Question Everything

Watching the Political System (er, Circus)

What Happened to the Political System?

As I write this it is very hard to juxtapose those two words — political and system. What we are observing today is, at best, a broken system. It is a moribund system. All organization is in tatters. It is failing miserably to perform its historical function in society, providing a basis for governance and generating policies to achieve governance objectives. And if you think I am merely writing about the political system in the United States you haven't been paying attention to the rest of the world. Politics is a mess everywhere.

This is by no means the first time in history when a political decision system has broken down and taken governance with it. We have seen this phenomenon many times throughout history as great civilizations have collapsed when their systems of governing fell to the machinations of a dysfunctional political process. Societies under stresses, such as resource declines, seem to most often respond first with a breakdown in the political system. That drags down the quality of governance since it is the political process that determines who the actors making the decisions are going to be.

The stresses are invariably first felt in the economic system, as previously noted. But that leads to the stresses felt by political leaders to “do something”. And since, as a general rule those leaders really don't know what to do, or even what the real causes of the stresses are, they do what politicians are best at — they point fingers at the usual suspects, make stuff up and hope no one will realize it. The political game then becomes one of convincing the electorate (or the financial powers) that one story is better than another just to get the job. Even in those rare cases where a political leader (in power or trying to get power) might know a bit about the real causes they are loathe to tell that story. No one wants to hear that the end is near and inevitable. Whoever tells that story won't be elected, or if in power, won't stay long. Remember Jimmy Carter?

The political process as it is playing out in the United States this summer and early fall will be something else to watch. I seriously doubt that there are too many observers of what has been going on so far who do not believe that the system is broken badly. The presidential race is an amplified version of a comedy that is playing out all over the world, at all scales of governance districts. Corrupt, stupid, narcissistic, politicians are playing into the hands of corrupt, stupid, narcissistic capitalists everywhere and in every level of governments. These days even those few earnest and generally honest politicians who got into public service because they really believed they could help the system and people living under it find they have to play the game by the rules that have evolved which are mostly about money, power, and getting re-elected (or not getting assassinated in a coup). In the US this season is further made preposterous by the Supreme Court's Citizen United decision which basically gave corporate powers carte blanche in purchasing the best candidates for representing their interests. Judges are supposed to exercise good judgment. The courts and laws are the backbone of civil society. When the back is broken, nothing else will work properly. What happened with the justices who found in favor of this abomination? What they will have done is simply accelerate the collapse of the political process and the collapse of governance.

How did we come to this? Every nation starts out with big hopes to provide a wonderful home for their citizens. Today many nations have citizen participation (some form of democracy) to allow citizen voices to be heard, at least in principle. Even those countries where democracy is not the form of governance, at least leaders are wary of unrest to the point of trying to maintain stability. Usually, as we've been seeing in the Middle East, that leads to strong arm techniques with violent consequences. But the best intentions of governments and leaders have proven ineffectual in producing working governments that produce livable conditions in their countries. What went wrong?

The United States is actually a very good example of how the political process can fail and destroy what might otherwise have been an effective form of governance. I will take examples of this from what is happening in the presidential race and the workings (or failures to work) of the three branches of government.

First, I would like to dissect the whole notion of the polity a bit and separate the mechanisms (subsystem) of governance from the political subsystem. In the US we have a stark version of these two subsystems working at odds with one another. Originally, the term polity meant to reference both the political process and the governance that resulted. Once upon a time that confluence seemed reasonable. Once when there were clearly socialist governments or democratic governments the business of developing principles for governing from the prevailing ideology was seemingly straightforward. The only differences that had to be worked out in the process of choosing leaders and legislators were the ideas about which policies should be set and how to implement them.

 

Figure 1. A systems diagram of an idealized political system in the context of the whole social, economic, and governance system. If everything worked in balance, this system should be able to produce a functional governance subsystem that monitors the well being of the social system and applies the governance principles generally shared by all members of the society, e.g., constitutions. The political system provides the selection process by which governance will be guided by the balance of political theories from either liberal (exploratory-empathetic) or conservative (exploitative-self-serving) ideological perspectives (see below for explanation). The governance principles are expected to evolve somewhat over time as society evolves (e.g. with changes in technology). This model does not take into account the limits of non-renewable resources or the ecological impacts of waste production. If the society were in a steady-state condition and at or just below carrying capacity, then the system would be in balance (what I have called a sapient society). Governance principles would have to include monitoring the environment (resource and waste flows relative to the Ecos' capacities) and regulating consumption/population to maintain balance. Humans never really developed a sense of need for such governing principles, and in fact strongly believed they could be ignored, which is a big part of why we find ourselves in a predicament today.

 

The political process is where society, under the influence of political theories and the influence of political advocates, must decide which persons among them will produce the most viable governance body. In democracies this is worked out, as it would seem to be doing in the US, through an election cycle. Our two-party+independent voters get to hash out what they believe is the best political theory (and political platforms) to follow given their understanding of the conditions of their social system and its relation to other systems in the world. Unfortunately their perceptions of those conditions are now largely controlled by the political parties, especially through a media that has become decidedly political (vs. apolitical). In this incredibly complex world where real knowledge is in short supply, almost everything has turned into a political debate using opinions in place of facts. It is understandable how the politics of economics has come under this influence given the deplorable state of economics as a social science. But even something like global warming due to human consumption and climate change resulting therefrom has become politicized in spite of the overwhelming scientific evidence available to inform policy making.

Politics ought to be based on facts interpreted through considered theories (not just ideologies) through deliberation, consultation, dialog, and debate carried out by people of reason in front of a citizenry who can exercise critical thinking (based on a well founded education) and exercise their voices to influence the process. Those we send to govern should be the best and the brightest and able to sort fact from fiction to arrive at good policies.

That is what it ought to be if it were going to work properly. But there is a weak link in this concept and that is human nature. It is especially the case when it comes to the level of sapience had by the average human, let alone that had by those who seek to be governors. Figure 1 represents a mythical system. One most of us want to believe exists, but in fact, is just an idealization that cannot come close given our shortcomings as a species in the realm of developing wisdom. What a pity.

Our politics, instead, arise from two seemingly at-odds needs that arise from our biological mandate that we have not yet evolved the appropriate internal regulations that come from higher sapience. All of life is constantly faced with a trade-off between exploration (e.g. finding some new kind of food) and exploitation (e.g. gobbling up an existing food resource). Exploration entails risks. You might expend a lot of energy trying something new, or looking for something new, and end up with a failed effort. You would have squandered energy (and possibly other resources) as a result. Exploitation looks less risky at first. Consume a known resource; you don't have to waste energy looking for it and you know what the payoff will be.

But animals need to participate in both kinds of activities over time for the simple reason that exploiting resources often leads to depletion effects. If the animal never explored the territory for new resources, then depletion of the known exploitable resource will lead to destruction of the animal. Thus it is incumbent on animals to be somewhat exploratory in order to avoid getting stuck in a resource hole. They need to have options. On the other hand they should not spend too much time and energy exploring where there is still an adequate supply of a resource since this would be a waste of time and energy with no real payback. It is important to recognize that this trade-off dynamic plays out at the individual, population, and species levels of organization. Evolution is a great example of the trade-off between exploration (new mutations and their effect on genotypes) and exploitation (stable phenotypes conserved in stable environments). But, as pointed out, individual organisms have to work with this same dynamic.

Where is the optimum in the exploratory-exploitation spectrum? For many lower species the “sweet spot” is determined evolutionarily, that is for the species through their collective fitness in particular environments. Some creatures, like barnacles, sit themselves down in a suitable location, anchor for life, and spend their entire adult lives staying in the same place just reaching out to grab food as it floats by. Others, like lion prides on the African plains must be able to explore a wide territory for game if they can't exploit the fact that game come to a water hole where they can just wait for food to come by. They have to solve a dynamic problem for how much exploration to do relative to the opportunities for exploitation. Every species has a programmed sweet spot that guides their behaviors. The higher species seem to have a larger interval of acceptable trade-offs around that sweet spot; they can shift the trade-off as circumstances dictate. But they still have a basic sweet spot that is conditioned evolutionarily by their fitness in their niche over the long haul.

In humans we have an extremely interesting variation of this exploratory-exploitive behavior. For most of our history it has served us well, but now I'm not so sure it is contributing to the fitness of the species. As with all animal species humans have an evolved sweet spot with a rather large range of positions that have varying payoffs. But over the last ten to twenty thousand years I think something very profound has been evolving due to the change from hunter-gatherer societies to settled agrarian societies. It appears that humans are evolving not one, but two sweet spots on either side of the original one. In other words, humans are seeming to be bifurcating into those who are more exploratory leaning and those who are more exploitative leaning. Those who are more willing to try new things and those who are happiest just continuing to do what they have been doing all along. Sound familiar?

