The Long Descent (15 page)

The collision between declining fossil fuel production and increasing demand is far more likely to cause drastic swings in the price of energy than the sort of sustained rise imagined by some peak oil theorists. As energy prices rise, speculators dive into the market, driving up prices further than actual shortfalls in production capacity would justify. Many energy consumers respond by cutting back on their energy use by means of lifestyle changes and conservation technologies, while others are simply priced out of the market. The result is that demand drops, stockpiles rise, and prices start to slide. The speculators dive out of the market, driving down prices further than actual declines in demand would justify, and the cycle begins again. These whipsaw movements in the price of energy can cause plenty of economic damage all by themselves, but there again it's possible to respond to volatility constructively — for example, by stockpiling fuel when it's cheap and drawing down those stockpiles when prices spike.

The same logic needs to be applied to other aspects of our economic situation. The United States today, as many people have pointed out, is a spendthrift debtor nation. We borrow more than $2 billion a day from overseas to pay for imports that far exceed our exports, and for a standard of living that can't be supported by our anemic manufacturing and resource-extraction base. Major shifts in the world economic order are inevitable as the resulting imbalances work themselves out. Those who claim that the result will inevitably be social collapse and a Road Warrior future, though, haven't been paying attention to world economic affairs. Over the last fifty years or so, quite a few nations have borrowed and spent their way into fiscal crisis. Some responded with austerity and periods of recession; some inflated their currencies, went into hyperinflation, and came back out of it; some repudiated their foreign debts and weathered the international reaction; others simply muddled through. All of them survived the crisis and rebuilt afterward, and so will the United States.

Many people nowadays, it has to be said, underestimate the resiliency of the modern nation-state. A US government faced with a severe economic crisis has plenty of options. It can respond to a market crash by flooding the economy with cheap credit, as Japan did after the 1990 stock debacle. It can respond to currency collapse by abandoning its old currency and issuing a new one with solid backing, as Germany did in the 1920s to end its bout of hyperinflation. It can manipulate markets, nationalize industries, enact wage and price controls, levy punitive tariffs and embargoes, subsidize basic necessities for the population, and impose rationing of fuel and food. If necessary, it can declare martial law and use the military and National Guard to restore civil order. In the last half century or so, all of these tactics have been used by other governments around the world as they faced the possibility of chaos. Any or all of them could readily be employed here — and for that matter, some already have.

There are still very rough times ahead, to be sure. After a quarter century of reckless borrowing and waste fueled by absurdly extravagant use of the world's finite energy resources, the United States is likely to face a period of contraction as bad as the Great Depression; an economic breakdown on the scale of the one that engulfed Russia after the collapse of the Soviet Union is far from impossible. Still, the United States continued to exist after the Depression, Russia still exists today, and millions of people came through each of these economic crises with their lives, families, homes, and livelihoods intact.

Thus we can expect the next few decades to see a great deal of economic volatility and wrenching change. Energy costs will be impossible to predict; prices will spike and crash, following a slow but very uneven upward trend. Economic sectors dependent on stable access to energy will face a very rough road indeed. On average, those people and industries that require more energy will do worse than those that can make do with less, and those professions that meet actual needs will do much better than those devoted to the mass production of the unnecessary. To make sense of these changes, though, it's necessary to take a second look at the economy and draw some rarely noticed distinctions between the real economy of goods and services and the fictive economy that currently dominates the way goods and services are produced, distributed, and sold.

Hallucinated Wealth

I have no idea if kids still do this, but in my elementary school days in the late 1960s it was common practice to write IOUs for “a million billion trillion dollars” or some equally precise sum, and use those as the stakes in card games like Old Maid and Go Fish. Some of those IOUs passed from hand to hand dozens of times before they were accidentally left in a pocket and met their fate in the wash. Kids who were good card players amassed portfolios with very impressive face values, especially compared to the 25 cents a week that was the standard allowance in my neighborhood just then. If I recall correctly, though, nobody ever tried to convert their IOU holdings into anything more substantial than cookies from a classmate's lunchbox. Apparently that's the one thing that kept me and my friends from becoming pioneers of modern finance.

