It’s the End of the World We’ve Known Since WWII (Updated Status Report)

Summary:  This is an updated status report about the end of the post-WWII world.  The global recession has accelerated the transition, revealing the current order’s weaknesses, and showing the people in the emerging nations that they have outgrown it.  The major nations continue to defend the current systems, a futile effort wasting time and resources that could be better spent adjusting to the new world now evolving.  This post updates previous posts in this series; links appear at the end.

By S. D. Siegel

Contents

  1. Decline follows the peak, as night follows day
  2. What happens next?
  3. Can we predict the form of the new world order?
  4. For more information

(1)  Decline follows the peak, as night follows day

Thou know’st it’s common; all that lives must die,
Passing through nature to eternity.
— Queen Gertrude to Hamlet (Act I, scene 2)

The post-WWII era peaked in the 1990s, with the end of the Soviet Union in 1991, the crushing of the emerging nations in 1997-98 (leading to their search for new systems), and the trough of WTI crude oil at $12 in 1998.

Decline started soon, resulting from structural flaws in the major nation’s political processes.  Symptoms include:

  • growing domination of the financial sector in the politics of US and Europe (eg, the failure of regulators to rein in the technology and housing bubbles before they burst),
  • the ill-designed stage 3 of the European Monetary Union started in 1999,
  • Bush Jr’s tax cuts in 2001 and 2003 undercut the solvency of the US government,
  • the US reaction to 9-11: the War on Terror’s massive changes to America’s internal political regime and external grand strategy, and
  • the major nation’s inability to craft effective energy policy in response to the start of the peak oil process (seen in rising oil prices).

The decline so far consists of two sets of interrelated dynamics.  First, a reversion to the mean of history:  the center of economic power returns to the East, ending a few hundred year long aberration.

  • The economic and political regimes of the developed nations (US, Japan, Europe) are failing under pressure of accumulated debt, aging demographics, and their accumulated public policy errors (described above).
  • Growth in the Emerging Nations (EM’s) continues, closing the gap with the major nations, as they adopt modern social and technological patterns.

Second, the foundations of the post-WWII’s geopolitical and financial regimes are washing away (we cannot yet see what will replace them):

  • cheap energy,
  • western leadership, with the US and Russia as the hegemonic powers,
  • US dollar as the reserve currency,
  • free trade (see here for details), and
  • (since 1970) free capital flows between nations.

(2)  What happens next?

“Unless you expect the unexpected you will never find truth, for it is hard to discover and hard to attain.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia

Crowds are often poor at recognizing the early stages of change. Sometimes they remain delusionally complacent until they suddenly collectively see what’s happening.

Look at WWI. The crisis started on June 28 with the assassination of Archduke Ferdinand of Austria. People (and markets) remained calm despite rapidly rising geopolitical tensions, until large mobilizations began on July 30. Then panic.  For more see “Political risk and the international bond market between the 1848 revolution and the outbreak of the First World War“, Niall Ferguson, Economic History Review, February 2006.

So far people remain calm, even in the worst-affected regions (doomed Japan and broken Europe). The emerging nations remains confident (probably due to their strong growth since 1998).  The US remains confident, sustained by its trillion-dollar annual borrowing by the Federal government — money burned to support the economy, wasted with no long-term benefits.   This calm can change suddenly, replaced by panic or aggression. Increased volatility seems certain, either way.

More specifically what can we expect?

(a)  Stressful politics, and policy errors

Stress affects political systems just as it does individuals. Decision-making usually degrades (unless we have great leaders), resulting in policy errors.  We become defensive, less generous — and define “us” more narrowly. Internally, politics might become factious zer0-sum battles. International tensions also will increase. We’ll rely on the existing global institutions, however inadequate, since their drastic reformation (or replacement by new ones) will come only at the end of the transition — marking the birth of a new world order.

Fortunately the era of State-State war has passed, so large-scale military action remains unlikely, despite the mad cheering war-mongers . But small wars and 4GWs (aka low-intensity conflicts) might become more common.

(b)  Continued low inflation

The US government has thrown a “Hail Mary” pass (i.e., QE2, perhaps to be followed by QE3) to prevent a deflation potentially lethal for a high-debt economy like ours.  Despite years of confident, politically useful, but failed predictions of rising interest rates and inflation, many remain hysterically certain that we’re a Weimar-in-the-making.  This is typical of the confusion brought about by transitions. People run about with fire extinguishers while their house floods.  We face challenges like those of 1931 and 1937, but crowds see only 1921.