Interestingly a similar bifurcation seems to be taking place on the altruism/empathy — self-serving/self-referencing spectrum (the personality type that can lead to narcissism). It is now clear that there are people who lean toward communitarianism versus those who lean toward individualism. And, I would hazard a guess that what we are seeing in this separation into two camps or ends of a spectrum, is that these two spectra are actually linked genetically. I'm betting that if we discover genes that influence someone's tendency toward exploration versus exploitation we will find them coupled with those that influence communitarianism versus individualism such that the former in each category are linked as are the latter in each category. All that is necessary is that they be on the same chromosome and so close together as to be relatively immune from cross-over during mieosis! That shouldn't be hard to demonstrate.

OK, so that is a bit speculative but come up with a better theory to explain what we are seeing in the separation between progressive/liberal persuasions and libertarian/conservative ones. The contrast is stark as is the widening chasm that separates these two “types”. We may be looking at two subspecies of humans based on these personality divisions. They even seem to breed selectively (assortative mating), which would accelerate evolution toward speciation!

Republicans and Democrats are becoming less and less able to see each other as fellow humans because they are evolving to be less like each other. They are evolving away from an ability to cooperate (though it seems the Democrats are a little more willing to try to find a cooperative solution, perhaps because they are the more exploratory and communitarianists).

There is, however one common idea that they are seemingly able to agree on that has grown in importance to both mind sets. It too is a result of the biological mandate, but taken to an extreme. It is the notion of profits as the raison d'être for the economy. Growth, just because we all accept that as the good, for its own sake, is universally taken as the only way to live on this world. Industry through capitalism emerged as a commonly held belief that this was the route to human happiness, that greed, which drives capitalists, was good. No matter what your political leanings this one idea trumped all others. The political perspective determined not whether capitalism and profit were the good, but only how they were to best be executed. Exploratory/communitarianism calls for regulation to keep the system from getting out of hand and a fair sharing of the rewards with all. The exploitative/individualists are convinced that it is every man for himself and the invisible hand that Adam Smith wrote about will take care of regulation from within. Neither group disputes the rightness of capitalism as a model for economics. They just differ in terms of how they think it best achieved.

Now, it turns out the one thing they all agree about, growth and capitalism, is the worst thing for both humanity and the Ecos. And what they do not agree about, how to achieve it, amplified by this process of sub-speciation, is leading us down the worst possible path toward destruction. They will fight tooth and nail to prevail.

Because growth and capitalism have now started to diminish well being as resource limits are being approached, the system as a whole is starting to fail. And that motivates each side in the various debates to insist more strongly that their political philosophies are the most appropriate to ‘fix’ things. It never occurs to either side that the problem is in the one thing they both agree on. Talk about irony. The figure below shows a somewhat different (though similar to Figure 1) view of the political system as things have evolved with the dynamics produced by these political theories motivated by greed.

 

Figure 2. A systems diagram of a general political/governance system evolving under the prevailing beliefs in growth and greed (modern capitalism). Processes are shown outside the social system (purple oval) but are in fact composed from components within that system, namely people. Resources are shown entering that system and wastes (material and heat) exit in balance. The clouds represent ideas and beliefs held by the polity. These are not necessarily informed by science (and most often are not), but rather by experience that has developed over the ages. Ovals are processes. Governance principles are the results of ideas that have been codified in constitutions, governmental institutions, laws, and general mores. The government, represented by the dashed oval, carry out logistical and tactical decision making, setting policies and issuing instructions to the civil society, economy, etc. that makes up the society, however arranged (i.e. representative democracy, confederated states, free enterprise, etc.). Human nature is clearly a subsystem operating within society to produce ideological principles (e.g. conservative approaches to problem solving) and an overarching set of beliefs that can produce negative effects on those ideological frameworks (lightening coming from dark cloud). Capitalism, as now practiced, would seem to be such a harmful effect on both left and right leaning ideologies.

 

The still believed promises of wealth from capitalism drive both sides of the political spectrum and even those in the independent category. As the whole system fails to deliver on that promise all parties have become shrill in promoting their particular ideological fix and blaming the other side for all that is wrong. But they will not face up to the reality. For example, consider the situation with the financial system, especially the culpability of the bankers and investment brokers in the many clearly fraudulent practices that have taken place since the demise of the Glass-Steagall Act. In spite of the severe damage done to individuals (e.g. wealth disparities and job losses) neither party has the intestinal fortitude to force serious investigations or punishments. Why? Because they are convinced they need the bankers and brokers to keep the economy going, and they foremost believe in “free enterprise”, capitalism, and growth, which right now depends entirely on expanding the money supply through financialization. If you put those guys in jail the entire system comes crashing down — the illusion of prosperity disappears in a puff.

The Show Must Go On

It doesn't matter if the clowns are crying. The show must and will go on. We haven't even gotten to the really interesting acts here in the US. We still have conventions and debates to watch. We still need to be thrilled by the Republican VP selection. We still have to watch the intensifying horse race (who will win the most dollars in campaign contributions?) We still have to watch in apt amazement as candidates attack more viciously their opposition. This is going to get a lot better — if you like blood and gore.

Shakespeare said it best (as usual),
“It is a tale
Told by an idiot, full of sound and fury
Signifying nothing.”
Macbeth (Act 5, Scene 5).

Our political process is in a shambles and has been for a very long time. I assert this is the case at all scales but is most acute, and most felt, at the national levels. There is no global level since there is nothing really close to a global governing body (though the UN and NATO are rough attempts toward that end). Nation states are faltering in increasing numbers. And it is all because the politicians and citizens are failing to recognize a simple fact. We are in contraction not expansion. The old ideas about economy and social justice, and governance simply do not hold under these conditions. And the idiots, as Shakespeare said, are blabbering nonsense at increasing volumes. They are in open combat (e.g. the debt ceiling standoff) and unable to find any way to move forward. Of course that is simply because they have no idea what a way forward looks like. They have no idea what is happening to our world so they simply do what comes naturally and blame the other side for all woes.

I have decided, after more than forty years of participating in the political process, that the system is so badly broken that further participation is futile. My general conclusion is that it really doesn't matter who wins the presidential race. It won't matter what party prevails in either houses of Congress. No matter who the electorate sends up (and I am convinced that will be people bought by corporate interests, certainly not public awareness and understanding) they will be unable to do anything useful. Neither party has a handle on the real crises we face let alone formulas for fixing anything. Besides that, I think the collapse of the whole process is imminent. It may even come with the election cycle in full swing. A major riot at one or both conventions will almost certainly put big nails in the coffins of the two-party system in the US. The new Greek government, in acquiescing to the EU's demands for more austerity may find itself in deep trouble and full blown revolts. Same for Spain. And then what?

From my limited perspective the only thing to do now is sit back and watch the show. It may provide entertainment value, but little else. There will be an election in the US. Someone will take over the White House and some party will dominate one or both houses of Congress. The Supreme Court won't change much but they have already shown themselves to be completely clueless so we should continue to see idiotic decisions in any case that involves economics or politics or social values (the court decision on health care, where Chief Justice Roberts may have accidentally sided with the liberals and calling the insurance mandate a tax still hasn't been figured out, was a fluke). The President will be ineffectual regardless of who sits on the throne. The Congress will continue to do damage to the country and the world regardless of which party prevails. In short I expect things to get noticeably worse after January. Most of that is because we still haven't found the magical neoclassical economics way to substitute for critical materials and cheap high power energy. And without doing so there is only one direction the economy can go. But also, I expect the problems associated with this to be amplified by a political and governance system that simply doesn't work anywhere near what an ideal system would. The one thing you can count on is human nature. Sadly.

Watching the Global Economic System

Why the Global Economy Is Such a Good Indicator

Among other systems-related factors, the economy is what all of us actually experience on a daily basis. The very first signs of collapse will be felt there. Long before we watch sea levels rise dramatically, long before even Republican nut cases like James Inhofe admit that the weather patterns are due to human-induced climate change, we will all feel the impacts of collapse through the economic conditions of life. Our jobs, our incomes, even our ability to find food on the grocery store shelves or gasoline at the pump, will all be subject to seismic shifts of unpredictable magnitude and direction. The vectors of change in everyday life will be chaotic at best. So it is probably a good idea to try to grasp the big picture of what is happening in the global economy.

As I was writing this piece a very important report came out of the FEASTA (Foundation for the Economics of Sustainability) group by David Korowicz titled: Trade Off: Financial system supply-chain cross contagion - a study in global systemic collapse. QE commentator Mark N. had posted another link to this work in a comment to the previous blog. If you have a limited amount of time and have to choose between reading my thoughts below versus reading this report, choose the latter! It sums up a lot of what I was planning to say about the economic system (focusing somewhat on the supply chain criticality) and the role of the financial subsystem in keeping this system afloat. He tackles the problems using the systems approach so actually captures everything I might have to say about the situation. Even if you decide to read my ramblings below, take time to read David's very important work.

