11. The Future
The western economies have been in decline for years. Most Western Nations have only maintained 'growth' over the last decade because of massive borrowing by their populations against a background of declining domestic production and increasing State expenditure. To create good 'growth' figures all Governments have had to resort to manipulating their official data. The difficulty is that it is only possible to manipulate data for so long and then reality intervenes. Only now has the size of the large empty void that underlies the World's financial structures become apparent. The current financial crisis is no more than this void collapsing. It will be a painful ride downwards and even as things are in decline no Government or Central Bank will ever admit what has happened. All the official agencies will keep on producing modified data to reassure voters and the banking sector that all will be well. Everything now depends upon confidence. Providing that most of the population believe that their future is safe then the world will keep going. If confidence is lost then down will be the only direction that things can go. Only if there is confidence in the World's economy will people invest, work for the future and most important of all borrow. If it is seen to be pointless to work, to save and to invest in the future then a very different financial structure will have to evolve over the next few years based on socialist principles with a demand lead economy. Already this process is well advanced with governments taking over the banking sector and prescribing their actions.
Inflation is in many ways a by-product of the democratic process. Every time that people vote they always support the party that promises them the most. It is hard to imagine that many people would vote for a politician that promised to cut expenditure or to reduce their standard of living. For the majority of the voting population there is no financial crisis because they derive their income from the State. They either work for the State or are dependent on the State and providing the State keeps supplying them with the essentials of life then they will be happy. Most of the population of the UK now expects to get ever more without actually doing anything themselves and few stop to wonder how this can be - after all why should they care providing that the gravy train keeps working. In fact, the current financial difficulties mean that those who are sponsored by the State are better off in a recession than they would otherwise be as retail prices are forced lower. The Labour Government would probably argue that its job is to protect the interests of its key supporters at the expense of the more prosperous and able in society. This means that they will have to seek every scrap of additional income that they can from the private sector. It is also clear that any new incoming Conservative Government will not make any real attempt to cut government expenditure as this would alienate voters. The way that things are progressing at the moment the British Government will soon manage over 50% of the UK economy particularly as it now controls the banking sector. At that point one can easily argue that the UK is a command lead economy. The only real challenge for the British Government over the next few years will be the need to find new ways to hollow out the historic wealth of the nation now that they have over played the inflation / growth card.
The Government was, and still is, prepared to sacrifice the savings and the thrift of those who place their money in banks by lowering interest rates in the hope that growth will miraculously restart. Even if this was to work then all that it would do is to keep an unsustainable situation running for a little longer. In the same way that the human race needs to establish a more balanced and simple lifestyle that does not damage the environment then so the Government needs to rebalance itself in a way that it only spends the wealth that the country can afford. UK plc is already bankrupt when the British Government's future liabilities are taken into consideration. It is also clear that the only thing that the current Labour Government can do is string matters along until the next election and then hand over a total disaster to a new Conservative administration. Of course, the incoming Conservative Government will have absolutely no idea what to do and will be faced with an unmanageable wall of debt. What is clear is that when the current downturn stabilises itself, the world will be a very different place. People's disposable income will fall dramatically over the next 5 years, pensions will fall in value, many pension schemes will fail, and the largess of Government will have to be dramatically cut back.
There is a lot of talk now about price inflation falling to 1% or less but this is only happening because companies are slashing their inventory. All the companies, in the various supply chains that feed the western nations are cutting back their throughput and slashing their inventory as they seek to survive. From a company's point of view if they can get enough money from selling their inventory to cover their outlay and their fixed overheads then at least they have not made a loss even if they have not made a profit. Many companies in the supply chain also need time for contracts with manufacturers and suppliers to run their course. Those companies that are able to retrench and to survive will be very cautious in the future and handle just what they know that they can sell. All that is then necessary is to work out how long it will take all the firms in the supply chain to moderate their throughput and to stabilise their position and it is possible to work out when the days of the bargain will end. Many contracts that are entered into by retail outlets are for one year. This means that by the end of 2009 many retail prices will start to rise. Many businesses will close in the next two years which will make matters even worse. Once a company has burnt its fingers it will take time for it to forget the lessons of the past particularly if it is still nursing a loss. Those that cannot downsize successfully will be gone within two years. Once a market has lost its spare capacity prices always rise rapidly when there is an increase in demand. In other words when things level off and start to rise there will be a high level of price inflation because there will be a lack of capacity.
