The stock market roller coaster ride has been wild. Several analysts I read (and tend to trust) claim that we can expect more next week. Some pessimists are expecting the markets to take a huge nose dive. As I write this Bush is hosting a meeting between the developed world's finance ministers as they attempt to coordinate a global response to the credit freeze up crisis. Moreover, Henry Paulson is expected to announce the use of capital infusion into the banking system through equity instruments as part of the bail out. This is something many economists wanted from the beginning. Better late than never, I suppose. Of course, I wonder where the US and other governments are going to get the money? The US is already in hock up to its ears. Are they going to borrow more money from the Chinese so that they can help the banks loan more money so that more consumers can consume? Does that sound like a wise thing to do?
The price of oil has come down quite a bit as a result (supposedly) of demand destruction in the slowed economy. At the same time OPEC is discussing reducing production in order to stabilize the prices where they prefer them (~$100/bl). High oil prices are now recognized as a major contributor to raising inflation rates when increased costs of energy get eventually passed through to customers of products and services. So prices coming down might provide a little relief in that area. But I suspect what we will see is the same kind of volatility in the oil prices as we see in the stock market. Down one day, up the next.
The 'experts' are pointing in every which direction to explain what is happening. The housing bubble, sub-prime mortgages, Reagan-philosophy and deregulation of credit markets, now its confidence, etc. are all candidates for the 'cause'. But as I wrote last week, these are just triggers and amplifiers. The real underlying cause of the deflation of the credit markets (in all their clever forms) is that we can no longer do the amount of useful work that our economy requires just to maintain. Our credit markets have been based on expectations of wealth production in the future. And, as I have explained, real wealth isn't more iPods. Real wealth is in infrastructure and especially an energy infrastructure. We can no longer put our energy and efforts to producing real wealth because we spent our windfall from fossil fuels on trivia. I hope we had fun with our SUVS (especially Hummers), our theater-sized TVs with satellite-provided 2,000 channels of infomercials, our NASCAR weekends, and such. Because now its time to pay the bill.
Only, look here, there is no money to pay with! We borrowed from the future. We fully expected to go on growing the economy and producing more stuff in that future. Now, with peak oil and decreasing energy return on energy investment (EROI) we have less and less energy to do anything worthwhile. There will be no future production of enough wealth to pay back the loans. All of those experts were completely oblivious to the true nature of economics. Up until the s**t hit the fan they mostly thought everything was just fine.
Worse yet, the majority of the country are still believing we should be able to have our toys and be wealthy too. Mainstream economists are still preaching the wonders of capitalism, consumer-based growth, and markets. Meanwhile the 'masters of the universe', bankers and traders, are breathing a sigh of relief that they may yet keep their estates in the Hamptons. Most people actually believe that we will get through this little problem and one day, when confidence returns, we'll get back to normal and go on happily producing more junk and consuming. Bush and his team of 'experts' are doing their best to guide us back to that happy, mindless, world.
But there is nothing they can do to make it so. We were just too leveraged relative to our future capacity to do useful work. Nothing short of a breakthrough in cold fusion is going to make this any different. If people were capable of recognizing the relationship between energy and the economy they might also realize that the only way forward would be to radically change their lifestyles and expectations. I'm not talking about a few conscientious souls planting organic gardens and getting off the grid, though I applauded their example. I am talking about a global move to sacrifice our trivial productions and get to work on things that really matter. A global-scale WPA style effort to build solar and wind farms, not to replace fossil fuel power plants to feed our consumption, but just to have enough electricity to salvage some form of civilization for our children. We have to give up eating oranges and tomatoes in mid-winter. We have to shut down most of the entertainment and sports industries. We have to re-localize our work, education, and agriculture in order to save fossil fuels to help bootstrap a new steady-state economy based on renewable energy sources.
But here is what is more likely to be the scenario based on the simple fact that most human beings have low levels of sapience (the reason we are in this mess in the first place). People won't believe they need to make sacrifices. They will continue to listen to the 'experts' talk about how it will get better if we just believe in the wonders of capitalism. And foolish people do want to believe. So our financial meltdown will result in many companies being unable to borrow money just to meet payroll. They will shut down, meaning that their former employees will not have money to pay their bills, their debts, and most of all, to buy stuff. The loss of customers will cause yet more companies to shut down, And the whole thing will snowball into a depression that will make the 'Great Depression' look like a holiday.
But here is the difference between the Great Depression and what we will see. We will never recover. During the Great Depression the production of fossil fuels actually increased, building a surplus of energy ready to be put to work. All it took was a world war to kick start the production wheels. Even had there not been a war the world would have recovered eventually. The energy was there and all that was needed was finding methods to couple the reserves with useful work. The war just lubricated the coupling so that energy could flow through again.
Peak oil means that there will be no such build up of reserves. We are on the downward slide and have already borrowed egregiously against presumed future energy (actually believing that future energy would be MORE than current flows). So, if we slide into a depression we will literally end up giving up all that I indicated above, not by willing sacrifice, but by virtue of the depression state. With the consequence that we will not have invested what energy we have left into building a basis for a future energy production system.
Consider what will happen if we are just paying attention to monetary costs of alternative energy systems as compared with the price of oil. This is the analysis currently used. As oil prices come down investments in wind and solar will not be made under the market and capitalistic enterprise system. Such investments will be relatively too expensive and have no obvious payoff. So, while our great captains of industry focus on dollar return on dollar investments we will fritter away every possible option of building out a sustainable energy system.
When I think about this waste of humanity through its own foolishness I sometimes feel disgusted. But then I remind myself that humans haven't got the neuropyschological machinery needed. We are not a really sapient species after all. Its really not our fault! We are sapience-retarded compared with what we need to comprehend the meaning of what we are doing to ourselves. Somehow in evolution we just ended up with an imbalance between cleverness and judgment/foresight. However, sapience, like intelligence, is distributed unevenly through the population. There are individuals with above normal sapience, even extraordinary sapience. My hope is that many of these people are wise enough to survive the increasingly likely downfall of Homo sapiens, or as I prefer Homo calidus, man the clever. I dedicate my thoughts on Sapient Governance (which I hope to get back to in these blogs soon) to those survivors. They will devise a civilization based on governance principles from nature and not be so full of hubris about their own capacity to just invent governments and economies on their un-principled assumptions.
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