Denial is Proportional to the Unpleasantness of the Reality

David Korowicz, a leading expert on systemic risk, discusses the virus and the range of possible outcomes. Fortunately Korowicz thinks the worst case outcome has a low probability.

https://www.resilience.org/stories/2020-03-04/we-need-to-talk-about-catastrophic-global-risk/

In China the circulation of people, goods and services has slowed and fragmented. An already weakening economy is now experiencing a major shock through the networks that sustain human welfare and societal functioning. Energy consumption is the most fundamental measure of economic activity and socio-economic complexity. Carbon Brief has estimated that energy use was 25% below expectations in the two weeks following the end of the New Year holiday equivalent to the energy drop that occurred between 2012 and 2018 as Venezuela’s economy and society underwent its profound crisis.

Slower global growth and an increase in the likelihood of a financial crisis can be expected. If process contagion begins to accelerate significantly, there are limits on how much governments and central banks can do to respond. Injecting stimulus can address a demand shock, but it would have limited supply-side effectiveness. Assuming a deeper shock (equivalent to the 2% GDP contraction during the Global Financial Crisis) followed by stabilization, society and economies will be left less resilient as it faces the increasingly turbulent years ahead.

At the furthest extreme there is runaway process contagion. In such a case supply-chain contagion (broadly defined, including impacting critical infrastructure services, for example) would begin to severely undermine global socio-economic integration and coherence. As it disintegrated and the forward-looking outlook became more uncertain, the failing financial system (credit, bank solvency, monetary stability and visibility, counter-party risk) would disrupt further supply-chains inducing a re-enforcing (positive feedback) supply-chain financial-system cross-contagion[iv]. No central bank can maintain a credit-monetary system if it’s core collateral, the expectation of economic production is opaque and collapsing in real-time. Beyond a tipping point, this could accelerate rapidly. It would effectively shut-down the flow of goods and services. Were this to happen, it would be a global catastrophe of unprecedented scale and duration.

This latter outcome is very unlikely.

Although Mac10 does not appear to understand the thermodynamics that underpin the problems he rants about, he does know how to turn a phrase about denial within our “free markets”.

https://zensecondlife.blogspot.com/2020/02/super-bubble-super-crash.html

The Reign Of Denial Is Crashing In Denial

One year ago, the Fed was “pivoting” from tightening to easing, the U.S. yield curve was inverting and the U.S. data was pointing to recession. Many pundits, myself included, said that recession was imminent. CFO confidence was at a decade low. In response, the Fed cut rates three times and the Trump administration “borrowed” a ludicrous 5% of GDP to give the illusion of expansion, which sucked so much liquidity out of bond markets that the Fed was forced to print money at a 5% annualized rate. The largest combined pro-cyclical stimulus in U.S. history without any comparison. Which of course created the largest super bubble in U.S. history.

In other words, the U.S. is in a recession now, merely covered over with record borrowing, record printed money, and record speculation which exploded this past week.

Worse yet, global central banks ALREADY front-loaded stimulus ahead of the true recession. Which means they have NO dry powder left for an economic downturn. Contrary to popular belief, artificially bidding up stocks does not benefit the economy.

Central banks have lost control over the economy. Now, they only have control over mass delusion. And very soon they are going to lose that control as well.

I re-listened today to Alex Smith @ Radio Ecoshock’s recent interview with Nate Hagens.

https://www.ecoshock.org/2020/01/nate-hagens-the-collision.html

Here are some important numbers from Nate that every citizen should memorize:
– 8 billion people use 100 billion barrels of oil (equivalent) every year
– 1 barrel of oil does 5 person years of physical labor

Therefore
– fossil energy provides 500 billion human (equivalent) slaves to help us
– each person has on average 60 slaves

That’s why the poorest Canadian lives better than the richest Pharaoh.

And why 500 billion (equivalent) reality denying fire apes are crowding out other (non-domesticated) species.

