Back to serfdom: Not as outlandish as we might think

At first glance at the title of my article, some may be tempted to believe that I deal in fiction, but that is certainly not the case. As I shall explain here, this might actually happen. It will likely be gradual enough to avoid initial collective detection, and it is not imminent enough to qualify as something that is likely to be a headline grabber, given our short collective attention span. It is however imminent enough that if you happen to be under the age of 50, you may live to experience it, even though many will not recognize it, even as it happens. So stick with me and keep reading before you decide that this is too far out there.

By saying that we are headed back to a time of serfdom, I don’t mean to suggest the thing that may automatically pop into the heads of those familiar with the history of serfdom. I certainly do not mean to say that we are all likely to be re-settled to toil the land with few tools, and little reward, and that our overlords will have complete control over us and our children for generation after generation. I do believe however that the time will come, and it will not be far off when many people will have their rights gradually restricted through legislation and contract, due to their current and future financial positioning. And even though most of us will not be put behind the oxen powered plow, some people may indeed end up having landowners as their master. Large financial institutions will be the big serf owners of the future, because those are the people who we currently owe money to. Since many farmers owe money to the banks, they may become major landowners, and they may need to source labor to make the land productive.

So we already identified one of the factors that will lead to a new era of serfdom. Our future debts may not be as easily thrown aside as it is the case in the present, given current legislation. For an important reason, which I already identified on numerous occasions on this blog and in my book, these debts will not shrink, if anything they will grow, while our collective ability to keep up with our debts will shrink. This ability to keep up with the payments will vary from family to family of course, and it may take only a year or two of reduced income due to unemployment or other misfortunes to end up owing ones freedom to the banks.

The reason why I say that our ability to keep up with our debts will shrink is because of the decline in potential global economic growth. I pointed out many times that since 2008, we entered in a period of global growth which will be permanently less than the 4% + average we saw starting in the mid 1990’s. Even the IMF and other organizations have admitted to this, by forecasting average global growth rates of around 3.5%, which is the new mainstream consensus for the next few decades. I did point out however that there is an event of great significance which was purposely overlooked, which makes even that 3.5% global growth rate an unattainable goal. In 2010 the International Energy Agency admitted that as of 2006, global conventional crude production has stagnated, and there will never be significant gains ever again. In other words, they admitted that the only way from the plateau we are on now is down, which people currently hotly debate when it will happen. Since that event, the global economy entered a new permanent phase shortly after, starting from 2008. Global growth for half a decade now is less than 3% and less than the mainstream forecasts in the last few years. It is however in line with the forecast I made in March, based on analyzing the world’s ability to grow on a smaller average yearly increase in total liquid supplies, of which 80% comes from conventional petroleum fields. For the next few decades, global growth will be in the 3% range, and then it will get worse as the next step will be a stagnation not just in conventional petroleum supply, but in total liquid fuels supplies. Much later on, there will be another event, which could signal the end of our economic system altogether, and that will be triggered when total liquid fuel supplies will start shrinking permanently.

Bottom line for us is that debt will become an increasingly heavy burden as stunted long-term growth prospects will make it harder for us to source the income needed to make our payments on a regular basis. We should remember that 3% global growth will mean significantly less average growth in the developed world. In fact, I expect developed world average growth for the next two decades to come in somewhere in the 1-2% range. That rate is not higher than current labor productivity gains, therefore it is safe to say, especially if growth will be in the lower end of that range that fewer and fewer people will be needed to get the job done. In the United States the potential labor supply is still growing, so things will become rather uncomfortable.

The actual level of growth needed for the long-term:

US labor productivity growth for 2012 is estimated at .8%, which is considerably slower than the longer term average of about 1.5%. We can expect labor productivity to continue increasing at an average 1% per year. So taking labor productivity alone into account, we come to the conclusion that we need 1% growth at the very minimum to keep things going. I am not taking into account the growth of the potential workforce, which continues to expand.

The other factor we have to keep in mind is that the top 1% of earners are seeing a greater share of increase in yearly income than the rest of us. The US census bureau just recently acknowledged that the income of the top 1% of earners increased by 5.5% last year, while that of the bottom 80% declined by 1.7% when adjusted for inflation. This occurred during a year, which saw 1.8% GDP growth.

