THE STAGE FOR THE 21ST CENTURY'S EPOCHAL CONFLICT

Sorry for the slowdown in posting. I'm thinking through the implications of our current situation and the process is slow going as I run it through my frameworks. Here's some early thinking that you may find useful (or not):

Setting the Stage

The prolonged economic and financial crisis of the 1930's (the Depression) forced the development of the modern nation-state. To mitigate the effects of this crisis, the nation-state learned to mobilize and manage national economies on a scale never seen before. Inevitably, the process used to extend control wasn't uniform, it took three different ideological routes -- government control, corporate control, and a corporate/government market mitigated symbiosis. This eventually yielded a fight for dominance that resulted in both WW2 and the Cold War. One approach eventually won.

Unfortunately, it's growing increasingly clear that we've entered another prolonged economic and financial crisis, which may become the Depression of the 2010's. So, if we follow the historical pattern (important: while history doesn't repeat, it rhymes), we will likely see new organizational solutions develop that mitigate the effects of this crisis. If this is true, it's very useful to identify what's different between this crisis and the last:

• Global and not national. Unlike the previous, this potential Depression will be global -- aka HUGE, FAST, and COMPLEX -- and not national. This means that the solutions needed to mitigate its impact will only occur on the global stage.
  
• Systemic disruptions. The second difference is that we will continue see numerous systemic shocks on a global scale. These shocks will increase in frequency as the dynamic instability of the global system becomes acute. Organizational structures that aren't resilient will be washed away.
  
• Post-ideological. Mass movements and ideologies are dead. Global markets and social fragmentation now rule. This means that we can't expect a repeat of the 20th Century solution set.
  

The question now becomes, what will these "solutions" that mitigate the effects of the "coming" Depression look like? The natural reflex is to assume that our nation-states will formulate a response. However, that doesn't appear to be a well founded assumption since this global problem is MUCH bigger, faster and more complex than they can handle. Further, nation-states have been in decline for nearly 35 years as they gradually ceded elements of sovereignty to a now dominant global marketplace (which was built to help America's ideological solution triumph over Communism during the Cold War). As a result, we can expect that moves by nation-states to prop up a global scale problem won't work. Worse, many states will likely go broke in the process,* well before the problem is mitigated. Instead, we can expect -- and this is purely speculative since the real responses won't be truly visible until well into the next decade -- three potential solutions to emerge (how they fight and who is likely to win is the most interesting aspect of this emergence to me). More on this in a later post.

*Will many nation-states go broke? Almost inevitably. For example, the US national debt went up 5%, or $574 billion, in only one month (October 2008). That is likely only the start of vastly more red ink. Why? The debt overhang for America, is estimated to be 370% of GDP (a combination of public, private, and corporate debt). This equates to $30 Trillion in debt over the long term sustainable level of 160% of GDP. That excess $30 Trillion in debt will need to be reduced to $0 before we can be restored to any semblance of fiscal health according to the existing model (in the last Depression, we went from 260% debt/GDP to 140%). There is a similar vulnerability to excess debt in many of the world's nation-states.

**Note that there is now, for the first time, a robust market for Credit Default Swaps (a financial product that allows you to bet on bankruptcy) tied to the solvency of the United States government. Note the direction of the price (higher rates mean a greater expectation of default).

Comments

[Wiggins]

John,

Could you clarify your narrative of the nation state's rise and fall? If you date the creation of the modern nation state to the 1930s and hold that nation states have been in decline for more than 50 years, then are you arguing that the nation state was ascendant for less than 30 years before it began to decline?

thanks,
W

[John Robb]

I was thinking this through when you posted. I suspect the break came with the energy and monetary crisis of the early 1970's. That's when the "lost control" of the marketplace and it became global. That's more like 35 years then.

[S]

John,

Interesting I was reading something and have been thnking through the same implications and potential responses considering the end of the last depression. a few ideas:

1. Iceland, Pakistan and Ukraine have essentially already failed. Hungary too, and the Baltics are on the brink. Credit default swaps on the us ar 40 wide vs. 1-2 Y|Y.

