Developing a new mindset based on economic reality (Part 1)

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I’m going to do this in several parts because it’s a really big topic. Today I’ll try and lay out why I believe facing economic reality head on is a fundamental first step to financial resilience.

Most of us still remain blind to the financial and economic turmoil that lies ahead. We trust that our elected leaders, economists and financial wizards will somehow find a way out of the debt trap we’ve set for ourselves… For reasons I’ll explain tomorrow, they can’t and they won’t.

But how are we supposed to make financial decisions when risk lurks around every corner? How are we supposed to know where or how to invest resources in a world beset with LIBOR’s, MF Globals, housing bubbles, high frequency trading, out-of-control entitlement spending, zero percent interest rates, astronomical global debt, and massive Wall Street fraud?

These are tough questions with no surefire answers. We’re in uncharted territory and we’re all flying blind.

The best place to start is to face reality unflinchingly rather than wishing things were different or hoping that with a few policy tweaks, we can somehow conjure up a return to exponential economic growth.

Develop a new mindset based on reality

Whether we’re prepared to accept it or not, exponential economic growth is a mathematically impossible fantasy that was only made temporarily possible because of the anomaly of cheap energy and cheap credit. We’ve taken both for granted.

Governments, businesses and households went into massive debt believing both were in infinite supply and we could always count on more growth.

We’re now learning that this may not be the case. What if unlimited growth isn’t normal? What if it was a fluke, made possible by abundant cheap energy and its byproduct, cheap credit?

This isn’t idle speculation by the way.

I believe it’s a fundamental law of the universe: Things expand and contract… Things are born, they grow, they decline and they die. Things that appeared infinitely abundant — the vast tracts of Sumerian cedar forests that were razed presaging the agricultural devastation of southern Iraq in Gilgamesh’s day; whale oil that brought whales to the brink of extinction in the 19th century; or today’s cheap energy (fossil fuels) – suddenly aren’t.

Anyone who tries to convince you otherwise is either engaged in self-serving fraud or misplaced hope.

Our misplaced hope is that we can continue to have unlimited access to an endless cornucopia of unnecessary and impractical new gizmos, toys, and services, made possible by cheap energy and cheap credit.

To paraphrase the late George Carlin, cell phones that make pancakes aren’t particularly practical or useful, but cheap energy/credit makes them possible.

In this fantasy world there is unlimited health care for all, everyone is employed, growing government entitlements will always be there to take care of us, and purchasing a pair of $315 Nike LeBron sneakers (two months wages for the MAJORITY of the earth’s population) is not economic insanity, but something that makes good financial sense.

We also hold on to the fantasy that we will be saved in the nick of time with some new cheap energy source – hydrogen, shale, tar sands, nuclear, you name it – when fossil fuels run their course. Sure, it’s possible, but we have to deal with the current reality that there is simply no scalable substitute today for cheap fossil fuels.

The economic reality is that at some point we will likely face a future of severe resource and financial constraints (the end of cheap energy and cheap credit) that will inevitably restructure the global economy in ways that will be much more localized, downscaled, and with much more modest and localized energy use (most likely renewables such as solar and wind).

The good news is that we humans do have an amazing capacity to adapt quickly to changing circumstances.

How we adapt will be the key… We will likely need to adapt to a world that is massively decentralized… A world in which a much larger percentage of the population will be engaged in small-scale food production… A world where we will no longer have access to unlimited cheap goods or agriculture shipped from halfway around the globe. A world where our energy needs will have to adapt to what we can produce ourselves, and probably at the individual household level – wind, water, solar.

In overly simplistic terms, this means if you live in Washington state you still get apples, but you don’t get pineapples. If you live in Florida or Arizona you don’t get air conditioning, and will have to make do with passive cooling innovations for your home. If you work, it likely won’t be in a metropolis high-rise with a 45 minute commute, but in a trade or business that serves some need of your immediate surrounding community.

As James Howard Kunstler writes, the way to become hopeful in the new world we face is to “demonstrate to yourself that you are a competent person who can understand the signals that reality is sending you and act intelligently in response… brave, resourceful, competent, and confident.” This isn’t doom and gloom, it’s self-evident… IF you’re dealing with reality.

Extricating ourselves from misplaced hope is difficult, and truthfully, I’m not much better at it than most. But the greatest hedge against anything the world can throw at you isn’t putting your faith, trust and hope in centralized institutions that continue to promise the impossible. It’s using your own brain and your own hands to face reality head on.

Tomorrow… Recognize that you’re being lied to, but understand why.

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One Response to "Developing a new mindset based on economic reality (Part 1)"

  1. Michael says:

    Awesome post! I’m looking forward to the rest of the series. I must say, despite the challenges and hardships ahead during this transition, ending up with a more decentralized world will be a net positive for us all in terms of quality of life and even all the way up to benefiting ‘national security’ because there will be fewer critical targets if we’re all decentralized in food and energy production. And with more people taking self-responsibility for their lives and local communities, hopefully that will presage an awakening of people realizing that they don’t need or benefit from big government, maybe we’ll see freedom yet again in the states. I’m looking forward to this. You hit the nail on the head–decentralization is the future–and I think it’ll be a great thing.

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