As we know it

There is an enormous difference between ‘the end of the world’, and ‘the end of the world as we know it’. The former has never happened, at least in recorded history, although Noah apparently got pretty close. The latter happens with remarkable regularity, although most people tend to deny even the ex ante possibility, let alone the ex post fact. When the-end-of-the-world-as-they-knew-it occurs – and assuming they survive the upheaval – they just adjust as best they can and carry on.

That’s what happened after mega-upheavals such as the French Revolution/ Napoleonic period, and after both the First and Second World Wars (which will surely come to be seen as a single elongated event/ period, like that of 1789-1815). It also happens after less dramatic developments, which may not include wars or even violent revolutions, but nevertheless mark the end of an era for nations or societies — so that for vast numbers of people, the world as they knew it was changed profoundly and irrevocably.Take, as a fairly recent example, the period of 1973-1980 which saw a major recession, high inflation and severe economic dislocation, against a background of demographic change (the baby-boom generation coming of age and joining the labour force) and geo-political tensions around the world. From the point of view of citizens of most Western countries, this period was a watershed, after which their lives and lifestyles were altered in many critical ways. Jobs were no longer readily available and ‘lifetime employment’ became increasingly rare, until it eventually disappeared as a standard feature of labour relations. Real incomes began to erode for the middle classes so that individuals and families had to work more/ harder to achieve/ maintain the standard of living they aspired to. The era of reconstruction and rising prosperity that began in 1946 had come to an end.

The world – certainly the Western world – is today at a similar point. The-world-as -we-knew-it in the 1980s and 1990s has come to an end. The fact that most people are not yet aware that that is the case doesn’t mean it hasn’t happened; it has, but they haven’t realised or, if they have, they haven’t begun to absorb the knowledge and, having internalised it, to adjust their thinking, expectations and behaviour accordingly. It was no different in 1975: there was no announcement that the world had fundamentally changed, on the lines of the fall of the Bastille  in 1789 – in other words an event that forced its way into the consciousness of thinking people and pushed them to the realisation that a new ball game with different rules was getting underway.

Absent that kind of mega-event, it is possible for people with a vested interest in the survival of the ancien regime to make believe that the old rules from the previous era till apply. Today that means, for instance, that people continue to believe that credit will be available – nay, is available, that regulation of financial intermediaries will continue to be lax and undemanding and, above all, that asset value will continue to rise. Secondary, but very important features of the old world, included growing disparities in income and wealth and the distortion of the labour market by the use of capital market instruments (think stock options) as a key element of employee compensation.

It is virtually impossible to know, or even venture to predict, what might come next, in the positive sense. But it is a fairly sure bet that the aforementioned aspects of the old world will disappear. Houses, whether in California, Ireland, Spain or wherever, cannot generally sell at prices totally detached from their rental value, people’s earnings power and the value of other assets. That is the definition of a bubble, and that one has burst. Shares cannot trade for ever on the basis of valuations that assume the record profits of recent years will be maintained into the future – so these valuations, and hence their prices, will fall sharply. And so on.

The economic and financial upheaval now getting underway will also trigger huge shifts in the structure of society and the power of different social groups and strata – what is commonly called politics – but in ways that are even more difficult to guess at in advance. After all, did anyone – even Alvin Toffler – envisage in 1975 the way Western economies and societies would function (and malfunction) in 2005?

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