Who Wins And Who Loses In A Deep Global Recession?
Globalization and financialization have fueled the global economy for 40 years. Now they're in the decline phase of the S-Curve.
Does anyone benefit from a deep, prolonged global recession? Perhaps not in absolute terms, but in relative terms we can say some will suffer less than others. We can also say that some will strengthen their relative positions vis a vis competitors and others will lose ground / weaken, with potentially fatal consequences if the recession leads to systemic instability, i.e. phase change or tipping point.
We tend to speak of economics in abstractions and statistics, but the consequences are social and political. Humans tend to get restive when they're hungry or their lifestyle is no longer affordable.
Small changes in complex, tightly-bound emergent systems can generate cascading consequences that bring the system down. The initial conditions of such systems may appear inconsequential when there are surpluses of food, energy, credit, jobs, etc., but they are often recognized as critically consequential once cascading failures unravel the entire system.
In other words, stability is always contingent in tightly-bound emergent systems like complex economies. Everything looks stable until it's not. This is why it's worth looking at who benefits and who loses ground in a prolonged, deep global recession of the sort the global economy is entering (I know it's taboo to say the R-Word, but avoiding words doesn't actually change systems dynamics.)
Those nations that lose ground might just stagnate, or they might be pushed off a cliff. Apparently small declines can end up unraveling the entire economy, with severe social and political consequences.
Let's start with supply and demand, as those influence price and availability via scarcity, costs and needs. Demand comes in two basic flavors, elastic and inelastic. The demand for fresh water and food is inelastic, in that we don't have the option of foregoing either for long.
Within the broad human need for sustenance, the demand for specific types of food is elastic, meaning that price and cultural tastes influence demand. If steak becomes too expensive, consumers substitute lower-cost chicken. A food item might be abundant and low-cost but the culture is unfamiliar with it or doesn't favor it.
One way to understand these dynamics is to ask: is there a substitute for what's needed and what's desirable? If there is a substitute, then demand tends to be elastic. If there is no substitute, then demand tends to be inelastic. For gasoline-powered vehicles, there is no substitute for hydrocarbons, though biofuels like ethanol can be added. There is no substitute for fresh water.
Needs are inelastic, desires are elastic. We have to have food, but if we desire caviar and can afford it (and it's available), then we can consume caviar. If all we can afford are beans and rice, we consume beans and rice.
Changes in behavior influence demand. Not wasting food reduces how much food we have to buy. Carpooling reduces our consumption of gasoline, and so on. Though behavioral changes can make a substantial dent in demand, there's no way to eliminate our basic needs for water, food, shelter and energy to zero.
But behavioral changes can dramatically change price. If the cost oof producing a commodity is high, faltering demand can reduce the price below production costs. The producers will then have to choose between restricting production and thus income, or go broke selling their surplus below the cost of production.
Supply responds to the incentives of price and the constraints of nature, energy and technology. In abstract economic theory, there's always a way to increase supply or substitute another product to meet demand. But the real world isn't quite so simplistic. Take grains, which are the foundation of human food because they're storable, transportable, nutritious and lend themselves to large-scale, mechanized farming and processing.
Unfortunately, only a few regions on Earth generate the vast majority of grain surpluses. The same can be said for hydrocarbons and other essentials. If any of these key sources of exportable surpluses of essentials is taken offline for any reason, the world economy will soon face scarcities for which there are no substitutes.
If we follow these realities to their logical conclusions, we end up with these conclusions:
Globalization and financialization have fueled the global economy for 40 years. Now they're in the decline phase of the S-Curve. The status quo response to this decay / decline is to do more of what's failed until it fails spectacularly.
The reason why we keep doing more of what's failed is there are no substitutes for globalization and financialization. The 40+ years of soaring prosperity are ending and a new era is being in which globalization and financialization can no longer fuel growth. Instead, they only accelerate instability and decay.
Funny things happen when complex, tightly-bound systems unravel. Profits get clawed back. Lifestyles that were taken as birthrights are on permanent back-order. Gambling no longer yields reliable gains. The recent past in no longer a reliable guide to the present or the future. Economic theories fail, as scarcities aren't alleviated by substitutions and new sources being brought on line. Technologies held up as global solutions cannot be scaled. Emergent systems start displaying characteristics that are not just the sum of their parts.
Predictability and stability are lost. The impossible suddenly becomes not just possible but inevitable.
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