“Alright you Primitive Screwheads, listen up! You see this? This is my boomstick! The twelve-gauge double-barreled Remington. S-Mart’s top of the line. You can find this in the sporting goods department. That’s right, this sweet baby was made in Grand Rapids, Michigan. Retails for about a hundred and nine, ninety five. It’s got a walnut stock, cobalt blue steel, and a hair trigger. That’s right. Shop smart. Shop S-Mart. You got that?” – Army of Darkness
Yes, these are the grooviest underwear in the world. And yes, I wear them all the time.
The world truly is a web – it’s very interconnected in ways that are obvious (snowy airports slow down planes and mess up your travel plans due to Cleveland. Cleveland!) to less obvious (gold drops in price during a stock market crash because all asset classes are impacted) to obscure and sometimes counterintuitive ways (a drop in men’s underwear sales indicates a huge drop in discretionary spending and a commensurate rise in skidmarks).
When I was younger, it seemed like the economy was tied to regions – the south might be doing well while the west was in an economic slump. One time we had a family stop in our driveway to ask for a cup of flour so they could make gravy at a campfire as they drove from some backwater southern state to California. Pa Wilder got them a cup of flour and some other things, canned goods and such – the little girls in the back of that beat-up car looked very small as their parents struggled to find an opportunity that would give them a future. (Yes, that image has always haunted me – I’ll never know how that story turned out.)
More recently, the national economy of the US has acted more like a single unit and less like a group of regions. Part of the explanation for “why” is banking. The world we live in now of large banks crossing state borders is relatively new. Banks, previously, had been firewalled and your account wasn’t with CitiFargo®, it was with a specific bank building in a specific town. One time I had to cash a check in a major metropolitan area (I was quite young). I tried to cash it at a bank with the same “name” – but it turned out that unless I went to the “main” bank the check was written to, I could not cash the check (for whatever reason I needed cash, not a check).
So, instead of hundreds of banks acting independently, we’ve created a small number of ever larger banks (the top three banks in the United States have over $6.5 trillion in capital – more capital than the next twelve in size have, and almost as much money as the US government spends on cream cheese each year) and these very large banks operate nationwide. So, rather than having your loan denied by the local banker, an algorithm in a computer in a databank in New York denies your loan. I’m kidding. If you’re breathing, you can get a loan. Take as much as you want. We’ve got your children, too, right?
Now the economy, and the loans, move more as a unit. Other pressures creating the web include the increasing specialization and centralization of manufacturing across the globe. Today, more goods are manufactured farther away from their final use point than at any point in history, increasing the economic connections across the world – over 50,000 (not a typo) factories closed in the first decade of this century in the United States.
Those global trade connections create immense wealth as trade flows across the world, but they also create a significant risk that’s never existed before – the idea that economic activity in China could devastate the United States, or vice versa. It may sound far-fetched, but the Federal Reserve’s monetary policy coupled with food aid programs plus ethanol’s mandated use as a gasoline additive led to the Arab Spring and the current civil war in Syria.
Huh?
Yeah.
The Federal Reserve, in order to stimulate the economy of the United States, dumped massive amounts of money from helicopters. Just kidding. They gave it to their friends. Anyway, this massive dump, known as Quantitative Easing, caused the prices of food to go up everywhere in the world, especially in the Middle East. And food aid programs (along with geography) actually lower the number of people engaged in farming. How is that? Well, if you farm and do really well in Egypt, you have to compete with free grain dumped in Africa. How do you compete against free? You don’t. But since the United States started mandating that ethanol be added to gasoline, it’s lowered the amount of food available. Why? Because the only way to make ethanol is to use stuff we could either eat or feed to some nice fat cow to make steaks.
It sucks to be Egyptian. It sucks more to be Egyptian when the prices of food go out of sight. The result of hungry, angry people? Rebellion, revolution. It’s ongoing in Syria. And it’s certain that over 500,000 people have died in the various conflicts after the “Arab Spring,” which was brought about . . . due to economic policy, “free” food, and food turned into car fuel.
Pulling at one bit of yarn in the sweater will end up unravelling the whole sweater – it’s all made of the same yarn. The global economy is similarly connected. And in order to make it more profitable, we’ve made it more efficient. Efficiency is good, right? Sure! The factory goes from one shift to three, and produces almost three times as much stuff if it goes 24 hours per day. But by doing that, if we lose that factory, we’ve lost three times as much production as if we’d done it inefficiently. A natural consequence of efficiency is higher profits. A side effect of efficiency is higher overall risk – the system is working at nearly full capacity, so the loss of any significant component places the system in deficit. There’s a shortage somewhere if the system runs into trouble.
That explains why the two Gulf Wars brought about huge price increases in oil – the system had to raise prices to allocate the oil to the most important (or richest) users and the world oil production system simply does not have “instant” capacity that can be added – the lag between supply and demand is measured in years. The price of oil acted as a retardant on the rest of the economy – a friction. Like a tax, it raised the price of everything that required energy to produce and ship – in short, all material goods were impacted, but nice sunsets were still free. Businesses that lived at the margin of profitability disappeared. Men’s underwear sales went down – yes, this is literally the last thing that gets purchased in tough times – no matter how bad, you can always wear the underwear another week (skidmarks and all).
But failed businesses don’t pay a paycheck. And newly unemployed people don’t eat out (or buy underwear) – even McDonalds® sales plummeted during the last big recession. And so McDonalds© doesn’t hire people. Those people don’t go to eat out, either. It’s failure. But it’s a failure that leads from one failure to the next, like dominos knocking each other over – something nerds call “cascading failure.”
How bad was the last recession? Certain sales in basic chemical precursors . . . stopped. Credit dried up – why would you lend to someone who might be going bankrupt?
Here are some actual examples that I was aware of during the 2008-2011 collapse . . .
- At some point – sulfuric acid production in the United States . . . stopped. Sulfuric acid is known as the “king of chemicals” because so many, many things depend upon it, like The Mrs.’ glass eye or her prosthetic leg. I know one producer of sulfur stopped producing for over a month. Why? No one would buy sulfur – at any price.
- Rail cars stopped being useful. On my 18 mile drive to work, I passed by (mainly) open line railroad. There were a few miles of siding (siding is the place where they switch cars). I noticed that the siding began to fill up. And it filled up further. Pretty soon there were miles (literally miles) of railroad cars sitting – not moving. Not moving any product.
What happened? We ended up putting 480 volts through the heart of the American economy with borrowed money and jumpstarting Frankenstein back to life. I’m not sure that we can do that again. The debts are higher. The excesses are greater. The PEZ™ supply is at a 20 year low.
Thankfully, they still ship ammo by mail. And I’ve got some really great underwear that will probably last for a long time. Does your underwear have chainsaws, shotguns, skulls and “groovy” on it?
Yeah, I didn’t think so.
