An exclusive interview with one of the most astute minds in the world of finance whose insights offer crucial preparation for living in a post-industrial world
PSYCHOLOGICAL INOCULATION FOR A CENTURY OF CHALLENGES: Carolyn Baker Interviews Nicole Foss
November, 2010, Boulder, Colorado: Nicole Foss, also known as Stoneleigh, manager of the Automatic Earth blogspot, generously gave me an hour of her time this week during another of her U.S. tours in which she is lecturing on the global financial crisis and answering questions from countless individuals who are preparing for its most dire ramifications. Her online presentation “A Century of Challenges” is a must-watch, complete with Powerpoint slides which de-mystify the world of finance that often leaves our heads spinning and our eyes glazed. I sat down with Nicole here in Boulder a few hours before her presentation in Littleton and asked her some key questions about global economic meltdown and its implications for all of us.
Foss originally studied biology and environmental science and acquired two law degrees. She wanted to understand globalization and its effects on peripheral societies and used her law degrees not to practice law, but to grasp how power relationships work. She was intrigued by how the law codifies and legitimizes existing hierarchies and then facilitates the conveyance of wealth from the periphery to the center. Naturally, she reasoned, “If I want to really understand how the world works, I have to understand money.” No, Foss did not earn a degree in finance, but rather, studied it on her own for about 15 years. In addition, she delved deeply into energy studies and connected the dots between the two disciplines.
Foss was born in the UK but grew up in Canada and then spent more time in the UK as an adult, later returning to Ontario. There she ran the Agri-Energy Producers Association of Ontario which focused on farm-based biogas. People began asking her to come and do talks on a variety of topics, and as she continued studying finance, she started pulling all the information together, ultimately creating her current “Century of Challenges” presentations and with her husband and writing partner, Ilargi, the Automatic Earth blogspot which is nearly three years old. They now live in Ottawa.
CB: What is your greatest concern at the moment in terms of the global economic crisis?
NF: That it could unfold very, very quickly. Because deflation is a swing of poverty feedback, it can take awhile to build up. If you try to explain to people what’s coming, because it doesn’t happen instantly, they tend to go back to sleep. The thing they need to understand, however, is that when it does hit a tipping point, a kind of critical mass, then it can unfold exceptionally quickly. Then it’s very much like having the rug pulled out from under your feet. So I tell people all the time, prepare now because it’s better to be two years too early than five minutes too late. You can’t play with this sort of thing. In September, 2008, we came within a few hours of the banking system seizing up, and that could easily happen again. People wouldn’t get a lot of notice. For anyone who’s not in the meeting room-it will be too late by the time they find out. My worry is that if there are an enormous number of people who just had the rug pulled out from under their feet, they’re going to run around like headless chickens, and the human over-reaction to events will be really responsible for a large percentage of the impact.
So what I try to do is provide a kind of psychological inoculation. People are going to be afraid, and they’re going to be angry. People who are angry and afraid are easily manipulated. If you look at Orwell’s 1984, the Two Minutes’ Hate in that book was really to get people thoroughly into that unthinking frame of mind and keep them there so you could basically tell them whatever you want them to believe. So I try to tell people that this is coming-this is what the herd is going to do. When people are angry and afraid, they don’t do anything useful; they play an enormous blame game, and they’re susceptible to manipulation by demagogues. A whole political culture could take a giant leap in a different direction which could be a substantially negative direction that could then have horrendous impact on everyone else. Until people recognize that that is coming, and see it for what it is, they will be susceptible to it.
I tell people to spend time in the Transition Movement or various other positive initiatives as well, but all these initiatives have in common building things from the ground up in a truly positive, constructive way. This is the head space that people need to be in because if we can blunt the human over-reaction, we can lessen the impact of the event itself. I don’t know that I can make this happen on a wide scale, but if I can have the largest possible effect, even if it’s not that much, it’s something, and we can only do what we can do.
My great worry is that we could see everything unfold very quickly, and then the whole political culture gets derailed in a fascist, theocratic direction.
This is certainly where it’s going already in the United States.
Yes, it is unfortunately, and this is a tremendous concern. In the event of this, everyone’s life gets much, much more difficult.
In this extraordinary presentation that you’re doing called “A Century of Challenges,” you argue that ongoing deflation is more of a threat than inflation. Can you briefly explain this?
