“Unsustainable things can last longer than you anticipate”.
Morgan Housel
Measuring the present disaster, in numbers ONLY, is CRUSHING.
This is not about 1929, it took four years then to reach the bottom.
It now happened in four months.
There has never been a triple crash like this before combining the Economy, a Pandemic, and Energy.
The collapsing financial asset markets started already to damage the real economy and will continue to do so in a worsening way.
Despite all the props used, the markets are less and less relevant to the real Economy.
The Pandemic destroyed an already unsound system of Consumer Spending, Energy, Services, Global Trade, Supply Chains, Investment, Production, and generally Value Creation.
But whatever disaster has befallen in the inhabitants of the Earth, has eventually ended.
Each time, after a disaster, a better World emerged, although suffering has been diminished only a little.
The signs of how this new World will form, are already emerging.
It will manifest itself in TWO STAGES.
A –> THE FIRST STAGE WILL BE ONE OF ENTRENCHMENT & CONFRONTATION.
Defending
The 2020-21 period will be one of retrenchment.
States will entrench themselves in their nationalistic frontiers, Social classes will entrench themselves in the specificity of their class, and confrontations, National or Social will follow.
All this will be due to the paucity of means to continue the consumption model that strongly emerged in the 20th Century and dominated World affairs up to now.
Socially two fundamental Social concepts are strongly challenged.
- The concept of the Society where two-thirds (2/3) of it has adequate means and one-third (1/3) inadequate, that allowed most advanced Societies to function, is not valid anymore.
- The concept of the Society that expects that every next year, more material progress will be achieved for most of the population.
This concept that sustains economically developing Societies is not sustainable anymore.
Hope is Globally in “short” supply.
Materially, Global value chains demonstrate the new reality.
Over the past four decades, much of manufacturing production world-wide has been organized in what has become known as global value chains (GVCs).
From raw materials to final products everything is moved around the World in its various stages of production. So raw materials mined in Africa become electronic components manufactured in China and become electronic devices manufactured in Germany, those are incorporated into airplanes that are finally bought from all the above and other Countries.
This, quasi closed loop, of the production and consumption network is mainly depending on China, Japan, the United States, and the European Union,
This is already leading to deglobalization. The lowest cost reasoning that permeated Capitalistic operations around the Globe up to now will decline, leaving its place to the Security of Supply reasoning within controlled national frontiers.
This will increase the Business fragmentation that is already developing, which is manifested primarily through the US and China Trade wars which are developing into Capital and divesting Wars and protectionist policies.
Not only Technology but even Science will suffer because communication of R&D results will be subject to Government licensing.
Governments legislate and regulate on experiences anchored in the past.
This administrative inability to anticipate the Future is where hope lies.
B –> THE SECOND STAGE WILL BE WEALTH CREATION.
Going forward
The method forward is the same method that is adapted to salvage an ailing Corporation.
Creative Destruction.
The salvageable part of the Corporation is separated and the rest is destroyed and fed to the salvageable part.
A re-shaping and re-orientation must take place.
Wealth creation always comes with the introduction of something new in Ideas Society, Science, Technology, Regulation, etc.
There are five principal domains that creative innovation will create Wealth:
- Gnostic & Cyber
- Energy
- Environment
- Circular Economy
- Economic Transformation
1. GNOSTIC & CYBER DOMAINS
The Gnostic & Cyber domains are the only ones that were not only unaffected by the disasters but also flourishing and resistant to the imposition of frontiers.
Advances in Gnostic Technology.
It is established that compared to 2012 it now takes 44 times less computing to train a neural network to a specific AI. (Moore’s Law3 would yield an 11x cost improvement over this period).
The research results indicate that, for AI tasks with high levels of recent investment, algorithmic progress has yielded more gains than classical hardware efficiency improvements.
That means that software development is advancing faster than hardware development which in turn means that AI is about to take off.
In the Industrial Revolution of the 19th Century, the Engine, acting as a muscle multiplier utterly transformed Society.
The Gnostic Revolution of the 21st Century, acting as an intellect multiplier will utterly transform Society again and be a new great source of Wealth.
