The Factor of Four: Preparing Yourself for Economic Meltdown

The article is still on the newsstands, and hence not yet available online, but in essence it sees three deliberate Bush-Greenspan policies leading to economic collapse in 2009:

• Starving the government — funding massive tax cuts for the rich by incurring monstrous debts that will have to be paid off by future generations and administrations,
• Complete reliance on cheap energy, commodities and Chinese manufactured goods instead of promoting conservation, and
• A policy of artificially suppressing interest rates to encourage reckless borrowing at all levels (personal, corporate and government), so that saving is discouraged, seniors cannot generate enough interest income to live on, and the economy becomes extremely fragile to economic changes (exactly as occurred in 1929).

The collapse scenario identifies a number of changes that occur like falling dominoes. What is interesting is that, much like the articles I have read about Peak Oil, about the non-sustainability of low interest rates, and about coming bubble burst in housing prices and (again) in stock markets, there is a recurrent ‘Factor of Four’ in this scenario¹:

• Energy, heat and electricity prices will rise by a factor of four ($160/barrel and $9/gallon)
• The prices of goods dependent on energy will rise by a factor of four (foods, which grow in oil-derived nitrogen fertilizers and chemicals; anything transported a significant distance; plastics and medicines; clothes made with synthetic fibres; asphalt and tar for roads and roofing; furniture with hydrocarbon-based fire-retardants and cushion fillers; cosmetics and cleaners; coatings, paints and dyes)
• Inflation, interest and mortgage rates will rise by a factor of four (making most debts unrepayable, leading to massive defaults, foreclosures and evictions)
• The value of homes, stocks and bonds will fall by a factor of four (wiping out personal net worth, collateral and retirement savings)
• The value of the US dollar will fall by a factor of four relative to most other currencies
• The unemployment rate will rise by a factor of four
• Business failures will rise by a factor of four (and foreign companies will bail out and buy out most large US businesses, since the US government will have no revenues to continue to bail them out)
• Tax revenues will fall by a factor of four (bankrupting many municipal and state governments, and possibly the US federal government as well)

It seems to me that progressives’ inability to explain to the average voter the importance of these competitive advantages (not easy in our dumbed-down world, but doable) is one of the key reasons they are, at least in the US, in the political wilderness².

The consequence of this “every man for himself” doctrine is that in the event of a severe economic downturn (and there is evidence it has already begun if you look at the real indicators and not the phony ones like GNP), the vast majority will be “priced out of any chance for real opportunity”. The consequence of a population (a global population, because the US will take down most of the rest of the world with it) which is without hope of climbing out of desperate circumstances is almost too horrible to imagine — we need only look to Afghanistan, Rwanda, Palestine, or Darfur to see what happens when people just give up trying.

Fallows suggests that only the rich and powerful elite will be immune to, and separated from, the effects of this economic collapse. Shielded by security guards in their homes, limos, penthouse offices and retirement villas from the staggering masses, they will be oblivious to it all (my grandparents regularly handed out food and other essentials to house-to-house beggars in the 1930s, to the great consternation of some of their peers and neighbours, who feared hordes of others would follow — they didn’t).

But it seems to me that there’s a second way to insulate yourself from the impact of economic collapse, other than by becoming fabulously wealthy. And that is to be prepared. If you knew that in ten years the Factor of Four would be upon us, and the eight drastic changes in rates and prices bulleted above would then be in effect, what would you do starting now to prepare for it?

The obvious steps:

• Reduce your need for energy: Buy an energy-efficient vehicle. Insulate your home better. Conserve energy. Reduce your need to work (by Radical Simplicity) or at least your need to commute. Strive for energy independence (explore community wind projects, solar and geothermal energy options). But make sure your replacement for oil doesn’t depend on corn — because corn depends on both subsidized oil (for fertilizer etc.) and subsidized agribusiness, neither of which is sustainable, especially in an economic collapse. Understand where your energy comes from — oil may be running your car but filthy coal and vulnerable nukes probably provide your electricity, heat and air conditioning.
• Buy local, natural and organic. Support small enterprises that depend less on government welfare. Buy stuff that lasts. Don’t buy what you don’t need.
• Get out of debt. If you can’t, go for low rates that are fixed for the entire term of the mortgage or loan. Pay off credit cards and other usurious loans on time every month. Don’t buy non-essentials you can’t pay for immediately.
• Find out how you’re exposed if the housing bubble bursts. If your house is suddenly appraised at much less than the amount of your mortgage, can you be required to pay down the mortgage in cash immediately? If so, are you prepared to just walk away from your house?
• Find out how your savings are exposed if the stock and bond markets collapse. Will you have enough to retire on? To live on? Consider moving investments to ‘near-cash’ certificates that keep their value even when markets crash. Consider investments in Euros or other currencies less vulnerable than the US dollar.
• Try to wean yourself off dependence on any government subsidies, pensions, and allowances, especially in the US. If the government suddenly becomes unable to pay its debts, it’s not going to be able to pay you either. Just ask the ex-employees of Enron what that feels like.
• Work to get Bush and Greenspan, and those with similar extreme economic policies, out of power. The earlier we start working on fixing the mess they’ve created, the better the chance for a ‘soft’ landing.
• Don’t hoard goods or other physical assets. It’s wasteful, ineffective, selfish and expensive.

You don’t need to do any of these things tomorrow, but it would be prudent to think seriously about doing them over the next few years. Think of it being like betting on a gambler in a casino who’s on a roll, tossing sevens and elevens one after the other. If you cash out of the living-beyond-your-means lottery too early, you’ll probably kick yourself for losing faith too soon, for not hanging in a little longer. But there’s lots of evidence from history that the consequences of cashing out too late will be much worse. And alas, as with all gambles, you’ll only know whether you did the right thing in hindsight.

A final thought from Fallows’ article, and it’s about education. He quotes Danish executive Niels Christian Nielsen, a Director of companies on both sides of the Atlantic, from a U.Cal presentation earlier this year on the subject:

These two main themes from Fallows’ scenario — how reckless economic policy is leading inevitably to economic meltdown, and the importance of having a government that sets a good example of economic responsibility and public investment for the benefit of all its citizens — are inextricably intertwined. Bush’s failure on both counts threatens not only to lead to the ignominious end of the world’s last superpower, but to drag the rest of the world needlessly into a long period of great suffering and deprivation in the process.

Notes:
1. One qualification about the Factor of Four, in case any economists or other number crunchers are reading this — the rates and prices above are subject to continuous adjustment for changes in supply and demand. Because the domino effect will lower demand, prices that spike to quadruple current levels will fall off as a result of this adjustment, so in some cases the net effect may be closer to a Factor of Two or Three. Fallows’ scenario reflects this. But if we’re trying to visualize how such a change will affect our economy and our lives, thinking in terms of today’s purchasing power, it still makes sense to use the Factor of Four.
2. I suspect that Europeans and Canadians take for granted the importance of these things, but do not really understand why they’re important — which is why it is not unthinkable that Bush-Greenspan thinking could happen elsewhere (as it did with Thatcherism), even without the religious undercurrent. That’s something for us outside the US to think about seriously.