I have been trying to finish this entry forever, but power has been out here for almost three days now due to an electrical storm a few nights ago. I have been running off portable batteries, charging once in awhile when we run the generator.
One debate I seem to have over and over again with one of my fellow expats here in Ghana is the success (or lack thereof) of central banks in controlling the unfolding economic decline.
This friend of mine insists that central banks will do what they have always done, which is oversee a gradual decline of economic power in the West, while ensuring enough volatility that it is hard for someone to sit in a long (or short) position and profit all the way down.
My thinking is informed by the behaviour I have observed in dynamic systems. Systems behave simply and change slowly over more than 99.9% of observable time, but behave unpredictably and change very rapidly during the remaining <0.1% of observable time.
The behaviour of dynamic systems, like climate, is nearly linear much of the time, but is characterized by episodic reorganizations. These reorganizations resemble car accidents, in that your life afterwards may have no similarity to your life beforehand. Consequently, trying to predict the behaviour of a system after a bifurcation is as difficult as predicting you will be in a car accident next week.
About all we can do is anticipate when the bifurcation will take place.
Central banks normally try to hide what they are doing, because they don't want the general population protecting themselves against the consequences of their actions. If you need deflation, you also need the general population to be hurt by it, otherwise there is no benefit. However this requires a prediction of what the general populace is going to do, and I think that this will prove the weak point of central bank operations.
For instance, the future operation of the system may well depend on people continuing to make their mortgage payments, even if the value of the house has fallen below the amount owing. Between the holy hell of MERS and all the recent foreclosure failings, it seems likely that more and more people are going to give up on those mortgage payments.
Whenever the central bank tries to interfere with the workings of the economy in order to bring about a desired change, the general population is going to have to act in the manner predicted by the genius economic modelers at these banks. But modeling is really hard, in this case because the behaviour of the population is unpredictable.
Here is an example. Some years ago the Canadian Mint introduced a one-dollar coin with a picture of a loon. The coin was made of nickel. The official opinion expressed was that Canadians would love these things and would call them “dollar coins” or “dollars”. But even before the coin was released, Canadians began calling them “loonies”, a name which has lasted to the present day.
A few years later, the Mint decided to introduce a two-dollar coin. This coin depicted a polar bear (now two polar bears). Once again, there was an official opinion—the public would call this coin the “Bear”. Of course, they were almost immediately known as “toonies”.
So much for the official prediction of public behaviour.
When the tipping point comes—and it likely won’t be recognized until afterwards—the changes will be broad and deep. I don’t know what our new world will be like. But I would guess it would have a lot less government and the economy would be more focussed on actual production and real wealth creation rather than the growth of paper assets.