In a recession there is always a drop in retail prices as inventory in the supply chain is sold off on the cheap and then a massive increase in prices as new capacity is brought online when things recover. Retail prices will then rise relative to disposable income as the amount of competition is reduced. A good example of this is the way that crude oil prices have fallen dramatically in the last few months as there is now a glut on the world market. However, a more detailed examination of the oil market makes an important point. The amount of refined petroleum products in storage, like diesel and petrol, are at an exceptionally low level. In other words, part of the reason for there being a lot of crude oil on the market is because it is not being refined. As soon as the oil price bottoms and demand for refined hydrocarbons starts to rise the refineries will buy as much as they can so that they can convert the cheapest possible crude into inventory. If everything works out well for the refiners, they will make a fortune. For them it is just a matter of timing.
After a long period of decline creating a new business or expanding an existing business takes time - say a minimum of 3 years - and the cost is considerable. Many businesses have consumed their own reserves and borrowed to stay in existence and ultimately this money will have to be replaced. The other logical consequence is that in future businesses will keep less inventory so that the commercial world will be even more fragile when the current recession levels out. Businesses in the West will be damaged far more than low cost producers in developing countries. As far as the Western economies are concerned there will be no great commercial recovery. In fact, any glimmer of new development will be limited because western companies will have to carry even higher social costs as State liabilities increase dramatically. In 5 years time the headline financial data might contain 'reassuring' figures but this will happen because of inflation and a general debasement of the economy and not because of real business growth. To make it possible for its expenditure to increase the Government has to have inflation, to print money, to increase borrowing, and to increase taxes. This means that the final outcome is inevitable and will come just as the current financial crisis has done - very suddenly. At the moment only Iceland and a couple of Eastern European Countries are seen to be at risk in the Western sphere. However if all the major countries in the EU were seen to be at risk of collapse the judgement of the banking system would be total and very quick. Imagine a scenario where the British Government could not pay its Civil Servants or meet its health and pension obligations because no one would lend it money. What would it do then?
The British economy is running down very fast. Eventually the British Government will not be able to go on raising money by issuing gilts because it will become very apparent that the UK economy is bankrupt and eventually there will be no one who will be prepared to take the risk of investing in the pound. The British Government will then have to go around helping itself to any source of finance that it can lay its hands on to meet its short term commitments. There will be a levelling out in three years time and then there will be another drop as the State will have to continue to hollow out the accumulated wealth of past generations because it will have no other option. What is certain is that the current recession will result in the net wealth of the UK dropping very dramatically.
It is only logical to ask if the current situation can be salvaged. There are many different scenarios that can be considered so the answer has to be yes it can but it would call for a fundamental reappraisal of the way in which the population see life and the way in which society operates. The difficulty is that standing still is not an option for any politician in a democratic country as the population expects ever more year on year. Halting the process of national decline would require a fundamental revision of how society conducts itself. If the population consisted of intelligent reasoning hard working people then it would be possible to structure a society where there is little or no growth, little or no borrowing with the population just producing the materials that are required for everyday life. It would be a case of putting the old social structures back in place and winding the clock back to say 1950 or even 1930. Unfortunately, the electorate will not accept this magnitude of drop in their standard of living. As it is, the Government is set on generating ever more activity for little or no benefit. The current economic mindset is that providing that there is lots of activity all will be well. This is no different to many other biological systems. When population collapse is imminent, many animals indulge in ever more vigorous activity just as their resources are exhausted. Managed conservation of limited resources is not the natural way. If future generations are to stand any chance it will be necessary to look at what society does and to determine what is necessary for a sustainable existence both commercially and environmentally.
It would be strange if it were not possible to link social development with commercial and environmental sustainability. If the British Government was to reduce its expenditure to say 25% of GDP it could stop using the printing presses, interest rates could rise back to a proper level of say 10% and inflation would miraculously stop. All the current frantic thrashing around would soon abate. There would be a period of pain as the financial systems settled down but within a few years matters would stabilise themselves and a period of low or even zero inflation would then follow. However, the chances of being able to persuade millions of people that the Government should try and wind the clock back 60 years is highly remote unless it is forced upon them - which it will be eventually.
