How We Can Weather the Economic Storms

Right now, the United States and entire world are facing an economic crisis of monumental proportions. The economy is like a rubber band. It works well in equilibrium, but when stretched tightly you do not want to be in the area when it snaps. Over the last few decades, our politicians have been engaged in stretching that band to its limits for political gain and seem to be intent on attempting to stretch it further through various bailouts. Ironically, these bailouts seem targeting at helping the most wealthy Americans who created this bubble in the first place. For every action there is an equal and opposite reaction though, and we must start to prepare ourselves for the band to snap. When it does, it could represent the most severe economic collapse in modern history as society has never known the gigantic economic imbalances that have been created in recent times.

The governmental, monetary, and banking authorities of the world have created a credit bubble which has caused significant distortions in the consumption patterns of individuals. Businesses hired employees and allocated capital on the basis of these patterns which were in fact, unsustainable. A person or nation cannot continue to spend much more than it produces without consequences. As a result, a systemic capital mis-allocation has occurred placing millions of people in jobs that will no longer be needed in the bubble sectors of finance, housing construction, and many consumer discretionary fields. This is the heart of our economic problems--people are employed in the wrong sectors relative to that needed in a long term sustainable economy. Throwing more money at sectors which need to be scaled down is obviously not the answer, yet it is the one being contemplated by the current US authorities. Simply stated, the government got us into this crisis, it will be unable to get us out of this crisis, and will probably serve to make it much worse.

The concepts of the global commerce and mass production have been both a blessing and a curse to the United States. In times of credit expansion, efficiencies obtained by sourcing products in other environments and using large scale automation lowered the cost of all sorts of goods to consumers. In economics this is referred to as exploiting economies of scale. Long term these are a great benefit to a society; however, when the society creates massive short term imbalances in production as mentioned above, these same technologies and processes are a disaster to the global financial system as massive negative operating leverage destroys businesses which planned their supply chains based on artificially high and unsustainable demand.

Let me give you an example. Suppose I am making a critical component for housing. If the Federal Reserve of the United States creates a housing bubble in order to keep the economy afloat after the Internet bubble collapses, all of the sudden I have huge demand for my components. I invest a lot of money in new equipment to automate the production of these supplies. This equipment costs a lot of money to run -- these are called fixed costs; however, since I anticipate a lot of demand, the fixed costs are dwarfed by the lower labor costs to make the items. However, once that demand returns to normal or below normal, the plant can be suddenly forced into bankruptcy because the renormalized product sales do not even compensate for the high fixed costs, let alone the labor costs. In such a scenario, it could actually be cheaper for an individual without automation to produce the same product, because they do not have the fixed costs to deal with. This is the danger in the credit creation exercise global banks and governments around the world have engaged in, which are resulting in the collapse of the global industrial economy. Similarly speaking, if US companies outsource production to China because the value of the US dollar is artificially high due to its reserve currency status, those factories become worthless to their trade in the United States once the dollar's value normalizes. This industrial capital flight from the US is a massive problem that will need to be addressed in the near future as our banking authorities destroy the value of the dollar through the process of monetization of our public and private debts.

With the problem defined, we must now endeavor to seek a solution. Demand does not simply dry up in the midst of a recession. People still want products; the issue is that they do not have the jobs to produce income to buy the products. These same people however do have skills that can be utilized to produce the goods that others want and to engage in trade. In order to most quickly direct the economy to a productive mode again, we have to find ways of matching the inherent consumer wants to the abilities of those left out of work by the global financial establishment. Due to the negative operating leverage as discussed in the paragraph above, this is very difficult to do at the macro corporate level. Part of the solution is to get back to local, individual enterprises that can produce independent of high fixed costs, even if the labor costs are higher in the short term. People have to stop thinking of themselves as "employees" and start to empower themselves as individual sole proprietors to produce goods those around them want.

Everyone has skills they have acquired over their lifetimes that can be leveraged to meet the needs of those around them. Those skills that one does not have can be learned through an apprenticeship or study. The approach to organizing a local economy in the midst of a depression then is a task of ascertaining a community's needs and matching that to the skillsets of those within the community. One does not need to rely on a "job" or "employer" then, or even on the US dollar monetary system as such arrangements can even involve barter at the local level. However, in such an economy, prior planning is critical in order to establish a makeshift supply chain if global and interstate transportation routes are no longer running effectively. Instead of ordering spare car parts to fix a car from China, one will need to consult a local machine shop. Instead of ordering needed medicines from a pharmaceutical company, one will need to contract with a local chemist. A local community map of services available and the products or services needed can be matched to figure out what skillsets and equipment need to be brought to a local community. For those resources, particularly raw materials, that cannot be sourced locally, trade routes with other localities or parts of the country can be prioritized. In this matter a local community can survive and potentially thrive despite the collapse of the global or national economy.

This process is very difficult to do after communications and trade come to a halt, but can be theoretically managed beforehand. The key is we need to start now to make contingency plans once the global economy unravels, which is an arguably inevitable consequence of the excesses of the last two decades. I submit that this is the reason we need to come together in communities to prepare ourselves for what could happen over the next five to ten years. We are very lucky here in the Inland Northwest in that such an arrangement is very feasible because the population density is not that high and we have great natural resources nearby -- timber, farmland, water, hydroelectric power, mining, etc. These are many of the elements necessary to create a sustainable community. This is the major reason the author of this piece moved here from New York City which, quite frankly, is very poorly situated for an economic collapse.

As a result, I urge you to join a local chapter of Arm In Arm so that we can build the infrastructure necessary to increase the chances of our community thriving in a time of economic turmoil. I am not saying this will be easy. We are sailing into uncharted territory here. However, it is much better to take proactive steps to find solutions now, than to sit back and wait for someone to save us. Ultimately, if we want solutions we cannot rely on anyone else for them. Ask the citizens of New Orleans about this. Indeed, study the experience from the 1930s in which government solutions like the National Industrial Recovery Act, which tried to micromanage the economy from the national level, actually turned a simple depression into the Great Depression. We have to take responsibility for our own communities and we best not delay; the time is now to take action!