What we both have to say is kind of simple. If the financial bubble bursts, the economic system comes crashing down and that will result in massive destruction to the globalized, interdependent world. We will leave a lot of oil in the ground, as it turns out, simply because we cannot get over the most driving aspect of economic activity. We won't do anything unless we can see how it produces a profit in the short term. “We” means everybody (well, perhaps except for the most sapient beings who actually can see into the future).

The Financial System is a Key Subsystem within the Global Economy

The reason I first chose to focus on the financial subsystem was that it is pivotal to many other aspects of the global economy. That is, the financial system forms a nexus through which every other aspect of economic activity must pass. It is a king pin for the economy and the bowling ball is headed right for it.

Now I want to step back (or perhaps I should say go to a higher elevation) and take a look at the larger system and see how the financial subsystem affects the other subsystems that constitute the economy. We need to map out (even if roughly) the other major subsystems in the economy as well as consider what we consider the boundary and interfaces of that system with other relevant systems, both human-centered, and with the Ecos as a whole.

First, though, let's consider the current views on the economy and what people believe drive it in being the engine of our wealth and well being.

Growth is Good (Not!)

What do most people mean by a “healthy” economy? Of course they mean a “growing” economy. Growth of national and global gross domestic product (GDP) is the sine quo non of economic health in the vast majority of people's eyes. The principles that apply are self-obvious, after all. In a growing economy there is an expansion of production that leads to job creation. People with jobs receiving living wages are able to buy the stuff they need which reinforces the growth. As long as there is continuing growth in the population, there will need to be growth in the economy to sustain everyone getting jobs and living decent lifestyles. It is obvious.

What everyone agrees on today, both conservatives and liberals, for example, is that the economy is in trouble. It is not growing (or growing rapidly enough) to be healthy and create those jobs. Of course parties from both extreme positions politically have differing views on what is causing this lack of growth, but they at least agree on the symptoms.

It is ironic, though, that the very thing that everyone is just so sure is the cure to the problem, growth, is actually the cause of our predicament in the first place. Economic growth at a time of approaching limits of critical resources is exactly the opposite of a healthy economy. The economy is entering a phase, a permanent phase, of on-going contraction that no one will be able to halt with any conceivable fiscal or monetary policies. In the end they won't even be able to slow the contraction down after it builds momentum.

To be clear about what I mean by growth let's consider the diagram I used in the last Watching blog, reproduced here.

 

Figure 1. From the blog post What Am I Watching?, this represents an economy that is growing. The relevant particulars are the import of raw materials and energy, work done on the materials to produce assets and the eventual decay/consumption of assets to produce wastes. The Ecos is represented by the open rectangles, which are sources of resource and sinks for material wastes. Energy waste - low temperature heat - is transported to space. Money is the method for communicating the “value” of assets in the economy. In this model the history of growth in assets, especially in the surpluses, creates an expectation of growth continuing in the future that allowed the creation of credit-based borrowing or the creation of money that is not actually backed by real assets. That increase in money, however, acts to speed up the production of assets as long as the inputs of resources can keep up.

 

In this model of the early economy an accumulation of surplus assets (e.g. grains in a granary) could be used as an investment in producing yet more assets. This is the basis of physical growth but also true economic growth. The physical size of the economy, including the biomass assets of our selves, grew proportional to the rest of the Ecos, which has remained essentially fixed in terms of total biomass and materials. The driver for this system is energy flow from the sun through the system, doing constructive work, to deep space as waste heat. We don't see it in this model, but as the size of the system increases, the complexity of the assets also increases with technological and social developments. Thus growth and complexity go hand-in-hand. In fact, increasing complexity seems to be a consequence of solving the problems resulting from growth, e.g. developing more complex farming practices in response to a growing population's demand for more food.

As I suggested in the last blog about financing, initially the borrowing practice, called investment, was from the existing surpluses, from savings. For the majority of the history of banking this has been the case with the exception that fractional reserve banking (as long as it didn't get out of hand) provided a form of borrowing against future, presumed to yet be produced, assets rather than existing assets. This was made possible by the use of money, which became an abstract representation for assets, either real or to be realized. The problem with fractional reserve banking is that it artificially expands the money supply, which in turn can be interpreted as an expansion of the asset base. As I said, as long as this practice was constrained by prudence and there was always an ability to find and utilize a surplus of energy and raw materials this did not seriously hurt anything. Indeed it was probably a catalyst for progress. That was the birth of financing.

Once, a long time ago, growth in the asset base for humanity was good thing. Those assets made it possible for humans to lead increasingly less dangerous lives. They gave humans more time to contemplate both their navels and the Universe. The surplus allowed a few bright individuals to construct more sophisticated ideas about how the world worked. In turn those ideas helped develop better assets and more surplus. Our clever species had transcended a boundary that life had been constrained by since its inception. The reduction of risks by our agriculture and technology meant that we were no longer as subject to the whims of nature as our predecessors and all prior living things had been. Growth in population was also a good thing when we were a rare species. With more people there is more variability in the gene pool and more opportunities for more clever individuals to emerge, which they certainly did. As noted above, with growth in assets comes increase in complexity. And that too was a good thing. Complexity, such as trade relations in neighboring villages, at some level leads to increased flexibility and resiliency. Living cells are the paradigm model of just the right amount of complexity. They are unimaginably complex in some ways (as our biology continues to discover), but not too complex in the sense that they become subject to the costs of complexity. Nor does their complexity increase until they suffer the law of diminishing returns on increased complexity, ala Joseph Tainter's hypothesis regarding human civilization collapse. Cells have evolved a high degree of variation in the exact forms of complexity they possess, but not in the level of complexity.

In the course of evolution of life on Earth, single celled organisms did not grow beyond a biophysical limit, nor did they increase in levels of complexity. Instead they started doing something more interesting. They started to aggregate and cooperate — they auto-organized to form multi-cellular clusters that took on a life cycle of their own. Different kinds of cell clusters would become competitive with each other. That is what gave rise to further evolution right up to the present. But cells, individually, remained at the relatively low level of complexity (and size) leaving the further development of higher complexity to the emergent multi-cellular organization.

The human economy has had a similar emergence of a new level of organization that could accommodate increases in complexity. The “firm” or production organization has acted as an analogue to multi-cellular organisms, allowing new forms of complexity to develop. Civilization has acted as a yet higher level of organization allowing firms to interact in both cooperative and competitive ways. But civilizations were still fragmented and semi-autonomous entities, much like multi-cellular life forms in a larger environment. They also competed and cooperated. But now comes globalization, the advent of a new level of organization for the whole globe. Only now there is no larger environment to occupy. There are no other globalized civilizations with which to compete and cooperate. And, wouldn't you know it, this all comes about just at the time when we have reached a depletion limit on our main source of energy, the source that allowed this growth and development to reach the level it has. We are starting to experience a decline in net energy from fossil fuels. Growth and increasing complexity are no longer options.

Economic Reality 101

It is hard to believe that universities give people PhDs for learning how to ignore reality. That seems to be the case in economics and political science. These “soft”, social sciences have no use for physics, chemistry, and biology. They have everything important to say about political economy wrapped up in neo-classical economic theories. And those theories require growth to continue no matter what. Indefinitely into the future. Infinite growth and development. After all, we humans have transcended the laws of physics, haven't we?

The economists, the politicians, and the sycophant media are still telling us that a healthy economy is a growing economy. In one perspective that is true. And that perspective is the continuing wanting of more stuff. More stuff (assets, whether useful or not) represents wealth and everybody wants to be more wealthy as time goes on. We want to grow. Ergo, growth must be good.

But rather suddenly, seemingly, we are faced with a reality that imposes on the nice neat picture that neo-classical economics has painted. It turns out we are subject to the laws of physics after all. And one of the laws of physics, the conservation principle, states that when you use something at a rate faster than it can be replenished, you tend to deplete the stock! Who knew? Economists had worked very hard to convince themselves and everyone else that in a market-based economy as a resource became scarce and more expensive, we would simply find substitutes at lower costs and get on with things, business as usual. They had never heard of Leibig's law of the minimum, which says there is some critical resource that is needed in every dynamic system that will regulate that system, especially if the dynamic is growth. That is biophysical reality and remember, economists don't worry about physics (or reality).

Here is a similar graphic to Figure 1 above. It has been modified to show two explicit realities that no one in the powers that be, (PTB) seems able to come to grips with. First the bubble inside the money bin is all of the hot air “money” that doesn't actually exist. Or rather it exists (printing presses and bank accounts go nuts) but doesn't represent anything real, not usable assets or asset surpluses. It represents, strictly, an expectation that something real will be in place some day in the future to fill the same space. This is the collective debt that we have created to make it look like everything would be just fine. Note that it feeds on itself. This is the Wall Street players paying themselves huge bonuses for keeping the smoke and mirrors preventing the rest of us from seeing what is really happening. That is a good trick. But it is just a trick. And unfortunately it is tied into the real investment loop that keeps productive work going.