It should be easy to visualize why, with a 5.5% increase in earnings, for the top 1%, there is little left over for everyone else, if we look at their share of total income earned, which in 2007 was 23.5%. So if we do a simple mathematical exercise we get the following:

Assume that total income in 2011 was $100, out of which $23.50 went to the top 1%. If their income increased by 5.5%, then their income is now $24.80

$23.50 x 1.055 = $24.80

which means that their income increased by $1.30. But the total income increased by 1.8%, because that was the economic growth for that year, so only $.50 are left for the rest of the population, or the 99%.

The data shows that the next 19% of the population took significantly more than that fifty cent portion left over, so the bottom 80% of households were left out in the cold, and thus we get that 1.7% decline in real income. I should point out that the US CPI is not a good barometer of how the bottom 80% of households feel the current rate of inflation, because it keeps so called “volatile” prices such as food and energy out of their price basket. Food and energy are however a big part of the actual consumer goods basket of the bottom 80%, and the price of these goods are precisely what is trending up the most for a decade now.

So, when we add labor productivity increases, to income inequality trends, we come to the conclusion that 2% average long term US growth rates are not enough to keep the majority in a stable financial situation for the long-term. Three percent average growth seems to be the minimum needed. Since 2008, US average yearly growth has been at 1%, and there is no reason to believe that going forward, the long-term average will improve much. Even if as of 2013, the US economy were to grow at an average rate of 2.5%, growth as of 2008 will still average only about 1.8% by 2020. We should not forget that between now and 2020 we will likely see another recession, while estimates for 2013 growth have been slashed back by the OECD to 2%, and even that may prove to be highly optimistic, because in the past few years all revisions came with a downward estimate for the short-term, while there is always a rosy picture painted about the more distant future that never arrives. Growth within the OECD member countries made up of advanced economies was estimated at 1.4%, which is also way below the long-term average needed of perhaps somewhere around 3%.

Correlation between growth and freedom:

Going back to the subject of why this may lead to a new era of serfdom, we have to keep in mind an important aspect of the world we live in. It is a world in which it has already been demonstrated that the banks cannot be allowed to lose. The 1% will continue to get a growing share of the pie, because they control the capital, as well as those who are supposed to regulate capital, so in effect they make up the rules. As we saw however, in the US, even with a growth rate of 1.8%, the bottom 80% of households actually had their income decline by 1.7%. If this happens for a year, it is tough but bearable. If this will continue at a steady pace for a few more decades, the average household earning about $50,000 per year right now, will only have $40,000 to play with by 2030. By 2040, that will drop to $35,000. So twenty eight years from now, the average household in the US will earn 30% less in real terms than they do now. I doubt that real debt per household will decline much by then however, because the only way this economy will grow even at that anemic 2% rate or so, will be if the consumer keeps on spending.

Somewhere down the line, the banks will no longer be able to be compensated for their loans to the bottom 80%, and even for a portion of the next 19%. At that point, they will have no choice but to take possession of illiquid assets held by the portion of the 99% who cannot keep up with their payments. They will take the house, the car, and even the labor that most of us use to earn our way. Legislation to allow them to do this does not exist currently, but it will if and when it will be needed. We have to remember once more that the banks and the 1% cannot lose in this game in the favor of everyone else. So, our houses, cars, will continue to serve as collateral for loans, but given the much higher expectation of default much more will be needed, so our labor might become collateral as well, since we have nothing else to give. Some might be tempted to counter that in case that loans become more risky, banks will simply cut back accordingly, but that cannot be the case, for it would lead to permanent recession. To avoid recession and eventual complete collapse, credit in the economy cannot be reduced and everything will be done, what can possibly be done to keep credit flowing. As the US and EU governments are looking to cut deficit spending, steps will be taken to compensate by increasing consumer spending fueled by debt, of course, since our real earnings are declining as the data shows.

Recent Growth trends:

Year US growth Global Growth
2008 1.1% 3.1%
2009 -2.6% -0.7%
2010 2.8% 4.9%
2011 1.7% 3.7%
2012 (estimate) 2.4% 2.5%
2013 (forecast) 2.8% 3.0%
Average 2008-2013 1.37% 2.75%

Note: Data sourced from Index Mundi , as well as World Bank for 2012-13 projections and estimates . I should also note that the World Bank’s estimate and forecast for 2012-13 is already seen as too optimistic for the US economy, because the OECD came out with a significant downward revision in November. US growth is expected to come in at 2% next year, and 2.2% for the current year.

