Deindustrialization and markets

Rook: I hear what you're saying, but why are the markets not responding to the high probability of future deindustrialization? Shouldn't they portend our future doom if this is a significant risk?

Bishop: Not necessarily. Imagine I offer you the following bet: if it snows this August then I will pay you $10. If it doesn't snow this August then you will pay me $0. Do you accept the bet?

Rook: Yes.

Bishop: Because you believe it will snow this August?

Rook: Of course not! I'm accepting the bet—despite the odds—because I stand to lose nothing and possibly gain something.

Bishop: So it was a purely rational decision to bet on snow this April?

Rook: Yes.

Bishop: Perhaps markets behave much the same way.

Rook: But we're not talking about snow futures.

Bishop: True. We're talking about deindustrialization. If the world begins deindustrializing, it is likely that many if not most monetary investments will fall to $0, given enough time. This is because, holistically and analogously reasoned, the shrinking pie will necessarily result, on average, in its slices becoming smaller. Reductionistically, most investments are suited for inflation or deflation but not both, and a chaotic oscillation between inflation and deflation will wipe people out, given enough oscillations, as it will be exceedingly difficult to predict when the next wave hits.

Rook: I don't see what this has to do with our bet example.

Bishop: Look at it this way. Even if the probability of deindustrialization not occurring is the same as the probability that it snows this August, the markets may still have rational reason to bet on deindustrialization not occurring, just as you had rational reason to bet on it snowing this August. This is because most investors will be wiped out if deindustrialization does occur, no matter what they do, so they may as well bet on continued industrialization, however slight the odds.

Rook: That logic seems a little backwards to me.

Bishop: It's rather straightforward. Imagine that, no matter what financial preparations you make, deindustrialization will wipe you out.

Rook: Okay, I can accept that as a hypothetical.

Bishop: In that case, it doesn't make sense to make financial preparations for deindustrialization, correct?

Rook: Right, since I'll achieve the same result regardless of my preparations.

Bishop: So you may as well make financial preparations that are best in case deindustrialization doesn't occur, even if deindustrialization not occurring is unlikely, correct?

Rook: Aha! Now I see what you're saying. I may as well make financial preparations based on the scenario I do have some measure of control in, regardless of the likelihood of that scenario coming to fruition.

Bishop: Exactly.

Rook: That's an interesting point and one that is based on the not-so-difficult-to-swallow assumption that deindustrialization would likely wipe out most people financially. But a doubt lingers in my mind: why not invest in non-monetary investments like homesteads, farmland, or transition towns? Surely these will not all be wiped out in the case of deindustrialization.

Bishop: Well, from the outset we tacitly assumed that markets are rational, which may not be the case. There's a human side—an intrinsic emotional side—to investing as well, and I posit it goes something like this: anyone with money can invest in a monetary asset such as a stock, bond, or a mattress stuffed with cash. Such investments are fundamentally passive and don't require much from the investor and especially don't require him to make fundamental changes to his life. Investing in non-monetary investments, such as becoming a farmer or moving to a transition town, do require the investor to make active, personal changes. In some cases these changes are quite extreme, and many people are understandably not terribly enthusiastic to take on such a large social or spiritual risk. It may be easier and safer to risk one's life savings instead.

Rook: Your betting example deals only with the financial side of things; surely some people will make non-financial preparations, such as learning farming or moving to a transition town. It seems that we should see an increase in these kinds of investments.

Bishop: And exactly we do! Some people are moving into rural areas and becoming more self-sufficient. They have for years, for fearing the collapse of industrialization is nothing new. People are setting up transition towns, which are new, for fearing the collapse of the biosphere as we know it is new. And we see plenty of trends of much simpler, less personally invasive non-monetary investments: people planting gardens in their backyards, women taking up knitting again, people embracing alternative medicine, the whole DIY scene, and so on.

Rook: Even so, I'm not convinced that deindustrialization is going to happen.

Bishop: And right and prudent you are to believe that. Remember, we're not talking about whether deindustrialization is going to occur or not; we're merely talking about whether the financial markets will offer us a useful signal before it does occur. And the prudent conclusion is: not necessarily.

Rook: So you're saying that people may not have reason to believe that deindustrialization is going to occur until it already begins occurring?

Bishop: No, it's actually worse than that. It might be that people will not have reason to believe that deindustrialization is occurring until after it has already begun. After all, what other metrics would you use to reach this conclusion if not the financial markets' indices? How would you know what's going on? But this, I think, is a topic for a different discussion.