(c)  Expensive oil (ie, liquid fuels)

Global growth, from the EM’s, is slowly boosting oil consumption.  At some point, peak oil will further complicate our lives.  When this happens depends on investment decisions (especially in OPEC), global growth, and geological constraints. Already the precursor to peak oil, falling EROI (energy return on investment), is pushing up energy prices — offset by improved technology which lowers the cost of exploration and production.

We’ve passed the first market: political peaking in 2008, when the Saudi Princes decided not to further expand production capacity (see details here). At some point production in the Saudi’s Gwahir field will begin its long decline. On that day world production peaks, for we cannot replace the resulting 10-15% (500,000-plus barrel/day) production lost each year.  Only the Saudis, and perhaps the CIA and SVR (form. KGB), know when that might happen.  Or not, as peaking tends to occur unexpectedly — recognized, as in the North Sea and Cantarell, only afterwards.

What happens as demand increases but production does not?  Oil prices must rise to destroy the excess demand.  Since oil demand is inelastic with respect to prices, prices must rise a lot to destroy demand.  Spikes in energy price rises are deflationary (as we saw in 2008), unless central banks (CB’s) respond with monetary easing (as they did in the 1970s). CB’s of emerging nations experiencing the inflationary effects of rapid growth are unlikely to ease and exacerbate the inflation.  CB’s of most developed nations may be unlikely to do so under current conditions, for different and complex reasons.

Peaking during the current crisis would have painful effects for all the oil-consuming nations.

(d)  How long will the transition take?

Large transitions take one to two generations. The long peace (1815-1914) was the greatest period of peace and prosperity in recorded history.  The transition which followed, 1914-1945, was painful. Poverty during the Great Depression, megadeaths from two world wars and several civil wars, and a plague (the 1918 flu).

(3)  Can we predict the form of the new world order?

“Choice. The problem is choice.”
Neo, The Matrix Reloaded

We have entered a singularity. We cannot reliably guess about the pace of the transition through it and what lies beyond, despite the gurus who make confident predictions.  Some speak as if they read the 2100 AD Britannica. Others seem to channel Hari Seldon (see Wikipedia), as if societies evolve according to economic theories. They deny agency to the people who are in reality comprising those abstract “societies” and “nations”, and ignore the immaterial factors that knit powerless individuals into a collective will.

The future results from the choices we will make, individually and collectively.  Some of these we can foresee, some will be unexpected.  But until the moment of decision arrives we do not know how we will decide — let alone how other peoples will decide.

Today complacency is a delusion – or an enemy, encouraging us to waste our most valuable resources: time. Once through this transition we’ll confront new challenges: demographic transitions (rising then falling populations), climate change, resource scarcity, the robot revolution (the next wave of automation), and others yet unimagined.  The end of history may lie in our future, but not soon.

“Therefore, mankind always sets itself only such tasks as it can solve; since, looking at the matter more closely, we will always find that the task itself arises only when the material conditions necessary for its solution already exist or are at least in the process of formation.”
–- Preface to A Contribution to the Critique of Political Economy by Karl Marx (1859)

(4)  For more information

(a)  See these reference pages:

(b)  Early posts (2007-08) about the end of the post-WWII world:

  1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  2. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  3. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  4. The US economy at Defcon 2, 11 March 2008 — Pretty self-explanatory.  Where are we in the downcycle?  What might the world look like when it ends?
  5. A picture of the post-WWII debt supercycle, 26 September 2008

(c)  Recent posts about the end of the post-WWII era:

  1. The end of the post-WWII world is not the end of the world, 21 May 2012
  2. The unseen but perhaps decisive grand alignment of the nations!, 22 May 2012
  3. Which nations will make wise decisions under stress? Who will screw-up and fail?, 23 May 2012
  4. The global economy is sitting on a volcano. What happens next?, 1 June 2012

This post originally appeared at Fabius Maximus and is posted with permission.

7 Responses to "It’s the End of the World We’ve Known Since WWII (Updated Status Report)"

  1. spade   June 29, 2012 at 1:40 pm

    Some good obervations laced with a good dose of Baloney!