The problem is that productive work can only be accomplished if you have adequate resources to work with. The advent of peak oil is a wake up call telling us that resources are not infinite. Peak oil by itself is not the central problem, but it is sounding an alert that should get us looking more closely at what the real problem is. And that is that because of diminishing returns on energy extraction (EROI) we are able to put less net energy back into the real economy. We thus can do less real work and produce less real goods and services. Everyone is getting poorer without seeming to really understand why. In a similar vein, some critical material resources are depleting so that it takes increasingly greater amounts of energy to keep up the same extraction flow rates. It takes more work to get the same metal out of less concentrated ores.

And there are no substitutes for high powered energy and low entropy material resources. The alternative energy technologies are just not up to the capability to produce the same substantial power that fossil fuels have provided. They may work OK to run a greatly reduced economy, some day, but they will never be able to provide the energy needed to run the current level of economic activity. So between the decline in net energy from fossil fuels and the low power production from alternatives the economy has nowhere to go but into contraction.

 

Figure 2. The economy after the on-set of declining resources will necessarily contract. Our current situation is that our expectation of continued growth of asset surpluses will continue into the future. We have created a financial (debt to be paid in the future) bubble in our monetary system that continues to skew decisions about investments and profit potentials.

 

Social Effects of Economic Contraction

The Great Depression of the 1930s is going to look like a cake walk. It wasn't WWII that brought the US out of depression as is generally believed (by who else but economists). That activity only acted as a trigger to spur the work fueled by more abundantly available fossil fuels. We had energy to waste, so waste it we did. The war put people to work, to be sure, building tanks and bombs (the ultimate in a consumption economy!). And once the energy flow infrastructure was in place in support of the war, then when the war ended there was abundant energy to do whatever else we wanted to do. And what we wanted to do was have fun, at least in the west. The eastern world had slightly different priorities and a different way of doing things (communism as it was practiced there) but they still wanted to go on wasting energy on creature comforts and weapons to dominate world politics.

The point is that the Great Depression came to an end and just about everybody believed it would some day. Remember Franklin D. Roosevelt's famous fear speech? There was never any doubt that good times would return one day. And sure enough after the war, the economy started growing again and there were all kinds of jobs. The recovery was a confluence of wartime inspired technological magic and the sheer volume of fossil fuels that were cheaply available. The economists put in their two cents. The Keynesian economists had been arguing that government stimulus (pump priming) would spur economic growth to the point that any debt incurred by the government would be more than paid back by the growth of the economic engine in the future. It did seem to work, didn't it?

So the whole notion of a deep recession or even a depression, while painful in the short run, never really bothered economists (it bothered incumbent politicians) because they were so sure that the end would come and that in the long run the economy would produce wondrous results for all of society if we just didn't constrain the markets too much, or from a libertarian point of view, don't encumber the markets at all!

The world is currently suffering a major economic slowdown if not outright recession. It varies in intensity in different parts of the world. China says it's doing OK for now, but word leaking out from civil society there tells a different story. The EU is suffering major problems in some members that threaten the very existence of the Union but more immediately could spell major economic problems as the financial system there is unable to compensate for past excesses in those few members. The US is probably best described by the word malaise. Of course for those long-term unemployed who have essentially given up on working an honest job for a living wage it isn't malaise, it is depression already. The prospects for getting out of these economic doldrums are looking more bleak every day. Even economists are starting to take precaution when predicting future growth. Not a small number of economists as well as the common sense man/woman on the street have started feeling that there is something very fundamentally different about the current situation as compared with prior recessions and the Great Depression. No one sees any way to get out of this.

That is for a very good reason, unfortunately. There is no way out. Declining resources, especially net energy to do economic work, is the controlling factor now. Decline means decline, period. We are all part of biophysical system that requires energy to do anything. If the energy flow declines the work declines. The wealth generation (real asset production) declines. Everyone has access to less and less in terms of material goods and services. This is so stupidly simple that it continues to confound me how supposedly intelligent people in government and academia just can't grasp it.

Of course they will grasp it eventually. Unfortunately it will be too late to do anything constructive about it. Actually I think it is already too late. Contraction, unlike unfettered growth, requires careful planning and execution of logistics for managing that contraction with the least pain possible. And our brilliant leaders (thought and political) have already blown it. Planning takes time and knowledge. They put off opening their eyes so long that we now don't have the necessary time. And, to be blunt, I doubt that they will ever have the kind of knowledge needed to develop plans. Thus, I'm afraid society will react to the acceleration of the contraction that is already underway as most societies in the past have reacted to collapse.

Preparations

The only thing that anyone might do to prepare for the economic collapse is to collect a complete set of tool assets that will allow the production of food, shelter, obtaining water, etc. in the future. Of course I am talking about hand tools, not power tools! The principles of biophysical economics are the same they have been since the very beginning of human commerce (my arrow heads for your corn). Future economics will work the same way. Humans need not give up completely and revert to hunter-gatherers in small extended family tribes. But they will have to adapt to a world without fossil fuels or big high-tech wind turbines.

The big unknown will be what happens in society while the contraction is gaining momentum. The one thing you can say for sure about chaos is that just about anything that can happen will happen. There is no way to predict the details in advance. So the only advice I can offer is to use your intelligence as best you can to put together your survival kit (including any community you want to be part of), situate yourself somewhere you think might be hidden of at least defensible, and keep attuned to local signs and conditions. In the end, almost nothing you can come up with is a guarantee of success. Thus my real recommendation is just be prepared to adapt as the situations change. Or be prepared to depart for another location if adaptation is not possible.

This is an appeal to the laws of statistics! If enough people try enough different approaches a few are bound to work.

Economic Predictions

Of course prediction is a fools game, which is, I suppose, why economists and politicians play it. But let me try my hand at constructing a likely scenario. It's actually not too hard. I started with the financial subsystem because that looks the weakest to me. Many kinds of forces are poised to prick the bubble and bring the house of cards down. But what will happen when that bubble bursts is pretty clear. Our economy is utterly dependent on debt-based financing to keep things going. When it dawns on everyone that those debts of yesterday will never be paid back let alone servicing future ones, financing will simply crumble. And when that happens everything else will follow (see Korowicz's report linked above for a description of the interplay between the financial system and supply chains). One of the most critical victims of this domino effect will be the energy supply industry. It takes a lot of money to discover, drill, pump, and refine oil. It takes a lot of capital to extract coal. And frac'ing ain't free. The extraction industries are super dependent on the financial system to keep them in business and once the financial system crumbles the necessary cash infusions will evaporate. No more energy, no matter what price. I suspect that national governments will, at some point intervene, not by bailing out the multiple times failed financial institutions, but by nationalizing the energy sector. One good argument for doing so is that of national security. It takes a lot of energy to run an army and navy. The US DOD is already investing a lot of research money into alternative sources of energy for operations. When they ultimately discover that the Second Law of Thermodynamics has not yet been repealed they will put pressure on Washington to take over the fossil fuel industry because the profit motive won't be working any more.

It takes energy to pump water. It takes energy to keep homes and buildings warm or cool in temperate climates. OK, you can forego the cooling maybe, except that pesky thing about global warming causing severe heat waves and droughts (already underway, thank you Jim Inhofe et al). It takes energy for everything we do. We can't even sleep without expending energy. So look for severe energy rationing as the military takes charge of the supplies and meters it out stingily to the populace.

The financial system will never recover. It started with savings of surplus grain and that is all that we will have in the future, if we are lucky. Debt financing is over or soon will be. There might be localized surpluses under the protection of a few war lord types ala Jim Kunstler's vision in his novels (World Made By Hand). But there will never be the kind of borrowing against future surpluses because everyone is going to finally get that there will barely be enough productive work done to maintain current assets let alone produce future surpluses (one caveat to this is that if the population undergoes a tremendous downsizing there will be a temporary surplus of lots of stuff, but without the energy to maintain it, it too will decay away - no surpluses last for that long.)

When You Watch the Economy

Unless you know how to sift through tons of economics data, your only real access to a view of the economy, unfortunately, is through the main stream media. And the problem with that is that they simply don't have a clue. The best advise I can give here is that you keep track of a few relevant trends. Your can't always trust the raw data reported, such as the jobless rate, or jobs created rate, etc. But what you can do is track the number of times those numbers advance or decline over time. You can even keep track of the amount of advance or decline and then do a form of weighted averaging over time to smooth out the noise. What you will find is that declines outnumber (and outweigh) advances, in measures where a decline signals bad times such as jobs creation, over time. The opposite for data where advances are a bad thing, such as number of unemployed workers.

