Thursday, March 5, 2009

Is there a silver lining to the bad world economy?

While others might dispute my claim here, I think the answer to the above question can be "yes." Why you ask - when so many people are suffering?

In summary, the reason might be that because of the downturn, we as a world now have a chance to correct not only an imbalanced economic system that benefited the few corporate heads at the expense of the corporate team and middle-class. Even more importantly we have a chance to balance our world energy and resource policies to protect the human existence on the planet from growing dangers of climate change. Finally, we might have the ability to resolve the nuclear conflict with Iran and the military uncertainty with Russia - since both countries are hurt by the fall in energy prices.

As Donald Trump mentioned recently on "Morning Joe" on MSNBC, a precipitating factor in the economic collapse was the energy speculation that spiked prices in the Spring-Summer 2008, causing rapid inflation in many areas of the economy world-wide. I had long believed this, as well. Much of the run up of oil prices was due to speculators who were fleeing the Mortgage/CDO (collateralized debt obligations) collapse, but wanting to maintain high rates of returns. Even as the demand dropped for oil in 2008 world-wide because of the increasing prices, the energy sector prevented price corrections (drops) by cutting back on refining because of the slumping demand. Oil companies wanted to keep prices inflated to near $4 a gallon gas in the US in September 2008, blaming the hurricanes in public documents, but in internal energy sector publications recognizing that refining had been taken off line because of falling demand. Rather than the oil companies being content with $3 a gallon, they struggled to keep the price near $4 a gallon. With food, travel, and many other commodities experiencing inflation through 2008, for families in the US who had frankly cut their budgets too close with credit, many could not keep up and failed, defaulting on mortgages that were poorly conceived and tenuous at best in good times.

In the height of the energy crisis, while there became a market for new technology such as Prius vehicles, the ability to retool in such an energy crisis would have been difficult if not impossible. Even as demand fell in 2008, it could not keep up with the speculators, who drove up the price of a barrel despite dropping demand, and oil companies that simply cut supply to prop prices as high as possible to make up for the falling demand. With only a few large, consolidated oil companies and countries controlling a large percentage of the world's oil, competition had failed. However, with the worldwide economic collapse, many of those speculators did not fair well when the price per barrel fell to a third of what it had been, and when demand dropped throw the floor. Speculation has minimized for now. We now can retool the energy sector and give our species a shot at the 21st Century.

While often the thought is we must "save the planet," as many environmentalists note the planet will do fine without us (albeit taking 1000s to 10,000s of years to recover) but our species might not be there when it does recover. As President Obama correctly advocates, we must use this calm in the energy storm to retool our economy to green/clean technology.

The failure of the energy sector also has the benefit of hurting Iran and Russia, who were using their energy surplus as a means to hurt the rest of the world. Iran and Russia were becoming leading strategic threats with Iran being close to having nuclear weapons and Russia showing its return to old "KGB" ways in Georgia during the summer. Both Iran and Russia were making huge profits on exporting oil and using those profits for the detriment of world stability. Both Putin and the radical portions of Iran are now diminished because they are no longer flush with cash. We now have some ability to try to reengage diplomatic solutions in both countries, with the hope of empowering the moderate elements of their populations. This is true on our side of the equation, as well, with the change in the US Administration to one that favors diplomacy. What Iraq should have taught us is that military intervention that is not broadly supported (Iraq vs. Afghanistan) is a bad way to resolve WMDs since our Iraqi invasion destabilized many countries in the region, where "democracy" simply brought in the extreme elements by popular demand in Lebanon, Palestine and Iran, and weakened those more favorable to the US like Jordan. If the nuclear threat of Iran can be contained diplomatically, then the world really does have a greater hope in the future. Much of this weakening of Iran can be attributed to the fall in oil prices, which is a consequence of the world economic collapse.

For the above two areas of concern, it is actually fortunate that we can much more easily correct the world economy from the CDOs, as BAD as that is given the sheer scope of the problem, then it would be to correct a complete collapse of the world ecology from the complete melting of the polar ice caps. What most people don't appreciate is that the polar caps are not just an issue of world water levels, but reflect a substantial amount of sun and heat because of the ice-albedo effect of white snow. About 600-700 million years ago, the planet was 100% ice covered and know as "Snowball Earth."

The reason was largely the albedo effect of the ice - no heat came through. Without polar ice caps at all in the summer, the reverse becomes the problem. The albedo of the ocean or land is very low and absorbs heat, rather than the ice in those parts that would have a high albedo and reflect the heat. The problem with albedo issues is that they accelerate on a curve, not on a straight line, and must be kept in balance. What does that mean? If we are not careful, we can start a cycle in the ecology that is irreversible. However, at least at the current time we might still have a chance to stop this train from running away, since world energy demand has fallen substantially ... at least until the economy returns.

Lastly, we can understand that economic mechanisms that overly reward the top 1% of the population at the expense of the economic middle-class are bad politically. Democracies survive by the security and contentment of the middle-class, not the wealthy. The poor are cared for best with a vibrant middle-class. The reason why many Latin American countries have struggled with maintaining democracy has been the lack of a vibrant middle-class. The hope of China long-term is the 300 million middle-class they have established in their country in the last decade. For the last 8 years, the Bush Administration and extreme Republicans just didn't get how limited the use of supply-side economic theories must be. Focusing on tax cuts for the wealthy, dereguation at the expense of the less powerful, and the falling of real wages for the middle-class while executive excesses were extreme, the Bush Administration put the middle-class into crisis. In this downturn, companies that simply provide bonuses to their failed management and cut employees will also fail as companies. Those companies that cut executive pay for such failures and maintain the most employees on the payroll as possible, while finding other ways to cut expenses short of layoffs, will succeed and help the economy return. We need middle-class consumers spending for the economy to return, and we need those consumers to spend wisely for the economy to be stable. History proves that.

The economy may be bad, no doubt about it, but we have a chance now to retool our energy and resource consumption/conservation and the rework how our economy functions. We have a shot at avoiding a nuclear disaster from Iranian supplied terrorists. If we as a world can come together in this crisis and rebuild diplomacy to solve global problems, while avoiding the grave dangers in our future, this time can become the best of times. I am hopeful.