Perfect timing by one of my favorite thinkers, Tim Morgan. His essay today elaborates on my lament that the most important problem we face is the only problem we never discuss. He hopes that a crisis might force us to confront the reality of our fossil energy predicament. I’m betting we deny it all the way to the bottom.

https://surplusenergyeconomics.wordpress.com/2020/02/28/164-a-bolt-from-the-grey/

Where the purely biological prognosis for the Wuhan coronavirus is concerned, there’s at least a ton of speculation for every pinch of fact, and there would be no merit at all in adding to that speculation here. One of the few things that can be said about this with any confidence at all is that somehow, sometime, the epidemic will end.

The expectation then will be that, in the purely economic and financial spheres, what the economic and financial consensus likes to call “normality” will be restored.

As people and businesses go back to work, as the flow of goods and services resumes, and as ravaged supply lines are repaired, the economy will be expected to stage a full recovery. People wary of travelling will, we’ll be told, start boarding aircraft again, and even the cruise liner industry might start to shrug off the tag of “floating petri-dishes”.

Capital markets, too, will be expected to bounce back, even if takes a long time to restore them to their full pomp, hubris and folly. Investors will be expected to go back to wasting their money propping up “cash-burners” again, and queuing up to get a piece of the latest moonbeam IPO.

But the reality, from a surplus energy perspective, is that this definition of “normality” is highly unlikely to be restored. In economic terms, the relentless rise in the energy cost of energy (ECoE) had already started making people poorer, long before the name ‘Wuhan’ had any connotation beyond the geographical.

It cannot be stressed too strongly that global trade in goods had already turned down, as had sales of everything from cars and smartphones to chips and components. Financial stresses had already become severe, and investors had already started to view cash-burning and over-hyped sectors with new caution.

Nasty though it is in purely human terms, and real though its economically disruptive effects undoubtedly are, the coronavirus didn’t strike out of cloudless economic skies.

Rather, it’s been a bolt from the grey.

It’s too soon to say whether the epidemic will act as a catalyst for a full-blown financial crash but, if it does, the authorities will have tough decisions to make, and we can only hope that the disastrous mistakes made during the 2008 global financial crisis (GFC) will not be repeated.

In the sound and fury of that crisis, the imbecility of ‘monetary adventurism’ was piled on top of the prior folly of ‘credit adventurism’. The blithe assumption was made that, left to its own devices – and, of course, bailed out by taxpayers from the consequences of its previous failures – ‘de-regulated’ finance could get back to driving economic progress.

Back in 2008, the ‘global’ crisis was presented as something that somehow had happened out of the blue, without human agency, and that ‘nobody could have known’ that a credit-driven bubble was going to end in a bust. The reality, though, was that we’d been using $2 of new debt to buy each $1 of highly dubious “growth”.

Since then, and whilst reported “growth” has become even more cosmetic and insubstantial, the debt cost of each dollar of it has risen to over $3. Along the way, the worsening imbalance between asset prices, on the one hand, and all forms of income, on the other, has inflicted enormous damage. This imbalance has blown huge holes in pension and other saving provision, has prevented the proper functioning of markets in pricing risk, has stripped the economy of “creative destruction” and has saddled us with far too much of the speculative and the outright exploitative.

Siren voices to the contrary, spending borrowed money has never been a cure-all for a process of “secular stagnation” driven by a structural deterioration in an economy in which the prior spurt in prosperity delivered by fossil fuels was coming to an end, and had started to go into reverse.

Nobody would envy the choices that are going to imposed on governments and central banks if – or, to be realistic about it, when – the 2008 crisis is repeated, but this time in the much larger and more menacing shape that has always been a virtual inevitability.

But the analogy that can most usefully be made here might be one which compares 1945 with 1918. After the first “war to end all wars”, the rallying-cry was “business as usual”, but no equivalent delusion could persuade the people of 1945 that there were merits in re-creating the inter-war world, be it the financial the excesses of the 1920s or the mass misery of the Great Depression.

This time, a similar catharsis might – just might – persuade us to start taking a realistic view of the economy, not as a monetary construct capable of perpetual growth through financial manipulation, but as an energy system whose prior ability to make us more prosperous has gone into reverse.