Another thing to keep an eye on is the number of times some economist or media type grasps onto the slightest bit of seemingly good news. Two years ago these folks were happy as hell when there was the slightest up tick because they just knew that there had to be an end to the economic woes and so these early signs showed that we would recover soon. Today, not so much. Many more economists are warning that we should approach such up ticks with caution. Who knows maybe they are developing a bit of wisdom after all!

Another major trend I am watching in the economy is the number of fraud events that are taking place in our most venerable, historically strong institutions. Mostly now we are watching this drama in the financial industry but it wasn't that long ago we were aghast at the shenanigans at Enron and the demise of Arthur Anderson Accounting as a result. Many big corporations were cooking the books and there probably are still many more doing the same. Get what you can while the getting is good. As people who have access to more detailed information about profits and such get increasingly panicky you can expect to see much more of this, if they get caught. Governments are increasingly strapped to provide investigation or enforcement so there is probably a lot that is going to go under the radar.

Then, of course, there is the jobs situation. The kinds of jobs that are available are increasingly low paying types. Or some previously higher paying jobs are being downgraded because, lets face it, it is a buyers market (corporations are the buyers!) Sooner or later the governments are going to have to take some action on this and it doesn't matter if the Democrats or Republicans are in charge. Only another Nero would ignore the powder keg conditions when a significant proportion of young people are out of work. Actually the news coming out about Romney's tenure at Bain Capital suggest he might just be another Nero. Great choice the Americans have in November, a well meaning but clueless incumbent or a would-be King Louis XVI (see: French Revolution!) Good luck with that.

Let me depart on a somewhat positive note. I've been noticing the number of news items about neighborhood organic gardens and yard gardens have been increasing. The indication is that more people are doing what I've been doing for a few years, converting more and more ornamental planting areas to food plants. I'm locked into my house for a number of sensitive reasons. But I do what I can. The reason this is positive is that people must be sensing that they will need to take charge of their destiny somehow. And they are practicing for self-reliance which is probably going to be the key to riding the economic roller coaster as it passes that first big peak. I'm trying to make sauerkraut this year! Wish me luck.

Watching the Financial System

The Big Picture

In systems science the Big Picture starts with the largest known boundary of the system of interest and the time scale over which the system has grown and developed if it is a complex adaptive system (CAS). I want to apply this analysis to one of the several subsystems of the Ecos, the financial system of the human economy, that is looking more like a flash point for collapse. It appears to me, from all of the news events of the last several years that this system is the one under the greatest immediate stress, but also the one that financial “wizards” can most easily manipulate to make it appear resilient, hence hide from the rest of us what the real problems are. I don't think it really is that resilient, and I suspect after the Barclay's Bank fiasco with the London Interbank Offered Rate (LIBOR) fixing scandal, a lot more people will agree with that.

That scandal is just the latest in a series of revelations about shenanigans in the banking and securities/futures markets that comprise the global financial system (also see: J.P. Morgan Chase trading loss). With each new revelation we find increasing evidence that the financial system is out of control, meaning that there are neither internal feedback loops nor external regulatory mechanisms able to keep the system performing the function that everybody believed it provided. So, in my estimation, this subsystem of the human-built subsystem of the Ecos may be one of the first catastrophic collapses we will witness as civilization comes undone, and the repercussions for all else will be tremendous.

The financial system has grown in importance within the economic subsystem over the last several decades, especially as globalization has preceded along. Financialization is the term used to describe the process by which the financial sector of the economy has grown to dominate the traditional production/service and agricultural sectors as a percentage of gross domestic product (GDP). Quoting from the Wikipedia article: “In 2000, trading in U.S. equity markets was $14.222 trillion, or 144.9 percent of GDP.” This represents the turnover in the financial markets but not the supposed income produced by the financial markets. The latter is a component of GDP and has become a significant one at that. Most of the growth of GDP over the last several decades has likely been in this sector, for example the incomes from trades and share prices of brokerage houses (not to mention the outrageous compensations given to their executives).

Financialization has been essential in keeping capitalism going. It is fundamentally pretty simple. Basically an aggregate in capital has to be raised from multiple sources in order to construct a new business venture. The money is effectively borrowed from “investors” with a promise to pay back both principal and interest from the profits of the enterprise. The expectation is that there will be future profits sufficient for both reinvestment and to pay down the debt (see below re: expectations of growth).

At the same time that the concept of borrowing against future profits to support growth is simple, the system itself has grown hopelessly complex. This is why we need to consider the Big Picture and the boundary conditions of the dynamics in order to hope for any understanding of what is going wrong. It will help to go back and look at the earliest versions of financing of enterprise. We need to understand where the ideas of borrowing came from in order to understand why the problem of financial bubbles and collapse are a concern today and in the near future.

The Past

The notion of an economy is also quite simple. We look at natural ecosystems and the exchanges that go on in living metabolism to see all of the same basic mechanisms at work. Figure 1 shows the concept in its simplest form. In Figure 1 A we see that an economy is simply the acquisition (capture) of materials and energy from the environment into work processes that convert them into useful assets. Assets, here, means not only artifacts, like clothing or shelter or spears, but also human biomass itself. Humans use and or consume assets so produce waste heat and waste material. Also, assets decay due to the Second Law of Thermodynamics (entropy). This simple model applies to all living systems at all scales of complexity.

 

Figure 1. The whole of the economy can be summed up as a system process whereby energy and raw materials are converted to useful assets (both artifacts and biomass) which are used/consumed. A) A hunter-gatherer economy uses short-term solar energy (food, animal hides, wood) and little in the way of material resources to produce assets (mostly biomass) that eventually degrades to waste heat and material. Such an economy does not accumulate a surplus of assets. B) An economy that has gained leverage by producing some assets (tools) that improve the capture of energy and raw materials can develop surpluses and set up a positive feedback loop (investment) into the work process which then generates even more surplus. The economic system is then growing.

 

The key concept to grasp in understanding the origins of finacialization is that of investment (Figure 1 B). Human beings have been investing time and energy into creating artifacts (tools) that would increase the efficiency of their access to resources — additional energy and materials. This single factor, born of the tremendous cleverness of humans compared with their predecessor species, is at the base of what made Homo sapiens so spectacularly successful evolutionarily. Cleverness increased our species fitness in essentially every kind of environment (except Antarctica) by extending the notion of adaptability beyond mere physiological or long-term evolutionary modification. We found ways to protect our bodies from inclemency and to supplement our direct metabolic energy requirements. With cleverness, once an insight threshold is passed, you take a little bit of time and energy to produce something that will return multiples of both time and energy in the future. You realize a profit which can then be reinvested in keeping the process going. The rate of change in technologies was originally very slow so that humans were still not a huge threat to the rest of the Ecos in terms of over appropriating material and energy that would have gone to other species until about ten thousand years ago. All of that changed with the insight threshold that gave rise to agriculture.

With agriculture a new phenomenon emerged — the surplus of energy, both operational and embodied began to grow. Settling in one location year round, and reorganizing social systems to accommodate the planting-harvesting cycles plus the need to protect a better defined territory changed so much that it is hard to encapsulate the effects in a few sentences. Nevertheless we must recognize this transition as extraordinarily fundamental in converting us from wild animals to domesticated workers, and all that follows psychologically from that. The advent of surpluses changed everything about human beings' relation to the Ecos. We were, of course, only following our biological mandates to protect ourselves from the vagaries of nature and to procreate as much as possible. That didn't really change. In fact it is the first mandate that drove our desires to continue building surpluses even when there might have actually been adequate stores to buffer against any reasonable contingency.

In our wild days the contingencies of survival were stark. Climate changes could change the availability of food in short order. As nomads this meant moving. As farmers this wasn't an obvious option. Surpluses, especially of grains, were a hedge against the contingencies of nature. Food in storage (which probably started early in agricultural history; see below) provided a reduction in risk of losing one's life and so fulfilled the first mandate perfectly. It also began the process of removing a natural negative feedback loop on human population sizes. Nature was constantly testing humans for survivability, and in that testing came two results. First the fittest (read most clever as well as wisest) survived and procreated. Second, the population numbers were reasonably kept in check in exactly the same way that all species are kept in check. Deaths tended to equal births on average, at least at first. Ever so slowly humans changed that equation through their use of technology (spears and fire, etc.) And they spread out into new environs. Thus the results of the second mandate began to be amplified by the success of the first mandate. Population growth and habitat invasion began.

The surpluses from the agricultural lifestyle accelerated this process even more. But it also produced increasing complexity in emerging societies. Specialization in trades emerged to increase efficiency yet more. People found that they were no longer self-sufficient and needed to trade goods and services. The first nascent complex economies emerged and developed, first with simple barter and later with marks on clay tablets representing value (e.g. bushels of grain in storage). As things continued to complexify money was invented to allow convenient trading of unlike goods and services where an agreed upon price provided equitable transactions. Money was a good thing in that environment. It made more complex trading possible which led to yet further increases in surpluses because it was a major time and energy saver in its own right.