    • Karl B.   July 1, 2012 at 11:22 am

      Question: what did you consider baloney? I stopped reading after seeing the author placing blame on Bush Jr. for the U.S. solvency problems. This is just another liberal concept. Similarly, the liberals ignore the real causes for the impending collapse in Europe.

      Is Europe's sovereign debt problem also Bush's fault? Liberals blamed the sub-prime and housing crisis on Bush. The key (and misguided) concept of a "home for everyone" was forced onto banks, regardless of the quality of the loan. The government allowed that bad policy, mainly pushed by liberals and from legal action when banks "red lined" a loan.

      Bush tried to reign-in Freddie Mac and Fannie Mae only to be stone-walled by Congress (mainly democrats). FM/FM heavily lobbied against any regulations on them. Certain congressmen yelled racism when people said FM/FM must be reigned-in.

      European style socialism is a failure. To think otherwise IS baloney.

      An article like this should focus on the prime issue of the "entitlement" attitudes that is a rot on society.

  2. Michael Lynch   June 29, 2012 at 2:59 pm

    The primary peak seems to be in believers in 'peak oil' theory, as it is called. Misinterpreting short-term political disruptions as reflecting insoluble problems is a facet of bubble psychology.

  3. benleet   June 30, 2012 at 1:52 pm

    The End of Growth by Richard Heinberg also paints this picture. The onset of peak oil, peak water, peak food, the danger of financial collapse. A turning point in history. I see it as an emergence of public governance inserting its role to save humanity from private greed. This is a comment I just wrote elsewhere:
    7% of all U.S. income in 2011 went to the lower-earning 50% of workers (75 million) as wage income, 93% went to the higher-earning 50%, and to capital gains income, interest income, proprietor income, etc. The wage income of 75% of workers (112 million) was less than the personal income of 1%. My blog: http://benL8.blogspot.com. There are many sources of info about inequality, Inequality.org, TooMuchonline.org, stateofworkingamerica.org, etc. But what can we do? Vote for Progressive Caucus members to Congress. That's OK, but not enough. Improve one's knowledge base, write your representatives at all levels, participate in progressive groups. Professor Wm. Lazonick states that 94% of corporate profits of the past 10 years went to dividends and stock buybacks, and the left over 6% may have gone to research. Certainly none went to raising employees' incomes, as private sector annual wage rate at the median only increased by 5.7% over 31 years, according to Lawrence Mishel of the Economic Policy Institute: "From 1978–2011, CEO compensation grew more than 725 percent, substantially more than the stock market and remarkably more than the annual compensation of a typical private-sector worker, which grew a meager 5.7 percent" http://www.epi.org/publication/ceo-pay-231-times-
    and for Lazonick, see: http://www.huffingtonpost.com/william-lazonick/ho

  4. gzuckier   June 30, 2012 at 10:53 pm

    "First, a reversion to the mean of history: the center of economic power returns to the East, ending a few hundred year long aberration."
    Indeed. Also another reversion to the mean of history; the center of the wealth and power of the developed world returns to a small number of wealthy and powerful individuals, who work against a background of numberless, faceless, powerless serfs, vassals, peons, and fellahs, ending a few hundred year long aberration.

  5. Karl B.   July 1, 2012 at 11:50 am

    I stopped reading after seeing the author placed blame on Bush Jr. for the U.S. solvency problems. The author lost ALL credibility with that comment. The author ignores the impact of socialistic concepts. This author likely ignores the real causes for Europe's sovereign debt problems.
    The key and misguided concept of a "home for everyone" was fostered by democrats. The established policy and regulations emphasized the "home for everyone" instead of controlling the loan's quality.
    Bush tried to reign-in Freddie Mac and Fannie Mae only to be stone-walled by Congress (mainly democrats). FM/FM heavily lobbied against any regulations on them. Certain congressmen yelled racism when people said FM/FM must be reigned-in.
    Socialism is a failure. To think otherwise IS baloney. Governments have a spending problem. The governments also have a MAJOR problem pushing bad socialist concepts. THAT is the real cause of our "solvency problem".
    The author should write about the growth of "entitlement" attitudes that will shape the coming years (for the worse).

  6. slideshow   May 1, 2013 at 8:35 am

    You have some really good ideas in this article. I am glad I read this. I agree with much of what you state in this article. Your information is thought-provoking, interesting and well-written.