It surprises me how many people still seem to think that the main business of a modern economy is the production and distribution of goods and services. Far and away the majority of economic activity nowadays consists of the production and exchange of IOUs. The United States has the world's largest economy not because it produces more goods and services than anyone else — it hasn't done that for decades — but because it produces more IOUs than anyone else, and it sells those IOUs to the rest of the world in exchange for goods and services.

An IOU, after all, is simply a promise to pay a given amount at some future time. That describes nearly every instrument of exchange in today's economy, from bonds and treasury bills through bank deposits and government-issued currency to credit swaps and derivatives. All these share three things in common with the IOUs my schoolmates staked on card games. First, they cost almost nothing to issue. Second, their face value needn't have any relationship to the issuer's ability to pay up. Third, they can be exchanged for goods and services — like the cookies in my example — but their main role is in exchanges where nothing passes from hand to hand except IOUs.

It's harsh but not, I think, unfair to call the result an economy of hallucinated wealth. Like the face value of those schoolroom IOUs, most “wealth” nowadays exists only because everyone agrees it does. Outside the social game of the market economy, financial instruments have no value at all, and the game continues only because the players — all of them, from the very rich to the ones with scarcely a million billion trillion dollars to their name — keep playing. They have to keep playing, because access to goods and services, not to mention privilege, perks, and power, depend on participation in the game.

The resulting IOU economy is highly unstable because hallucinated wealth has value only as long as people believe it does. The history of modern economics is thus a chronicle of booms and busts, as tidal shifts in opinion send various classes of IOUs zooming up in value and then crashing back down to Earth. Crashes, far from being signs of breakdown, are a necessary and normal part of the process. They serve the same role as laundry day did in the schoolroom IOU economy: by paring down the total number of IOUs, they maintain the fiction that the ones left still have value.

All this leaves us in a historically unprecedented situation. Economies based purely on hallucinated wealth existed before the 20th century, but only for brief periods in the midst of speculative frenzies — the Dutch tulip mania, the South Sea bubble, and so on.
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Today's hallucinated wealth, by contrast, has maintained its place as the mainspring of the global economy for more than half a century. Social critics who point to the housing bubble, the derivatives bubble, or the like and predict imminent disaster when these bubbles pop, are missing the wider picture: the great majority of the global economy rests on the same foundations of empty air.

Those who have noticed this wider picture, on the other hand, are fond of suggesting that sometime soon, given a suitable shock, the entire structure will come cascading down. Those of you who were reading the alternative press at the time of the 1987 stock market crash will recall predictions of economic collapse in the wake of that vertiginous plunge; I made some myself, within my circle of friends, and I ended up with egg on my face when nothing of the sort happened. Similar predictions have accompanied each of the notable fiscal crises since then — the Japanese stock market debacle of 1990, the Mexican debt crisis of 1995, the Asian currency crash of 1998, the tech-stock crash of 2000, and so on. Similar claims are now being made about the housing bubble, the US trade and credit deficit, and of course about peak oil as well.

Plausible as these claims of imminent disaster seem, I suspect they're missing the core of the situation, as well as the lessons taught by twenty years of violent economic gyrations. It's a mistake to expect hallucinations to obey the laws of gravity. It's doubly a mistake when the institutions charged with keeping them in midair — the Federal Reserve Board in the United States and its equivalents in other industrial nations — have proven adept at manipulating markets, flooding the economy with cheap credit (that is, more IOUs) to minimize the effects of a crash, and inflating some other sector of the economy to take up the slack of a deflating bubble. It's triply a mistake when the North American middle classes and, to a lesser extent, their equivalents in other industrial countries, display a faith in speculation so invulnerable to reality that their response to a crash in one market is to go looking for a new speculative bubble somewhere else.

