We are in the midst of a depression / debt deflation, but one unlike anything beforehand. This is truly global. Truly interconnected, and truly uber-leveraged.
No bank is safe, no asset is safe. No currency is safe and no country is safe.
The pyramid scheme is collapsing under its own weight. Yet the twin vortices of inflation and deflation are disorientating us all. Disguising the underlying tensions and masking the future collapse.
The real economy is unable to supply productive capacity growth. We are hitting the buffers in terms of efficiency gain and real economic growth.
With the extortionate rise in money, debt, assets and derivatives we have deluded ourselves into thinking this reflects the true potential of future productive capacity. But that cannot be realised in the real world. The monetary assets actually represent negative inventory (belief that one holds a permanent claim on something tangible in the future – a long term call option as it were).
As energy declines, then real productive capacity is likely to fall too, which means that there will be less REAL assets for consumption to go around. The longer we continue to try and prop up the fictitious leverage, the longer the divergence between ever rising expectations and yet declining real capacity.
Deposits have been rehypothecated, mortagages have been rehypothecated. The nation’s Gold has been too, and in a very real sense our whole economy has.
The amount of claims far exceed the real assets to back them. It is nothing but naked leverage; the only thing holding up our fabricated sense of wealth and international power. Leverage that lurks in the shadow (banking system) until the claims start coming in. So how does this get settled? Are all claims on assets devalued equally, or do only a select few get to keep their claims whilst the rest of us get our fingers burned?
This excellent post on Golem-XIV so graphically highlights both that the claims are coming in (and so the leverage is collapsing behind the scenes), but also that the pyramid builders are making their exit and blocking the rest of us from escaping. They don’t want to get trampled as everyone dashes for the exits.
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.
This post is an excerpt from Richard Heinberg’s recent newsletter (Museletter!). Apparently it is based on an op-ed which the mainstream press seemed reluctant to publish. Perhaps because it challenges the endemic assumption that as long as certain policy prescriptions are followed (Austerity from the Right, Stimulus from the Left) then economic growth will continue.
Both mainstream views miss the vital point that Richard lays out below:
During recent weeks, evidence has piled up that U.S. and European economies, far from recovering, are swirling back into recession. Failure of American politicians to address the federal debt crisis, the U.S. credit rating downgrade, and increasing fragility of European economies have investors running for the hills.
Concern is being voiced that we may be at a fundamental economic turning point. Deutsche Bank’s strategist Jim Reid even suggests that the western world’s financial system might be “totally unsustainable.”
As it happens, I’ve just published a book, The End of Growth: Adapting to Our New Economic Reality, that reaches the same conclusion, and that foresaw the economic relapse that’s playing out in headlines. The book’s content was finalized in March, when economic data appeared to show the nation in a recovery. I suppose I’m justified in saying “I told you so,” but others are as well. Herman Daly, former World Bank economist, has pointed out the absurdity of expecting continual economic growth on a planet with limited resources. Paul Gilding, former head of Greenpeace International, explains in his book The Great Disruption why climate change and resource depletion are bringing world economic growth to a close. And Jeremy Grantham, co-founder of GMO (one of the world’s largest investment funds), argues that, with ever more humans competing for a finite supply of natural resources, rising prices of metals, oil, and food are decisively choking off GDP growth.
Even if we are being proven right, this is no time for victory laps. Here’s the point. Daly, Gilding, Grantham, and I are saying that as humanity has chewed through the low-hanging fruit of our natural resources and has turned to lower-grade and more expensive ores and fuels, managers of the economy have attempted to keep growth going by piling up debt in the mistaken belief that it is money that makes the economy run rather than energy and raw materials. Now we’ve reached limits to government and consumer debt, and the realization of that fact is sending financial markets into fibrillation. If energy supplies and debt are both stretched tight, that means more economic growth isn’t possible. Worse, if policy makers fail to realize this and continue assuming that the current crisis is merely another turning of the business cycle, then we lose whatever opportunity still remains to avert a crash that could bring civilization to its knees.
Admittedly this is still a minority point of view. After all, in the “real” worlds of politics and economics, growth is essential to creating more jobs and increasing returns on investments. Questioning growth is like arguing against gasoline at a NASCAR race.
Liberals believe that stimulus spending by government will boost employment and consumer spending, thus flipping the economy back to its “normal” growth setting. But stimulus packages of the past few years have produced only anemic results, and governments can’t afford more of the same.
Conservatives nurture faith that if government spending shrinks, that will liberate private enterprise to grow profits and jobs. Yet countries that implement austerity programs show less economic growth than those whose governments borrow and spend—until the spending spree ends in bond market mayhem.
Neither side wants to acknowledge that its prescription no longer works, because that would imply the other side is correct. But maybe both liberals and conservatives are wrong, and growth is finished.
If Daly, Gilding, Grantham, and I are right, this is scary business. But there will be life after growth, and it doesn’t have to play out under conditions of misery. With less energy to fuel globalization and mechanization, there should be increasing need for local production and labor. We can reorganize our financial and production systems so that everyone’s basic needs are met. Indeed, if we focus on improving quality of life rather than increasing quantity of consumption, we could all be happier even as our economy downsizes to fit Nature’s limits.
