The End of Growth: Adapting to Our New Economic Reality (19 page)
Read The End of Growth: Adapting to Our New Economic Reality Online
Authors: Richard Heinberg
Tags: #BUS072000
What should be done to avert further deterioration of the global financial system? Once again, the pubic debate (such as it is) is dominated by the opposed viewpoints of the Keynesians and the Chicago Schoolers — which are approximately reflected in the positions of the US Democratic and Republican political parties.
The Keynesians still see the world through the lens of the Great Depression. During the 1930s, industrialized countries were in the early stages of their shift from an agrarian, coal-based, rural economy to an electrified, oil-based, urban economy — a shift that required enormous infrastructure investments (in new highways, airports, dams, and power lines) that would ultimately pay off handsomely for a nation on the verge of realizing a consumer utopia. All that was needed to initiate the building of that infrastructure was credit — grease for the wheels of commerce. Government got those wheels rolling by taking on debt, with private companies increasingly taking the lead after World War II. The expansion that occurred from the 1950s through 2000, as that infrastructure was built and put to use, easily justified the government pump-priming that initiated the process. Future payments of interest on the government debt could be ensured through growth of the tax base.
Now is different. As we will see in the next two chapters, both the US and the world as a whole have passed a fundamental crossroads characterized by increasing scarcity of energy and crucial minerals. Because of this, strategies of growth that worked reliably in the mid-to-late 20th century — via various forms of business and technological development — have reached a point of diminishing returns.
Thus the Keynesian spending bridge today leads nowhere.
But stopping its construction now will result in a catastrophic weakening of the entire economy. The backstop provided by government spending and central bank debt acquisition is the only thing keeping the system from hurtling into a deflationary spiral. Fiscal conservatives who rail against bigger government and more government debt need to comprehend the alternative — a gaping, yawning economic void. For a mere glimpse of what major government spending cutbacks might look like in the US, consider the impacts on European nations that are being subjected to fiscal austerity measures as a corrective for too-rosy expectations of future growth. The picture is bleak: rising poverty, disappearing social services, and general strikes and protests.
Extreme social unrest could be an eventual result of the gross injustice of requiring a majority of the population to forego promised entitlements and economic relief following the bailout of a small super-wealthy minority on Wall Street. Political opportunists can be counted on to exacerbate that unrest and channel it in ways utterly at odds with society’s long-term best interests. This is a toxic brew with disturbing precedents in recent European history.
If the Keynesian remedy doesn’t cure the ailment but merely extends the suffering (while increasing government debt to truly toxic levels), the medicine of austerity may have such severe side effects that it could kill the patient outright. Both sides — left and right, the socialists and free-marketers — assume and hope to the point of desperation that their prescription will result in a rapid return to continuous economic growth and low unemployment. But as we are about to see, that hope is futile.
There is no “silver bullet,” no magic solution that will turn back the clock to an era of abundant resources and easy growth. For now, all that governments can do is buy time through further deficit spending — ideally, using that time to build infrastructure that will continue to function in the coming era of reduced flows of energy and resources. Meanwhile, we must all find ways to come out from under a burden of debt that will otherwise crush us. The inherent contradiction within this prescription is obvious and unavoidable.
BOX 2.4
Credit: The Economic Magnifier
Credit has a history that goes back almost to the beginnings of civilization. For example, early banks (like the Bardi and Peruzzi banks of the tenth and thirteenth centuries) extended credit to monarchs so the latter could afford to go to war. But, during the past century, the extension of credit has become an overwhelmingly pervasive practice that reaches not just into every government and business, but nearly every household in the industrialized world.
Why this vast, recent expansion of credit? One word sums it up: Growth.
Credit gives us the ability to consume now and pay later. It is an expression of belief on the part of both borrower and lender that later the borrower will have a surplus with which to repay today’s new debt, with interest, while still covering basic operating expenses. We will be better off in the future than we are today.
Modern economic theory treats debt as a neutral transfer between saver and consumer. In a world at the end of growth, it becomes anything other than neutral —as the ‘savers’ will never be able to obtain their deferred consumption.
In an economy of fixed size, where some enterprises are expanding while others are contracting, credit can play a useful but limited role. In a growing economy, credit finds and creates fabulous new opportunities. If credit expands to an unrealistic degree, or if a formerly growing economy enters a recession, the result can be a credit bubble or debt overhang, leading to widespread debt defaults and a dramatic contraction of credit.
In a serious recession, the economy can suffer a powerful, overwhelmingly debilitating one-two punch. The first comes from the interruption of growth; this in itself dashes hopes and leads to increased unemployment and declining earnings. The second, which is potentially far more damaging, comes from the contraction of credit. During the economic ascent, credit provided fuel and encouragement; on the way down, it steepens the fall and removes safety nets. The collapse of credit can turn an economic pothole into a pit of quicksand.
The end of growth is the ultimate credit event, as everyone gradually comes to realize there will be no surplus later with which to repay interest on debt that is accruing now.
EARTH’S LIMITS : WHY GROWTH WON’T RETURN
The 2008 crude oil price, $147 per barrel, shattered the global
economy. The “invisible hand” of economics became the invisible
fist, pounding down world economic growth to match the
limitations of crude oil production.
— Kenneth Deffeyes (petroleum geologist)
We have just seen why, since 2007, growth has languished for reasons internal to the world financial system — the system of money and debt.
Problems arising from speculative overreach, real estate bubbles, and the inherent Ponzi dynamics of our global debt-based financial structures are endemic and profound. Still, if these were our only difficulties, we might reasonably expect that eventually, once they are sorted out (however painful the process may be), growth will return.
Indeed, that is what nearly everyone assumes. It’s a matter of “when,” not “if ” growth resumes.
