Home > Economics, Energy, Finance and money > It’s de ja va all over again

It’s de ja va all over again

Ever since this financial crisis exploded in 2008 there have been commentators likening it to the 1930s. Steve Keen explains that private debt levels (never mind the sovereign debt sideshow) are higher than they were in the late 1920s. Paul Mason recently drew parallels with the 1930s in order to discuss various policy responses that might occur.

From an economic policy view, the 1930s crisis was often viewed as a problem of lack of demand. So demand stimulation came to the recue in various different guises. The diagnosis of the 1930s by Karl Polanyi viewed the crisis in terms of social reactions to the damage caused by un-fettered market economics. The blog post Wall of Illusions covers this viewpoint quite succinctly.

However, Polanyi may have missed an important aspect of world economic development. Perhaps the US New Deal, the rise of Fascism & state Communism were actually experiments in socioeconomic structures for optimising demand stimulation. The late 19th century and early 20th century bore witness to enormous increases in economic productive capabilities. The challenge for the economic policy maker was to indentify the best method for creating demand to satisfy this tsunami of supply. Naturally warfare is one method for achieving this.

The success of the Social Democratic mixed economies that emerged post World War II could be attributed to it establishing the least worst method for demand stimulation. Therefore, the debt-based demand growth model (whether by Gvt, business or private households) was the most socially acceptable method for ramping up the global economy to exploit the enormous energy and resource supply that was unearthed. The US and dollar reserve currency rode to the challenge of being the engineer and engine of a profitably expansionist global economy.

In the current crisis the enormous debt overhang threatens to constrain demand. Steve Keen’s exellent analysis of the debt burden, highlights how debt payments are prohibiting real economic growth.

But this is only part of the story.

As we actually reaching the peaking out of many natural resources, crucial for economic growth, the current crisis will be mired in insurmountable problems of supply.

This chart of G7 economic growth is showing a secular downward trend. From growth levels of about 3% p/a in the 1990s to stagnation in 2010 – 2015. This confirms a secular slowdown of -1% in growth every 5 years, which a major turning point happening about now.

The chart confirms that major developed economies are platauing in terms of economic productivity. If we link this plateau with the energy & resource constraints staring us in the face and you can only conclude that the world’s major economies are incapable of supplying the necessary cost-effective inputs to power economic production, regardless of fiscal and monetary stimulus. The capitalist economy’s acceleration addiction is getting an unwelcome dose of cold turkey.

The mainstream policy response will be two fold. Firstly, a desperate clinging to the high demand expectations, fully embeded in the zealotry surrounding the neccessity for creditors to be made whole on their expansionist lending practices. All efforts possible will made to maintain (or even grow) debts as the dogma suggests that only this can hope to create the neccessary demand stimulation.

As supply shocks also become apparent, we should also be wary that in a last gasp pique of laissez-faire de-regulation (of labour & environmental protections) will be imposed too. The migration of production capacity to large developing countries has only ever been to achieve the illusion of permanent supply growth. But this has already come at extreme social costs, such as mounting personsal debts, rising unemployment, declining social welfare. The desperation is only likely to push this further and further.

This is the legacy that predatory capitalism is delivering for the world. Energy and resource supply at any cost. Regardless of the impact on the environment, on people’s health or their quality of life.

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  1. November 4, 2011 at 10:45 am | #1

    All so true Tragically so.

  2. January 4, 2012 at 11:09 am | #2

    As Jim Rickards highlights in his recent book “Currency Wars”, the period between 1914 and 1945 marked the transition from the UK’s Pound Sterling to the US Dollar as the world’s reserve currency for international trade.

    How much longer will the US hang on?

    http://forensicstatistician.files.wordpress.com/2012/01/20120103_jpm_reserve.png

  3. July 24, 2013 at 6:25 am | #3

    Hi Hawkeye,

    finally got around to focussing on reading the links you posted at Golem XIV. Where I posted today regarding my reading so far this summer on Reality.
    On the subject of reality from a scientific perspective Poppers Falsifiability is very powerful and poses very challenging questions regarding testing hypothesis and theories.
    A revelation for me in this direction is the notion of Fossil Fuels, It never occurred to me that this was a theory. Long chain Hydrocarbons isn’t so compact but is actually more correct usage. Callling Liquid Hydrocarbons Fossil Fuels, whilst it may be true that some are is a prohibition on thinking outside of the box on the issues ( not least the environmental issues) which seem crowded out of much of the thinking we are allowed to do as a civic society.

    Anyway these three articles are worth reading.

    http://en.wikipedia.org/wiki/Abiogenic_petroleum_origin

    http://en.wikipedia.org/wiki/Nikolai_Kudryavtsev

    https://mail.google.com/mail/u/0/#search/peak+oil/13fd8bdc3ed61520

    As an aside my father in law is a mobile combine harvester engineer and was telling me about a client who grows Malt 10 hours drive North of Stockholm. The planting season is Late May early June, The Snow goes around the second week of May and is back some time in October. But he plants and harvests along with his neighbors several thousand acres most years ( Last Year the Snow beat the Harvest window.) The point being there is 22 hrs of Sunlight June July August September. This made me think about the Solar energy implications in a linked system Nothern and southern hemispheres. Obviously its an interesting example of how our pre disposed notions of what is possible can be chalklenged?

  4. July 24, 2013 at 3:33 pm | #4

    Hi Roger

    Thanks for the reply. Could you resend the 3rd link, as this seems to be based on a gmail link?

    I would class myself as a sceptical empiricist, along the lines of Nassim Taleb. Therefore, I don’t believe that there is an absolute truth, or an absolute proof, i.e. Popper is a bit too extreme / abstract, but I do agree with his principles of falsification, but we must also proceed with practical judgments in the absence of full information. We humans make models of the world, and we should test them against evidence. Scientific theories should be tested against what they can accurately predict, and of course they need to be falsifiable.

    I haven’t studied the Abiotic theory of oil that much, but am very sceptical about it. What is the “falsifiability criteria” for this model? As I understand it, geologists have found oil reserves in places where the topography of the planet are suitable to have captured and compressed biomass. The Abiotic theory doesn’t appear to have provided anywhere near as successful method for predicting where oil might be. Besides, even if it were true, then what does this theory offer to explain what did indeed happen to all the decayed biomass from millions of years ago?

    Happy to look more into this, but at the moment I’d say the odds are 99:1 in favour of the fossil fuel theory. It’s not 100:0 closed case, but at the moment the Abiotic theory has failed far more conclusively than the fossil fuel theory.

    - Hawkeye

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