The End of Growth: Adapting to Our New Economic Reality (39 page)

In the next two chapters we will explore how humanity might apply creativity to the task of adapting to depleting resources and stagnant or shrinking economies. As we are about to see, it is essential that we deal with the immediately looming monetary-financial crisis if we are to buy time to set ourselves on a course for a happier, more sustainable, and more secure future.

CHAPTER
6

MANAGING CONTRACTION, REDEFINING PROGRESS

Only a crisis — actual or perceived — produces real change.
When the crisis occurs, the actions that are taken depend
upon the ideas that are lying around. That, I believe, is our
basic function: to develop alternatives to existing policies, to
keep them alive and available until the politically impossible
becomes politically inevitable.

— Milton Friedman (economist)

Many analysts who focus on the problems of population growth, resource depletion, and climate change foresee gradually tightening constraints on world economic activity. In most cases the prognosis they offer is for worsening environmental problems, more expensive energy and materials, and slowing economic growth.

However, their analyses often fail to factor in the impacts to and from a financial system built on the expectation of further growth — a system that could come unhinged in a non-linear, catastrophic fashion as growth ends. Financial and monetary systems can crash suddenly and completely. This almost happened in September 2008 as the result of a combination of a decline in the housing market, reliance on overly complex and in many cases fraudulent financial instruments, and skyrocketing energy prices. Another sovereign debt crisis in Europe could bring the world to a similar precipice. Indeed, there is a line-up of actors waiting to take center stage in the years ahead, each capable of bringing the curtain down on the global banking system or one of the world’s major currencies. Each derives its destructive potency from its ability to strangle growth, thus setting off chain reactions of default, bankruptcy, and currency failure.

The likely outcomes of a non-linearity response of the monetary-financial–system to the end of growth thus constitute a wall in our path. Beyond the wall are other challenges and opportunities — challenges like oil depletion and climate change, and opportunities to reshape the economy so as to make it more sustainable over the long run, and to make it better serve human needs.

The depletion of resources and the buildup of greenhouse gases are gradual processes, though their various impacts will be subject to tipping points and will provoke short-term crises. Efforts to deal with these problems — such as building low-energy transport infrastructure and low-carbon food systems — will take a generation or more. That kind of time just won’t be available to us if we can’t get past the financial-monetary wall. If we hit the wall at full speed, our options will be severely and suddenly reduced. The economy, and society as a whole, may undergo an abrupt, dramatic, and chaotic simplification as trade virtually ceases.

So far, we are on course for full-force collision. The fundamental problems with our monetary and financial systems have not been addressed, but only papered over.

Our financial-monetary system is not just vulnerable to periodic internal disruptions like credit crises, it is inherently unsustainable in the emerging context of energy and resource constraints. And if the financial-monetary system seizes up, this will imperil society’s ability to respond to any and all other crises. This means that, whatever our other priorities may be, we must also immediately devote effort to reforming the financial-monetary system.

This chapter is mostly about what governments can do — must do, in fact — to get past the wall of looming financial-monetary collapse. As we will see, there may be more than one strategy that could work. But having averted immediate collision, we won’t be in the clear: this short-term barrier in humanity’s path must be negotiated in a way that also steers us around slower-developing problems such as climate change and resource depletion. If not, civilization will carom from one crisis to the next.

The Default Scenario

Making economic forecasts is always hazardous, as was pointed out in Box I.3 in the Introduction, “The Perils of Predication.” Nevertheless it may be useful to outline a potential default scenario — one way that events could unfold if we continue on our current track. Things need not play out this way, but if we do nothing to alter our current trajectory they very well could.

If consumer spending fails to recover, so that demand for new loans continues to remain low, this will put pressure on major banks’ balance sheets, making the toxic assets still on their books more difficult to conceal among what would otherwise be sounder, newer loans and investments. Unemployment will almost certainly remain high in the US (according to nearly all official forecasts), causing tax revenues to remain low and forcing drastic cuts in the budgets of cities, counties, and states. Other sovereign nations with high debt levels will be remain vulnerable to currency and credit crises. Central banks and some national governments (principally the US and Germany) will be compelled to extend more bailouts.

In effect, the global economy will be stuck with trillions of dollars in IOUs that cannot be repaid. And the number will continue to increase if policy makers continue to demand economic growth, because governments’ attempts to restart growth will require the further expansion of claims in the form of debt.

Under these circumstances, national governments and central banks (including the IMF, which acts somewhat as a global central bank) will be the only entities capable of keeping banking systems, and hence the global economy as a whole, functioning. Governments and central banks will be acting under the assumption that they are merely priming the pump of the economy until conventional consumer-driven growth resumes. But as growth fails to revive, one intervention after another will be required — propping up major banks, guaranteeing hundreds of billions of dollars’ worth of mortgages, or bailing out “too-big-to-fail” businesses. The result will be an incremental government takeover of large swaths of national economies, with central banks assuming more of the functions of commercial banking, and national governments underwriting production and even consumption.

