To survive this crisis a company has to increase revenue and decrease spending. Itâ€™s pretty simple on a microeconomic level, but when you have a bunch of firms doing the same thing you get one hell of a macroeconomic tsunami. One company can fire people without affecting consumer spending overall. However, when many companies downsize thereâ€™s a huge effect on consumer spending, and confidence. Companies and people take actions in their own economic self-interest, but the result is pretty similar to the bank runs that led to the Great Depression. Firms are panicking. Itâ€™s like the tragedy of the commons, except with zombie sheep fucking each other and eating each otherâ€™s brains. More accurately, itâ€™s like everyone rips up their piece of the common green and takes it home, leaving us with a big hole in the ground.
Which is to say, it’s going to get worse before it gets better. What makes it worse is that this is perhaps the first truly global recession. In the past you could have the Dark Ages in Europe and China getting along fine. However, with people and systems so connected, a shock in one part of the world immediately cascades across the globe. Sri Lankans – being in the shitter to start with – are, I think, somewhat laissez faire about this. I’m not sure we understand the gravity of the situation. As Marc Ambinder reports, the Americans do, in particular the Obama admin.
Where the discussion isn’t going, at least in public, (or the PR level), is the possibility that the first foreign policy crisis the administration will face will be the complete economic collapse of a large, unstable nation. To be sure, Pakistan is nearly broke, and U.S. policy makers seem to be aware of that; but a worldwide demand crisis could lead to social unrest in countries like Indonesia and Malaysia, Singapore, the Ukraine, Japan, Turkey or Egypt (which is facing an internal political crisis of epic proportions already). The U.S. won’t have the resources to, say, engineer the rescue of the peso again, or intervene in Asia as in 1997.
The fate of nations is on the line. This is not just about companies failing. A rational firm has no choice but to increase revenue and decrease spending. But when everyone decreases spending how does anyone increase revenue? It’s effectively a panic, a run on the banks. The inevitable response is for the government to nationalize industries (like the banks) to stop the panic. Because the government can simply order everyone to chill the fuck out until things settle. However, this means that the governments also undertake the risk. And the debt is still there. So if the underlying assets are bad (which they are, they’re fucking turds) then it’s not firms that collapse, it’s governments. And nations. Nations will collapse, like Iceland. People in Iceland are pretty chill, but I’m buying some leather clothes in case some Mad Max shit goes down here.
Right now there is a bunch of bad debt careening around the system like a pinball. It has to go somewhere. You can shake and kick the machine all you want, but eventually it’s going to go TILT. And we’re kinda going to have to start over.
In local news, Sri Lanka has a $1.6 billion stimulus package in the form of the war. Which is great, cause a nationalized firm that kills many of its employees seems like a good idea. However, we also have a President spending millions on airplanes from foreign countries (for the failed Mihin) while people are literally going hungry. We have a Supreme Court Justice whose whimsical decision to override a legal contract because it was stupid threatens to topple the stock market and make it impossible for the nation to get credit. And the Central Bank Governor isn’t an economist at all. I don’t know if our particular fuckedupedness somehow insulates us from the global tsunami, or if it makes things worse. I suspect the latter.
One particular worry is that global oil prices are totally tanking. I’ve never seen a graph like this. It is literally straight down. Low oil prices would seem good for the economy, but in this case it seems to signal a pretty dramatic drop in global demand for any sort of economic activity. That is, to repeat, firms and individuals are reducing spending on a micro level, resulting in a global clusterfuck on the macro. Which is to say, the actions we take to protect ourselves may endanger us all. Looking at what’s out there I don’t see how this ends without the entire global economy, down to even monetary structure, being rebuilt. And I mean rebuilt as in ‘destroy and rebuild it’. Which will be, needless to say, painful. Read the Oil Drum thing. It’s scary.