The day after tomorrow

The title of this post is unashamedly plagiarised from the film, The Day after Tomorrow, in which extreme consequences follow from climate change. Three enormous storms develop - one each over the US, Europe and Asia - which together force the planet into a new Ice Age, killing millions and forcing the survivors to move south.

The science behind this film has I think been largely discredited from a climate change point of view. But I have been struck by the similarity with our economic situation. We have, indeed, three enormous storms - one each in America, Europe and Asia. And the consequences may be a fundamental realignment of the global economic landscape.

Storm 1 is already familiar to us. This financial storm is progressively destroying the Western system of finance. The "global" financial crisis of 2008 was centred over the US, the originator of the subprime debt collapse that underpinned the disaster, and the UK because of its primacy in global finance. But the dislocation it caused to the global financial system was the trigger for Storm 2 - the Eurozone crisis. And it is no means over yet. We still have a frozen and dysfunctional financial system, propped up by transfusions of money from central banks and governments. We are only just beginning to discover the extent of fraud in fundamental financial activities such as rate-setting and lending. We have trillions of dollars of derivatives backed by fictional assets waiting to unwind.

While I don't buy into the "US dollar will collapse in hyperinflation" theory, I do think there is far more turmoil to come. Zombie banks cannot be propped up indefinitely by depriving people of income, jobs and security: eventually the people will say "NO" and force politicians to switch off the life support, and we will see a banking collapse which will make Lehman look like a minor blip. It would be useful if financial authorities acted pre-emptively to reform the banking system, dismantling and discarding the dead wood and clearing the way for new growth, but I'm not hopeful. They seem to be spending all their time trying to bring the dead back to life.

Storm 2, the Eurozone crisis, has not yet reached full strength. This looks complex, but at its heart is a political storm. The Euro project is doomed. It was wrongly constructed from the start and there is in my view insufficient political will to correct its deep structural problems. There is a growing fracture between the North and South parts of the Eurozone - and, uncomfortably, this also coincides with old religious and cultural differences: the "hardworking" Protestant North versus the "profligate" Catholic South. Ireland, which has in the past suffered terribly from territorial conflict dressed up as religious differences, is currently aligned with the Catholic South because of its high public debt following its unwise decision to bail out its banks, but in many ways behaves more like the Protestant North.  France faces an uncomfortable choice between maintaining the Franco-German alliance that is crucial to the survival of the Eurozone and accepting that its natural allies are the Southern states, especially Spain and Italy with whom it shares many characteristics.

The problem is, as students of European history will know, that previous attempts to create a super-Europe have always ended in the same way - war. Already extreme nationalist parties are growing in popularity and old grievances are being dusted down and polished. I find it very sad that the project that was supposed to eliminate the risk of European war may end up causing it.

And the death throes of the Eurozone carry implications for the whole of Europe. If the Eurozone disintegrates into national conflicts and settling of old scores, how can the European Union survive even as a free trade area? What are the prospects for Eastern European countries caught between a collapsing EU and an increasingly acquisitive Russia? What would the impact of an EU collapse be on its key trading partners - particularly China, which is heavily invested in European countries?

Which brings me to Storm 3 - and the issue that underlies all three storms. China, India and Russia are all facing economic slowdowns. There has been much discussion of the Chinese construction bubble and subprime lending, its municipal debt problems, its dysfunctional regional banks incestuously related to its equally dysfunctional regional governments, and its reliance on the People's Bank of China to manipulate its currency and prop up its banks. All of this looks very, very familiar to students of the US and of the Eurozone. The same pressures that blew up in Storms 1 and 2 are building up in China. There is bound to be an explosion, isn't there?

Well, yes, I think there is. However, China's economics are different: unlike the US and much of Europe, it has a trade surplus and large foreign reserves, and has been industrialising at breakneck speed. It may weather its financial storm, although it is already losing its trade surplus as Western economies cut their imports. But it has another, bigger storm brewing - as do India, Japan and Russia. Both Sober Look and Also Sprach Analyst have discussed the Chinese demographic problem at some length, and others have discussed similar issues in relation to both India and Japan. No-one seems to know which one will blow up first, but there seems little doubt that eventually the ageing populations in China, Russia  and Japan, and male/female imbalance in China and India, will cause callousness towards those unable to provide for themselves, poverty among the working population, migration, civil unrest and perhaps regime change.

The same demographic problems face Western economies, too. The fact is that our populations are ageing: people are living longer and fertility rates have dropped. In the future we will not have enough people of working age to support our elderly. Governments are pinning their hopes on people working longer, but the problem is that although we have enabled people to live longer we have not yet enabled them to stay healthy for longer: an increasing number of people spend years living with levels of physical and mental disability that make it impossible for them to work. And people object to working for longer, too. There is a sense of entitlement around state pensions and elderly benefits: when these are reduced or changed people claim they have been "robbed", because they incorrectly believe they have paid for them during their working lives. And because the "grey vote" is politically powerful, it is a brave politician who tinkers with the entitlements of the elderly. Consequently younger people face the prospect of spending their entire lives in debt and paying high taxes to support their parents' generation. It is no surprise that many of them are looking to emigrate to younger, more vibrant economies.

