October 29, 2029: Black Hole Monday, Part 1 – The Future Environment
By Bryon Robidoux
Actuary of the Future, October 2023
Part 1 of this submission is a narrative and dramatization derived from the book The End of the World Is Just the Beginning: Mapping the Collapse of Globalization by Peter Zeihan. His book describes the current global Geopolitical landscape. Part 2 asks the question: What would happen to the insurance market if Peter Zeihan were correct?
The high school principal states over the microphone, "Please congratulate the class of 2063. They are officially graduates and are ready for the next stage in life!"
At the graduation party that night, Aunt Betty curiously inquires, "So Michelle, what are you going to school for?"
Dad proudly speaks up, "She is following in my footsteps! She is going to Maryville University in St. Louis to study actuarial science. She just finished taking a class over her first module."
Michelle responds, "Dad is pretty excited that I picked this path if you can't tell."
Aunt Betty asks, "What is the module cover?"
Michelle excitedly answers, "The history of insurance and its current state."
Dad asks, "Betty, I am going to get a beer. Do you want one?"
Aunt Betty, "Yes!"
Aunt Betty scoots to Michelle and says, "Tell me about this class."
Michelle asks in a shy voice, "Are you sure?"
Aunt Betty, "Yes, you are much better at telling stories than your father. Tell me about your favorite part of the class."
Aunt Betty, "It was our conversation of 2020 to today. The years in which dad was an actuary. Do you remember COVID-19 and early 2020?"
Reminiscing
Aunt Betty replies, "Oh my god, do I! It was a crazy time. Your dad and I were in college. Luckily, weed was being legalized around the US to calm us down. We had the capital riots, and China seemed poised to take over the world. But then it seemed overnight that China appeared to disappear. We had growing supply chain issues during that time, so it was hard to order things. Inflation was of little concern before COVID-19, but it was stubborn, like in the late 1970s. It got even worse!
One hundred years to the day of the 1929 stock market crash, we had the 2029 stock market crash. Also, there were a series of aftershocks throughout the 2030s and early 40s. There was famine worldwide. It started breaking out due to economies collapsing, and the world was in constant turmoil. Your uncle Marty McFly died in 2038 at age 45 because he could not find the doctor he needed, and the medical device was on backorder. I was unemployed for several years, and so was your dad. It was hard!"
Demographic Impacts of Globalization
Dad comes back with the beer and hands it to Aunt Betty. Dad shockingly says, "Why did you slam that down? Normally you are a sipper."
Aunt Betty replied, "We just started discussing the Great Deglobalization, which was like the Great Depression 2.0. The Great Deglobalization brought back some rough memories!"
Dad said, "Man! Those were rough years. Michelle, this is why you were not born until 2045, and I was in my mid-40s. We had to wait for that storm to blow over. Globalization planted in humanity a virtual virus that acts like Shingles. The virtual virus laid dormant for 84 years. The rapid increase in population and industrialization was our immune system. Globalization allowed for an increase in technology, which extended life spans. Much of the global population's growth was due to people living longer and not increasing birth rates. When the population started collapsing due to old age, our weakened immune system caused the virtual virus to attack with a vengeance due to our global interconnectedness!"
Michelle excitedly replies, "Deep, dad! We talked about why this happened. It is pretty fascinating as an observer. Aunt Betty, there was a good reason for the supply shortages. During globalization, the Chinese did not have enough children to replace the outgoing population due to urbanization and Mao's one-child policy in the late 1970s. This policy was a double whammy! Population replacement takes birth rates around 2.1 kids per couple China's birth rate plummeted to around 1.3 per couple.
As the Chinese died or could no longer work in the late 2020s, the working population could not keep up with China's pre-COVID production levels. This working-population collapse meant supply shortages started slowly and then cascaded over the decade as the population collapse accelerated.
Global Dependence
During globalization, we optimized all our supply chains, which meant there was very little diversification of suppliers. The emerging market countries industrialized, specialized, and monopolized certain exports. A shortage of a single link could muck up the entire supply chain, a significant source of rampant inflation. Everyone was hoarding supplies. People had to pay out the nose if they wanted them, which drove costs exponentially higher. This shortage caused a higher demand for products with extended supply chains, further exacerbating the issue.
The economy only worsened during the 2020s as the death velocity increased in China. When no hope was left, labor costs skyrocketed, skillsets died off, and foreign capital rushed out of China. The world depended on China to keep the money flowing, meaning a massive global economy driver dried up almost overnight. When China burst, the system bled a vast amount of cash and liquidity, which led to the worldwide stock market crash on Monday, October 29, 2029. We called in Black Hole Monday because you couldn't escape the aftermath. In 50-60 years, China went from nothing to being on par with the US. Our industrialization was much slower. As the old saying goes, the faster you industrialize, the faster you fall! But other phenomena made this time extremely difficult.