What we’ve lived through is essentially a giant credit expansion. Credit expansions create mutually helpful and mutually exclusive claims. They are excess claims to underlying real wealth. Sometimes in the Peak Oil community, people see energy as the only cause of everything, so they would say you have to run out of energy to have a collapse. I would say you really don’t because when you create what is effectively a Ponzi scheme, you create excess claims to underlying real wealth. For one thing, it’s virtual wealth, so you can create a bubble without an enormous subsidy of energy because you’re creating something that isn’t really there. But then because it is a Ponzi scheme, it is inherently self-limiting, and it will crash, and then what happens finance becomes the key driver to the down side. So energy is a huge driver going up, and finance is the key driver on the way down because it’s much shorter term. So what deflation is, is the extinguishing of excess claims to underlying real wealth. This is the point where people realize they are playing a giant game of musical chairs, and there’s only one chair for one hundred people. So you can imagine when the music stops how this plays out. This is no slow squeeze but a frantic grab for a chair-that is, pieces of the underlying real wealth pie.
Once you have the creation of excess claims of wealth, there’s nothing anyone can do to prevent those from being extinguished at some point. We have to go through the period where that happens because credit is in excess of 95% of the money supply. The crash of credit, which is the virtual wealth portion, crashes the money supply because the money supply is money plus credit relative to available goods and services. When you collapse the supply of credit, you’re collapsing the money supply. That is deflation by definition. So anyone who isn’t looking at the role of credit is going to make mistakes as to where things are going.
I mean we really have to take into account the fact that credit is going to crash. There’s going to be a massive de-leveraging. People say, “Oh well, they’ll print their way out,” or “Quantitative easing will just keep things going forever.” Only extremely limitedly can you keep kicking the can down the road. And things like quantitative easing are not inflationary because there’s no money getting into the real economy. It’s a game of smoke and mirrors, ie., “We’ll tell people we’re pumping all this money in the system to restore confidence. Maybe if we restore confidence, they won’t all run out and take their money out of the bank.” But it isn’t going to work; it only appears to work during the period of a rally. A rally is just a resurgence of confidence and a renewed suspension of disbelief. And when you have the psychology of a rally, that supports whatever anybody’s trying to do and makes it look like it works. But it’s really the psychology that’s making it work.
I think we’re about to move to the down side now. The current rally is finishing-it’s rolling over and so for QE2, there will not be that supportive psychology, and when that is not there, everything central authorities try to do will fall flat on its face. This quantitative easing is not going to work; it’s not inflationary. If you try to print, what ends up happening is that the bond market will kill you, so you end up with your interest rates shooting up, not just for the government, but for everybody. Trying to print your way out of it just gets you to the cliff even faster.
I really see this as critical. You have to go through deflation.
So what do you think is the future of the U.S. dollar?
I think that for a year, maybe longer, it will probably do quite well compared with other currencies. I think there will eventually be a lot of capital flight out of Europe to the U.S. That will probably prop up the dollar significantly whereas the Eurozone is going to get smaller.
So this will keep the dollar strong for awhile?
For awhile, but it’s not a long-term bet. Cash is no long-term bet. It’s a way to preserve capital through the great de-leveraging, so cash is king during the period where you’re going through deflation. Hold cash to start with, then move to hard goods at the point where you can afford it. Hard goods are things like land, tools, and barter goods-all things that perform real functions. Don’t go into debt to do it, and don’t use up every last penny you have. The next 2 to 5 years are the best times to do this. You ride out deflation in cash, and you ride out inflation in hard goods. I think that beyond a year or two, what you get is a really chaotic currency system. The speculators will have a field day with it. At that point, it doesn’t matter what your dollar is worth in terms of someone else’s currency but what it is worth in terms of milk and bread.
What do you think about alternative, local currencies?
They are an inherent part of relocalization, but they don’t tend to last all that long because one of the reasons they work is that there’s economic activity going on. And, if they are very successful, governments tend to shut them down. So what I tell people is, by all means do it, but when you do, regard yourself as living on borrowed time. If you do this with a fired up sense of urgency, you can probably accomplish a lot in a year or two.
Time banks are great too because they build relationships of trust. This is something that is absolutely critical, and it’s one of the reasons that Transition works. What you get in times when you’re having any kind of contraction, the trust horizon collapses. So all of a sudden, the institutions people used to trust are now stranded beyond the trust horizon. And where you do not have trust at that level, you lose political legitimacy, and without political legitimacy, without a general sense of buy-in at that level, you end up with surveillance and coercion as a substitute. That is where I think the national institutions are going. As the trust horizon collapses, the things that work are the things that are still within it. This is why local currencies and time banks work. Relocalization works because you can get the same kind of buy-in for local strategies that you once had at a much higher level.
Relationships of trust are the absolute foundation of society in all times. That’s what Transition and similar initiatives are about, and initiatives like this really can be successful even in very hard times.