So if I am right, that the economic storms we are seeing across the Northern hemisphere presage a fundamental realignment in the economic landscape driven ultimately by demographic changes, how will it pan out? The last sequence in the film shows the US president delivering a broadcast address from a hastily-established Presidential residence in Mexico. Why on earth Mexico would allow the president of a refugee nation to speak as if he ruled the world is never explained, but then that's Hollywood.  It seems more likely that the US would lose its global authority. We have assumed that the mantle of "world leader" will shift to China: but if China is caught up in the storm as well, then economic strength and authority may go elsewhere. Looking at the world, the nations that have youth and energy on their side are mostly southern ones. Latin America, Africa, Indonesia, Australia. I mentioned the growing fracture between North and South in the Eurozone. Will we see a much larger, global fracture between an elderly, economically stagnant Northern hemisphere and a young, vibrant, growing South? And will the vibrant Southern nations be willing to support the elderly North? What could the elderly North offer them in return? It is hard to see why a relatively poor, young Southern hemisphere would be willing to prop up an elderly Northern hemisphere that is considerably richer. Only if the Northern elderly are prepared to spend their wealth buying Southern goods would the Southerners play ball - but that is a recipe for slow economic death.

Mind you, China may not accept the inevitability of its population ageing. It has not hesitated in the past to use brutal methods to achieve demographic change. Faced with a working population unable to support its elderly, migration of young men (particularly) to countries where there are more young women, civil unrest and the possibility of revolution, what is it likely to do? Kill the unwanted (in this case the old, frail and disabled), or allow them to starve to death? Close its borders to prevent emigration? Use the armed forces to suppress protest? We will have to wait and see - but it has done all of these within living memory.

Western democracies have more of a problem, because of the power of the "grey vote". Successive governments have ducked the issue, fearing electoral unpopularity. It is highly unlikely that a democratic government would resort to the kind of brutality - forcible euthanasia, for example - that a dictatorship might. But will we see social pressure on the elderly, frail and disabled to "do the decent thing" - commit suicide so that they are not a burden on the younger generations? Will those who DON'T do this be ostracised, or worse, abandoned or forced to run? Will Logan's Run become reality?

All of this hangs on the availability of resources. Although the pace of growth of the world's population is reducing and the balance is shifting from north to south, it does seem likely that increasing global population will put further pressure on global resources and a fragile ecosystem. The Population Institute forecasts dire consequences for the world if political leaders do not address the question of fair distribution and sustainable use of resources. In their paper "The Perfect Storm", they raise important questions for world leaders to address in a summit planned for July 2030. Talk about forward planning!

But there are already struggles for control of resources. And those struggles are sufficient in themselves to cause a conflict that could wipe out the world as we know it long before 2030. The world is utterly dependent on the Middle Eastern oil-producing nations - and they know it. They pull the strings of our economies with their control of oil production. But they have a storm of their own, and this is what we REALLY should be worrying about. Important as the financial, political and demographic storms in the northern hemisphere are, they are as nothing compared to the possibility of Armageddon in the Middle East.


  1. The Limits to Growth, authored by the Club of Rome in 1974, extrapolated these problems to crystallise into catastrophe mid 21st century.

    Exponential growth in pollution, inflation, and population were the main issues they identified if my memory serves me right, with the prospect of war over ever decreasing resources.

    Perhaps we should rely on Tim Worstall and his friends at the Adam Smith Institute to solve the economic problems? Or James Delingpole to solve the environmental impacts?

    No? I thought not.

  2. Don't ignore that China's demographic problem is a result of the imposition of the savage & appalling One Child Policy- a policy the direct result of the impoverishment of China by idiotic Communism.

    US & European crash was a direct result of massive credit expansion complicated in US case by the insane "equality" policies imposed on US banks, Freddie Mac & Fannie Mae. Europe was complicated by the adoption of a currency union in a non-optimal currency area.
    Ireland increased bank lending from the major 6 banks from €120b to €400b between 2000 to 2006; and 80% of this new lending was for domestic construction.

  3. Hello Frances;

    Just out of curiosity, as a citizen of Great Britain, are you familiar with the writings
    of one of your great scientists, Frederic Soddy, an associate of Rutherford and a
    recipient of a Nobel Prize in Chemistry? (ca. 1922, if memory serves) Like you he
    developed a serious interest in the economy, and wrote a great deal on the subject.
    His most famous work is entitled, "Wealth, Virtual Wealth and Debt". He is considered
    to be a founder of environmental economics, and the volume in question is freely
    available online. Have a look if the spirit moves you.

