Showing posts with label banks. Show all posts
Showing posts with label banks. Show all posts

Tuesday, 3 March 2020

Responding to Collapse, Part 16: Shortages of Money, Part 1

A few posts back I said that shortages of electrical power, diesel fuel and money will be at the heart of the troubles that lie ahead for small remote communities as collapse progresses. I am interested in that sort of community because that is where I am recommending that you take refuge in order to ride out collapse (and where I have already taken refuge). I've covered electrical power in parts 10 to 14 of this series and diesel fuel in part 15, so that leaves money for this post and the next one.

We'll be looking at shortages of money from two angles here. First, in this post, shortages that occur when you have money on deposit at the bank, or credit prearranged with the bank, but can't access it due to problems with the banking system. Second, in the next post, shortages that occur when you have trouble earning enough money to live on because of problems with the economy.

The song says, "money makes the world go round". You could certainly be forgiven for believing that, especially given the increased commodification of everything that has been going on, and the growth of the financial sector of the economy in the last few decades. I don't agree, though. Drawing from the writings of Dr. Tim Morgan on "surplus energy economics", I would say that it is energy that makes the world, or at least the economy, go round.

We'll get back to the role of energy in the economy in my next post, but first let's look at money itself. Money is really just a system of tokens we use as a medium of exchange, a unit of account, and a store of value.

Conventional economists tell stories about how before money was invented, people had to barter for what they needed but couldn't produce for themselves, and this was very inconvenient. In fact, as an anthropologist would tell you, barter was used only on those rare occasions when they were trading with strangers, and often with the intent of gaining a (possibly unfair) advantage. They were strangers, after all.

Most people usually dealt only with people they knew and didn't want to cheat. In small groups (less that Dunbar's number) there was no need of money since people just did what was needed, didn't attempt to keep precise accounts it, and accumulated little of value to store. This was primitive communism which worked on the principle of "from each according to their ability and to each according to their needs."

As people began to live in larger groups, it proved useful to have some way of keeping track of transactions with people outside one's immediate group. I'm not going to go into the historical details here (read Graeber's book if you are interested), but eventually we arrived at the system we use now.

Today money is created when a bank loans it out as debt. The main thing about money created as debt is that it can increase flexibly as the economy grows, where money based on precious metals is limited by the scarcity of those metals. In order to make a profit, which is after all the reason for their existence, banks insist that those loans have to be paid back with interest. This means that the economy must continually grow in order to cover that interest. As long as the economy is growing, this system works quite well. Indeed that is why we adopted it, to accommodate the growth stimulated by fossil fuel energy.

Only a tiny fraction of money ever exists as coinage or bank notes—mostly it just consists of entries in the banks' accounting software. Coinage confuses the issue of what money really is, since coins at least appear to be made of precious metals. Many people believe that money based on precious metals (gold, silver) has some real value, because of their rarity and the difficult of mining them. They call our modern debt based money “fiat currency” because its value is based solely on your confidence in it. I disagree. Take gold as an example—it has some limited industrial use because of its low electrical resistance and high corrosion resistance, but its current high market value is based almost entirely on what people think it is worth. In fact all money is an abstraction and its value is based only on what value people agree to give it.

Indeed the financial sector of the economy is largely based on trading in money itself as well as stocks, bonds, and derivatives. Much of the so called wealth in the world is based on these things, and their value is almost entirely based on public confidence in them. If the confidence evaporates, so does the wealth.

I would define wealth as an enforceable claim of ownership on things with real value, or an enforceable claim on future productivity, yours or someone else's. The value of money in the bank or investments, is based on a claim on future productivity, and if that productivity decreases, so does the value of your claim on it. And, of course, if your claims become un-enforceable, as they might if the financial sector or society itself experience disruption, your "wealth" is worth nothing.

In the last few decades the switch over from primitive communism to modern neoliberal capitalism has been just about completed. The idea of an "immediate group" has largely disappeared, much to our loss, and money mediates almost all relationships, even to some extent within nuclear families. This means that we are very much dependent on the systems which provide us with money, and via that money, the necessities of life.

