
The politicians comply.
anyone expect this to change? It is not in the interest of senior
managers of large banks to change it. They can deal with regulation.
This stifles competition. But they will not tolerate free market
have collapsed. Bankers' bonuses have not. This is how the system
We will see
government bailouts whenever banks are threatened with bankruptcy
(bank + rupture). The central banks will always intervene, even
if politicians stand on the sidelines. Politicians are not in the
loop to be told what is happening. They don't want to know. This
is why Congress resists auditing the Federal Reserve System. "It's
none of Congress' business," says Bernanke implicitly. Congress
will not be reformed until the Great Default arrives, i.e., when
the Federal Reserve finally refuses to buy government debt. We are
years away from that day.
We hear of
an economic collapse as being imminent. But this ignores the ability
of the Federal Reserve to keep bailing out big banks. Congress may
resist the next bailout request, but it will not resist a request
by the FDIC to make money available. It is politically acceptable
to fund the FDIC. It is politically imperative. The voters depend
on the guarantee by the FDIC. They will resist another TARP. They
will not resist a bailout of the FDIC.
We will see
a continual erosion of productivity. The banks will refuse to lend.
The government will continue to absorb $1.3 trillion a year of capital.
The public does not care. It senses that this cannot go on, but
it has gone on so long that politicians can always kick the can.
So, this is what they do. Nobody loses his seat in Congress because
collapse, is in our future. But this erosion at some point will
start increasing much faster than Keynesians expect. This will be
our "Greek moment."
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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