2. If the risk free rate is not risk free then what are the implications for global capital market theory and the its core building block.

3. If Obama wins, his economic team is essentially a bunch of retreads who believe contrary to the dissolution of the state in the accent of the state. They believe that the clearing of the underbrush beginning in the 70s is essentially at fault for the current situation.

4. The entire discussion of the economy ignores the geopolitical component, which is to say the US hegemonic push for "free" trade/globalization. One reflexivily assumes that the US policy decisions where at their core enlighted and rational. Politically, perhaps, but not necessarily economically. For example the US / China axis started out as a wedge against the Soviets, but post cold war accelerated into a n uneasy vendor financing relationship.

5. Rubin who is at the heart of obama thinking really pioneeered the idea of capital account surplus (i.e. the US as the financial guru) to offset the current account. Part and parcel of this was his strong dollar policy. That policy accelerated the misallocation of capital into a negative spiral that blew up into the mexican crisis, the asian contagion and the vicious rate cutiing cycles that whad already become the solution du jour per Greenspan post 1987.

6. The structural irregularities in the economic architecture will require drydocking and complete rebuild. The entire system is built on the idea of incrementally more debt. The staters believe that the US can stand in for the private sector to absorb the deleveraging until risk appetites return. Said differently, they think that the disequilibrium that we operated at owing to Greenspan and the perverse rate environment is sustainable.

7. The world remains materials short and population long. While technology acted as an acceleraor during the cold war to "get the message out" it is also acting to accelrate the revolsion of the US.

8. The NOV-15 meeting of the G-20 is critical in that the world has been quite clear that they envision a post Bretton woods II world with dollar hegemony sidelined. That makes the Petro states in the Gulf the absolute key here. So whiole Israel worries over its existence at the hands of iranian nukes, the Us ought to be worrying over oil in rubles, yuan or other.

9. How could the US try and reverse what seems like a tidal wave economically. The asset light "FIRE" model,ironically similiar to Enron, has turned out to be its equal. Arbitraging dollar hegemony is coming to an end and the greate irony is the US is totally ill prepared for the next paradigm.

10. The current solution is appears to be throw more money at old concepts and hope they turn the tanker. Whether its the state or GM the solution is anachronistic.

11. Putting aside the current US economic kneecapping (note Paulson has been to China upteenth time begging for access to China financial markets), underneath the surface is a growing divide and hate in the US between the reds and the blues which is vastly underestimated. Ironic that the blues represent anuneasy alliance of the rustbelt old paradigm compnies (GMs, Steel, intelligensia) and the economic elite (nation staters).

12. Hard to avoid the conculsion that greater conflict is coming both as a function of the geo political divides and the local regional economic competition for resources.

The US is looking more and more like the historically unnatural act it is.

[D-rangd]

Hoellee krap, u guys got no idee wat ur talkin bout. I see that the credit market symbiosis has a negative deflation value of 32% while the yield curve is rising with a coefficient of .0000789. I think I'll run these numbers through the discombobulator. Check!

[zenpundit]

Hi John,

Interesting post. You have started with the wrong historical premise though. Not completely wrong but perhaps off enough to effect your downstream thinking. The Great Depression is not the starting point or even the high point of nation-state intervention in market economies.

Rather you need to look at the World Wars. It wasduring WWI that government regulatory administration and financial controls were first tested and legitimated. The careers of Bernard Baruch, William McAdoo, Herbert Hoover, John Maynard Keynes and General Ludendorff are instructive here.

Keynes of course, drew the most significant lessons from WWI but Ludendorff, who held much of the real power in Germany in the last years of the Great war, is not to be underrated for his subsequent theory of Total War. Hjalmar Schacht drew other lessons from Germany's economic predicament under Versailles that led him toward autarkic manipulation of currency, exchange rates and international trade.

