The capitalist singularity

Why the balloon has to burst

The Capitalist Singularity - The moment, recognised historically, when the first domino fell.

I’ve been reading the excellent book Sapiens by Yuval Noah Harari. In it was a lengthy piece about capitalism and one concept in particular caught my attention. While I did know this, I don’t think I had put the two pieces – capitalism and credit - together strongly enough.

This concept is cogently argued by many learned people, Nate Hagens for one. But, and it’s a rather large but, it is far from common knowledge. In that regard, it’s like Modern Monetary Theory where I see Nobel Prizes are still being dished out for the current economic orthodoxy that doesn’t work (in theory or practice).

A slight aside – have you heard of the Long-Term Capital Management debacle?

Set up by American economic geniuses, including Nobel prize winners Myron Scholes and Robert C. Merton, the wealthy banks piled money into what they assumed was “a sure thing”. To cut the a long story short, the economic model they developed was based on the concept of arbitrage – the ability to place two bets where there are only two outcomes and either one will win you money. Like betting on the All Blacks to win at $2.05 and finding a different bookmaker to back the Springboks at $2.05. Put on shitloads because you’re guaranteed a 2.5% return.

Sound too good to be true?

“Long-Term Capital Management did business with nearly every important person on Wall Street. Indeed, Wall Street feared that Long-Term's failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system. the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets.”

The term is hubris – yet all the usual suspects are still drinking martinis and watching the sunrise. Only the poor get burned when financial institutions collapse – that’s how capitalism rolls, baby.

Back to capitalism and credit.

Credit isn’t a recent phenomena but, historically, humans have been more pessimistic about the future. Why would you lend money when you thought the chances of getting it back weren’t flash because people might die of the plague before they could become successful? Thus, human society rocked along at a pedestrian rate - starting a new business was hard because you had to save first (and the chances of dying young were much higher).

Enter capitalism (supercharged by the discovery of oil). When the future looks rosy, lending money is a great way to make money without doing any actual work or getting your suit dirty. I’ll give you millions to invest in a business, you’ll give me my money back plus interest and we’re both happy - actually, I’m delighted as my suit doesn’t need dry-cleaning.

The balloon starts to inflate.

In 1974, the removal of the gold standard allowed countries and banks to create money out of thin air – it’s called fiat money. Only about three percent of the money in circulation exists as money – the rest is credit. This money created out of thin-air, or credit, increased the flow of air into our capitalist-economy balloon.

Photo by Niklas Kickl on Unsplash

Do you see the problem?

People who are borrowing money have to pay it back plus interest – this is only possible if the balloon keeps expanding. If the balloon contracts (recession) there isn’t enough money to cover the future bets plus interest. Defaults occur.

I think of credit as a claim on future wealth (and happiness!). That is why the word “recession” creates such nervousness across the globe. Less wealth tomorrow but the same amount of creditors wanting to be paid – the math doesn’t work.

The capitalist system - driven by credit - must pop unless growth occurs indefinitely. And, as most, if not all, human growth over the past century has been powered by oil, the balloon is huge. And oil is not infinite - not in any meaningful human timescale.

“If we were to grow the global economy at 3% a year, as most governments and institutions expect, we would use as much energy and materials in the next 30 years as we have in the past 10,000. The moment we are no longer able to grow sufficiently to service debt and financial claims, there will be a musical chairs moment in global financial systems.” The Great Simplification

That’s 2053. I’ll be 87 (hopefully). My children will be 52 & 53.

The last word - we need to reimagine society post-capitalism and the clock is ticking. We can either do this and start to realign society to lessen the impact of a world with less energy (and less hopeful creditors) or wait for the “Capitalist Singularity”.