Today most of us access the cash we have on deposit at a bank via an automatic teller machine (ATM) or less commonly via a human teller at the local bricks and mortar office of our bank. And more and more we use debit cards to eliminate actual cash altogether, accessing our bank deposits directly at point of sale terminals. Many of us also have credit cards allowing us to access credit up to a prearranged limit at ATMs or point of sale terminals. Some of us, who are undertaking rennovation projects or operate small businesses for instance, have arranged lines of credit at the bank, at much lower interest rates than credit cards. This form of credit is usually accessed via cheques or online transfers.

But having cash on deposit or prearranged credit is no good if you can't access it. Ready access to money relies on infrastructure that can fail quite easily. A local grid failure or damage to communications cables can knock out ATMs, point of sale terminals and the banks themselves—you may have noticed that, when you are dealing directly with a human teller, they are making entries in a computer while dispensing or receiving cash. Cash itself has to be delivered regularly to both ATMs and banks and shortages of diesel fuel or storms closing the highways can stop those deliveries.

Financial crashes, recessions or depressions can cause banks to fail and take your money down a financial black hole with them. And during such crises the banks who don't fail get very cautious in their dealings with each other and the public. This is like throwing sand in the gears of the economy, and makes the situation worse. In such an event, you can except that your access to credit will dry up and that even your access to cash on deposit will be limited, since the banks will be concerned about nervous people deciding to withdraw all their money, in what is known as a "run on the bank". The banks, of course, don't have enough cash on hand to cover all the deposits that people have made, and would likely limit you to taking out only a few hundred dollar a week, at most.

The simplest preparation for these sort of problems is having a chunk of cash on hand, enough to see you through a few days or weeks at the worst. And having a stock of food and other essentials on hand so you don't need so much money to spend in times when the banking system isn't working.

A lot of people seem to think that a long term failure of the financial sector would be the end of the world, or at least of the economy, and believe that it is the form that collapse will take. But remember an economy is just a system in which the things people need are made and exchanged. Among small numbers of people who know each other (or can quickly come to know each other), and certainly in emergencies, it is quite possible for such activity to continue without anyone keeping track of it. The thing, of course, is to have close to hand the resources from which to make what is needed. In large population centres, once shipments stop, this quickly becomes difficult. In small agricultural communities, it need not be so much of a problem.

In communities of more than a couple of hundred people, it would be useful to print and issue a local currency and set up accounting systems separate from the no longer functioning banks. The idea that we can't get by without banks irks me—they currently have a monopoly on the services they provide and on which we depend—and they make a generous profit in that business. If they can no longer do their job, then we should feel free to replace them as needed.

As my regular readers know, I believe that collapse is actually something that happens quite slowly, has been going on for the last 50 years or so, and will be continuing for years or probably decades to come. But, when it comes to money, I can see why many people seem to have their hearts set on a fast collapse. Such a collapse would be much harder, of course, but at least your creditors, landlords, etc. would be collapsing with you and wouldn't be able to come after you for what you owe them. Leaving you free to concentrate on the business of survival.

In a slow collapse there will be a period of time (already started, actually) when the banks and landlords still want their pound of flesh, but many people no longer have jobs, or good enough jobs, to pay them.

That will be the subject of my next post.

As I have been writing this post, the corona virus, COVID-19, has been spreading over the world. I've done a fair bit of reading on it recently, and I am getting disgusted with the amount of fear, uncertainty and doubt (FUD) that is being spread around by people who stand to gain by attracting more visitors to their websites. This is uncertainly not conducive to an intelligent response.

This a new disease and there is much we do not yet know about it, much that we will only know after the dust has settled. I think this sort of uncertainty is going to be characteristic of many of the challenges we will face as collapse deepens. My hope is that this blog will be conducive to a calm and constructive response to such challenges. Here are a few links that I hope will help when it comes to responding to COVID-19:

That last link is behind a paywall, so I'm including a link with advice to help you get past paywalls in general.. Just part of my anarcho-communist approach to life.


