Mish: Global Crisis Destroys 40% of World Wealth

What can I add? Read it…

Meeting date

The next meeting of our South Gippsland Futures forum will be on Thursday 12th of February at 7:00 pm, Foster Community House.

Another glimpse into the Abyss

This rather crude but informative video gives another view of the magnitude of what's happening. Remember we in Australia are but a flea on the back of this dog:

Why Foster? Why South Gippsland?

The fundamental choice I made about how my life was to be ordered was my decision to make attachment to place a priority over following a career. By making such a choice a very different set of values then follow from the ones dictated by climbing the slippery pole of career ambition. This is not to say that I haven't had any sort of career. I have, but it's been bounded and limited by a higher loyalty. I do what I need to do to live in this place, although sometimes that has involved working in other places for a while, such as in Indonesia and Thailand in order to set myself up financially, or Melbourne in the eighties when I needed more social stimulus.

By making such a fundamental choice, one's life is greatly simplified. It's easy to work out what your subsidiary values are. Because you will spend a long period of time in a local community, the kinds of artificial aids one needs to bolster one's prestige in a larger and more abstract social milieu aren't needed. What's the point of a prestige car when for better or worse, everyone knows what kind of person you are anyway? And in any case, the flash car doesn't look flash for long once your wife starts carting her goats around in the back.

Office and career politics can be a thorny issue in any job, but if everything doesn't hinge on it and you were only in it for the money and a bit of fun in the first place, if you fall off the slippery pole, it's no longer a shattering tragedy.

Of course communities can be toxic too, or just plain unlucky. It pays to back winners in this life. It may be admirable to devote your life to helping lepers in Burma, but it's not likely to be a great place to bring up the kids and you can forget the notion of participation as a full citizen in national life. Even in this wide brown land, there are places I personally would give a wide berth to. What's the point of being president of the Wittenoom Progress Association? In the same way and with the broadest and crudest brush-strokes, I would not consider anywhere inland of the Great Dividing Range. Too dry, too vulnerable to climate change and almost always too vulnerable to changes in single economic variables (export agricultural products for starters are exposed to market fluctuations, climate variations and land degradation through irrigation and dry land salinity).

I've got nothing against city or suburban living per se. There are vibrant and sustainable communities in cities and big towns, and the larger and more diverse a place is, the more reslient it is likely to be in the face of the changes which are now upon us. So small communities like Foster are liable to be less viable and more vulnerable than bigger ones.

But I'm used to living here, I've lived in a diversity of other places and looking at it with a cold objective eye it's got a lot going for it. And that's what you need: a cold clear look at the frying pan you're leaping from into which fire? What follows is Lloydy's rough guide to thinking about this sort of decision.

Sea or Tree Change? Nothing wrong with either, but think carefully about where you’re moving to. No low lying coastal properties! And if you’re thinking about a move to the tropics, consider how you’d go without air-conditioning, and the likelihood of extreme weather events such as cyclones.

Again, consider location before all else! What are you really after? Is what you’re seeking a realistic vision which you know will work, or is it just a remnant of a fantasy you had while trapped in the cube farm? You remember that weekend you and your wife had in the cabin tucked away in a rain forest a couple of years ago – that’s what you want! Whoa buddy! No it isn’t! In the end, there is a common human pattern which governs the good life. We need food, shelter, love and companionship, meaningful work and community. You move into your cabin in the woods and what happens? You’d forgotten about the mosquitoes, the leeches. You run out of firewood in the middle of a week of solid rain. Your wife gets run off the road by a logging truck and becomes too traumatised to drive herself anywhere. You find in winter you’re driving into town in the dark and home in the dark, dodging wallabies and wombats, not very successfully, and in eighteen months, the gravel roads hammer your gorgeous little European car to death. There are only two crappy TV stations. After your house warming party, you don’t see anyone for months at a time, until Christmas, when all your old friends turn up with their surly teenagers and have a holiday for free. You discover your close neighbours, who you made a big effort to befriend when you first arrived, are barking mad. They borrow your tools and never return them, and you find yourself having vague and troubling conversations with them at the mailbox involving long running feuds, guns and dark marital secrets. And all this is assuming the price of fuel still makes driving hundreds of kilometres a month, in and out of town, affordable!

