The day after tomorrow

The day after tomorrow

Add to Reading List
Add to Reading List
This post first appeared on Coppola Comment in September 2012. It has been slightly updated to reflect current developments. 

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 discovering 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 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. I suppose by then our dysfunctional banks might be capable of surviving by themselves, but I'm not hopeful. I suspect that removing public support would be terminal for them - though perhaps new forms of financial intermediation will be ready to take their place. 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: 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. Yes, nations are developing alternative energy sources - including natural gas, though this introduces a whole new political dimension, particularly in Europe. But with the possible exception of the US, they are still a very long way from breaking their dependence on Middle Eastern oil production. The reality is that the Middle Eastern countries still pull the strings of the global economy. 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.

Related reading

Capital controls or cooperation?

Global greying

In the countries of the old - Coppola Comment

Image from publicity material for the film "The Day after Tomorrow".


Twitter Feed

RT @mybuchshelf: Are book collectors real readers, or just cultural snobs? – via @aeonmag

A collection of some of the best econ books of the year, feat - @ryanavent, @BrankoMilan, @g2parker and more...…

RT @mark4harrison: Blogged: Donald Trump and America's Incomplete Contract with Itself @warwicknewsroom @cage_warwi…

RT @NIESRorg: The weak pound in your pocket: @angusarmstrong8 continues to make waves with his blog post, this time in the @FT https://t.c…

RT @LSEReviewBooks: Review Archive: The Sharing Economy: The End of Employment & the Rise of Crowd-Based Capitalism by Arun Sundararajan ht…