Links to the rest of this series of posts, Preparing for (Responding to) Collapse:

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Monday, 15 January 2018

The Bumpy Road Down, Part 3

Winter on Lake Huron

In the last post in this series I talked about the next financial crash and how it may well be serious enough to spread into the non-financial sectors of the economy and effect supply chains and critical systems in ways that we did not see in the Global Financial Crisis of 2007-08. Systems that most of us depend on for the necessities of life may fail and many kollapsniks see this leading immediately and inevitably to a hard, fast and permanent crash of industrial civilization.

I disagree, seeing this as just one more bump on the road down, the cyclic pattern of crash and partial recovery that I believe will characterize the rest of the age of scarcity.

To understand why I hold this opinion, I said we need to do a couple of things:

1) take a systems dynamic approach to the events we are talking about. Specifically, we need to look at what happens when overshoot occurs in nature, in systems like the one we inhabit. Which is, after all, a subset of the ecosphere. Overshoot is a common enough phenomenon and usually works in fairly predictable ways.

2) look at the sort of things governments, communities and individuals can do to limit the damage of a financial crash and its spread to other critical systems.

Today we are going to do that.

(Note: all three of the graphs below are smoothed out, idealized and imprecise representations of the processes they illustrate. The point is to allow me to make some points visually. I hope not to get into much in the way of quibbling over minor details, of which no doubt a few are missing, inaccurate or outright wrong.)

So, first, let's take a look at how overshoot works. Take moment or two with your favourite search engine and you will find a graph that looks something like this:

1) typical overshoot situation with constant carrying capacity

The green line shows the behaviour over time of the population of a species which finds itself initially at a level well below the carrying capacity of its environment (the dashed blue line). Because that environment provides lots of whatever the species need to grow, it does grow. This tendency to grow in response to favourable conditions seems to be an inhernet property of life. As is always the case, this is exponential growth—it starts out slowly but eventually reaches a point where it takes off and quickly exceeds the carrying capacity of the environment.

What happens then is interesting, especially since we currently find ourselves in just such a situation. You get some oscillation of the species population, above and below the carrying capacity, until it finally settles out somewhat below the carrying capacity.

First, let's be clear that it is possible to exceed carrying capacity in the short run, at the cost of damaging the environment and reducing its capacity—overpopulation has a negative effect on that capacity. There is also some time delay built in to the effect of population growth, as newly born individuals add relatively little to the species impact on the environment compared to what they will add once they have grown up. The negative feedback and the time delay result in the oscillation shown in the graph.

Of course, the straight line representing carrying capacity would actually have some peaks and valleys, corresponding to how the environment responds to the stress of overpopulation and how it recovers when the population falls. If we idealized both the blue and green lines into something like a sine wave, we would see that the variation in the carrying capacity leads the variation in the population by about 90 degrees.

The red line, by the way, represents a fast and permanent collapse. In order for this to happen the carrying capacity has to fall all the way down to basically nothing. This can happen for a variety of reasons, but overshoot isn't one of them, because as soon as the population falls off below the carrying capacity, the stress on the environment is relieved and it begins to recover.

There is, in fact, no such thing as a "balance of nature" and it is by no means inevitable that the oscillations damp out and the population settles down just below the carrying capacity. In many cases what we actually get is the situation in the next graph, where populations oscillate on an ongoing basis.

2) continual oscillation of predator and prey populations such as foxes and rabbits

You might think that the population of rabbits and foxes in an ecosystem would level out at steady values, but that is not in fact what is observed.

If we start at a moment when there are relatively few of each species, we see that the population of rabbits (the prey, dashed blue line) grows rapidly. It is well below the carrying capacity of the ecosystem for rabbits and there are relatively few foxes (the predators, green line). But the increasing number of rabbits make hunting easier for the foxes, and their population starts to increase too. Eventually there are enough foxes to overhunt the rabbits, resulting in a crash in the rabbit population. This is followed by a crash in the fox population, since there are no longer enough rabbits to support it. This brings us back to where we started and the cycle carries on.

The reason the cycle can carry on indefinitely is that the foxes limit the rabbit population so that it never exceeds the carrying capacity of the ecosystem for rabbits—the plants the rabbits are eating never get over grazed.

The situation for the human population of this planet is, as you might expect, more complex.

The impact (I) that the human population has on our environment is determined not just by the size of that population (P), but also by the level of affluence (A) we are living at and effectiveness of the technology (T) we are using to maintain that affluence.