Live in or very close to a town. Assume at some stage that you will need to do without a car at all. Choose your town with care. It should have a diverse population, with reasonable medical services and other professionals, and not be overly dependant on one crop or industry. Is it dependant on irrigation which may fail? Don’t live in a place surrounded by tall trees unless you want to spend every summer terrified by the smell of smoke. Don’t be sucked in by charming old buildings. And don’t buy low lying properties on the coast. Remember? Global Warming? Sea level rise? Long before the waves wash over your mansion on the beach at Mollymook, its value will have collapsed through sheer fear of sea level rise. You won’t be able to get insurance on it either. Be sensible!

Look at the people. Try and gauge their feelings about the place. Is it ruled on Saturday nights by gangs of drunken louts in noisy cars, looking for someone to fight? Get the local paper and look at the police reports. What sorts of crime get reported weekly? If it’s just lost wallets and speeding fines, with the odd break in of sheds on remote properties, it should be OK. Is the shopping centre full of a lot of empty shops? Look at the demeanour of the people you see in the street. Do you see lots of people in conversation on busy days with smiles on their faces? Are the young people friendly or surly? Remember everywhere has its oddballs, so don’t focus too much on them.

Talk to school teachers if you have children who’ll be going to local schools. You may be lovely cultured people, but the wrong crowd in a small town can destroy your kid’s lives, or force you to send them to boarding school. On the other hand, the right crowd will give them a confidence, straightforwardness, lack of cynicism and ability to mix with all types which they would never get in the City. They will be big fish in a small pond, and get the kind of attention to their education which you’d need to pay serious money for anywhere else. I know some remarkable groups of people who’ve grown up together in country towns and who’ve gone on to adult life staying in close touch with each other and doing great things, in particular a bunch of people from Mallacoota in East Gippsland who I’ve worked with on many diverse projects over twenty years, and who’ve become musicians, builders, writers and film industry professionals, and with whom you could trust your life.

So you decide to make your move. You find the ideal house, you have work lined up. Good. Now you need to get some tradesmen in to do some work and you’ve struck your first problem. It takes forever to get the builder/plumber/electrician. And beware of someone who’s too available. The good tradies are always booked well ahead.

Now you will be starting to measure your dreams against the reality. Just don’t forget the locals will be doing the same to you. Everyone is very friendly, but it all comes down to one thing. Are you a good payer? If you want to discover whether it’s possible for something to travel faster than the speed of light, mess a local tradesman around over money. Every other local tradie will know instantly and they’ll never return any of your calls. Oh, they’ll nod politely to you in the street and make vague noises about coming over sometime, but you’d better call someone from out of town if you want the job done in this lifetime.

This is the reality of life in a small community. Every act outside your front door is public act, and there are no private conversations. The small acts of kindness and patience will be noticed, and so will every insult and act of deviousness. Don’t run the person you bought the business from down in conversation with your customers. Let them do that, after all, it was their brother/uncle/ daughter in law. Treat everyone with equal respect and decency and you’ll gain a reputation as a good person and it wont do you any harm.

Everyone knows who the local dope dealer is, and who made a move on the teenage baby-sitter. In the town I grew up in people still spoke of a scandalous pregnancy resulting in a broken engagement which had taken place sixty years before.

The upside is that when disaster strikes, like a serious illness, or your house burning down, the community will get behind to help in a way that will astonish you.

Where the banks have gone (down the gurgler)

Here's a nice graphic which shows what has happened to the worth of the big international banks:

A picture is worth a thousand words...

There's a good graphic illustration of the debt problem over at Global Guerrillas. It's easy to see why the current financial arrangements can't go on.

A must-read!

An excellent essay (which I got onto via Ran Prieur) on why the current policies to combat the recession world-wide are doomed to fail, because the system they are designed to protect is finished: unsustainable. And then the essay goes on to give a very clear picture of what will replace the current system. No surprises here: it will be networked small business!

Our level of pain and suffering before we emerge on the other side of this disaster will be governed by extent to which resources are poured in to try and keep the current system of centralised capital-intensive large-scale production and distribution going. In other words, the more completely governments commit to subsidising the current system, the more complete and devastating the crash will be when it fails, because the alternative will not have had a chance to grow and take up the slack.

