"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Wednesday, November 3, 2010

Nicole Foss, aka "Stoneleigh" of the Automatic Earth Blog, on Deflation, Wealth Destruction, and Preparation

Nicole Foss is no lightweight.  She has written for the Oil Drum, but has since started her own blog, The Automatic Earth, to focus on the economic crisis.  She believes the current economic crisis is a greater impending danger to the world economy and living standards than peak oil is, and that's why she left the Oil Drum.  However, she does believe in Peak Oil and its long-term damage to life as we know it, it's just that she thinks the current economic crisis is something people should prepare for first.

She is firmly in the deflationist camp, and does not believe inflation will be a threat, even though she does believe that long term, gold is a solid investment for those that can wait out the severe deflation that awaits us.  Personally, I have yet to make a decision, though I lean towards the hyperinflation as a political phenomena view.  It seems to me that both inflation and deflation camps have sound reasoning behind their theories.  If anything, I believe that both are possible, at different times, and we have yet to really experience both severe inflation and severe deflation.

For those that are not familiar with Nicole Foss, here's a bio:

Foss runs the Agri-Energy Producers' Association of Ontario, where she has focused on farm-based biogas projects and grid connections for renewable energy. While living in the UK she was a Research Fellow at the Oxford Institute for Energy Studies, where she specialized in nuclear safety in Eastern Europe and the Former Soviet Union, and conducted research into electricity policy at the EU level.
Her academic qualifications include a BSc in biology from Carleton University in Canada (where she focused primarily on neuroscience and psychology), a post-graduate diploma in air and water pollution control, an LLM in international law in development from the University of Warwick in the UK. She was granted the University Medal for the top science graduate in 1988 and the law school prize for the top law school graduate in 1997

She was recently interviewed by the blog "Transition Voice," and below are several snippets from the interview that I found interesting and well worth a read:

Loughrey: Your message is that a severe depression much worse, and lasting longer, than the 1930s, is arriving soon due to the credit collapse. The US government claims to have averted that scenario with the bank bailouts. How do you respond to their official pronouncements of a recovery?

Foss: The recovery is an illusion. The measures only appear to have worked because there is a stock market rally to support them. None of what Hank Paulson did in 2008 worked because we were in a declining phase at the time. Once we turn the corner into another market decline, then nothing they do is going to appear to work.

Loughrey: Many in the peak oil community believe higher oil prices created our economic crisis. You disagree. Why?

Foss: You don’t need to postulate a shortage of energy to precede a financial crisis. Because financial bubbles are Ponzi schemes, and are therefore inherently self-limiting, they reach a top and they crash on their own.  The spike in mid 2008 to $147 per barrel was a massive speculative bubble. We said at the time that it would be followed by an enormous price crash, and it was. This smaller speculative bubble will end the same way. Oil prices could go down quite sharply to as low as $20 a barrel.

Loughrey: The peak oil community is preparing for hyper-inflation. What would a person expecting deflation do in preparation that might not occur to someone expecting inflation?

Foss: Hold cash and get out of debt. Deflation means that cash will hold its value; while property and other assets will not. Whether you expect inflation or deflation, it is wise to have supplies stored: things to eat, to use as spare parts, or to trade for things you will need.

Loughrey: What’s your impression of economists? You’ve got the Keynesians on one side saying “let’s spend our way out of our troubles” and you’ve got monetarist Chicago boy-Frieidmanites on the other side saying “let’s drown the baby in the bathwater.”

Foss: I think a plague on both their houses. Friedmanites do not understand the role of credit in the money supply. They define money too narrowly so they don’t understand why deflation is coming. Secondly they assume away the people. To them, economics is a machine explained by physics without having to understand people. Their economics model cannot describe the real world because economies are based in collective human behavior.

To Keynesians I would say when you are in a hole, stop digging. When you are already drowning in debt, more debt isn’t going to work. It is just throwing more money down a giant black whole of credit destruction. Furthermore, it is putting additional excess claims to underlying real wealth in the hands of the very people who are best positioned to cash them out. So it is tilting the deck in favor of the big boys again.
I am in favor of tilting the deck toward the average person by preparing them against deflation. Ordinary people will do something useful with rescued wealth for the sake of their friends, families and communities.

Loughrey: How will the crisis you expect play out for different economic classes?

Foss: When you fall out of a window, how much it hurts depends on what floor you’re falling from. If you are a person with no debt and few assets, it’s like falling out a ground floor window. Whereas the upper-middle class who seem to be wealthy but are cash poor, and up to their eyeballs in debt, and who have no skills, to them it will feel like falling out of the 100th floor window. So it’s how much cash they have going forward that will matter, not how much they’ve seemingly had in the past. We will see a big shakeup of who has what. The people who do well will not necessarily be the people who are wealthy now. Some of them are going to be so devastated, so incapable of living without money that they may drink themselves to death, like people did in Russia.

Loughrey: Your recent speech in Marquette Michigan emphasized psychological inoculation. What’s that?

Foss: If you are expecting something, then it doesn’t come as much of a shock. By warning people what’s coming, I am hoping to keep people out of movements of anger, like the Tea Party. Anger sucks all the energy out of you to prevent you from helping your friends, neighbors and family. It is better to accept reality; get over it; and move on. Join something positive and constructive instead, such as a relocalization or Transition group.

Loughrey: Is there anything else you’d like to say to Transition Voice readers?

Foss: Stay in a constructive positive head space. Make an effort to understand the financial situation to develop your sense of urgency so you can build a different world.

Full Interview HERE.

Now I'm not one to tell everyone to run for the hills and live in a remote cabin - but I honestly can't criticize anyone that does so either.   I have a lot of respect for the transition movement that Foss endorses, though I am not a participant.  I do agree that belonging to a community of sorts, a supportive network of friends and family is important on many levels.  I have also thought about my immediate environment in terms of water supply, food distribution networks, power grid, etc...  I think it's foolish not to.  But it's not something I dwell on a daily basis either.

Nobody knows how this crisis will end, or even if there's is an end.  The process could also be gradual and may become a new lifestyle that evolves that we slowly adapt to.  But a little low cost preparation, like getting to know your neighbors, developing social support networks, saving money and some gold, to me,  is a no-brainer.  And then life goes on...

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