This gives us the famous equation, I=PAT. Since I am going to be using the term "T" in another equation shortly, I'll change this to I=PAD, where "D" stands for decoupling. Decoupling is the use of technology to produce affluence at a lower cost to thge environment and it is a number between 0 and 1, with 0 being the goal we would aim for, eliminating our impact altogether. In fact it is proving so difficult to get decoupling anywhere near zero that it is very unlikely to be the solution to our problems.

Carrying capacity (C) also works somewhat differently for human populations.

We can increase the size (S) of our environment by expanding into new areas of the world and habitats previously occupied by other species or by "indigenous" humans.

We can tap into forms of energy (E) beyond just food. For somewhere between two and three million years we've been using fire for landscaping, for cooking our food and for heating our shelters. In each case we were using the energy in burning biomass to increase the carrying capacity of our environment, increase the value of our food, and/or expand the range of environments that we can live in. For the last few hundred years we've been using the energy of fossil fuels to radically increase the carrying capacity of our environment in many seemingly clever ways.

Since whatever method we use to acquire energy consumes energy in the process, it's actually the energy that is left over, available for use (the surplus energy) that's important. This is best expressed as "Energy Returned on Energy Invested", EROEI. This is a dimensionless number and the larger it is, the more surplus energy. When the EROEI is equal to one, the process is just breaking even and there is no point in doing it—we want a much higher EROEI.

Hunter-gather and pre-industrial agricultural societies managed average EROEI's in the high single digits at best. Industrial societies based on fossil fuels in the twentieth century had EROEI's many times that high, which made possible high levels of growth and the development and use of technologies which had previously been completely out of reach. Today the average global EROEI is around 11.

Which brings us to our use of tools and technology (T). With just Neolithic technology (fire, stone tools, weaving, tanning, pottery, boats, agriculture) we spread over the whole planet except for the Antarctic, occupying and thriving in environments very different from the ones where we evolved. Since the Renaissance, the Enlightenment and the Industrial Revolution our use of technology has exploded. And not just material technology, but financial, organizational and information technologies as well. All of which has enabled both our population and affluence to grow at heretofore unprecedented rates.

So, the carrying capacity of this planet for the human race can be represented by the equation C=SET. Clearly, I (Impact) must be less than C (carrying capacity) or we are in overshoot. And since sometime in the late 1970s we have indeed been in overshoot. Currently the level of overshoot is around 60%. That is, our impact on the environment is 1.6 times what can be sustained on an ongoing basis.

3) oscillating overshoot with declining carrying capacity

From left side of this graph to point "a" we see the long and very slow growth of the human population before the discovery of the New World. After point "a" the carrying capacity began to increase significantly as the size of our environment effectively took a large jump with the European settlement of the New World, as the use of fossil fuels greatly increased the amount of surplus energy available and as we developed numerous new technologies to use that energy. Human impact increased with the carrying capacity, as our population grew and affluence increased.

The growth of carrying capacity continued until the last quarter of the twentieth century, point "b", when depletion of fossil fuels and reduction of their EROEI, diminishing returns on technological innovation and stress on the environment from human activities started to reduce the carrying capacity.

Human impact has continued to grow since then, and is now so far above carrying capacity that one has to expect a crash in the near future, point "c". As I said in my last post, this is likely to start with a financial crash. The financial sector of the economy, since it deals largely with non-material things that don't have much inertia, can change very quickly. It is currently under a lot of strain from huge amounts of risky debt. I favour a scenario where a spike in the price of oil, brought about as the current surplus of oil bottoms out, sets off a currency crash in one of more countries, leading to a wave of bankruptcies and governments defaulting on their debts. After point "c" human impact will start to decrease rapidly, primarily due to the effect of the financial crash on affluence.

Note that I have again included a red line (and a light blue line), which represent a fast and permanent crash of both carrying capacity and population. This is possible and some would argue that climate change and ocean acidification (among other things) may be damaging the environment enough to make it the most likely outcome. I don't think so. The ecosphere is amazingly resilient, once human impact is reduced. People have gotten the wrong impression about this because we have been playing the silly game of upping our impact and then wondering why the situation keeps gets worse, as if it wasn't our fault.