Enough of my talk. Read the essay (pdf warning!). It's long but every paragraph is a revelation. The fact is that hardly any of us understand the economic world we are living in, and those of us who do, don't know much. Read this essay and you will have elevated yourself to near genius level!

I'm adding something here after my original post: I think he does somewhat over-romanticise the life of the small manufacturer. Having been one myself for many years, worked my butt off and gone broke, it's necessary to point out here that every way of life has its own joys and sorrows. In small business, the learning curve is steep and it can be long. And to quote Tom Wolf, it can blow at any seam!

But whatever it is, it ain't boring. And we don't have a choice here, in the end. Unless we are prepared to go to some sort of neo-Feudal system. Or have it forced on us. I'll be publishing a novel dealing with a lot of these issues on this site some time in the next couple of months. It's set towards the end of this century, and while it's basically an entertainment I'm teasing out a few ideas in it about how a very different world could arise from elements which are present right now. Cheers!

Care

How much of our world do we really care about? What could be gone tomorrow without causing us any pain (putting aside anything that we currently depend on to make a living). I drove through Melbourne yesterday, and had to make a big arc from the inner suburbs through the arid north-west along the Western Ring Road, then to a few stops in West Footscray, then to Spotswood on the banks of the river, then to Yarraville and into the city along New Footscray Road and Docklands, and then to Dandenong and Lynbrook in the far south-east before the two hour drive back to Foster.

So much of Melbourne, new Melbourne, built since nineteen-fifty and especially since nineteen-ninety is just plain awful. Docklands is a miserably ugly and pathetic joke and its apartment buildings monuments to greed, social isolation and a culture that needs to spend as much time as possible looking at entertainment on screens to avoid seeing where and how it actually lives. The new and incredibly expensive ferris wheel there has all the aesthetic appeal of a safety cover on a drain, only on a grotesque scale. It gives its riders a wonderful view of what can only be described as the most inhuman unlovely semi-industrial landscape that the devil himself could have devised in co-operation with Australia's finest property developers, civil engineers, thuggish politicians, ethics-free architects, planners and an army of concretors, scaffolders, crane drivers and plumbers whose last aesthetic impulses had been beaten out of them at primary school or through a steady diet of crap TV and junk food. And it's all cost an absolutely staggering amount of money: ie lifetimes of work and natural resources. And how many people give a damn about any of it, would feel it carries great spiritual meaning for them? Not too many I would be sure. And how much will be of any utility at all without lashings of cheap fuel? Hah!

Many parts of Melbourne, generally those built before eighteen-ninety, are beautiful. And people feel strongly about them and will fight to preserve them. Yes I know there were lots of unlovely inner suburbs which might be full of madly-renovating young professionals now, but which were pretty much unloved until the seventies. Tastes change. But who will give a damn now or in the future if Jeff's Shed, or Dockland Stadium, or the Bolte Bridge, or any of the huge retail complexes in the City, or the nightmarish ones at Southland or Chadstone, Knox or Northland were to be demolished.

I see pretty much eye-to-eye with Jim Kunstler when it comes to modern architecture and the tragedy of suburban sprawl. None of us will care enough to save it when its hour comes, and that hour is soon. Then the best that will be said about it is that it will serve as a convenient mine of building materials for the generations, much diminished I fear from our present swollen numbers, who will come after us.

From Mish: Social Mood Will Define The Future

Boomers have known only inflationary or reflationary conditions for most, if not all of their conscious lives. Here is the pattern: Want, work, borrow, spend, enjoy, and worry about the bills tomorrow, as if tomorrow would never come.

Now tomorrow is dawning, the bills are due, and boomers are now entering end of life with a need to consume what they perceived would be a treasure chest of accumulated wealth that would allow them to sustain their inflationary lifestyles to life's end.

However, that wealth has now vanished in a giant deflationary two-step of collapsing home prices and a collapsing stock market. Note that those are symptoms of deflation not proof of it.

However, 15 out of 15 things one might expect to see happen during deflation are happening now, as detailed in Humpty Dumpty on Inflation.

Material living standards and associated expectations among even the lower working class and poor in the western nations have been raised to levels that will not likely be maintained during a secular deflationary crisis, let alone permit the lifestyles of the upper working class, professional middle class, and wealthy to remain intact.