Money could be used as an information feedback mechanism to control the flow of goods and services and also the rate of investment. Figure 2 shows two stages in the path toward financialization. First there was the creation of a money supply that was roughly correlated with the supply of real assets (Figure 2 A). As assets grew so did the money supply. This model, of course, does not address the distribution of either asset wealth or the money representing it. That distribution was probably subject to the same rules that apply today. Those who controlled the social structure siphoned off more assets and their representational form just because they were providing a coordination function that made them more “special” than the workers. The picture started to get distorted when coinage and the use of precious metals took on a value life of its own. Treasure in the form of gold and silver, jewels, etc. captured the imagination of many humans as being actual wealth. This was only possible because humans had developed so many surpluses of various kinds of real assets that the coupling between money stocks and asset stocks became weakened. The era of mercantilism further distorted the relation and money took on a new role as a kind of wealth on its own. Of course the underlying value was always based on its ability to purchase real assets but the strength of that connection was severely weakened such that the amount of money and the amount of embodied energy in assets (related to the work of producing those assets) became semi-independent of each other. In everyday life the prices of things ceased reflecting the true costs of making those things for many reasons. Many costs were hidden or ignored in order to support the notion of making profits. Sheer complexity of products and services reduced any possibility of cost transparency, even for the producers.

What was realized, at some point, was that over time the asset base was growing, both in absolute amounts and per capita. Bankers saw an opportunity here. Banking originally emerged from the practices of ancient granaries in which a portion of the overall stock of grain could be loaned out to new farmers to allow them to start their own cultivation. Surpluses of grain were such in many regions of the world that growth in farming could be easily supported by simply borrowing some seeds and repaying them when the new harvest came in. Of course this was a little risky if there was a bad crop season or the new farmer was not competent. But most of the risk was countered by the sheer amount of grains being stored for all of the other farmers for safe keeping. By the time the new farmer returned what he owed, everyone got their shares back and there was enough left over to feed the granary keeper to boot.

So a system of borrowing an asset, as a form of investment, to generate more assets had been established probably not long after mass agriculture started, say 5,000 to 8,000 years ago. Thus the notion of growth of the economy to keep up with the demands of a market (more mouths to feed) emerged.

Early bankers were not much more than granary managers except that they kept peoples' money rather than barley. Banks fulfilled a purpose in keeping money safe but at the same time accessible to the money owners. Bankers charged a small fee for their service. But as bankers noted that the money kept in their vaults, which actually represented surpluses, seemed to be growing and noting that most people would leave their money alone a bright idea occurred. Suppose a new tradesman wanted to start a business but needed a lump of cash to do so, to buy tools, materials, rent space, etc. Why not dip into the money stocks and take a small fraction out of each savers' account to package a loan for this worthy fellow^[1]. He could pay it back out of his profits in the future, along with interest, and everybody would be happy. In fact, the banker might reward his savings customers by paying into their account a small fee just for leaving their money alone, thus ensuring the scheme would work.

 

Figure 2. Money was created as a means for representing the assets and especially the surplus. Money could be used as a medium of exchange (assets for work/work for assets). A) Money became a dominant medium of exchange as well as the means for controlling investment in new work (the valve objects represent a control based on information, green and purple arrows, from measuring quantities and changes in quantities). B) Once humans noticed that surpluses tended to grow with the abundant supplies of energy and materials, made possible by better technology, they created expectations for future growth in surpluses and so created money representing future assets rather than just current assets. That money could be used to control investments with an expectation of increasing surpluses. Unfortunately, the same money can be used to regulate consumption of non-investment goods and services. Thus emerged fractional reserve banking that had the basic effect of artificially, and for a time, increasing the money supply (Figure 2 B).

 

The idea that money could be created out of a debt obligation caught on in its own right. Before long all kinds of promissory instruments were created to handle different ways of aggregating capital for investments in future earnings. And that practice has not abated to the present. Somewhere along the line financial markets themselves became creators of investment opportunities as when people caught on to arbitrage practices. Since money had no necessary ties to real assets other than through negotiated prices for goods and services, people actually imagined that they were creating wealth by taking advantage of price differences in market valuations. On the surface it looks the same as buying up a good at one price and then finding someone else to buy it at a higher price, pocketing the difference as profit. That's what middle men do, after all. But the good in this case is not a physical product but a piece of paper carrying some nominal value marked in the coin of the realm but having little necessary connection with any underlying physical assets. Stock markets, originally developed to provide easy liquidity for investors who might have to sell their shares in emergencies, soon turned into betting parlors where money was made on betting on differences occurring, not just the differences themselves.

As things became even more complex, and once the pretense of tying monetary value to some kind of physical asset (gold, in this case) was removed, the stage was set for bankers and investment brokers to invent all kinds of markets buying and selling all kinds of instruments (paper) that had nothing to do with the real economy (hard assets, for example). Each sale was recorded as a real transaction in monetary value. So the seller booked revenues while the buyer booked a piece of paper, essentially a mere promise that somewhere in that complex world they could redeem the paper for a real asset, as if it were an asset. Then a funny thing happened on the way to ruin. Paper assets started appreciating much like real properties did. Real estate had always been recognized as becoming more valuable over time simply because the growth in population always meant the demand for space would continue upward in the long run. Appreciation of real estate made sense to everyone, but if it was the case for that kind of asset, why not for paper ones as well?

That is when the financial world departed from the real world for good (see the definiton of delusional!). The financial world expanded the money supply irrespective of the state of the physical economy. Bankers and brokers created money out of thin air, patted themselves on the back, and then paid themselves very healthy bonuses for doing so. Their rewards were not for creating real wealth but for creating the illusion of creating wealth. The expansion of the money supply may have helped some legitimate growth in the physical economy, but too much more went to growth of the financial sector. As this sector reported profits (income) the GDP rose. They made it look as if the economy was growing. Politicians loved it!

The Present

The financial subsystem is essentially a house of cards built on top of a bubble, or a composite bubble (see Figure 3). We got a taste of this when the defecant hit the fan in the housing bubble/sub-prime mortgage markets leading to a large number of bank failures and a substantial bailout for the surviving institutions by governments^[2]. The situation is similar in many parts of the world, not just the US. Europe is in the grip of financial emergencies of several sorts and the EU is constantly trying to apply band aids to stanch the bleeding from really large wounds (Greece, Spain, etc.). There are reports that China is suffering a real estate bubble about to burst.

As in Figure 3, there is a pin (probably several) that are poised to burst the bubble and bring the whole house of cards down. It isn't always possible to see what the pin could be. By definition bubble bursts cannot be predicted so far as what will cause it and when it will happen. All we know for sure is that bubbles do eventually bust and often with devastating consequences.

 

Figure 3. The financial system is a house of cards built on top of the bubbles it created to give the illusion of growth of wealth. The only real wealth that will sustain society is the embodied energy in the ‘real’ assets. What pin prick will burst the bubbles? What happens to the house of cards when the foundation explodes beneath it?

 

The real economy is based on real physical assets plus the capacity for producing new assets. The latter comes down to the availability of physical resources, especially energy. It is necessary that a certain proportion of assets be held as surplus so that it is available to ‘loan’ to ventures seeking to acquire those resources and produce more assets (note that this does not necessarily imply a growth economy, however). But the borrowing is against existing surplus (savings) not speculative assets to be produced sometime in the future.

Where we stand today is that non-renewable resources have been dwindling with over extraction. Net energy per capita, available to the economy, has been declining. So whatever surplus we held, our collective savings, have been eroded such that it was necessary for the past several decades to create illusory assets on speculation that somehow the production economy would once again rev up and produce a sufficient surplus in the future to compensate for current deficits. We did this by reducing much further the reserve requirements on banks and large funds like pension funds that invest in equities. The apparent creation of money then made it possible to continue the illusion of investing in real asset production. But it just wasn't so.

Society made the mistake of treating superfluous trinkets and entertainments as if they were actually assets. They definitely cost money to produce but less in the way of resources. Moreover, they were not likely to contribute in any meaningful way to the future generation of assets. iTunes might make it more tolerable for copy clerks to make it through their mind-numbing days at the office, but that really isn't the same as producing tools that will increase our resource flows in the future. We are spending a lot of illusory wealth on illusory (and hence worthless) asset-like stuff while all the time getting poorer.