To the right is a little chart that contains some shocking information. The top 20% of the human population (in terms of affluence) is responsible for 76.6% of our impact. A financial crash will be very hard on those top 20% and in the process will drastically reduce human impact. Sadly, myself and most of my readers are in that top 20%.

Referring back to diagram 3, I expect that at point "d", where "I" is finally less than "C", the carrying capacity will begin to recover, and a while later at point "e", human impact will begin to increase once again as well.

Remember also that carrying capacity is defined by C=SET, and there is much that humanity can do to change the value of "T" in that equation. I am by no means saying that we will find a "solution" to our problems based on material technology. What I mean is that a major factor in the big decrease in carrying capacity during the upcoming crash will be the failure of our financial and organizational technology to cope with the situation. And there is a lot we can do to reorganize our financial, economic and political systems to work better under the new conditions. Once we are forced to do it. So I do expect there will be a recovery after this crash.

It is very likely that during the crash the financial chaos will spread to the rest of the economy and that there will be some reduction in the growth rate of our population as the support structures provide by industrial civilization fail completely in some parts of the world. But it seems likely that human population will continue to grow until it once again outstrips carrying capacity, at point "f". And then at point "g" we will have another crash. I suspect depletion of fossil fuels, water for irrigation and phosphorous for fertilizer, and the effects of climate change will lead to a collapse of agriculture in many parts of the world. Famine and epidemics will at that point start to rapidly reduce our population and eventually reduce it back below a once more reduced carrying capacity (point "h") and another recovery will begin (point "i").

Beyond point "i" it is hard to say much about exact details or how many more crashes will take place. But the trend of continued oscillation with decreases in both carrying capacity and human impact will continue. The downward trend is because our current system relies on non-renewable resources that we are using up. That trend will continue until our impact can be sustained solely by renewable resources. Along the way we will go through some very hard times (point "i" and subsequent valleys in the green line) because of the damage done to the planet in the process. But eventually, with our impact drastically reduced, the ecosystems will recover. I expect that at this point we will have retained some of our technology and because of this the overall carrying capacity and our population/impact will settle out a bit above what it was in pre-industrial times.

One further thing I want to emphasize is how uneven this whole process will be. Yes it is likely that the impending financial crash, because it involves systems that are highly interconnected and global in scale, will be felt to some extent over the whole planet. But the degree to which the financial chaos spreads to the rest of the economy will vary greatly from place to place. And subsequent crashes, once the high degree of global interconnection has been broken, will most likely occur at different times in different places.

Wherever people are not completely dependent on global supply chains, the effects will be less severe. To the extent that they are not ravaged by climate change, some parts of the developing world where subsistence agriculture is practiced may continue on with little change. Unfortunately many areas will suffer the ravages of climate change—droughts, flooding and heat waves. Many countries (particularly in Africa and the Middle East) do not produce enough food for their own populations. With supply chains broken and agriculture struggling everywhere, these areas will find it difficult to continue importing the food they rely on. Supplies of energy and water will also prove problematical.

I am well aware that all these graphs and explanations do not constitute a proof of my assertions about the bumpy road down. But I hope I have succeeded in making what I'm trying to say much clearer. It's up to you to decide if there is anything to it or not, now that you know what "it" is.

The other area I wanted to touch on today is the sort of things governments, communities and individuals can do to limit the damage when a financial crash spreads to other critical systems.

As the financial crash starts to gain momentum, governments will (to whatever extent they can) use the same tools as they did in 2008 to get things under control— loans and bailouts for faltering businesses, and keeping interest rates very low. It also seems likely that, as the situation worsens, "bail-ins" will be used as well, where depositors are required to accept discounts on their deposits to reduce the pressure on failing banks. And "haircuts" where bond holders have to accept discounts on the value of those bonds in order to reduce the pressure on the governments that issued them.

These efforts will have mixed results and the crash will no doubt spread to the non-financial sectors of the economy. Many governments will try switching failing critical systems over to a direct command “martial law” economy. This will be done with varying degrees of skill (or ineptitude as the case may be) and varying degrees of co-operation from their citizens. Vital materials which are in short supply due to supply chain and production breakdowns will be placed under government control and rationed (food, energy—especially diesel fuel, water treatment and medical supplies), and attempts will be made to patch supply chains and production facilities back together with whatever comes to hand.