Conclusion:

There is only one viable argument that can hold up against my assessment, and that is that long-term average growth will be much higher, therefore my conclusions are irrelevant. It is hard to argue however for a faster rate of growth in the future, given some important factors that we need to consider. There are just too many things we already experienced going against us. Since 2008, we had a major oil price spike and two food price spikes, and 2013 might be another tough year given this year’s lower than expected and needed global agricultural production. I expect many more commodities will follow suit in the next years and decades, and it most certainly is not about speculators, but about supply not keeping pace with demand. Since 2008, we keep getting positive forecasts about the western and global economy, promising that higher growth rates are just a year or two away, yet every time we get downward revisions as time takes us forward. Since 2008, the European Union has not really had any growth on average. The US averaged 1% per year since then, and even that is mainly thanks to the ability to run 8% + budget deficits. The outlook for 2013 has just been lowered by the OECD to 2%, for the US and another flat year for the EU. If past years are a guide, this time next year, we will be told that growth will end up being less than initially expected. Remember that we came to the conclusion that 2% growth is not enough to keep the bottom 80% from losing real income, while for half a decade now, the US is at 1%, and the EU is flat.

Other people who looked at our situation and came to the conclusion that we are in deep trouble, such as the peak oil crowd, environmentalists or even many people in finance who figured out that things do not add up, generally came to the conclusion that we are headed for collapse, and upheaval. My conclusion is somewhat different, because I believe that as long as the establishment believes in its ability to keep this tough situation together, they will continue to fight the collapse move by move. It is in fact essential that they do, because our complex society has built many dangerous toys, such as nuclear weapons, and power plants which require a complex society to operate, or at least babysit.

For now, we are made to believe that we are still alright, so all we have to do is wait another year or two for the good times to roll in. This gentle trick will fail, as expectations of downward revisions will become engrained in our collective psyche and at that point, more drastic measures will be taken including a gradual diminishment of our basic rights we came to expect. At some point, the many little steps will add up to the establishment of a new authoritarian regime, with a democratic face. The democratic face will gradually disappear as well, leaving nothing but a very strong autocracy aided by the many leaps in technology we made so far and will still make in the future, as well as the support of the few fortunate ones, who will want to keep their heads above water at all cost. All of it will take many decades, so there is no outright collapse on the horizon as many other people predicted recently.

It is within this trend and not within the one we are promised through continued forecasts of robust growth in our imminent future, which will trickle down to everyone, that it is indeed possible that many of us will be reduced to the status of serfs. When someone else owns a part of your labor that is what you will be. In time, this serf labor may be directed towards needs, against our will. For instance in mining, farming or even the sex industry. Then there will be the children of those whose labor is already owed. If they will have nowhere to go, due to the fact that they will start off at a deep disadvantage, they will end up inheriting the status in exchange for being allowed to stay in the bank owned house of their parents. Eventually, legislation may appear to allow banks to force the next generation to inherit the labor owed.

I wish I could see a way out, but there is not, at least when it comes to collective salvation. The book I wrote, advocates a way to get around the problem of sustainability, which would provide a mechanism for the global economy to increase the value we get per unit of natural resources consumed, thus giving us a chance to increase growth a while longer, giving us time to fix things. What I advocated will never ever catch on however. I realize from the feedback I got back so far that even those who do care about sustainability are repelled by the idea, because it does not contain the romantic and ideal solution which they support due to their ideal view of humanity, which is that if only they can show us the gravity of the situation, we will all pull together and solve the problem, without any of us trying to go the opposite direction in order to gain an obvious economic advantage (In economic terms called the free rider dilemma, which sustainability crusaders always fail to address in their proposals). They will continue to wait for this, even as the world around them will become darker and nastier. As their ideal stance will continue to fail, they will blame it on the political right, which only cares about profit and not our collective future.

Individuals, who will happen to be in a good position by chance, or through wisdom and discipline, will continue to remain free. Those of us who continue to play the patriotic role of global consumer of last resort, with no thought given about what the future holds, will likely end up losing the most precious thing of all. It is something many of us only enjoyed for a relatively short period of human history, and something that should not be taken for granted.

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