But that benign future is unlikely to transpire if we all continue living in a dream world where growth knows no bounds.
The alarm bells are ringing. Wake up to the post-growth economy.
If economics would like to consider itself a “science”, then it should be willing to be subjected to genuine scientific scrutiny.
The next 10-20 years will offer us perhaps the most damning expose of the fallacy of modern economics. The true test of a scientific theory is its ability to make testable predictions. Therefore we should compare the expectations laid out by mainstream economics with those from less orthodox origins.
Relentless (linear) growth is assumed to be possible, as long as mankind adopts the bureaucratic / technocratic prescriptions of the economic preisthood. This is the Solow growth model embeded in neoclassical economics.
By contrast in 1972 predictions of global economic growth, population and resources were made by the Club of Rome team’s “Limits to Growth”. The predictions made by this report are consistent with the field of Ecological Economics which places the human economy WITHIN the worlds natural resources. So far, their predictions are worryingly accurate:
(Chart Courtesy of Charles Hall’s Revisiting the Limits to Growth)
The Club of Rome’s model offers a considerably more plausible representation of the world economy than that postulated by traditional economics. The model relies on stocks and flows of various inputs and outputs, the rate at which is dictated by certain rules and feedback loops. Key aspects of the model are:
1) the world has a finite set of resources
2) industrial production requires resource inputs
3) the rate at which these resource draw downs are occuring are not underestimated
4) the consequence of resource extraction & consumption yields pollution
Therefore, the model does not disobey basic laws of physics, such as thermo-dynamics. So from a theoretical point of view it is superior to any Neoclassical model no matter how elaborate their mathematical prowess. Mathematics should represent reality, not replace it; and the Club of Rome model achieves this.
From a practical view, the model predicts world food per capita peaking in about 2010. Real world events are bearing this out. The model also predicts peak resource extraction (steepest decline of the blue line) between 2010 and 2020. Many in the “Peak Oil” community share this synopsis. Peak Industrial Output per capita, and Peak Services per Capita are also predicted to be on the cusp of steep declines.
If the next 5-10 years follow these trends then it will become even more untenable for the traditional economists to hold sway over the population and politicians.
But even more foreboding is that it is just as plausible for many in positions of power and influence to try and distract and deny these problems publicly, whilst privately understanding this dynamic. Instead of informing, educating and preparing the nation for the unsettling future, many in power may simply resort to hoarding wealth, influence and access to these dwindling resources.
Portentous times, indeed.
“From a physics perspective it seems natural to suppose that economic wealth is an abstract representation of a capacity to do something. If so, then economic value, adjusted for things like inflation, should be directly proportional to the rate ( in Watts) at which civilization consumes energy (e.g. coal, oil, uranium, etc.). Nothing in the universe happens without energy being transformed from one form to another. The global economy should be no exception.”
A more indepth discussion of the LTG book and the academic assualt against it see:
The way to appreciatie how I arrived at my conception of “Sell Freedom, Buy Control” is to study two things that happened in the early 1970s:
Firstly, in 1971 Nixon closed the Gold Window. The US economy had started to hit certain fiscal limits. The monetary system was trying to tell us that we might be nearing the buffers. The evidence of problems was there for all to see.
Secondly, the book “Limits to growth” was published in 1972. It told of the dangers of presuming infinite growth in a finite world. It sold millions of copies and had the potential to shape both policy and expectations of people in the developed world. What ever happened to those concerns about our limitations?
The backlash was formidable. The extent of propaganda aimed at demolishing the idea of resource limits was matched by the sheer extent of economic manipulation to support a more upbeat narrative.
The US subsequently embarked on a re-structuring that essentially involved it extracting tribute from the rest of the world (rather than growing benignly / organically). Tying in Western Europe and Japan to a fiat money mirage kept the illusion going. It bought 30-40 years of apparent peace and stability. It also provided the basis for a fundamental re-structuring of wealth and class relations; all operating covertly.
Since 2007 the house of cards is starting to topple; meanwhile the bilking of the system is just becoming more overt, if you just know how to look for it.
David Harvey’s “A brief history of Neoliberalism” is a great primer on the economic & social warfare aspect of the current crisis, showing how the 70s marked a turning point
David Strahan’s “Last Oil Shock” covers the resource issues and the extent of insider / political manipulation that has been happening for the last 30-40 years to hide the impending problems from the public.
Taken together a credible narrative of our times unfolds.
For a more jovial (but no less powerful) summary, Rob Newman’s History of Oil is a truly eye-opening account of the 20th Century, and what may be in-store for the near future:
This is the story of our times. But it is one that the media refuses to tell.
A recent blog by John Michael Greer clearly explains the background to his theory on Catabolic collapse, and why we are likely to be in the midst of a second shock wave to hit Industrialism. Greer dates the first shock wave to be in 1974 when much of the UK & US Industrial base began to disintegrate.
I’ve recently read two of his books (The Long Descent, and The EcoTechnic Future) both of which are informative and uplifting. Greer manages to temper visions of the future to establish a sensible middle ground that falls between the absurdly optimistic common perception and the hardnosed Dystopian (Mad Max) view.
I’ve not covered much on the link between Economics and Energy yet, but watch this space.