I have no doubt that this can be made to work, at least to some extent. It does require convincing the public that it is necessary and that it is being done fairly—applied equally to the rich and powerful as it is to the poor and weak. And inevitably there will be thriving black markets.

Governments that already operate some of these systems directly will be better prepared and experience greater success. System that have been contracted out to the lowest bidder—companies that are primarily responsible to their stock holders rather than their customers—may fail in a variety of ghastly ways.

On the other hand, I think there will also be quite a bit of quiet heroism on the part of companies and individuals in critical industries whose job it is to keep things working. These folks are for the most part competent and highly motivated, and their efforts will be more successful than you might think.

Some governments will be so successful that their citizens may hardly be aware that anything is going on. In other countries, people will be reduced to relying almost entirely on what can be done locally, with locally available resources. Right wing capitalist governments whose primary obligation is to the rich and power will begin to practice wholesale abandonment of the poor and unfortunate.

There are also things that can be done by local communities, families and individuals to be more self sufficient—to be able to carry on during those periods when industrial society fails to supply the necessities. Increasing local inventories in order to be more resilient in response to supply chain failures would be a good beginning. But just being clear about what the necessities are and not wasting resources try to maintain luxuries will be one of the biggest challenges. The first step is realizing that much of what we consider necessary is, in fact, not.

So, as I've already said, I'm expecting a recovery, or rather a series of recoveries after a series of crashes. These crises are going to cause some changes in the way things work, resulting in a very different world. We'll have a look at the trends that will lead to that new world in my next post.

P.S.
If Blogger's statistics and Google Analytics are right, a lot of people are reading this blog on mobile devices. I'd be interested to hear how the graphics in this post worked on those devices.


Links to the rest of this series of posts:
Political Realities / Collapse Step by Step / The Bumpy Road Down

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Sunday, 26 November 2017

Collapse Step by Step, Part 8

Lake Huron Waves Breaking Along South Pier, Kincardine

The Bumpy Road Down, Part 1

The term “bumpy road down” refers to the cyclic pattern of crash and partial recovery that I believe will characterize the rest of the age of scarcity and make for a slow step by step collapse, rather than a single hard and fast crash. Indeed, that is where the "step-by-step" in the title of this series of posts comes from. And yes, many of the individual steps down will happen quite quickly and seem quite harsh. But it will likely take many steps and many decades before we can say collapse is essentially complete, and between those steps down there will (in many areas) be long periods when things are stable or even actually improving somewhat.

The fast collapse is a favourite trope of collapse fiction and makes for some exciting stories, in which stalwart heroes defend their group from hungry hordes and evil strong men. And if the story happens in the U.S. the characters get to do their best to stop a whole lot of ammunition from going stale. But it seems to me that in most parts of the world things will progress quite differently when disaster strikes. Indeed there is a branch of sociology which studies how people and societies respond to disaster, and it has identified a set of incorrect beliefs, known as "the disaster mythology" that much of the general public holds on the subject. In particular, the expectation of looting, mass panic and violence is not borne out in really. Here are some further links on the subject: 1, 2, 3, 4.

Dysfunctional as today's world may seem to many of us, it is working fairly well for those who are in power. They have a great deal invested in maintaining the "status quo", and in making sure that whatever changes do happen don't have any great effect on them. They also have a lot of resources to bring to bear on pursuing those ends, and a lot of avenues to go down before they run out of alternatives.

The other 80% of us, who are just along for the ride so to speak, still rely on industrial society for the necessities of life. We are hardly self sufficient at all, dependent on "the system" to a degree that is unprecedented in mankind's history and prehistory. As unhappy as we may be with the way things are at present, it's hard to imagine collapse without a certain amount of trepidation. Denial is a very common response to this situation.

Some of us, though, aren't very good at denial. Even if we only follow the news on North American TV, which largely ignores the rest of the world, we've seen lots of disturbing events in the last year or two and it is hard not to wonder if they are leading up to something serious. Many people in the "collapse sphere" are predicting a major disturbance in the next few years, and some think that this will be the one that us takes down—all the way.