Cyber globalization
The closing of physical frontiers will not affect the Cyberspace. A new area of the interchange will also create new Wealth rules.
2. ENERGY.
Every great socioeconomic change is preceded by a change in the mode of Energy.
This is worthy of a particular analysis.
Muscle, black powder, Coal, Oil, Nuclear, Natural Gas, and now Renewable sources, are the milestones.
The present value of the Energy Companies sector’s weight in the S&P500 has dwindled from more than 12% ten years ago to less than 3% now.
The main reasons for the drop are Companies producing or using Coal and/or Hydrocarbons.
Only Renewable Energy Companies are holding up.
Renewable energy demand is expected to increase this year by 1% compared with the overall 6% decline in energy demand forecast by the IEA.
The main reason is the drop in the use of internal combustion engines and the second reason is the reduction of the use of Coal and Oil in the generation of electricity increasing the renewables percentage in the Energy mix.
The Energy mix is tilting in favor of the Renewables for three main reasons:
- The continuously dropping initial cost of renewables, which now is competitive with fossil fuels.
- The very low OpEx of Energy production from renewable sources.
- The electrification of Transport.
Two additional reasons are the rapid drop in the cost of Battery Energy Storage and the Geopolitical uncertainty of fossil fuel supply.
As the Oxford University report:(Oxford Smith School of Enterprise and the Environment | Working Paper No. 20-02 ISSN 2732-4214 (Online)) estimated for every $1 million spent, 7.49 full-time renewable energy jobs are created but only 2.65 jobs in fossil fuels.
3. ENVIRONMENT
Great awareness of the importance of the Environment has been developed in the 21st Century, spread and assisted by the Mass Media that continuously demonstrates the fragility of our present Environment.
The new generation, people who were born in the period ranging from the early 1980s to the early 2000s, are investing almost exclusively to Companies and Corporations that respect the Environment and Society.
As a very experienced Analyst remarked: “The biggest-ever generational transfer of wealth, which will be around $30 trillion, from baby boomers to millennials, will take place in the next few years”.
This has been greatly strengthened by the Covid-19 pandemic
For example, work from home also cleans the atmosphere. It is the biggest-ever drop in energy-related greenhouse gas emissions.
A telling characteristic is that in April there were zero car sales from Italy to India.
The image above shows New Delhi before & NOW. No society will accept a return to a polluted atmosphere for long.
4, CIRCULAR ECONOMY.
The present linear Economy cannot be sustained without destroying the Planet, but there are additional significant reasons.
Further to the economies obtained to a World that will be short of everything, including food, the shortening of the Supply Chain, and its extensive containment within national borders, the Circular Economy offers very attractive policy options.
5. ECONOMIC TRANSFORMATION.
At the end of 2020, the Global debt will reach more than 280$ trillion dollars.
It is obvious that, even with the best Keynesian practices, this cannot carry on forever.
The question is not what the States will do about it because Governments have a great track record of kicking the can further.
The real issue is that we will see demand destruction.
Economic transformation won’t take life back to normal. There will be, at least ten years, a fast forward in the way we work, shop, manage, and administrate.
Deglobalization will make Sustainability at the national level a major requirement.
The new habits of working, shopping, and communicating from home will utterly transform the Economy.
While restaurants and theaters will fill up again, there will be nothing like the business before.
The greatest Economic Transformation will result from the diminishment of physical movement and space requirements.
This will create a drop-in employment income and demand.
The question is how this is to be Socially manageable.
A universal majority consensus of support for the introduction of universal basic income is close to being achieved. It remains to be agreed at whose expense.
Conclusion
A need for creative pragmatism from the Leading elites will be in great demand.
As Bloomberg reported: Macron has a source of inspiration in Robinson Crusoe, a famous castaway from 18th– century literature. “True idealists are great pragmatists”, he said last week speaking to a group of artists.
“When facing the shipwreck, Robinson doesn’t hold his head in his hands, trying to sketch a grand theory of the disaster”, the president continued emphatically. “He first takes the ham and the cheese with him. But inside, he has this capacity for reinvention”.
The biggest lesson for Robinson Crusoe however is that it is extremely difficult to function alone.