The "state capitalism" of the Great Depression ( be it New Deal, Nazi autarky or Soviet 5 year plans) paled next to what the major powers did during WWII, or even that of WWI. Hitler's regime effectively ended the depression in Germany be creating a war economy ( albeit by squeezing productivity, limiting consumption and tolerating a hidden inflation) while the Soviet economy was a war economy from the inception under Stalin

[swimmer21]

John,
part of the stage is also in Europe. It appears that this part of the world seems more resilient than some other. Systemic decisions have been made to tackle the crisis : interbanking lending facilities, revision of the Bretton Woods agreement. Internally a new step of integration of nation states is high on the agenda. More than the political decisions, I can see that the practices of collaboration and cooperation is bearing some fruits now. Not only at a political level but disseminating everywhere in the society, at least in France.

[Bryan Alexander]

Great think-piece post, John.

One question: how far do you think on-line organizations will go in this crisis? That is, will peer produced (Benkler) entities grow and have effects?

[A.E.]

I would second Zenpundit on this. Van Creveld's 2006 book (not the new one) has an interesting look at Luderdorff' theories of war, so check that out too.

[Stevelaudig]

"Putting aside the current US economic kneecapping (note Paulson has been to China upteenth time begging for access to China financial markets)," If I am the current Chinese administration why would I want to kiss the American Typhoid Mary [or rather lend her money]. China may be large enough and may be insular enough to "wall" off many off the viral problems that the current U.S. administration has set in motion. Quarantine was one model to deal with plague and the contemporary financial operation spreads malaise as quickly as catapulting bodies over Venetian [or whatever] walls. This is still rough draft so don't beat me up too hard on it.

[AoT]

Global and not national.

If you're referring to the Great Depression, it was global, as have been a huge number of other recessions.

[Skeptically Optimistic Undergrad]

John,

Think that social networking platforms + microfinancing (check Kiva.org for a model of this) local enterprises to increase resilience in communities could help mitigate the shocks of deleveraging? I imagine it would help as well to incentivize local investors to play games of conspicuous philanthropy (to compete as a strategy with the less sustainable costly signal game of conspicuous consumption) by making individuals' contributions transparent and perhaps ranked. A viable idea?

Apologize for the double - I meant to post here.

WW

[Duncan Kinder]

"I imagine it would help as well to incentivize local investors to play games of conspicuous philanthropy (to compete as a strategy with the less sustainable costly signal game of conspicuous consumption) by making individuals' contributions transparent and perhaps ranked. A viable idea?"

It worked in Ancient Athens, where wealthy Athenians directly sponsored public works of various sorts.

As I recall, the contributions were not entirely voluntary.

[ps]

Stevelaudig,
You ask why China would want to lend the US money - they already have (look at their reserves) and they therefore have some incentive to protect the value of those assets. We have a very symbiotic relationship with China and it is unlikely to be unwound. Their labor, resource pool, and liquidity put them in the drivers seat. We had better be kissing their ass.

[MrPeace]

Could we use Taiwan as a means for us to settle our depts with China.

[WarLord]

Greetings

An unsustainable model with 2/3 of the economy driven by US consumer spending/debt. Will China be able to ride rhe tiger of controlling their population without the infusion of exim cash primarily dollars?

What happens to US/China et al if the Iranian borse trades oil in euros?

The unwinding of exotic debt wil be ugly...

[ps]

WarLord,
40% of China's GDP are gross exports, 12% net exports. Big but not 2/3 and not all US. Unsustainable? Yes, but with their reserves they have the ability to stimulate domestic demand as exports decline. In terms of controlling the population the answer is again using reserves (not that this has begun yet). When oil is no longer traded in US$? That will be ugly but likely to be resisted by Saudia Arabia and any leverage China may have.

As to my comment about ass kissing, I should have included Saudi Arabia.

[MDJ]

Post-ideological? :/

[John Robb]

Thanks Zen. You are exactly right, the early groundwork for state control of the economy was done during WW1. Mobilization is a key feature of 2nd generation warfare (total war, etc.). However, it was considered temporary (unwound) until the depression where it became integrated into the normal functioning of the state. Permanent mobilization...