A good post from Mish and a must read for those of us running a business. Check it out.

Trust

Just because something can't be measured doesn't mean it's not vital. I'm going to talk about trust, for which there is no unit of measurement. But like the air we breath, trust is usually most noticeable when it is absent. We have just been through a long period where trust has been present at many different levels in our society in sufficient strength to allow very elaborate and abstract structures to arise. Now we are passing out of that epoch, and this will force us into different set of social arrangements. How thoroughgoing this change will be and how pleasant or unpleasant life will be afterwards depends to a large extent upon which parts of our society experience a loss of trust and how deep this loss goes.

At the moment the world financial system is suffering a credit crisis. The word credit comes from the Latin credere, whose meanings include to believe, confide and entrust. Because banks don't trust each other or any institutions holding assets of doubtful value, the free flow of finance which is essential for big business and world trade has dried up. The banks don't trust each other because each knows of its own dire capitalisation problems due to holding doubtful assets. How has this problem of doubtful assets arisen? Because the people giving loans thought they could avoid the risk of defaulting debtors by passing the loan on and simply skimming a commission for setting up the loan. The economists and advisors from rating agencies who oversaw the trade in these loans made major errors of judgement: in other words, they were trusted and that trust has turned out to be misplaced. So we now have a loss of trust in the banks and in the experts who advise banks and other institutions. Talking of which, here's Shaun Micallef's interview with Tony Froth of the Reserve Bank of Australia.

But loss of trust in and between banks is just part of a general loss of trust in many of the higher levels of our system. The Chinese milk contamination scandal might be dismissed as symptomatic of a system which hides its endemic corruption, but what about the ramming of GM foods down the throats of consumers in Australia in the face of widespread public disquiet about the safety of GM products, where GM advocates so often engage in ad hominem attacks instead of addressing public's legitimate concerns? And when it comes to sources of objective information, more journalists are employed in public relations now than in conventional news outlets, which in any case are dominated world-wide by a few major players such as our Rupert, who are very obviously playing political games of their own.

At a personal level, many of us have had unpleasant experiences dealing with large institutions in everyday life. Dealing with our two largest phone providers is a case in point. Whatever the personal virtues of the human being one deals with over the phone, you know that they are prisoners of an amoral, sociopathic corporate culture which has as it's raison d'être the provision of the least possible service for the maximum possible return and powerful players in this corporate culture will use whatever resources are at their disposal to bend the public and legislators to their will.

And speaking of legislators, what about John Winston Howard, Australia's former Prime Minister, receiving the Presidential Medal of Freedom from outgoing President Bush? When reality gives us such theatre, no place is left for satire. But it also an excellent example of how the currency of trust has become debased at the political level. Two of the architects of a failed aggressive war which was launched on lying premises and who have each worked assiduously to undermine basic democratic freedoms in their respective countries in a quest for untrammelled power play a cynical game of mutual congratulation. Each leaves a legacy of weakened respect for the institutions of which they were a part. My attitude to Kevin Rudd, John Howard's successor as Prime Minister is held by many of my friends who voted for him, which is we hold little real hope for him doing any good, just as long as he is not as bad as Howard. And as for President Bush, his legacy is likely to be a greatly diminished respect for the Presidency which will translate into an important loss of legitimacy and power for successive presidents.

Loss of trust in the financial industry, in big business and in politics are necessary precursors for collapses in these systems. If the collapse is not to go further it is necessary that we act in ethical and moral ways in community, family and personal life. To the extent that we have become ensnared in immoral or unethical conduct in the pursuit of a career, we are complicit in the collapse of the current system at a higher level. But societies can survive and rebuild after collapses in the economy and in political systems. They cannot survive a corrupted community, family and personal life.

Hammering the economists

Sorry, I just can't let it rest. I know the recession hasn't really started to bite here but it will. Then we will wonder why we weren't warned earlier — a lot earlier. Economic commentators are one thing — I know some people might find this disturbing but very often commentators are just pimps for the industry, or naive, wild-eyed boosters. But economists, professionals advising banks and governments, should have a handle on the real world. And have they? IMHO with very few exceptions, no. This is shown by the chorus those who want to stimulate us out of the recession ie. shovel more coal into the Titanic's boiler after it's hit the iceberg.

