Are We Seeing the Economic Inflection Point?
I missed the Summer Solstice because I was intensely focusing on my book writing last June. But as a rule I try to reflect on our situation every seasonal inflection point. This is because the seasonal changes remind me constantly of the nature of cycles and the stochastic nature of nature. Cycles repeat. But combined with the nature of a non-ergodic universe (non-stationary processes) within the pattern of repetition there is difference. Remember the idea that no one can step into the same river twice? That is the same with cycles in the real world. Each time around there is change and difference and novelty superposed over the familiar patterns. La Nina was supposed to fade according to prior cyclical history. But this time its different!
But the economic events of the last few days have jogged my attention to the nature of inflection points in logistic curves! And, thus, reminded me of my ritual. Here are my Autumnal Equinox thoughts.
In July I mused, Are You Witness to the Beginning of the End. The beginning of the end is an inflection point. Naturally, given the economic news of the past few days I can't help wondering if I'm prescient.
Of course I am not. For over four years now I have been saying that the economic conditions around the globe are going to get worse. They have. But I don't really see into the future. The other day a colleague approached me. In the not too distant past he thought I was a crackpot because when the ‘economists’ were seeing “green shoots”, and this included some of our esteemed professors at the University of Washington (one of whom chastised me in a public forum!), I kept claiming things would continue to get worse. I had been vociferous that the economy would still go further in decline. He has, he sheepishly admitted, finally acquiesced to my prior predications and asked me what I was using for a crystal ball. I told him I didn't have a crystal ball. I had physics and systems science. Physics deals with the nature of net energy flow through the economy. Systems science deals with how to consider the the physics in the context of economic activity. Aggregating the entire economy as a work engine that converts natural resources into desired human usable goods (and services) the prediction is simple. Reduce the energy input to the economy and the result is downturn in economic activity of all kinds and monetary price inflation. Systemic physics rules all of human economic endeavors!
Energy is in decline thanks to the twin phenomena of peak oil and declining energy return on energy invested (EROI), which has a direct impact on the prices of energy, especially barrels of oil. As stupidly simple as this sounds it is all you really need to know. The global trend in weighted average oil prices along with oil production numbers really tells much of the sordid story. Even if you don't know the actual net energy, say in BTUs, delivered to the economic engine (we don't keep records of that) you can infer from the price of oil what the effect on the economy will be. Every day that the weighted average price of oil is over, say, $85 there is more drag applied to the global economy. Drag on the economy translates into non-growth. And here is the kicker. The global capitalist economy based, as it is, on debt financing and consumer spending simply cannot handle this drag. It absolutely needs growth in spending to sustain it. Unfortunately, the weighted average global price of oil has been over $100 for many months (the West Texas Intermediate, WTI, crude price on the NYMEX is much less, but is also not really representative of global oil prices).
The reason the economy has been so sluggish is that energy has been costing so much that all supply chains have been suffering cost increases. Right now we are seeing those costs start to percolate up the supply chain line and affect all products and services. Food and gasoline prices continue to rise in spite of short-term reductions in oil prices (at least in the WTI crude market). The Fed's responses, essentially printing money that ISN'T backed by real wealth production simply contributes to the inflationary pressures. Prices will continue to rise, at least relative to most peoples' abilties to pay, and wages, already stagnant, will diminish further leading to many more people sinking into the ranks of the poor. It will get much worse. And, I am sorry to say, based on the systems physics, it will not be getting better. Please believe me when I say it gives me no joy to be the bearer of bad news. Do with it what you will.
We have passed the “beginning of the end” inflection point. Remarkable how close it is to the Autumnal Equinox, the halfway inflection point in the solar day. We are on our way to the Winter Solstice. One can't help but wonder what that will bring. Happy Equinox.