I definitely agree that something is about to happen, but I don't think it is going be the last straw. Just one more step along the way.

As always, I am directing this mainly to those who are not highly "collapse aware", so a closer look at what's going on and what this next big bump might look like would seem to be a good idea. And of course I am making generalizations in what follows. As always, things will vary a good bit between different areas and at different times, and all of this will affect people of the various social classes differently. Also beware that I am not an economist, just a layman who has been watching the field with keen interest for some time. What follows is a summary of what I have learned, in a field where there is lots of disagreement and where the experts themselves have been wrong again and again.

Despite all the optimistic talk about renewable energy, we are still dependent on fossil fuels for around 82% of our energy needs, and those needs are largely ones that cannot be met by anything other than fossil duels, especially oil. While it is true that fossil fuels are far from running out, the amount of surplus energy they deliver (the EROEI—"energy returned on energy invested") has declined to the point where it no longer supports robust economic growth. Indeed, since the 1990s, real economic growth has largely stopped. What limited growth we are seeing is based on debt, rather than an abundance of surplus energy. And various adjustments to the way GDP is calculated have made the situation seem less serious that it really is.

Because of the growth situation, investors looking for good returns on their money have been hard pressed to find any and so have turned to riskier investments, which has resulted in speculative bubbles and subsequent crashes. The thing about bubbles is they are based on trust. Trust in some sort of investment that in saner times would be recognized for the risky proposition it really is. But always there comes a day when the risk becomes obvious, people rush to get out, and the bubble crashes.

The dot com bubble was the first to burst in this century, and the real estate bubble in the US was the next, leading to the crash of 2008.

After 2008 many governments borrowed money to bailout financial institutions (banks) which were in danger of failing, since that failure would have had a very negative effect on the rest of the economy. To control the cost of that borrowing and stimulate the economy, they lowered interest rates. These low interest rates have made it possible to use debt as a temporary replacement for surplus energy as the driver of the economy. Unfortunately this is pretty inefficient—it takes several dollars of debt to create a dollar's worth of growth, and the result has been debt increasing to totally unprecedented levels.

Meanwhile, much of the ill advised risk taking in the financial industry that led to the crash in 2008 has continued on unabated. You may wonder why responsible governments didn't enact regulations to stop that sort of thing. And indeed they did, to a limited extent. I suspect, though, that really effective regulations would have stopped growth cold, and no one was willing to accept the negative results of that. Better to let things to go on as they are, leaving future governments to worry about the consequences.

So, in 2017 we are deep into what might be called a "debt bubble." It relies on trust that interest rates will remain low and that any day now there will be a return to robust growth so that we can all make some money and pay off our debts. Those are risky propositions, to say the least.

On top of that, low interest rates have made it much more of a challenge for pension funds to raise enough money to meet their obligations, a vital concern for retired baby boomers like myself.

Those same low interest rates have made it possible for many non-viable or barely viable businesses to continuing operating on borrowed money, where under more normal circumstances they would have been forced out of business. This makes for a weaker economy, not a stronger one.

Here in Canada we still have a real estate bubble going on, especially in cities like Toronto, Calgary and Vancouver, and that despite recent government efforts to cool the real estate market by making it more difficult to get a mortgage, and by applying a tax on foreign real estate investors.

And over the last year that have been a long list of natural disasters which have increased the financial stress on governments, insurance companies and even re-insurance companies (who insure the insurance companies themselves).

The more conventional economists have come to think that all this is a normal situation and that it can just keep on keeping on. But there are others who think that this will lead to a crash of even greater magnitude that 2008. And many kollapsniks think this crash will mean the end of industrial civilization.

Some commentators expect this crash to take the form of a rash of debt defaults by governments who can no longer carry the debt loads they have built up. And a similar wave of bankruptcies of those shaky businesses I was just talking about, when they finally get to the point where they can no longer hold on. Tim Morgan, one of my favourite economists (who is certainly aware of the possibility of collapse), speculates that this bubble may burst in a different way than those of the past, with the collapse of one or more currencies. He points to the British pound as a prime candidate for the first to go and thinks that the U.S. dollar may follow it.