Anyway there's an interesting article at Naked Capitalism discussing the teflon conscience of the economics profession.

"...that elusive American dream of having a country, rather than a country club..."

Ah, Dmitri Orlov! Even when he rambles he raises a laugh. Plus I love it when he lashes the economists (luckily I don't have any in my family: Christmas would be very difficult!)

"...and then there are the additional problems of poor advice and lack of authority. To build support for his plans, Mr. Obama must rely on the consensus advice of mainstream American economists. These astrologers to the wealthy, with their fancy astrolabes they call "models," may be popular during flush times, in spite of the feeble predictive abilities of their "science," but they start to seem down right foolish and feckless once the economy starts to implode. Still, these pseudo-scientists, with their pseudo-Nobel prizes and their tenured faculty positions, are quite entrenched, and will be difficult to dismiss, because the fiction they spin is so much more cheerful than the physical reality it is designed to obscure.

Add to this the fact that the financial and economic levers ofcontrol that are available to Mr.Obama are no longer connected to anything real..."

How long on the bumpy plateau before we reach the cliff's edge?

Here's a big quote from memmel, commenting on Gail The Actuary's post which I mentioned a day ago.

So I don't see the debt pyramid collapsing for purely financial reasons simply because collapse right now benefits no one I see it coming later and being forced because of high energy prices. How much later is tough I'd say 2011 at the earliest with a range of 2011-2012 it all depends on when energy prices start rising strongly again. As long as they are low the game will continue since people can trade increased energy usage for lower but still decent net profits.

As and example of the fact we probably won't collapse because of a pure collapse of the financial pyramid I'd argue that if it was going to happen it would have already happened if investors where going to demand high interest rates from the US because of fear of default we would be doing that now. Given that the financial system has chosen to allow the US government to print money at will we can assume they will continue to do so until it no longer does any good.

So at the end we I think will see a sort of Indian summer for the next few years even if oil prices rise since financial games will be able to offest rising fuel costs for a time. And as long as oil remains cheap I think the end game won't even start regardless of how many bad things happen in the financial world since we have accepted the Government backstopping everything. Thus with low oil prices I really don't see a end to the ability of the Government to keep things slumping along they could pull it off for at least a decade.

Memmel's writing can be a bit hard to follow, but his very clear thinking makes it worth the effort. Our big problem both as individuals and as business people (see my last post) is trying to work out what is really going to happen to the economy and when. It's worth reading all the comments on Gail's post (there are heaps!): memmel's come fairly far down the list.

One of the comments often heard when discussing the Peak Oil problem and the financial crisis is that human ingenuity will find a way out, and soon we'll all be able to continue again in the same old way once we sort out the current mess. I think this springs from a number of misconceptions about the situation we're in. They are (as I see it)

(a) We're not trying hard enough (people have become lazy/uneducated/selfish)

(b) Powerful interests/corporations are stopping the implementation of known solutions to the problem of oil shortages
and/or
(c) The sheer demand for solutions will produce them (science can produce an endless cornucopia of goodies given the will and the funding)

(d) Simple lack of understanding of the Peak Oil issue (by the majority of the population)

(e) Simple lack of understanding of economics (by nearly everyone)

Taking them in reverse order, (e) has arisen because the economic system is now fiendishly complicated, it has grown up on an ad hoc basis over centuries without ever being designed in the conventional sense but simply through the accretion of bits, and those charged with understanding it tend to wear ideological blinkers which prevent them from seeing it as it really is (see my post mentioning Glenn Stevens, Governor of the Reserve Bank of Australia..."I do not know anyone who predicted this course of events"). (d) is due to the scary, intractable nature of the problem (which stops the media and politicians talking about it), its lack of visibility in day-to-day existence and to similar intellectual issues which prevent economists from understanding economics. (c) is simply the casino mentality we've all grown up in, where life gets better because it simply does: that's been our experience all our lives! Why shouldn't it continue? And (b) is the fantasy of the powerless and uneducated. Which brings us to (a).