House of Debt
Along with optimizing supply chains during globalization, we went from supplying capital for new investments to providing money to roll over debt. The debt addiction made liquidity and collateral more important than interest rates. The dependence on revolving credit created a high dependency on safe assets, such as US Treasuries. This insatiable dependence made private firms inelastic at the cost of capital. The Gramm-Leach-Bliley Act of 1999 caused a large concentration among US financial firms and weakened the control of the US Federal Reserve. It didn't make firms too big to fail. It made them too interconnected to fail, which is why the Fed kept raising rates post-COVID in the mid-2020s but couldn't control things. A lot of slack developed outside of the Fed's reach during 84 years of globalization.
Limited Supply of Safe Assets
Dad, in a proud voice, responds, "Wow! You learned a lot in that module. The gut reaction of regulators was to make all insurance companies and banks hold vast amounts of capital, further straining collateral and safe assets. Because more than one holder can use the same bond as collateral, the Rehypothecation agreements create excessive leverage. When things go wrong, the person holding the collateral tries to find the source, which means that the whole interconnected chain can collapse while adding to market volatility. Aunt Betty, this was a significant source of our economic aftershocks."
Geographies of Success
Michelle interrupts, "Wait! The shocks were more than just the liquidity issue. The other countries didn't perfectly time with China's collapsing population and supply issues. Other emerging markets and European countries had the same demographic issues as China, but China was the whale in this story. The shocks occurred when other markets collapsed later. Deglobalization was an unwinding of the world's interconnected rat's nest. The US and other Geographies of Success relocated supply chains because they were the least impacted countries."
Aunt Betty asks, "What are the Geographies of Success?"
Michelle explains, "Geographies of Success are countries with plenty of lands to grow food, fossil fuels within their borders, cheap waterways to transport goods across the country, and a decent military to protect their position. Examples are the US, Australia, New Zealand, Argentina, and a few others.
When companies and capital flew out of China and other emerging market countries, the most highly skilled and strategic supplies moved to the US for US supplies. Everything else for the US moved to Mexico, Columbia, and Argentina to keep the cost structure like before the 2029 stock market crash. The supply chains were safe because America's Navy was big enough to protect the Western hemisphere. But the problem was that moving all those factories took ten+ years. It was hard to put Humpty Dumpty back together again when his pieces were scattered worldwide.
The Collective
But the bigger problem was that people with the skills to run the factories were dead or on the other side of the world. Our teacher used emergence and complexity theory to explain why the skills gap was an issue, but his explanation was a little hippy-dippy."
Aunt Betty asks, "What's emergence and complexity theory?"
Michelle responds, "It is the study of how agents with simple instructions and decentralized control combine to create complex and coordinated behaviors, like beehives and ant colonies. In an uncoordinated fashion, we all belong to a global collective responsible for collecting the world's knowledge and know-how, which we store in manufactured items and ship worldwide.
Think of planet earth as a beehive. Each person is a bee. Our flower nectar is oil. Our honey is knowledge and know-how. We worker bees exist to gather expertise and bring them back to the hive. Each bee can only collect honey from a small part of the world. They evolve to maximize their collection capability for their area, which forces them to have highly specialized skills. Specialization immensely increases yield and causes geographically concentrated skills. If the environment changes faster than a species can evolve and adapt, the species will likely die out.
Through globalization, this beehive-like behavior allowed everyone to gain highly specialized, geographically concentrated knowledge and know-how. As bees transform nectar into honey through productized digestive processes, we change the oil into knowledge through training using time-consuming experiences and social activities. The expertise concentrated and embedded in our social networks makes it extremely hard to copy and move to other locations.
The skills gap and supply chains also explain why 2063 technology is pretty much the same as in 2023. When people die off, so does the knowledge of the collective. Therefore, technology's exponential rise became flat and even negative in some cases, meaning quantum computers, fusion reactors, and self-driving trucks are still out of reach for my generation. Only through the extreme specializations of globalization could our technology grow exponentially."
Labor Dichotomy
We also talked about the dichotomy of employment in the 2030s, when you and dad were unemployed. Due to the skills gap created by the population collapse, you simultaneously had mass unemployment and labor shortages.
Dad answers, "You would think we could quickly retrain people with the internet and fix the supply chains. But instantaneously retraining people is impossible. As you learned in class, it takes time for people to learn new skills, especially if the generation with the skills is dying off. Training and retooling people is tremendously challenging. This fact resulted in all kinds of political tensions.
The people on the other side of the world with skills wanted to migrate to countries with Geographies of Success. But the locals were not welcoming due to the mass unemployment. They felt the immigrants were taking their jobs, but the locals lacked the skills for the newly built factories. With so much fear and political rhetoric, no one could step back and see the big picture, which plagues the world when they only follow the headlines."
Michelle responds, “Ouch! How did this impact insurance? I am curious about your perspective versus my class."
… to be continued.