    Regarding population demographics, much depends on whether you take the view,
    as Soddy did, that resources are, in the end finite, or whether you subscribe to the
    "cornucopian" view that we will always find a way to grow within the finite envelope.
    If the former is true, then the only question is when, by whatever means, society
    finds a way to live within its' total available energy inputs. At some point, the pig
    must pass down the python, and this can, but does not inevitably have to be
    disruptive. At the very least, old ways of doing things will have to change.
    Much to think about! Cheers.

    1. Hmm. A bit of both, really. I have immense faith in human ingenuity, so I think we would probably continue to find ways of growing. In fact resource constraint is known to be a key driver of innovation. So I suppose I incline towards the optimistic. However, we do have to find a way of satisfying our energy needs without relying on hydrocarbons, and until we have achieved this we will face serious limits on growth and continual struggles for control of scarce resources.

  4. Frances: to me the storms you discuss are all due to the unsustainability of current trade imbalances. These imbalances have been allowed to persist and worsten by the sophistication of the financial system and by the Euro.

    The rich countries are going to have to consume a smaller proportion of the world's resources. The adjustment is painful.

    Meanwhile, there's the terrifying possibility of ecological collapse.

    1. Paul,

      I agree that Storms 1 and 2 are both about unsustainable trade imbalances, really. But Storm 3 is not. Demographic changes in the northern hemisphere are mainly to do with cultural shifts as poverty reduces and education improves - particularly regarding the status and role of women, though this is an unpopular thing to say.

      There is a Storm 4, of course.

  5. Are you people familiar with the work of former central banker Bernard Lietaer ?

    I share his perspective anyway. We should look at the wonderful ways mother nature provides the fractal solutions. It is like ecosystems. we also need diversity instead of just efficiency.

    What we need are complementary currencies. Like Saber or Furia Kipu. It is about community not about individuality.
    Computers made able to privatise, now it is networktime to unify. Evolution will follow the same public/private cycle Martin Armstrong is also talking about.

    Fractal we are. Always. Mother nature simply is.

    Human kind will have to learn and adapt.
    ... but slow learners we are.

  6. Francis, Re your claim that as regards so called bank reform, the authorities are “trying to bring the dead back to life”, there are plenty of authorities that would agree. E.g. Kenneth Rogoff said “Legislation and regulation produced in the wake of the crisis have mostly served as a patch to preserve the status quo.” And Mervyn King said, “Basel III on its own will not prevent another crisis…”

  7. Storm n+1: Global Food Crisis

  8. I'm not sure I agree with your analysis about the southern global nations being "young, vibrant, growing". I think the situation there is much more complex than meets the eye. Its true that quite a lot of these nations have growing economies thanks to a commodities boom and youthful populations. However the economic growth in many southern nations is fair from evenly spread.

    In many ways the problems of developing nations parallel the problems that we in the developed world face, a rich elite disconnected from the countries they live in and a poor underclass that are often resistant to social interventions by government. However in developing nations the problems an order bigger and the government is often paralysed by VERY limited resources. Equally the "underclass" is often heavily influenced by tribal traditions which sometimes are very counterproductive to their development (eg. education of women and family planning).

    In the few third world countries I have visited you end up with the situation where government invests the money developing the cities where there is a growing middle class. Meanwhile the poor rural areas have limited resource thrown at them as the investments generate less than stellar results. However when you look at the population growth I suspect that you will find its often skewed to the rural poor (who are more likely to hold traditional beliefs on families than buy into the concept of a "western" nuclear family). This in turn leads to some difficult divisions (in nations where there is already divisions along tribal lines).

    Obviously its easy to be pessimistic about the developing world and much of what I have written assumes worst case scenarios about distribution of population growth and resources. However I fear that particularly with Africa we are in danger of moving from labeling it "the hopeless continent" to the new Eldorado when actually the truth is a bit more complex!

    1. I did say that development of the "younger" nations depended on rich "older" nations releasing resources - which historically they have been unwilling to do. If hang on to wealth then rather than southern countries developing, there might be increased migration from south to north, particularly of young people.

      I'm certainly not blind to the problems in Africa. But demographics are definitely in their favour - as they have been in both China and India. A plentiful supply of young people is a very important asset, and many of these countries are also rich in natural resources. They have a lot going for them.

      Developing nations usually develop cities at the expense of rural areas and, often, industry at the expense of agriculture: if you remember, the UK did, in the Industrial Revolution. This causes people to migrate from rural areas to cities - as they are doing in China at the moment. The concentration of people in cities provides a plentiful labour source for industry and people scarcity in rural areas forces modernisation of farming techniques. The development of cities therefore usually drives growth rather than inhibiting it.

      Uneven rewards are not in themselves a growth inhibitor.


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