Like the mythical frog in the slowly heating pot of water, we don't seem to be fully aware of how much harder we are working these days to keep the industrial system functioning. Since the late sixties the amount of income a middle-class family has needed to get by has steadily risen. Way back then, any reasonably able bodied man could support a wife and several children while purchasing a house on a single wage. There may have only been a fraction of the consumer goods and food choices available which we have today, but the basics were fairly affordable. Now we are blinded by a Santa's sleigh full of of tricky toys, and every second person seems to be some kind of food aesthete, but even two young and well educated people will struggle financially to buy a house and while having a family. It's even worse in the USA where private health cover represents a massive burden for a normal middle-class family (see this excellent lecture by distinguished law scholar Elizabeth Warren who teaches contract law, bankruptcy, and commercial law at Harvard Law School).

Hours of work have become longer and longer, because the costs of maintaining the system are constantly rising. But most of us can't see any other way of doing it, and in any case it's all most of us have ever known. We're used to it. We're under the gun of obligations, expectations and massive debt burdens. And although we have more entertainment than ever, from cheap trips to Asia to addictive video games, from 8 Gig iPods to affordable BMWs, from twenty flavours of ice cream to unlimited internet porn, all this does is help distract and numb us to how trapped we've all become. And we have become very good at turning up and doing our bit. Our training is getting more effective, we're more disciplined as a work force, our productivity inches ever upward. Because it has too! But unfortunately externalities, in the form of Mother Nature, are going to impose themselves in a way which we will not be able to surmount. We are going to go bankrupt.

It takes unusual strength of mind to admit you've made a mistake, and that to continue on your current path will lead to inevitable disaster. It's easier to stay in denial, and that is is often the case for those of us who get in over our heads financially (particularly in business the first time it happens! The second time you can at least see it coming): we hope for a miracle to save us until the day the car is repossessed and the mortgagee auction sign goes up on the fence in front of our house. Whole civilisations are no different, and are even less likely to face the fact of unviability. So every thing is done to keep business as usual operating, to keep a smiley face on at all times, to paper over the cracks as they appear.

This is what the bailout of financial institutions world-wide is all about. The people carrying out these emergency measures know full well the risks they are taking and that they are laying up in store an even more dire disaster by avoiding one today, but they see no other alternative! And if they were suddenly to give up the game and walk away, they would be immediately replaced by someone else dedicated to keeping the show on the road no matter what! Because even the stupendously rich are trapped and are cracking under the strain.

We are going into a recession world-wide this year, and we will fret and worry about how we will get through it, but in the meantime governments in industrial nations everywhere, aware of the much graver danger we face (in a way which most of us are not), are fighting tooth and nail to avoid a far more dire financial calamity than a mere recession. They too are hoping for a miracle, even as the measures they are putting in place set the scene for a more complete crash down the road if there is no deus ex machina.

So how much time can their scrambling for bandaids buy us? That is something no-one can say for sure. Memmel's guess is from 3 to 10 years. I tend to agree with him, and while the looming recession will cut into our businesses profitability over the next months or years, I will be planning for the Big One, which will come because we will not be able to fight it off forever.

(For a brilliant, graphic and grim illustration of the last days of a doomed system, which shows how the dynamic plays out through the lives of individuals, watch Downfall)

Taking care of business

As I indicated in an earlier post, my job at the moment is to think through the implications of what's happening financially in terms of our business, which is a small retail plant nursery in a country town with a population of about 1500. Small businesses are highly volatile at the best of times, and a sharp and prolonged downturn will quickly shake out the weak and probably a lot of the strong as well.

There are a number of salient features of small business which need to be kept in mind. One is that small business people are generally hard workers and when things get tough, they tend to think the solution is to work even harder. The old adage of when you find yourself in a hole, the solution is not necessarily digging deeper should be on the wall of every small business person's office. And there is no better way to find out your weak points than to work for yourself, where every mistake you make rebounds to hit you in the face. undamped and unexcused by the presence of co-workers who can conspire with you in a normal work place to cover your tail or engage with you in mutual fantasies of victimhood and blaming others.

The easiest way for me to think about how we might survive the coming shakeout is to imagine a future beyond the immediate crisis. There will be small businesses in that future — in fact, there may well be very few large businesses which survive, but where human life exists so does small business. So what will these businesses doing, and how will they be doing it?