Other experts I've asked say that while the U.S government does have huge debts, they are not so large in comparison to the size of its economy—an economy that is strong enough that trust in it is unlikely to fail. I am not so sure. Much of the strength of the U.S. dollar comes from the fact that all trading of oil is done in it. If you want to buy oil then you need U.S. dollars, so the demand for them is always high. But a number of countries who are not allies of the US have proposed abandoning this system, suggesting that they are willing to accept other currencies for their oil. If this were to happen on a large scale it would significantly weaken the US dollar.

But it takes some sort of unusual event to start a crash like this, to initiate the loss of trust. And that brings us back to the fossil fuel industry.

While the falling EROEIs of fossil fuels have hurt economic growth, it is a mistake to think that those fuels are not still the life blood of our civilization. The success of modern industry is based on the productivity boost provided by cheap energy. The price of oil, for many years, was a fraction of its worth in terms of what could be made with the energy embodied in that oil. But when the price of energy goes up, it reduces the profitability of industry, often leading to a recession.

The oil prices I quote here are for Brent crude, just to keep things simple. In fact, oil trades at a dizzying variety of different prices, depending on where it comes from and its quality, among other things. If you look back over the history of recessions since the 1950s it is interesting to note almost all of them were preceded by a spike in the price of oil. In the summer of 2008 the price of oil, which had been going up for several years, topped out just before the crash at almost $140 per barrel.

After the crash, the economy slowed down significantly, and the price of oil dropped to around $30 per barrel due to falling demand. Starting in mid-2009 the economy began to recover and the price of oil increased to over $100. This appeared to be a straight forward case of supply and demand—an indication that the supply of oil was barely keeping up and suppliers were being forced to turn to more expensive sources of oil to meet the demand.

Then in mid 2014 something surprising happened— the price of oil and many other bulk commodities began to go down. By early 2016 the price of oil was under $40/barrel, and it stayed in the range between $40 and $60 until quite recently when it edged up over $60.

All kinds of ideas have been put forth as to why this drop in the price of oil happened, many of them contradictory. It is my thought that two things have been happening. First, demand destruction—a slowing down of the world economy caused by high energy prices. Second, a temporary increase in the supply of oil, mainly from fracking in the continental US and tapping of unconventional oil—tar sands in Canada, heavy oil in Venezuela, and deep offshore oil in various place around the world, that were suddenly profitable when the price was around $100 per barrel.

Whatever is the cause, it is clear that we have had a surplus of oil for the last few years, and this has kept the price down. OPEC discussed limiting supply to force the price back up, but very little came of it, even though the lower price was severely hurting the economies of the OPEC nations.

In the short run, lower oil prices have had a beneficial effect on economic growth. But unfortunately, the big oil companies were making so little profit that they couldn't afford to invest much in oil discovery.

Regardless of what you may think of the idea of "peak oil" on a global basis, it is a simple fact that the output of any individual oil field declines as it ages. Exploration for new oil aims to match that natural decline with new discoveries. For conventional oil, that has not happened since 1963 and by the start of this century this was becoming a problem. A problem that likely had something to do with the run up of oil prices prior to 2008.

Following 2008, higher prices and improved technology (like fracking and the syncrude process for getting oil out of the tar sands) made more oil accessible. But with the current lower prices, that is no longer the case. Furthermore the wells opened up by fracking are proving to have very high decline rates.

So it seems that sometime in the next year or two, the decline rate of the world's oil fields will have eaten up the surplus of oil. Discovery of new oil fields doesn't happen overnight, so there will be a crunch in oil supply. Not that there will be no oil available, but oil suppliers will be hard pressed to keep up with the demand and the price will spike upward. There may even be shortages of some petroleum products until those higher prices pull demand back to match the available supply.

It seems very likely that such a spike in the price of oil will touch off a loss of trust leading to a recession of such severity as to make 2008 look minor.

In my next post in this series I'll look at how that recession—might as well call it a crash—might proceed and what will likely be done to mitigate its effects.


Links to the rest of this series of posts:
Political Realities / Collapse Step by Step / The Bumpy Road Down

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