Will 2023 Be "Just An Average Recession In An Average Year" Or Will It Be Transformational?

  I also believe that 2023 will be a transformational year on par with 1989 or 2008... if we are lucky. It could also be on par with 1914 or 1939...

Authored by Charles Hugh Smith via OfTwoMinds blog,

It shouldn't surprise us if 2023 turns out to be atypical and disruptively transformational in ways few believe possible.

It seems expectations about 2023 cleave neatly into two camps: the dominant mainstream view is that 2023 will be economically difficult due to a mild recession, but this will be nothing more than a run-of-the-mill recession.

Inflation will likely moderate but remain higher than recent averages. Everything else--politics, social issues, entertainment, fashion, social media, etc.--will continue on whatever path it is currently on.

In other words, 2023 will be much like any other year.

The implicit assumption in the mainstream view is that historical cycles are figments of fevered imaginations. The flow of human history is entirely contingent and follows no pattern or cycle.

The much smaller "outlier" camp sees the potential for a disruptive transformational year.

Those of us who conclude cycles are based on the ebb-and-flow dynamics of credit, energy and human nature and are therefore not just real but consequential despite their predictive imprecision see 2023 as a potential pivot in cycles which entered a new phase in the 2020-2021 time frame.

This cyclical shift isn't a result of Covid or the response to Covid. It's the result of diminishing returns and the exhaustion of the dynamics which powered the previous era: hyper-financialization, hyper-globalization and low-cost, abundant energy.

In terms of human nature, confidence and complacency rise and fall, euphoric greed and panicky fear ebb and flow and as Peter Turchin has demonstrated, order and disorder take turns as reasons to cooperate decay into reasons not to cooperate.

As David Hackett Fischer demonstrated in The Great Wave: Price Revolutions and the Rhythm of History, systemic increases in price--what we call inflation--sow the seeds of economic, social and political disunity, conflict and collapse.

In his book The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization, Thomas Homer-Dixon proposes a cyclical dynamic powered by the relative costs and rewards of participation in the status quo:

Once the costs exceed the rewards, people lose the incentive to support the status quo with their labor and participation. They drift away (what I term opting out) or reduce their effort to align with the diminished rewards and opportunities to advance their own interests.

The Russian economist Kondratieff famously observed how credit cycles between expansion and contraction, and this cycle powers economic expansion or contraction.

The Collapse of Complex Societies by Joseph Tainter outlines a dynamic in which the advantages of adding complexity to a social / economic system are substantial at the beginning but as the returns from additional complexity diminish, the costs eventually outweigh any gains and the system decays.

The success of adding complexity is institutionalized by the status quo, which then clings to this strategy even as the returns on adding complexity become negative and thus destructive.

I call this "doing more of what's failed."

Other systems analysts (Donella Meadows et al.) have illuminated the nonlinear character of systemic transformations. Ugo Bardi calls this "The Seneca Cliff": systems which expanded slowly and steadily can decay and collapse quite suddenly and violently, surprising everyone who took the previous stability as permanent.

Systems follow their own rules, and so unlike politics, our opinions don't change the results.

All of these dynamics are (in my analysis) clearly visible in the global status quo. The rational conclusion is the risks of disruption, disorder and conflict as things decay and fall apart are relatively high.

While some trends and conflicts can last for decades (the Thirty Years War in Europe, the Cold War between the US and the USSR), diminishing returns on status quo "solutions" that no longer work as anticipated tend to unravel on the periphery which then spreads quickly to the core.

Those economies and societies which are hidebound / centralized politically and economically are brittle because they lack the systemic means to adapt quickly and successfully to diminishing returns and seismic shifts in price and the availability of essentials.

Brittle systems that lack the structural means to adapt decay and collapse. This is scale-invariant, which means this is equally true of households, small businesses, global enterprises, nations and empires.

There are many such brittle systems in the global status quo, and to expect all of them to remain stable as diminishing returns start yielding negative returns (i.e. cost more than they produce in gains) and scarcities drive prices higher than the bottom 90% can afford as inflation reduces the purchasing power of their earnings--this expectation is based on a confidence that past trends are essentially permanent and every system in the world today will adapt successfully to scarcity, disorder and the reversal of financialization and globalization.

Maybe this will be the case, but given all the dynamics that are so readily visible, it would be prudent to consider the potential for dominoes falling on the periphery (i.e. in "places that don't matter") will soon be toppling dominoes in the core centers of power and control.

In my analysis, the dominant dynamic is always natural selection. Our opinions and projections don't change anything. What divides the systems that endure and become stronger and those that decay and collapse is their evolutionary vigor, which is a function of decentralized competition, transparency, sharing of information and experimentation that is rewarded rather than punished.

I cover these dynamics in my book Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States.

Simply put: systems that view dissent and disorderly churn as threats will decay and collapse because the most powerful forces of adaptability are dissent and disorderly churn.

It shouldn't surprise us if 2023 turns out to be atypical and disruptively transformational in ways few believe possible.