LONDON: "Granddad Benny, is it true that capitalism committed suicide?" Granddad looked up from the fire he was stoking with bundles of 2006 and 2007 vintage mortgage-backed bonds. "In a way, Joel, yes. In developed countries, people got too greedy, especially bankers, and everyone borrowed too much.
"In less developed countries, people racing to improve their living standards reawakened the slumbering inflation monster."
Joel put down the stick he was using to scratch the dirt.
"Why did the Gigantic Global Bubble Burst of 2008 catch people unawares? Weren't there any warning signs, Granddad?"
"With hindsight, Joel, water should have set alarm bells ringing. Before the Giglobubu, wealthy people paid $15 per liter for Cape Grim bottled water from Tasmania, at a time when the Asian Development Bank estimated that 700 million people in Asia lacked access to clean water.
"Investment banks even started to invent securities betting that water shortages would arise. Even so, when the Water Wars started, the world wasn't prepared.
"Cyprus started buying water from its neighbor, Greece, because its dams were down to 7.5 percent of capacity and its desalination plants couldn't meet demand. Spain drew up plans to build a pipeline to funnel water from the Ebro River to Barcelona, the country's second-largest city, amid the worst drought in half a century."
"Did people collect rainwater for drinking, like we do, Granddad?" Joel asked. "I've noticed how grumpy you get if there's not enough for you to make coffee in the morning."
"Some did, Joel. Rich people, though, bought their coffee from shops, paying stupid money for buckets of flavored water with a dash of milk. It took Starbucks just four years to double in size, so when the company said in 2008 it planned to shut 600 U.S. cafés and chop 12,000 jobs, 7 percent of its global work force, some clever people started to worry.
"Speaking of milk, that was another clue. All across China, millions of people earned enough to buy refrigerators for the first time. Then they rushed to the shops, buying pints of milk to put in their shiny new fridges. So energy prices surged to keep the fridges humming, and milk prices went through the roof along with other foodstuffs. Inflation climbed out of its coffin and started to terrorize the bond market all over again."
"What did the central banks do, Granddad? Weren't they the ones in charge of the economy?"
"Well, the most important parts of the global economy were certainly ruled by independent, inflation-targeting central banks. While their system worked fine in good times, it turned out to be a disaster when the going got tough.
"Governments were quick to grab back the reins of monetary policy from their unelected proxies, but with inflation spiraling higher and growth slumping, they only made things worse."
"Did inflation kill capitalism, Granddad?"
"Capitalism sowed the seeds of its own demise because the benefits of a decade-long boom accrued to capital, with nothing flowing to labor. Telling workers who hadn't had a decent pay raise for years to tighten their belts once the good times ended proved disastrous.
"People started to realize that just because communism had lost, that didn't mean capitalism had won. Cracks started to appear. In New Zealand, the government nationalized the country's rail and ferry services, deciding it could do a better job of running the transport network than private industry.
"Then the euro, one of capitalism's crowning achievements, began to unravel. After Ireland rejected the Lisbon treaty in three consecutive referendums, its fellow single-currency members decided to kick the country out of the project. Once Germany and France realized how easy it was to thin the ranks back to the core gang of euro countries that they'd wanted in the first place, they started finding excuses to ban more nations, starting with Italy.
"With banks and mortgage lenders going bust faster than the government could arrange bailouts, every nut job with an Internet connection started demanding a return to something called the gold standard. When a bunch of academics joined in by denouncing fiat currencies, the general public lost all trust in money."
"Didn't something bad happen to the animals, Granddad?"
"A locust storm forced China to cancel the 2008 Beijing Olympics. The honeybees started to die, followed by the penguins, then dolphins began to commit mass suicide on beaches all around the world. Pine beetles munched their way through the forests of North America. It got harder and harder to deny that the environment had been ruined.
"So when a film came out called 'The Road' about a post-apocalyptic world, people were already scared and angry. They started to form cults worshipping the author of the tale, a reclusive writer called Cormac McCarthy who rarely gave interviews and had won a Pulitzer Prize in 2007. They decided he was some sort of prophet of doom."
By the flickering firelight, Granddad could see Joel's eyelids beginning to droop.
"That's enough storytelling for one night, Master Bernanke. Go and make yourself warm under the blankets. We'll be safe in this cave until morning, then we'll press on toward the coast."
~ International Herald Tribune ~