My guess is that the main changes will be in no particular order:

1. The end of highly leveraged finance and the types of business which need to carry a lot of debt
2. A retreat from franchising and from standardised centrally administered branding
3. A shortening and simplification of the supply chain with more localised sourcing of goods
4. A retreat from extreme specialisation
5. Less reliance on the complex, fragile business systems with short useful lives spawned by the IT revolution
6. Less reliance on outside specialists of all kinds
7. More stable work forces and more reliance on skills within the organisation: these two necessarily go together
8. More close co-operation between businesses in particular communities and less reliance and oversight from government above the local level
9. The disappearance of luxury goods and service businesses except from the larger urban centres
10. The radical shrinkage of small businesses such as financial advisors, travel agencies, vehicle dealerships of all kinds including recreational boating and recreational vehicles, computer repair and sales businesses, long distance trucking, businesses dependent on contracts to government or big business
11. A re-emergence of vanished businesses such as shoe makers and repairers, blacksmiths, seamstresses, local furniture makers and upholsterers, tinkers, potters and brewers
12. A changed security environment which will entail new ways of thinking about how to protect business assets. In some communities this will result in the emergence of standover men from local Mafias selling "insurance" but in more forward thinking places, traders will pre-empt this development by banding together and making their own private security arrangements, as the State is forced to contract from its traditional role because of shrinking tax revenues

This list is by no means exhaustive. If you are a small business person, what I've outlined here will give you a rough guide for thinking about your own strengths and vulnerabilities, and how you might bridge the gap between now and then.

As an initial step, think about your debt levels and general vulnerability to financial constriction. Do you have an informal line of credit which the bank could call in at any time, leaving you high and dry? Are your customers vulnerable to financial crises? Is your business essential or optional? Are your suppliers reliable or diverse enough for you to cope with interruptions? How long and vulnerable is the transport chain to your business or community? Are you dependent on government or big business for your work? Are you dependent on distant technicians and experts for your viability? Is fuel a major component of your enterprise? How close are you, geographically and logistically, to your market? What vital inputs or components sourced from elsewhere could make your business vulnerable should they become hard to get?

Then think about what your strengths might be and how you may take advantage of a retreat from big business and a general reduction of manufactured imports. Not to mention that people (in communities which have remained viable) will tend to shop more locally. Can you cultivate local suppliers? And remember that no matter how hard times are, people still need their entertainment and escape from their immediate circumstances (music and movies were HUGE in the Great Depression): their little luxuries and indulgences. Young people fall in love, get married and have babies. Food, clothing and shelter are always needed.

Useful information sources: educate yourself!

An important new post from Gail the Actuary at The Oil Drum. It's a measured look at the outlook for 2009 concentrating on the financial fundamentals underlying our industrial economy. Lots of valuable comments after the main article as well.

Also worth a look if you want to understand the crisis in world finance, this series on Youtube of easy-to-understand lectures in digestible chunks by Sal of Khanacademy. It clearly shows why the financial system is so vulnerable to collapse at the moment.

We're happily floating along in our little bubble while somewhere else: kaboom! (for the moment at least)

It's a strange experience we're having here in The Lucky Country, as we ease our way into the New Year with a large proportion of us still on holidays. We traders in Foster have had a bumper Christmas season, the Main Street is crowded with carefree tourists and anyway it's hard to think about business when your body is in beach mode. Yet the news coming out of the USA and Europe is of The End Of The World As We Know It. It seems a jarring disjunction and perhaps it's understandable that many of us, including most of our leaders, simply cannot believe that It Can Happen Here.

What we are witnessing are the first stages of the collapse of our familiar, comfortable industrial civilisation, which most of us have been in since the cradle, and which we fondly expected to be in until our demise surrounded by sobbing, well-fed loved ones (if we haven't irritated them all too much in the meantime).

Dmitri Orlov, an individual who witnessed the fall of the Soviet Union and who has been predicting this current collapse for some years, has most clearly mapped its likely progression. He talks about the five stages of collapse. Stage one is financial collapse, which we can currently observe on television or in the newspapers. It seems abstract, hard to understand and distant from our day-to-day world. We idly wonder if financial types in dark suits will fling themselves from high places on city buildings, before we move on to the sports section and the weather.

This is what we have seen so far in Australia. Various high-fliers have come undone, while the distant and as yet invisible (to us) financial tsunami has sucked away the liquidity from our financial shores, disclosing various previously hidden bottom dwellers of unedifying appearance, as well as revealing the nakedness of those emperors of business who only a few months ago seemed to be clad in rainments of glory. Naturally not many of us feel too badly about all this and are experiencing, understandably although not particularly creditably, a certain schadenfreude.

