Is it time to batten down the hatches for economic storm?
MONTEVIDEO -- Forget the brutal winters.
There is a financial storm coming, and west central Minnesota may be one of the better places to weather it, according to a popular Internet blogger on financial matters.
Nicole Foss, of Ottawa, Canada, spoke Oct. 26 in Montevideo on what she believes is a coming, profound period of deflation that will be made worse by a looming energy shortage.
"A very serious financial crisis is approaching,'' said Foss, who is co-author of The Automatic Earth under the pen name of Stoneleigh. She was formerly editor of The Oil Drum Canada, which focused on peak oil and finance. She's on a speaking tour in the Midwest, and spoke as a guest of the University of Minnesota Sustainable Development Partnership and Clean Up the River Environment.
She and her writing partner argue against the claims of many economists who report that we are seeing a cautious but slow recovery. Foss said periods of deflation are inevitable corrections to market bubbles, and we've got lots of correcting to do first.
There is a great deal of price discovery ahead now that the housing and especially the financial bubbles have burst. The rapid, downward movement will itself become perpetuating. Hope and greed drive expansion, while fear drives contraction, Foss explained.
She also argues that efforts to pump money into the economy may cause short-lived rallies, but cannot reverse the downward momentum.
Foss blames much of the mess on the overextending of credit. She charges that derivative markets have served only to increase the number of those claiming to own the same piece of pie, and only add to the problem itself: There's too much debt in relation to actual wealth.
The ratio of debt to gross domestic product in the U.S. was 299.8 percent in 1933 at the start of the Great Depression, according to Foss.
The debt to GDP ratio has climbed from 301.1 percent in 2003 to 369.7 percent today, she said.
"We are digging ourselves into a much deeper hole than we had in the Great Depression,'' said Foss.
She also argues that the proposed strategy of quantitative easing -- to essentially increase the reserves of major financial institutions so that they will have low-cost money to loan -- will not have the desired effect either.
She is among those who point to the liquidity trap first described by Massachusetts Institute of Technology economist Nathaniel Mass in 1978. Interest rates drop so low during periods of deflation that cash balances are passively held. The Fed can pump money into the economy, but can't move it.
There is not enough money circulating to lubricate the economy.
"It's like driving your car with the oil light on,'' she said.
Speaking of oil, Foss believes that the world's declining supply of it will play a big role in what's ahead too. As editor of The Oil Drum she wrote about an "energy poor'' future as available supplies of fossil fuels become more costly to extract and bring to market. The lack of cheap and abundant energy supplies will make it much tougher to climb out of the coming downturn than was the case during other periods of deflation.
She doesn't see renewable or alternative energy sources coming to the rescue, either. The net energy gains they provide are meager compared to what fossil fuels have offered when the cherry picking was easy. And, the infrastructure needs to make renewable energy a viable option will require immense investments and decades of time to bring to fruition.
What about nuclear? "The nuclear industry is not compatible with social upheaval,'' said Foss, adding that she expects to see lots of upheaval as economic woes grow.
She told her audience that rural areas such as west central Minnesota did not experience the housing and financial bubbles on the same scale as did other parts of the country or Europe, and consequently the fall here should not be as great.
"I wouldn't want to be in south Florida right now,'' she said.
She also said that rural areas can have an advantage in securing access to resources such as food, water and fuel to see their way through tough economic times.
She urged her rural audience to be prepared. Start by eliminating any debt, she said.
Her recommended, long-term strategy is to build connections with other people, as these relationships can be critical in times of economic scarcity.
She also recommends brushing up on skills for "depression proof'' employment. Being able to fix things is one line of work that can help. She also recommended health care and food as possible areas to weather the worst. Identifying niche needs and developing time banks -- where labor is bartered in place of exchanging money -- are also options she offered.