The pin poised to burst the bubble could be anything. The recent scandal of Barclay's is being considered as the tip of the iceberg of financial institution malfeasance, fraud, and other illicit behaviors (not to mention just downright unethical ones). Perhaps the house of cards will destroy itself and in doing so burst the bubble. Or the austerity measures the financial world wants to impose on populations may backfire and lead to such a loss of production that the asset base will crumble under the bubbles leading to their bursting. Or the populations may revolt against such measures, and I mean a violent revolt. The riots and demonstrations that have been taking place world-wide may just be the signal of a major bloody revolution in many countries.

One way or another this whole financial system is on the verge of collapse. What happens when it does?

The Future

The collapse of the financial system may be the trigger event that leads to the collapse of civilization. This comes about because our current consumer economy based on capitalist markets can only function with a financial system such as we have evolved. That system has to continue to create money out of thin air in order to keep capitalist enterprises in business, let alone start new ones. And, perversely, the financial system needs capitalist markets to keep itself afloat. They both need the consumer-based economy that simply consumes junk and diminishes resources without any real asset creation taking place.

One thing is absolutely certain. With net energy in decline, and energy being the single most important key ingredient in useful asset production, the machine for producing real wealth is grinding to a halt. And all of the financialization in the world is not going to compensate for the decline in real wealth that is starting to take place. As an example of this decline consider the problems with infrastructure maintenance. The citizens aren't willing to pay more taxes because their real earnings rates have been in decline (in correlation with the decline in net energy per capita) and they feel it. At the same time the infrastructure needs ever more expensive maintenance so governments have to go further into debt just to pay for some minimal amount — and that maintenance isn't proving to be enough! We are in a downward spiral from which there is no recovery. Everyone and all institutions are actually substantially poorer today than just thirty years ago but we've inflated the dollar values of everything (expanded the money supply) such that it hides their real situation.

There is no escape from this spiral. Financialization as a strategy to make us feel like things are still going as they always have (when energy supplies were in the ascendancy) is starting to fall apart. Our politicians (especially the current president of the US) still believe that we somehow have to keep the financial world healthy and all will be well eventually. They are right that if the financial world collapses it will take the rest with it. But they are dead wrong believing that it can be held together until better times come along. Debt and speculation-base financing is betting on a future that will not arrive. There will be no future of such substantial production of assets that it will more than compensate for the decades of reliance on drawing down our surpluses and then pretending there were more surpluses that could keep us going until this economic climate catastrophe came to an end.

One of the things I find interesting in all of this, and something that shows up from a systems perspective, is that the bankers and brokers and traders were never trying to maintain an illusion in any conscious sense. They were and still are just plain greedy. What they are doing is trying to get everything they can get out of the system as quickly as they can. Perhaps subconsciously they realize that this is all too good to be true, from their perspective. So they hustle, lie, and cheat to book huge rewards. But what they are doing is really just a consequence of the nature of the financial system. They are not the causes of our woes. Their behaviors are just more symptoms of what is really wrong. Ironically, for them, their monetary wealth, accumulated at the expense of everyone outside of Wall Street (and London, etc.) will evaporate into the thin air out of which it came in the first place. Ashes to ashes, dust to dust, and air to air. They will end up sitting in their mansions in their exclusive communities staring at bare cupboards just like everybody else. Perhaps the pain they will then feel will be a bit more acute than that felt by the rest of us who are now acclimatizing to the reality that is imposing itself on civilization. I suppose that will make some of us feel better.

Collapse Trigger?

This post has focused on the financial system because it has been in the news so much of late. It really looks like a system in danger of imploding. But it is only one of the many subsystems that are experiencing severe stresses right now. In Figure 4 I give a simplified view of the several subsystems that are showing signs of collapse. Will there be a first one? Hard to say. But something has to give.

 

Figure 4. All of these subsystems are interconnected. They are all under stresses that could cause them to fail. Which will be the first is hard to predict. In fact they could all implode at once!

 

If J.P. Morgan or Barclay's Bank fold anytime soon watch out. Let us not forget the whole area of sovereign debt or private debt. Of course they are all tied to the same basic process. Everybody was borrowing in an attempt to keep the gravy train rolling. But that train is coming off of its tracks as we focus our attention on the Kardashians (I can't believe I even know who they are!) Next time you go to an NFL game or a NASCAR event, do enjoy it. Next time you line up to buy the latest iPxxx product savor the fact that you will be spending inflated dollars on worthless junk. Those things that keep you from thinking about what is really happening are all you have left of the world of our memories. Party on dudes and dudettes.

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Footnotes

1. The practice of lending probably started before there were granaries or banks. Soon after the advent of cooperatively managed agriculture there emerged rich people who may have made loans to wannabe farmers. The concept of a tenant farmer is probably as old as agriculture itself.

2. It is now becoming clear that one of the real triggers for the bursting of the sub-prime mortgage bubble was the sudden spike in oil prices in 2008 resulting in rapid increases in gasoline prices. People living on the edge found it impossible to both pay their mortgages and pay for gasoline just to get to whatever jobs they were holding down. The oil price-mortgage maintenance domino effect resulted in the collapse of mortgage-backed security instruments and the rest, as they say, is history.

What Am I Watching?

Signs that the End is Nigh

[edit note: Neigh changed to Nigh! OK, it was late, I was tired... So thanks to those who pointed out the distinction. And my apologies to those who came here looking for something about horse language!]

The boundary conditions for human civilization and, indeed, our species have been identified. Even though economists are loathe to admit it, we are in the throes of resource limitations that thwart any kind of future economic growth, that is growth of real wealth not that phoney debt-based paper stuff. No amount of technological twiddling is going to change the fact that we have used up the most easily accessed critical resources. It would take a technological miracle, probably based on a radical physics discovery (a lot more than the recent announcement of data patterns at CERN compatible with the existence of the Higgs boson!) of a completely new kind of energy source, previously unimagined. With adequate energy it would be feasible in principle to recycle much of our current wasted material resources. We could, for example extract fertilizer nutrients from the runoff water from agriculture, thus preventing soil depletion and dead zones in the oceans. It takes energy to combat entropy. Every time concentrated or configured material wealth is consumed and dissipated we come that much closer to entropy's take over. The material flow through in our economic system is largely one way at present, with only minor amounts of things like aluminum and copper being actually recycled.

The major source of energy for human civilization is that stored in fossil fuels. We are depleting those at the fastest rate possible constrained only by social factors I will discuss below. We have reached the peak of conventional oil extraction (in spite of the recent distortions being reported by the mainstream media and people like George Monbiot, the fact is that we are at peak oil extraction) and combined with the declining energy return on energy invested in both conventional and newer non-conventional fuels, such as shale oil, there is no hope that fossil fuels will provide the energy needed for the future maintenance of civilization, let alone growth.

Indeed it is even worse than that. To a very large degree we have been frittering our inheritance of fossil sunlight away on frivolous pleasures, meaningless toys and gadgets, that provide no real gain to our wealth. Consider how many different versions of iPxxs have been bought and abandoned just because of some new ‘design’ innovation. How many ‘smart’ phones have been thrown into the trash heap because the newest models provide wow features? Actually just consider the whole marketing game. Its about getting people to buy stuff they might enjoy (for a little while) but not something they actually need, or is an investment in their ability to live in the future. And most of this stuff is used up or even thrown away long before it wears out. For what purpose?

Well, in a sense it doesn't really matter if we understand the purpose of human profligacy or not. It is what it is and it doesn't look like there is much chance of changing that before it is too late. In fact, if my calculations are right it is already too late so it is no longer worth fretting about.

That being the case I want to share with you the kinds of things I am watching in the world which will mark events and trends signifying the collapse of our global civilization. I don't expect to be around to see the most severe cataclysmic events (although I must admit that at the rates of change we are seeing in many of these processes I may have to re-assess that assumption). Rather I focus on processes and trends and rates of change. I select these various processes based on their systemic interrelations, particularly the kinds of feedback effects we see that will dampen some kinds of processes (like economic growth) and accelerate other kinds of processes (like methane escape increasing the rate of global warming).

The processes I am watching have all been covered in various forms in my previous blogs. What I will be doing now is simply pointing out when I think I see a significant change or event that may provide us with a better handle on how rapidly the decline is happening. I will also examine the systemic relations between these processes and try to assess how changes in one may affect changes in the others. Call it observational systems science applied to the global human civilization. Should be interesting.

The Systems Viewpoint

The processes that most directly affect daily lives around the globe are economics and politics. Those two are tightly intertwined but not in the ways most people think. Political actions cannot make the economy better, certainly not in any permanent sense. They can only make matters worse, and we are seeing this in action right now. Interestingly a number of pundits are recognizing and saying that the president, for example, really can't do a whole lot about certain economic conditions. The recognition of this realization is amplified in the US political season that we all must endure. Discussions about what either the incumbent president or the challenger could do once the election is done abound with an increasing consensus that promises being made now are probably worthless. Neither the incumbent nor the challenger actually have a science-based model of the economy. They are running on pure party-line ideological beliefs. So even if they somehow managed to get legislation through that was designed to accomplish something, say jobs creation, they would fail miserably (in terms of restoring the income potentials of all those wanting to work). The reason is that the economy is governed by laws neither of the candidates understand or are even aware of. And their respective ideologies are actually counterproductive with respect to what actions might actually work.