To say that the economic empire of hallucinated wealth will continue to exist, though, does not imply that it will continue to produce the goods and services or the jobs that people need. Arguably, it doesn't do that very well right now. The “jobless recovery” of recent years saw most economic statistics rise well into positive territory, while most people saw their expenses rise and their incomes shrink. Things could go much further in the same direction. It requires no great suspension of disbelief to imagine a future in which the stock market hits new heights daily and other measures of economic activity remain in positive territory, while most of the population is starving in the streets.

Partly, as Bernard Gross predicted decades ago,
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economic indicators have morphed into “economic vindicators” that promote a political agenda rather than reflecting economic realities. The statistical gamesmanship inflicted on the consumer price index and the official unemployment rate in the United States show this with a good deal of clarity.
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Partly, though, most of the common measures of economic well-being only track hallucinated wealth. The markets that keep the financial news agog with their antics are IOU markets disconnected from what remains of the real economy, where real people produce and consume real goods and services. Thus, trying to track the economic impact of peak oil, global warming, and other aspects of our predicament by watching markets and financial statistics may turn out to be as misleading as trying to track the supply of cookies in a schoolroom by watching the exchange of IOUs in card games.

In today's world of hallucinated wealth, the theory that a massive market crash triggered by peak oil will bring down the real economy of goods and services is implausible at best. Crashes there will certainly be, and some of them may be monumental, since volatility in the energy markets tends to play crack-the-whip with the rest of the hallucinatory economy. Crashes aren't threats to the system, though; crashes — and the recessions and economic turmoil that follow them — are part of the system.

The economy of markets and statistics has aptly been compared to a circus and, like any other circus, it serves mostly to distract. While interest rates wow the crowd with their high-wire act, and clowns pile into and out of various speculative vehicles, the real process of economic decline will unfold elsewhere — all but invisible behind a veil of massaged numbers, and discreetly unmentioned by the mainstream media — in the non-hallucinated economy of goods and services, jobs, and personal income.

As the boom and bust cycle accelerates on the downside of the Hubbert curve, we can expect each recession to push more people into poverty and each recovery to lift fewer out of it. As industries dependent on cheap, abundant energy fold, we'll see jobs evaporate, lines form at the doors of soup kitchens, and today's posh suburbs mutate into tomorrow's shantytowns. Rising transport costs and sinking median incomes will squeeze the global trade in consumer goods until it implodes; shortages and ad hoc distribution networks will be the order of the day, and wild gyrations in currency markets could easily make barter and local scrip worth a good deal more than a million billion trillion dollars of hyper–inflated IOU-money. Poverty, malnutrition, and desperation will be among the few things not in short supply. Until waves of change rock the political systems that keep the IOU economy in place, though, it seems most likely that the circus of hallucinated wealth will continue performing.

Slow-Motion Disaster

Ironically, while economic failures are likely to prove less drastic than some recent predictions have made them appear, declining public health will likely turn out much worse than most people nowadays suspect. Though it's all but unnoticed so far — outside of a small cadre of worried professionals — the coming disintegration of public health in coming decades promises a disaster in slow motion.
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It's not surprising that this crisis has gotten so little air time. Public health is one of the least regarded — though it's among the most necessary — of the basic services industrial society provides its citizens. It's not exciting stuff. Sanitation, pest control, water treatment, food safety regulations, and the like are exactly the sort of humdrum bureaucratic activities that today's popular culture ignores most readily. Even infectious disease control rarely achieves the level of intensity chronicled, say, in Randy Shilts' history of the AIDS epidemic,
And The Band Played On
; more often it's a matter of collecting statistics, tracing contacts, and sending local officials and hospitals e-mails that are easily and often ignored. On these pedestrian activities, though, rests the industrial world's relative freedom from the plagues that visited previous societies so regularly and killed so many of our ancestors.