In the US, this process will be enormously complicated by politics. One of the two main political parties is making resistance to expansion of government spending the centerpiece of its platform. Yet, whether Democrats or Republicans hold power in the US, the solution hit upon will eventually be more or less the same (recall: it was Republican President George W. Bush who extended the first round of bailouts and stimulus packages) — though the path toward achieving it is likely to be extremely contentious and littered with casualties. With states, counties, and municipalities nearing bankruptcy, the Federal government’s hand may be forced: It must eventually either bail them out or permit the unfolding of a fiscal and human crisis that could spread to engulf the nation.1

The US government’s expanding role in the economy is likely to be accompanied by greater reliance on the military for attempted solutions to national and international problems, for the following reasons. Cutting military spending will be problematic in a flagging economy, as that would create even more unemployment; substantial spending cuts in this area would likely be politically contentious in any case. Meanwhile, burgeoning trade, currency, and resource conflicts are likely to provoke saber-rattling responses from US adversaries and allies alike. Policy makers in a few strategic countries will be quick to back up tough talk with further investments in arms (though in many other nations military investment rates will fall for lack of available funds). The military may also be seen as the ultimate guarantor of domestic order.

Economic and demographic strains cannot help but stoke widespread dissent and unrest.2 In response, governments are likely to become more repressive. In the US, again whether Republicans or Democrats are in power, this could mean increased surveillance, controls over the Internet, tightening laws governing freedom of expression, and sharp reductions in guarantees of civil rights and liberties — most likely in the name of protection from terrorism and in response to worsening natural disasters. Wikileaks aside, secrecy will be rampant — with the biggest secret of all being that leaders have no viable long-term strategy to stop the economy’s slide.3

With support services (in the U.S: Social Security, Medicare, public schools, the food stamp program) stretched beyond their limits, we could see more public resentment against immigrants, especially in border states. Of course, the economic pain gripping the United States will not actually be the fault of immigrants — or China, Muslims, environmentalists, or even terrorists. Nor is the essential problem Big Government: As we have seen, the desperate effort to inflate government spending and power is more of an effect than a cause of the nation’s predicament. The search for scapegoats will accomplish nothing, but it will consume enormous amounts of effort and produce needless casualties. A sound case can be made that bankers and government officials played key roles in the financial crisis, and these individuals should be held to account. But correctly assigning blame will not make the crisis go away.

Events could continue to play out along these lines for several years, with gradually worsening outcomes. Nationalization of the economy will not constitute a solution to society’s difficulties; it will merely be a reflexive means of averting immediate meltdown. The phrase “bailout fatigue” has already entered the lexicon of policy makers, and will be the subject of increasing worry and controversy in coming years. Even with ballooning deficits and enormous spending programs, economic problems will only fester. Budget-balancing austerity measures will succeed only in reducing economic activity further. In either case, as energy becomes ever less affordable, economic productivity will decline and costs of long-distance trade will rise.

At some point in the next few years, stock and real estate values will plunge, banks will close, and businesses will shutter their doors. Monetary, financial, and social systems built upon the expectation of growth will simply fail in growth’s absence. In the worst instance, that failure could take the form of a nearly complete cessation of trade, as occurred nationally in Argentina in December, 2001. Some sort of new economy would inevitably emerge from the wreckage, but in scale and scope it would be a shadow of the one we knew just a few years ago. Measured in GDP, it might correspond to the world economy of fifty, a hundred, or even a hundred and fifty years ago.

The pursuit of the ideals of fairness, openness, and freedom, and the fights against corruption, greed, and tyranny will of course continue, as they must, but these struggles will play out within the constraints of a shrinking economy. Promises of plenty if only new leaders and policies are put in place will prove hollow. Social progress could yield relative change in economic conditions (advancing the prospects of the poor versus the rich), but not absolute change (the economy will still be contracting); meanwhile, the more intense the conflict, the more resources will be consumed that might have been devoted to helping households and communities adapt.

Sadly, the scenario I have just laid out is not necessarily the worst-case outcome. It is possible to imagine ones in which environmental disasters or energy shortages play more prominent roles, and where collapse comes sooner and is more complete.

Whether contraction is chaotic or controlled, and whether it comes sooner or later, a radical simplification of the economy is more or less inevitable, as systems designed for cheap energy and economic growth slam up against environmental limits. And the risk of uncontrolled, chaotic collapse is considerable. As the 2010 Bundswehr (German military) report on Peak Oil put it: “A shrinking economy over an indeterminate period presents a highly unstable situation which inevitably leads to system col-lapse.... The risks to security posed by such a development cannot even be estimated.”4

I am about to argue, however, that
economic contraction need not entail
catastrophe and sorrow if the process is managed well
.

Haircuts for All...or Free Money?

To get past the wall of potential financial-monetary collapse, governments would have to resort to extraordinary emergency measures. In the best instance, this would create time and space to begin coming up with long-term, infrastructural responses to declining energy supplies and climate change — responses involving the redesign of transport systems, power generation and transmission systems, food systems, and so on. Of course, there is no guarantee that time, once gained, will be well spent. Nevertheless, in principle the wall can be traversed.

The essence of the wall is this: We have accumulated too many financial- monetary claims on real assets — consisting of energy, food, labor, manufactured products, built infrastructure, and natural resources. Those claims, essentially IOUs, exist in the forms of debt and derivatives. Our debt cannot be fully repaid: every dollar saved in the past is owed ever-multiplying returns in the future, yet the planet’s stores of resources are finite and shrinking. Claims just keep growing while resources keep depleting — and real prices of energy and commodities have begun rising. At some point it will become clear that this vast ocean of outstanding claims will never be honored, and the result could be a tidal wave of defaults and bankruptcies that would sweep away most of the economy.