But there are seldom-acknowledged factors
external
to financial and monetary systems that are effectively choking off efforts to restart growth. These factors, whose impacts are worsening over time, were briefly alluded to in the Introduction; here we will unpack them in more detail, discussing limits to oil and other energy sources, as well as to food, water, and minerals. We will also explore the increasing cost of industrial accidents and environmental disasters — and why, in the wide wake of global climate change, those costs are likely to escalate to the point that disaster avoidance and recovery will constitute a major portion of future government and private spending. Along the way, we will examine how markets respond to resource scarcity (it’s not a clear-cut matter of incrementally rising prices).
Crucially, in this chapter we will see how and why the most important of these non-financial limits to economic expansion are matters of concern not just for future generations, but for markets and policy makers — indeed, for everyone —
today
.
Oil
In the Introduction we briefly surveyed the Peak Oil scenario and the events surrounding the oil price spike of 2008. It is tempting here to launch into a lengthy discussion of Peak Oil and what it means to industrial society. I’ve been writing about this subject for over a decade, and it would be easy to fill the space between these covers simply with updates to existing publications. But that’s not what is required here; for our immediate purposes, all that is needed is an overview of some main points regarding oil depletion that are relevant to the question of whether and how economies can continue growing. Readers who wish to know more about Peak Oil should refer to sources listed in the end notes.
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When discussion turns to the economy, most of the ensuing talk tends to focus on money — prices, wages, and interest rates. Yet as important as money is to economies, energy is even more basic. Without energy, nothing happens — quite literally. Energy is not just a commodity; it is the prerequisite for any and all activity. No energy, no economy. (In the next chapter we will examine the argument that we can produce economic growth while using
less
energy — by using energy more efficiently; our conclusion will be that this is possible only to a limited extent and in situations that differ fundamentally from our current one.)
The massive worldwide economic growth of the past two centuries was enabled by humanity’s newfound ability to exploit the cheap, abundant energy of fossil fuels. There were of course other factors at work — including division of labor, technological innovation, and increased trade. But if it weren’t for oil, coal, and natural gas, we would today all probably be living an essentially agrarian existence similar to that of our 18th-century ancestors — though perhaps with a few additional though minor wind-and water-powered industrial accouterments.
Growth requires not just energy in a general sense, but forms of energy with specific characteristics. After all, the Earth is constantly bathed in energy — indeed, the amount of solar energy that falls on Earth’s surface each
hour
is greater than the amount of fossil-fuel energy the world uses every
year.
But sunlight energy is diffuse and difficult to use directly. Economies need sources of energy that are concentrated and controllable, and that can be made to do useful work. From a short-term point of view, fossil fuels proved to be energy sources with highly desirable characteristics: they could be extracted from Earth’s crust quite cheaply (at least in the early days), they were portable, and they delivered a lot of energy per unit of weight and/or volume — in most instances, far more than the firewood that people had been accustomed to using.
Oil has the particular advantage of being a liquid, which means that it (and its refined products like gasoline and jet fuel) can easily be stored in tanks and pumped through pipes and hoses. This effectively maximizes portability. As a result, oil has become the basis of world transport systems, and therefore of world trade. If the oil stops flowing, global trade as we know it grinds to a standstill.
The phrase “Peak Oil” is often misunderstood to refer to the total exhaustion of petroleum resources —
running out
. In fact it just signifies the period when the production of oil achieves its maximum rate before beginning its inevitable decline. This peaking and declining of production has already been observed in thousands of individual oilfields and in the total national oil production of many countries including the US, Indonesia, Norway, Great Britain, Oman, and Mexico. Global Peak Oil will certainly occur, of that there can be no doubt. There is still some controversy about the timing of the event: has it already happened, will it occur soon, or can it be delayed for many years or even decades?
In 2010, the International Energy Agency settled the matter. In its authoritative 2010
World Energy Outlook
, the IEA announced that total annual global crude oil production will probably never surpass its 2006 level.
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However, the agency fudged the question a bit by declaring that the peak was not due to geological constraints, and that total volumes of liquid fuels (including crude oil, biofuels, synthetic oil from tar sands and coal, and natural gas liquids like butane and propane) will continue to grow — just a bit — until 2035. In discussing the IEA report, a few analysts declared that these latter claims were essentially just efforts to avoid panicking the markets.
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BOX 3.1
Oil Shock 2011?
In the early months of 2011 street demonstrations erupted in Iraq, Iran, Tunisia, Egypt, Bahrain, Yemen, Libya, and Algeria. Libya became mired in civil war, and its rate of oil exports fell from 1.3 million barrels per day to a small fraction of that amount. In Saudi Arabia, banned opposition groups threatened a “day of rage.” In response to these events, the world oil price — already in the $90 range — shot up to $120. Comparisons with the economic oil price spike of 2008, and its consequences, were inevitable.
Many in the US cheered as decrepit dictators in Egypt and Tunisia fell, and as Gaddafi’s hold on Libya seemed to loosen. But as it became apparent that more democracy for North African and Middle Eastern nations would translate to higher gasoline prices for American motorists, the real motives for, and costs of Western nations’ decades-long support for autocratic regimes in oil-rich nations became starkly apparent. This was a strategy to enforce “stability” among exporters of the world’s most important energy resource, but it was wrong-headed from the start because it could not be sustained on the backs of millions of people with rising expectations but declining ability to afford food and fuel.
If, somehow, serious political disruptions are confined to Libya, Egypt, Tunisia, and Bahrain, oil-importing nations may be able to weather 2011 with minimal GDP declines resulting from $100 oil prices. But it may be only a matter of time until Saudi Arabia is engulfed in sectarian and political turmoil, and when that happens the world will see the highest oil price spike ever, and central banks will be powerless to stop the ensuing economic carnage.