[John Robb]

MDI, while we have more ideologies than ever, all are vastly diminished in support. They can't be used as a means of state mobilization.

[John Robb]

Undergrad. Too small a factor. Merely a function of existing wealth concentration. Better to learn how to fish than rely on fish given to you as a gift.

[John Robb]

Bryan. We will see many more "activist" online organizations develop to attack, coerce, and ridicule as things decline. It's both cheap and effective.

[wu.ming]

"(important: while history doesn't repeat, it rhymes)"

very well said, worth repeating.
welcome to the remix.

"Better to learn how to fish than rely on fish given to you as a gift."

another nice one, but maybe not appropriate here?

kiva's not giving gifts, but facilitating microcredit. it's an online version of grameen, more or less.

e.g. undergrad's learned a new way to fish, but needs a loan for capital investment, he can go to kiva (or the others sprouting up).

is this not an end around the banking system?

as far as concentration of wealth is concerned, yes, still concentrated, but a ton of that wealth was just redistributed. certain individuals bet the right way and have increased their concentration (mr. black swan for example).
some of those individuals are looking for end arounds too.

many thanks for the benkler tip bryan. 1/2 way thru chapter 2 of the wealth of networks. ideas are growing and sprouting chaotically already, far beyond attack & ridicule...

it's all in how one uses the tools yes?

[complexfatwa]

Wu,
I agree regarding the micro-credit question; I think there's a potential here for resilient community/network direct financing. Charlie Rose had Michael Milken and Muhammad Yunus at the same table the other day, and Milken suggested the Grameen model could scale to first-world purchasing-power levels. I'm skeptical about the scaling, but I think the concept has potential.

[wu.ming]

milken AND yurus?
u gotta be kidding.
that's wicked cool.
talk about strange bedfellows...
here's the link...gonna watch now.
many thanks

http://tinyurl.com/5w5cep

[wu.ming]

fatwa, just watched it.
re: scaling, remember how mr.yunus corrected mr.rose, it's productive power before purchasing power. that is the fundamental revolution in perception that is necessary before this model can embrace the 1st world.
but Queens is the perfect place to start methinks.

[EN]

Although I agree with many of the comments here I'm not so sure that it's so terribly complicated or direct as naming dates and decades. I believe that Austrian economics is a great predictor of the mess we are currently in. Rich people and organizations always become fat and lazy and eventually their wealth is redistributed to the smart and hard working. What Austrians fail to understand is that it's virtually impossible for the rich (who were extremely Laissez Faire until the minute they became rich in which case the status quo becomes their new God)to believe in free markets once they have "theirs". Protection of their assets is all that matters and they will insist that governments, which the rich will always have great influence in, bail them out of their own stupidity in the name of saving the economy for the common good. Of course GM, and other Buggy Whip manufacturers (and their heavily subsidized employees) will always fight for access to the treasury. Fighting for the market is no longer palatable or profitable. Fighting for the treasury is much easier. Of course it will all fail in the end. It's a matter of waiting for the treasury to finally go broke.

[Vincent]

The proliferation of the War on Terror indicates, a priori, that mass movements and ideological fanaticism are not "dead" as you said. Rather, the divide between democratic (rational choice theory based) organizations and other (irrational/collective value based) systems is becoming like "black and white". In my humble opinion, finding a way to quietly, not militarily, infuse foreign countries with stability (rationality) is the key to winning this Long War and refining the global economy.

[Duncan Kinder]

"In my humble opinion, finding a way to quietly, not militarily, infuse foreign countries with stability (rationality) is the key to winning this Long War and refining the global economy."

How and with what do we do this?

[wu.ming]

"How and with what do we do this?"

open source decentralized resilient technologies directed toward the people instead of institutions (state/corps)

once that is figured out, the state ceases to exist as a paternalistic power structure.

[james wilson]

Or global depression will increase the importance of nation-states and identities, strengthen the bonds that should be strengthened, and turn back the onslaught of standardization and uniformity--which marks the end of all civilizations.