Most of the population are far more concerned in having an easy life than they are in the global environment or their future prospects and those of their society. For the UK to survive it would be necessary for State expenditure, as a percentage of GDP, to drop a long way back from its current level. This would necessitate a dramatic cut in the size of all branches of State expenditure. The Health Service, the Civil Service, Social Services, education, the military in fact all branches of government would have to be cut back drastically. Most of the population would never accept such a reduction in the size of the State. Also imagine the task that would be involved in persuading the bulk of the population to have a maximum of 2 weeks holiday every year. Imagine persuading every women that she should have three sets of clothes and that the era of having dozens of pairs of shoes was at an end. People would have to go back to growing and eating fresh food, and cut their waste to a minimum. It would only mean reacquiring skills that were lost in the 1970s and learning the true meaning of the words like conservation and sustainable from a personal perspective.
The current global economic recession is probably the best thing that could have happened for the global environment. Anything that helps to reduce consumption and persuades people to behave in a more frugal manner helps to protect the environment. What is clear is that the environmental lobby will get what it wants but not in the way that it expected. Over the last twenty years the British Government has been doing very well at cutting the country's carbon emissions. Destroying the countries manufacturing capability and then its service sector has seen a significantly reduction in the country's carbon footprint. When the older coal fired power stations fail in the next decade carbon consumption will fall even more. Of course, people will have to get used to having power cuts but at least the British Government will reach its carbon reduction targets. Of course, this has to be seen against some of the most classic pieces of double talk that politicians engage in. Politicians often talk about sustainable development. It is not possible to protect the environment and to consume more. By definition all growth is bad for the environment so it is impossible to put the words sustainable, development, growth and prosperity together in the same sentence. For example, more than half the energy that a car consumes in its life goes into its manufacture. Getting rid of older cars and replacing them with new ones can never be good for the environment. Keeping old cars running for longer is the best option. Producing cars that can be repaired and upgraded is better for the environment and in the end for an economy like the UK that is based on importing. This means making cars less sophisticated and less plentiful which is good for the environment but bad for employment and taxation.
None of the latest eco technologies, with the possible exception of geothermal energy, will ever work on a large scale yet most people believe that the future lies with green technology. In the case of electric cars there is not enough selenium on the planet to make all the batteries that would be required so this is a non-starter. The hydrogen fuel cell is an option for the future but this is a forlorn hope. There are not enough rare metals on the planet to make all the units that would be required. The cost of tooling up industry and putting all the fuel supply systems in place would be enormous. Dozens of nuclear power stations would be required to split water to release hydrogen and petrol stations would have to be converted to make it possible to refuel the new vehicles. As a result the hydrogen car is just an unfortunate distraction. Of course, if governments were to remove all taxes from purchasing and operating cars fitted with new technology then their economics would be completely transformed. However, this would be such an enormous financial loss that no government would ever contemplate it. Most importantly of all the petrol companies and the automotive industry are very content with the way that the current cartel operates so they do not want any real change at the moment.
Most of the public are convinced that there are thousands of people looking for solutions to society's problems such as finding sources of clean energy. In any recession R&D and investment in new product lines are the first items that are cut by businesses. Few people are actually conscious of the fact that virtually all the major inventions of the World came about because of war. We all like to believe that war is bad but unfortunately war is the only time that governments and industry put technical development before all else. War was the striking feature of the twentieth century and without it the World as we know it would not exist. No wars means no significant technical breakthroughs. Another way of looking at it is that a child who is born today will not see any significant technical developments during its life. We already have three generations who have grown up without knowing about war. Will we now have generations who will see no new developments?
Only when reasonably equally balanced societies squared up to each other for a fight on a regular basis has technological and social development taken place. Having a common enemy forces all elements of a society to cooperate and for key players to share information in a way that would not otherwise happen. It is possible to counter argue that most technical developments would have occurred anyway although it would have taken considerably longer. The question is would they? Where would we be today without the American Civil War, the First World War, the Second World War and the Cold War. The development of new technology is always a complex interaction of many skills with one development triggering another. So much of what we regard as normal today was developed in the 1940s with the impetus extending into the 1950s.
The Chinese invented gunpowder but never used it as part of a system for killing as they had a huge empire and so had no one to get into an arms race with. Similarly, the Roman Empire was very sophisticated but never had an industrial revolution as they had no one with which to compete. During the 15th and 16th Centuries, there was an arms race across Europe. As a result there was an enormous weapons industry which meant that there were huge developments in metallurgy. Without this basic work there would not have been an industrial revolution. The Napoleonic Wars resulted in the invention of the tin can. The French developed the first modern medical service to ensure the well-being of their troops. Being able to bore cannons made the production of cylinders for steam engines possible. The American Civil War resulted in the World's first mass production facilities and these were for rifles.