Unfortunately Stage 1, Financial Collapse will be followed in due course by Stage 2, Commercial Collapse. Those born in Australia after 1975 are unlikely to remember going through anything like this, but us older folk have had a taste. As an adult, I experienced the recession of the early seventies, the late seventies, the early eighties and the late eighties/early nineties. To quote Dmitri Orlov, If Stage 1 collapse can be observed by watching television, observing Stage 2 might require a hike or a bicycle ride to the nearest population center. Suddenly one notices lots of empty shops, lots of cars with "For Sale" signs on them on the sides of major roads in the suburbs. Everyone upon whom the axe has not already fallen trembles with anxiety that they may be next. People become isolated by fear and insecurity. Just as the financial crisis can bring the mighty down, revealing unedifying ramifications within the ranks of the previously respectable, so among us regular folks crises bring to the surface our insecurities, relationship problems and the consequences of unwise or self-indulgent behaviours or investments.

There was a time when this downturn was visible on the distant horizon, and it was possible to prepare for it as far as one ever can. Very few of us did, which is regrettable but entirely understandable. For younger people, it was something outside their experience and us older folk often felt ourselves fenced in by prior investments, relationships and obligations. We have been through what can only be described as a kind of mass delusion, where even if we felt doubts about the direction everything was going in, our feeble voices were drowned out by those in the majority who believed the party would go on forever. This mass delusion has been at every level of our society, and even those who you would think should have known better have been sucked in.

The result of all this will undoubtedly be a radical loss of legitimacy for certain authorities and professions, particularly politicians, economists and business leaders. A dangerous tendency will be to see the hand of conspiracy where in fact there was mere incompetence. Perhaps one saving grace will be a sense of shared misfortune. It is the high fliers who've been hit hardest and earliest, and for the rest of us, we will be able to take comfort in the fact that much of what we are about to go through will not be possible to sheet home to mere personal failings. Our fate will be for better or worse a shared fate, and whatever we rebuild on the other side of the disaster will be a result of communal effort, and not a winner takes all game.

After Stage 2, Dmitri Orlov talks of Stage 3: Political collapse. Faith that "the government will take care of you" is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance. This is a very dangerous point to get to, and it's quite possible that the USA could get there quite quickly. It's difficult to imagine Australia going this far. But it's too early to say yet. Much depends on whether any of our political leaders can grasp what is really going on, because really poor leadership can bring it on. What could also bring us undone is really stupid expectations from the general public. A sense of entitlement coupled with an unrealistic world-view, an addiction to conspiracy theories and scapegoating and a violent and predatory outlook (the situation which has obtained in the USA under George W Bush) will guarantee poor leadership and a slide towards Stage 3.

The major problem is that we are not going to recover from this downturn in the same way we have in the past. Then the music slowed down but restarted some months or a year or so later with a similar tune. But this time, with the winding down of fossil fuel availability due to our rapid decline in local production and the extreme unlikelihood of us being able to run up even more foreign debt in order to import the oil we'd like, we are not going to re-emerge in the same world.

Stage 3 collapse is the situation we see in the Democratic Republic of Congo now, are likely to see in Zimbabwe soon and can look forward to for Pakistan. It may seem quite bizarre to imagine the USA going like this, but the fissures in society brought on by the destructive activities of the Bush administration, the level of political corruption at Federal and State levels, the absence in many parts of the country of effective and inclusive local communities, the racial divides and the fundamentalist and paranoid extremism of large sections of the population make an ominous mix. See John Robb's latest post for a view of how things may develop in the South-western USA.

Stage 4 and 5 of collapse are not yet relevant to our discussion and hopefully will never be. Our task is prevent collapse from moving beyond Stage 2 into Stage 3.

2009 financial outlook

From Minyanville: While peak social mood helped propel the movement toward increasingly open social networking platforms and large scale interactions, the rush to disassociate from the crowd will inevitably manifest as a reduction in broad network exposure and a preference for close-knit, tighter communities. Beneficiaries of this movement will be families, small groups and, to an extent, neighborhoods.

Read the whole article.