So I expect to see a lot of mismanagement ensuing in the not-too-distant future. It doesn't even matter which party gets control of the White House. They will both screw things up equally badly, just trying different approaches. We know that the incumbent will do so because he already has, with his views on the financial system favoring bankers and Wall Street. He is in their pockets by all accounts. And the Wall Street bankers and investment houses are guaranteed to steal from the rest of society (of course it isn't limited to Wall Street; Barclay's Bank showed us that it is a global phenomenon so Wall Street is just a symbol for the general condition). Even worse than merely stealing real wealth, bankers create money out of thin air and pay themselves huge bonuses for doing so. They happily create debt and gambling bubbles that are guaranteed to implode on everybody else and pay themselves huge bonuses for doing so. And as our current president has demonstrated, they can do this with impunity because when the defecant hits the fan, the government will willingly bail them out so they can do it again. Dodd-Frank? Give me a break!

The economy is governed by energy flow. So I continue to watch that very carefully. While a lot of analytic focus continues to be placed on peak oil as a critical phenomenon, as I have said the real issue is net energy available to do useful work per capita. That is the limiting factor. I will continue to try and piece together the combined effects of declining EROI and peak or declining fossil fuel extraction as they relate to declining net energy. It would be nice to have some kind of direct measure of net energy, instead of just looking at oil extraction, but that doesn't seem to be technically feasible given our current accounting systems. The only thing we can do is estimate it based on the physical amount of fossil fuels we have and our best estimates for EROI. Still I think we should get some warning signs by that effort.

The major belief structure operating in the world today is that a capitalistic, market-based, consumer-oriented economy is the BEST approach to creating wealth. We have to give credit where credit is due. Once upon a time that was really true, at least before the emphasis started to shift toward the consumeristic aspects. Profit motive, entrepreneurism, competition to drive down prices, and all of the mechanisms that are entailed in this kind of economy did indeed produce enormous wealth for a segment of humanity. But the whole premise is based on continuous growth (for profits to grow) and that required the shift to consumption orientation. In order to keep the engine going you needed to have ever expanding purchasing of stuff and services even if that stuff and services did not contribute one bit to fulfilling lifestyles. Today the capitalist economies are trapped needing growth to maintain investment opportunities against a loss of the very basis of wealth creation — energy. Without the latter capitalism will die.

Watching the political process in this country is like watching the clown act in a circus. All chaos and loud noises. Everybody trying to squeeze into one of two (or three) tiny vehicles that aren't going anywhere anyway. The clowns batter each other with outsized plastic baseball bats just to get the crowd to laugh. Only the general crowd in the US doesn't get the joke. They take everything the clowns do seriously. They think it really means something. Candidates saying outrageous things just to get attention. It is just ridiculous.

The only justification for watching this spectacle is what it can tell you about the human society's likely responses to the traumas that are descending. The Republicans are still denying global warming (though they are starting to come around on the fact of climate change). George Will, today on one of the talking head shows, proclaimed the cause of the massive heat spell covering most of the country was (get ready for this) summer! The depth of stupidity here is mind boggling. Just what kind of evidence do you need to get you realizing that something important is happening, let alone what is causing it? Moreover, at what rate do you need to see these changes taking effect before you admit that there is something different about this time. Democrats, unfortunately, are really not much better in regard to their responses. They acknowledge the science of global warming, for example, but then turn around and ignore hard science when it comes to wishful thinking about “going green”. They continue to spout off about how, if only we would subsidize solar or wind, all of our problems will be solved by technology. And, they think, with no real evidence to go on, that that shift to “green” will create wonderful new, high paying jobs. They are no more realists than the Republicans. And the Libertarians are so completely out of touch with reality that I don't have anything else to say about them.

Then there is the biophysical realities of climate conditions, water over-consumption, soil degradation, food production declines, and biodiversity loss. These are all symptoms of what is ailing us. As with all symptoms we need to monitor them just to understand the progression of the disease. Environmentalist have never gotten past the point of worrying about what humans have done to the environment as being THE number one problem. They won't touch population issues and they are equally guilty of counting on technological solutions as the Democrats, politically. Of course there is a lot of overlap between environmentalists and Democrats so this isn't surprising. Their purposes were well intentioned but the diverted attention from the real underlying causes of our plight. They put undo weight on one of the many symptoms and in doing so alienated a number of people who might have otherwise taken a look at the underlying systemic problem.

Climate change, while merely symptomatic, may be one of the most critical factors to keep an eye on. Radical weather anomalies and general shifts in climate parameters will provide some of the worst kinds of stresses on societies. Populations will be displaced, or more likely due to the rapid onset we might see they will simply expire in place. The energetic (and hence financial) costs of mitigation and adaptation will be prohibitive given the decline in net energy. Thus I suspect there will be little real large-scale adaptation attempted. All one has to do is look at the failures of our governments to simply maintain critical infrastructure now! Where will they get the resources to pay for mitigation and adaptation if the climate chaos is as bad as some climate scientists now claim it is likely to be? We will not only have to suffer political failure but failure of governance in general. Our system of governance is so brittle (and I don't just mean that in the US) that it cannot possibly adapt itself to the rapidly changing needs. Rather we may witness many revolutions not unlike what we saw in Egypt, and likely with similar, though more bloody, outcomes. This is as true for the United States as it is for any other country. The revolutionaries will not be able to do any better and so there could be waves of revolutions as long as there is some energy to drive the effort. But those revolutions will likely destroy the very capabilities of extracting energy and so counteract their own continuance.

I consider the twin (Siamese) predicaments of energy decline and climate change stresses (with all of their ramifications in terms of other vital resource availabilities) to provide the greatest forces driving collapse. So I will keep an especially sensitive eye on developments there.

From a systems viewpoint it appears that the real “cause” of our dilemma is our own mental weaknesses. We are not truly rational creatures. We are subject to thinking guided more by heuristics and producing biases that we nevertheless mistake for rationality (when in fact it is rationalization). Our brains are simply not evolved enough to allow us to override limbic influences and use knowledge-based judgments in guiding decisions. This weakness extends to everything from decisions to buy a hot looking car because a hot looking babe was in the advertisement to choosing a science career because the subject happens to be the hot topic de jour. For that matter it probably guides an awful lot of decisions about what sorts of experiments to do and how to frame the results to put the scientist in the best possible light. None of us is immune from insufficient sapience (except for those rare few), not even the supposed brightest among us. Science, thank the stars, works not because individual scientists are objective, rational beings, but because the process produces self-correction when false understandings prevail. And then there are the financial wizards and bankers — the capitalists who truly believe that their creation of paper assets based on smoke is doing God's work. They just cannot help themselves letting limbic drives take over. Anyone who has spent time in a trading pit knows the meaning of animal spirits.

So I will be watching people. I will continue to observe how people in general react to the various events that portend decay, decline, and collapse. They are in the news on a daily basis at present. But most people go about looking at each debacle as isolated and independent events. I've even talked to people who, even though they think things in general are bad and maybe are going to get worse, still think the main cause is just a string of bad luck events, e.g. the housing bubble/sub-prime market and the gasoline price spike were coincident and the bursting of that bubble just caught Wall Street off guard. Once the housing market bottoms out, we'll get back on track for economic growth again — you know, the normal way. But the truth is that these events are connected at a deep level. My past blogs have attempted to demonstrate that all of these events are rooted in the same basic phenomenon, our imprudent reliance on finite fossil fuels, our imprudent extraction as if there were no tomorrow, and the resulting bursting of the biggest bubble of all, the energy bubble. We are imprudent in all that we do to use that energy, including and especially expanding our populations and profligate consumption of junk just for the sake of consuming. We have no consciousness of the long-term consequences because our brains are incapable, on average, to compute those models.

I think it will ultimately come down to how people react to contraction once it sets in in earnest and the pain simply cannot be ignored. To be honest I have no idea how people will generally react. We've speculated on various scenarios in the blogs and comments, but how could we really know what to expect from a truly unprecedented phenomenon. It is true that other civilizations have collapsed and different cultures have produced different reactions. But in all of those cases the civilizations were fairly localized yet there was knowledge of a world beyond the civilization. People had other examples to look at and other places to go when the going got hard. In a global collapse there are no other examples and no other places to run and hide. Everything and everyone will be subject to similar conditions. And given that the dominant culture of the day is greedy capitalism I suspect strongly that the predominant reaction will be violence, both in terms of attempts to take away and attempts to protect what people possess.

But we will just have to see what happens.