So what about several friends pooling resources and starting a small business together-a business that provides goods or services that people need?
Pooling resources is great, but borrowing money is not. In a deflation, almost no money is changing hands, and therefore, you have almost no economy. At that point, if you have a business and have to service a debt, forget it-you’re gone. Therefore, good preparation means borrowing no money at all.
Investing in skills is a very good idea. Being able to build and repair things is going to be an incredibly valuable skill. There’s so much planned obsolescence in our economy that if someone can keep a washing machine designed to last only four years going for ten, they have a very valuable skill. Also, people setting up some kind of health clinic when healthcare is no longer available will be a phenomenally valuable service for their community.
For all of the systems that fail-systems that have been built from the top down, we must build parallel structures from the ground up. If we don’t, when centralized systems start to fail, we have to provide parallel structures or we won’t have them. Often, the provision of services is more valuable than the provision of goods.
We’re going to get away from the idea of material wealth in general, so a lot of things that we currently regard as essential, we will come to understand are not.
What are some key areas in which people should prepare for the worsening collapse of industrial civilization?
Basically, people have to be prepared for our centralized life support systems beginning to fail. They don’t fail all at once, but all these centralized systems that we provide from the top down are going to get less reliable. Not that they go away instantly, but they get rationed, or they are only available at certain times. Of course, we’re not used to living that way, and for some people that will be catastrophic.
People could pool resources, get a little mini-van and set up their own local bus service with it. People will most certainly need to create their own food co-op’s, and they can also create their own community renewable energy infrastructure. If the scale is kept local, people will accept it far more readily than structures that are beyond local scale and simply imposed on them. Community powered wells are also another possibility depending on the area of the world in which you reside. Different things will work in different places. Community water filters would be a great option if the water coming out of the tap is a little if-y-of course assuming that water is coming out of the tap.
People have to be creative and ask: What am I getting from the top down, and how else could I get that instead? This is being resilient.
Groups of teachers can get together and create a small community school when public education goes away or if and when it becomes a mandatory, government-managed system of indoctrination. Of course this depends on the particular community and if and how a government system operates there. Furthermore, a lot of people in rural areas are just not going to be able to get to schools as the busing system collapses.
We must be aware of the loss of political legitimacy which we are seeing right now in the U.S. elections. In some communities that are crumbling economically, there is little interest in politics at all. In fact, politics is perceived as a one-way street in which the government extracts tax revenues, and the community gets almost nothing in return. At that point, government becomes completely predatory.
Right now the government is completely between a rock and a hard place because in the worsening foreclosure debacle, if the government tells the people that it will not reinforce fraudulent mortgages against them, then the banks collapse, and the people are not happy about that. On the other hand, if the government comes down on the side of the banks, which they are more likely to do, and tells the people that fraudulent mortgages are going to be enforced against them, people are going to be furious. This has the potential to absolutely explode in the administration’s face. There are no solutions to this.
This will be the number one culprit in public opinion for what’s coming. What’s coming was coming anyway, but the foreclosure mess will be seen as the cause. We are a rationalizing, not a rational, species. There are people right now who are very wealthy but may well be on the street and lose everything in a few years. Therefore, the elite are going to be much more elitist in the future. The insiders who know that you have to have liquidity are just sitting there with their cash waiting to buy everyone else’s assets for pennies on the dollar. That lasts until people have nothing left to lose and then they get out the pitchforks, which at some point they will do.
So tell us about your tour of the U.S. that you’re just now completing. How have you been received, and what is the mood among the people you have encountered?
This tour has been very successful, and I’ve done multiple tours before this in the U.S., and I’ve done two months in Europe. I drive, don’t fly, and don’t stay in hotels. The reception has been phenomenal. People have been really interested in hearing what I have to say, and they’re very appreciative. It’s providing them with the tools they need to navigate the future. I’ve never had a really skeptical audience.
Your future projects?
I’m thinking that I’ll need at least a year for traveling. I’ll be doing a conference in Michigan and then I’ll be speaking at a biodiversity conference in Belgium, invited by the Belgian government. I’ll be in England for a week and down the west coast of France and into Spain. I’ll also be going to Germany to work with Transition Germany, and the National Bank of Poland called me up and wants me to go there. I keep my flying to a minimum because I don’t like it, and I think we’re going to see the kind of deterioration of air travel that we saw in the 70s. When people are in an unconstructed frame of mind, they cut corners, and when they don’t have a lot of money and there’s a lot of consolidation in the industry, that is a recipe for multiple disasters.
Thank you so much Nicole for your time and incredible insights. It sounds like you’ll be back in Boulder in January, and I can’t wait.