The end of the world. That is, the end of the world we’ve known since WWII
Summary: A status report about the end of the post-WWII world. The great recession has accelerated the process, revealing its weaknesses and showing the people of the rapidly growing emerging nations that they have outgrown it. The US is almost its lone defender, a futile effort wasting time and resources that could be spent adjusting to the new world being born.
The post-WWII era slowly winds down, slowly but noisily. The end began 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), the trough of WTI crude oil at $12 in 1998, and the US government’s (Fed and SEC) failure to rein in the tech bubble (which burst in 2000). 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 aging demographics and their accumulated public policy errors.
- Growth in the Emerging Nations (EM’s) is accelerating as they adopt modern social and technological patterns.
Second, the foundations of the post-WWII’s geopolitical and financial regimes are washing away:
- western leadership, with the US and Russia as hegemonic powers,
- US dollar as the reserve currency,
- free trade (see here for details), and
- (since 1970) free capital flows between nations.
How long will the transition take?
Large transitions take one or even 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).
The pace and nature of this transition are unknowable, despite the gurus who speak as if they read the 2100 AD Britannica. We can only guess about the shape of the new world that lies beyond. It depends on choices we all will made, choices we do not yet understand.
A note about inflation
The US government has thrown a “Hail Mary” pass (i.e., QE2) to prevent deflation, deflation potentially lethal for a high-debt economy like ours. Despite that, many are hysterical about prospect of inflation or even hyperinflation. This confusion is typical of the confusion brought about by transitions. People run about with fire extinguishers while their house floods.
A note about oil
Global growth, from the EM’s, is boosting oil consumption. At some point, peak oil will further complicate our lives. First comes political peaking, as OPEC becomes unwilling to expand investment and production. Eventually production will hit geological constraints.
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.
What happens as production costs rise and production constraints multiply? 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 are also unlikely to do so, for different and complex reasons.
For more information see these reference pages:
A note about the pace of change
Crowds are often poor at recognizing the early stages of change. Sometimes they remains delusionally complacent and then experiences rapid collective recognition. The classic example is 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 major mobilizations began on July 30. Then people freaked out, too late. (For more this 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)
For more information
For posts about China’s rise as a great power:
- Power shifts from West to East: the end of the post-WWII regime in the news, 20 December 2007 — We are seeing another western industry ceding dominance to eastern competitors, one more step in a larger process.
- China becomes a super-power (geopolitical analysis need not be war-mongering), 9 July 2008
- Words to fear in the 21st century: Lǎo hǔ, lǎo hǔ, Lǎo hǔ, 14 July 2008
- A different perspective on the US and China, seen by an American living in Russia, 23 March 2009
- China – the mysterious other pole of the world economy, 22 July 2009
- Recommended: Another big step for China on its road to becoming a great power, 27 July 2009
- Will China collapse?, 5 August 2009
- A revolution is not a dinner party. Thoughts about the future of China, 19 August 2009
- Update about China: a new center of the world, 13 December 2009
- Timely: Rare earths – a hidden but strategic battleground between the US and China, 5 May 2010
- How China builds its commercial empire, 12 July 2010
Posts about the end of the post-WWII world:
- 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.
- 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).
- 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.
- 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?
- A picture of the post-WWII debt supercycle, 26 September 2008
- A look at our government’s debt – rising because we like to spend, 29 December 2009