Before the First World War airplanes were a quirky novelty. By 1918 there were bombers, fighters and transport aircraft. Before the war the internal combustion engine was very unreliable. By the end of the First World War there were factories turning out thousands of motor vehicles with a high standard of reliability. The social impact of the First World War was immense. In 1900 almost half the working population was in domestic service. After the First World War only a fraction of this number were employed in this way.
The Second World War yielded radar, sonar, jet engines and metal bodied pressurised aircraft. It is these developments that made mass air travel possible. Plastics were available before the Second World War but it was the shortage of metals that caused chemists and engineers to find new ways of creating, forming and exploiting the properties of these materials. The Second World War necessitated the construction of chemical works to produce nitrates, potassium and phosphates. When the war was over these chemical plants were not required for the manufacture of munitions but the chemicals that they produced could be used as fertilisers. As a result there was a massive increase in crop yield after the war. During the war tractors were made available to farmers to compensate for the men who had entered the armed forces. This process of automation led to a decline in the number of rural workers and a rapid increase in output from the land. German work on organo-phosphorous nerve agents led to the creation of insecticides and herbicides which transformed food output and improved human health. Public health leapt forward following the introduction of penicillin. It was the American President Franklin D Roosevelt that ordered the large US drug manufacturers to pool their endeavours to mass produce a whole new family of drugs which they did in only a year. As if to support this point it is over forty years since the last significant family of antibiotics was released onto the market and since then only minor refinements have taken place. In other words no pressure and the drug companies focus on profits and not R&D.
Arguably, the greatest development of the Second World War was the atomic bomb. It is very unlikely that any post war Government would have invested the sums of money that were required to convert the theory into a reality. Without the atomic bomb the world might be a more unstable place. The technology for nuclear power stations evolved on the back of the research that took place into nuclear weapons. It will never be possible to say with certainty where we would be today without the Second World War but the world of 2009 would probably have more in common with 1959.
Without the need to crack the German wartime ciphers there would have been no need to create computers. As it was, an enormous effort went into finding new methods for number crunching which led to the development of modern computers. The Cold War resulted in an explosion in communication technology, computers and microelectronics. Weapon systems resulted in many different forms of miniaturisation. Without the Cold War maybe the world of 2009 would look more like the 1970s.
Most of the wonderful green technologies that are supposed to save us in the future were in place and working in 1945. There is so much hype in the media about wonderful new ideas and new developments and yet often the matters under discussion are not new and many of the wonderful new ideas were tried in the past and were not found to be viable. In the 1940s lorries in West Africa were running on palm oil and cars were running in Sweden on wood fumes. Cars in England and France were running on methane obtained from farm yard manure. The technology works but it is not particularly cheap to set up or easy to operate. If bio fuels are so wonderful is it likely that the Germans would not have used them in their tanks in 1944. The question has to be why nothing very striking is happening now. The atomic bomb went from theoretical physics to a working weapon in a couple of years. It only took the Germans a year to produce the first jet fighter. No democratic government today could persuade its population to devote vast amounts of resources to developing new technology. Only in time of war or with a totalitarian regime are resources channelled into developing new technology.
The human race is facing some very real dangers. Throwing a few millions at solving the current problems is pointless. Massive sums of money should have been diverted into solving these impending problems over the last twenty years but it was not. Most people have a very restricted view of the world and are selfish and very short term in their views and so for politicians R&D is not a priority. For this reason green technology will not yield any real benefit. It will be the classic case of too little, too late. In addition, it is all very well to have a whole range of new technologies available to save society from itself but it will cost money to put them into widespread use, and this money is just not available. A new approach is needed to prepare for the future and societies goals will have to be redefined.
Instead of a gentle winding back of State borrowing to a sustainable level the Government will ensure that expenditure spirals every upwards as it desperately tries to stimulate an economy that was flooded with cash for a decade, which borrowed itself to 'prosperity' and which has lost the ability to generate real wealth. The only real challenge for the British Government in the next few years will be to find new ways to hollow out the historical wealth of the nation so that things can keep going for a bit longer.
Published: January 2009