It’s the end of the world we’ve known since WWII (updated status report)

Summary:  This is an updated status report about the end of the post-WWII world.  The global recession has accelerated the transition, revealing the current order’s weaknesses, and showing the people in the emerging nations that they have outgrown it.  The major nations continue to defend the current systems, a futile effort wasting time and resources that could be better spent adjusting to the new world now evolving.  This post updates previous posts in this series; links appear at the end.

Contents

1. Decline follows the peak, as night follows day
2. What happens next?
3. Can we predict the form of the new world order?
4. For more information

(1)  Decline follows the peak, as night follows day

Thou know’st it’s common; all that lives must die,
Passing through nature to eternity.
— Queen Gertrude to Hamlet (Act I, scene 2)

The post-WWII era peaked 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), and the trough of WTI crude oil at $12 in 1998.

Decline started soon after, resulting from structural flaws in the major nation’s political processes.  Symptoms include:

• growing domination of the financial sector in the politics of US and Europe (eg, the failure of regulators to rein in the technology and housing bubbles before they burst),
• the ill-designed stage 3 of the European Monetary Union started in 1999,
• Bush Jr’s tax cuts in 2001 and 2003 undercut the solvency of the US government,
• the US reaction to 9-11: the War on Terror’s massive changes to America’s internal political regime and external grand strategy, and
• the major nation’s inability to craft effective energy policy in response to the first signs of global oil production peaking (eg, rising oil prices).

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.

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• The economic and political regimes of the developed nations (US, Japan, Europe) are failing under pressure of accumulated debt, aging demographics, and their accumulated public policy errors (described above).
• Growth in the Emerging Nations (EM’s) continues, closing the gap with the major nations, as they adopt modern social and technological patterns.

Second, the foundations of the post-WWII’s geopolitical and financial regimes are washing away (we cannot yet see what will replace them):

• cheap energy,
• western leadership, with the US and Russia as the hegemonic powers,
• US dollar as the reserve currency,
• free trade (see here for details), and
• (since 1970) free capital flows between nations.

(2)  What happens next?

“Unless you expect the unexpected you will never find truth, for it is hard to discover and hard to attain.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia

Crowds are often poor at recognizing the early stages of change. Sometimes they remains delusionally complacent until they suddenly collectively see what’s happening.

Look at 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 large mobilizations began on July 30. Then panic.  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.

So far people remain calm, even in the worst-affected regions (doomed Japan and broken Europe). The emerging nations remains confident (probably due to their strong growth since 1998).  The US remains confident, sustained by its trillion-dollar annual borrowing by the Federal government — money burned to support the economy, wasted with no long-term benefits.   This calm can change suddenly, replaced by panic or aggression. Increased volatility seems certain, either way.

More specifically what can we expect?

(a)  Stressful politics, and policy errors

Stress affects political systems just as it does individuals.Decision-making usually degrades (unless we have great leaders), resulting in policy errors.  We become defensive, less generous — and define “us” more narrowly. Internally, politics might become factious zero-sum battles. International tensions also will increase. We’ll rely on the existing global institutions, however inadequate, since their drastic reformation (or replacement by new ones) will come only at the end of the transition — marking the birth of a new world order.

Fortunately the era of State-State war has passed, so large-scale military action remains unlikely, despite the mad cheering war-mongers. But small wars and 4GWs (aka low-intensity conflicts) might become more common.

(b)  Continued low inflation

The US government has thrown a “Hail Mary” pass (i.e., QE2, perhaps to be followed by QE3) to prevent a deflation potentially lethal for a high-debt economy like ours.  Despite years of confident, politically useful, but failed predictions of rising interest rates and inflation, many remain hysterical certain that we’re a Weimar-in-the-making.  This is typical of the confusion brought about by transitions. People run about with fire extinguishers while their house floods.  We face challenges like those of 1931 and 1937, but crowds see only 1921.

(c)  Expensive oil (ie, liquid fuels)

Global growth, from the EM’s, is slowly boosting oil consumption.  At some point, peak oil will further complicate our lives.  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 — offset by improved technology which lowers the cost of exploration and production.

We’ve passed the first marker: political peaking in 2008, when the Saudi Princes decided not to further expand production capacity (see details here). At some point production in the Saudi’s Gwahar field will begin its long decline. On that day world production peaks, for we cannot replace the resulting 10-15% (500,000-plus barrel/day) production lost each year.  Only the Saudis, and perhaps the CIA and SVR (formerly KGB), know when that might happen.  Or not, as peaking tends to occur unexpectedly — recognized, as in the North Sea and Cantarell, only afterwards.

What happens as demand increases but production does not?  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 may be unlikely to do so under current conditions, for different and complex reasons.

Peaking during the current crisis would have painful effects for all the oil-consuming nations.

(d)  How long will the transition take?

Large transitions take one to 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).

(3)  Can we predict the form of the new world order?

“Choice. The problem is choice.”
— Neo in “The Matrix Reloaded”.

We have entered a singularity. We cannot reliably guess about the pace of the transition through it and what lies beyond, despite the gurus who make confident predictions.  Some speak as if they read the 2100 AD Britannica. Others seem to channel Hari Seldon (see Wikipedia), as if societies evolve according to economic theories. They deny agency to the people who are the reality comprising those abstract “societies” and “nations”, and ignore the immaterial factors that knit powerless individuals into a collective will.

The future results from the choices we will make, individually and collectively.  Some of these we can foresee, some will be unexpected.  But until the moment of decision arrives we do not know how we will decide — let alone how other peoples will decide.

Today complacency is a delusion – or an enemy, encouraging us to waste our most valuable resources: time.

Once through this transition we’ll confront new challenges: demographic transitions (rising then falling populations), climate change, resource scarcity, the robot revolution (the next wave of automation), and others yet unimagined.  The end of history may lie in our future, but not soon.

“Therefore, mankind always sets itself only such tasks as it can solve; since, looking at the matter more closely, we will always find that the task itself arises only when the material conditions necessary for its solution already exist or are at least in the process of formation.”
–- Preface to A Contribution to the Critique of Political Economy by Karl Marx (1859)

(4)  For more information

(a)  See these reference pages:

• Articles about Peak Oil and Energy
• Studies and reports about Peak Oil and Energy
• All posts about the end of the post-WWII era
• All posts about the Financial crisis – what’s happening? how will this end?

(b)  Early posts (2007-08) about the end of the post-WWII world:

1. 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.
2. 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).
3. 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.
4. 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?
5. A picture of the post-WWII debt supercycle, 26 September 2008

(c)  Recent posts about the end of the post-WWII era:

1. The end of the post-WWII world is not the end of the world, 21 May 2012
2. The unseen but perhaps decisive grand alignment of the nations!, 22 May 2012
3. Which nations will make wise decisions under stress? Who will screw-up and fail?, 23 May 2012
4. The global economy is sitting on a volcano. What happens next?, 1 June 2012