Stupidity and the Global Financial Crisis Part Two

Albert Einstein defined stupidity as doing the same thing over and over again and expecting different results. Industrial civilisation is providing a scenario that provides us with the opportunity to test the stupidity of the world’s leaders.

In 2008, two major problems combined that resulted in the Global Financial Crisis (GFC) Part One. The first of these was the oil price spike, the second the unravelling of the subprime mortgage debacle, which came close to collapsing the global financial system.

In late 2010, it appears that similar pressures are building to those that triggered the GFC Part One, so let us conduct a thought experiment, to test the possible outcomes of the GFC Part Two and the stupidity or otherwise of our political leadership.

Commencing in late 2004, global oil production reached a production plateau. Demand continued to grow however, with strong growth particularly from China and India resulting in a predictable outcome, namely that the price of oil spiked, reaching a record in July of 2008 of US$147 a barrel.

Concurrent with rising oil prices was the unravelling of the sub prime mortgage debacle; with borrowers that should never have been loaned money predictably enough finding that they could not meet their repayments. The flow on effect on our Ponzi banking system was that international trade and finance came very close to freezing up, arguably with only the actions of the world’s reserve banks preventing economic collapse.

In short, a combination of too much debt and the spiking cost of the lifeblood of the global economy resulted in the deepest economic downturn since the Great Depression. The medicine of choice by governments around the world was stimulus financed by you guessed it, more debt.

The logic of this response was based on the assumption, or hope, that such stimulus would enable future growth which would in turn pay off the debt. Of course if this response fails, all that it has achieved is to kick the can, or snowball, a bit further down the road. 

Today a similar set of circumstances to those that triggered the GFC are building. The price of oil is hovering around the US$90 a barrel mark (at historically high levels). With strong demand growth from developing nations and a rebound in consumption in nations such as the US, when combined with anaemic growth in supply, it is likely that oil prices will head higher in the short to medium term.

It should be noted that every post war oil price spike has resulted in recession and there is no reason to expect that the next spike will be an exception. 

Simultaneously we have a serious debt problem, both privately (such as Australian and Canadian home owners) and publicly (the national governments of Greece, Ireland, Portugal, Spain, the UK and US to name a few, as well as many cities and states).

With falling tax revenues and ballooning deficits, the solvency of many governments around the world is and will be tested.

The scene is being set for part two of the GFC.