We imagine this country is in crisis, yet crisis is relative. Most people in the world would envy our material austerity and be thankful for our endlessly ‘collapsing’ health service. But with our expectations thwarted and in the anxiety of uncertainty, we are focussed inward. Yet we remain as deluded as ever.
Our arguments about austerity and default, and our prospective return to economic growth are framed within the context of a stable global economy. We imagine our troubles as if they are largely our own, shared maybe with a few other peripheral Euro-zone countries and some errant German banks. Our argument assumes that within our national life, a path can be found, however hard and long, that must eventually lead to renewed growth and a return to something like we had before property speculation consumed us. And even were Ireland’s economy to remain sunk in a mire, somewhere else out there, in Canada or China, the global economy will continue to roll on.
From the sidelines we hear that a UN Food and Agricultural Organisation index measuring the price of a basket of food commodities surpassed the 2008 record and oil prices remain well above $100 a barrel. This is in the context of a battered world economy and a global credit crisis that far from being resolved, has merely been displaced. The United States and Japan’s credit rating is on negative watch, and the Euro hangs in balance. And while nobody will shout about it, there are many global banks who are only standing because governments and central bankers are deploying all their declining powers to prevent their bluff being called and all hell breaking lose. Food and energy prices are pushing popular revolutions in the Gulf, North Africa, and China which in turn are pushing up food and energy prices. All of this seems elliptical to our inward conversations.
Yet the real threats to our economy and society over the coming few years are from these things we have little control over. Even were our economy in the rudest of health, it could still face ruin. That is because we are dependent upon, and interwoven with, the globalised economy. And the globalised economy cannot stand the convergence in real time of constraints in its primary enabling energy resource-oil; its primary human constraint-food, and loss of trust in the credit that makes economic life possible. This convergence marks the end of economic growth, and will initiate powerful destabilising shocks and stresses to the globalised economy.
Because of this, across the political spectrum, people are claiming solutions for a predicament that cannot be solved. They are claiming a level of insight and dominion over systems they can barely intuit and over which they have little and declining control. Citizens assume there must be a solution to get us out of recession, a way to reverse what we have come to call ‘austerity’. More than that, they demand the right to the realisation of their expectations- our pensions and purchasing power, jobs and savings, health and education services.
Through these assumptions we enter the collective delusion about where we’ve been, where we are, and where we’re going. Part of the reason for this omission is a world-view maladapted to the conditions in which we now find ourselves. World-views comprise the meanings and assumptions through which our lives are understood; they embody the myths, stories and emotional attachments that frame our place in a complex world. They are social, and also define how we become socialised.
We share a common world-view formed in the context of our past experience, and in particular, that of economic growth and the profound influence it brought to the human experience. We have become accustomed to the reassuring thought that at the end of every recession, no matter how deep or long, growth and prosperity will again take off. There is a sense that economic growth, though sometimes wayward, is the natural order of things. It is a powerful idea both redemptive and optimistic.
Economic growth is part of the glue that holds together the social contract between the rich and poor, and between citizen and state. It stands behind our expectations of technology, the rise of China, population growth, and pensions. Growth shaped the specialisation of our occupational roles and the forms of social relations. It acclimatised us to increasing wealth, both personal and in the goods and services we expect from society and the state. We are now claiming as rights, services that only fifty years ago would have been considered miracles. It shaped our identity as the tormented consumer and the anxious lover.
Growth is very recent, two hundred years or so, and resilient, bouncing back from world wars and a great depression. It’s been the driving dynamic of the integrated, de-localised system that has tied our welfare to trillions of transactions across the world. It has been so stable, and we have become so habituated to it that we barely notice what has transpired, the inherent complexity obscured by attenuation in simple things and services-my phone rings, I take a bus, my money works to buy my bread. That bread was once hard won from our local environs and required a large share of our time or income. Now it is of slight cost, accessible with trivial effort, but requires the integrated dance of complex transport, IT, banking, electric grid infrastructure; factories supplying factories, supplying factories; and the economies of scale and supply-chains that depend upon a globalised world.
Not only have our dependencies become more and more de-localised and complex, they have also become more dependent on high speed flows of good and services. The real-time flow of deliveries is an integral part of modern production processes. If economic transactions are halted, for example, by a large-scale systemic banking collapse, then trade and supply-chains would be arrested. The longer production systems are halted then the greater the entropic decay as consumables are consumed and systems wear and rust. And the longer the down time and the wider the scale, then the harder it would be to re-boot the economy, and the greater the risk of a terminal systemic collapse in the global economy. If a significant part of the global banking system collapses for anything more than a week, the risks of a terminal supply-chain/ production collapse rises significantly.
Indeed internationalised production flows are as important for the viability of our complex economy as energy flows, they are two of a number of co-dependent elements that integrate the globalised economy. If spare parts for our national grid could not be replaced due to some supply chain failure, having plenty of fuel may not matter, electricity might not be delivered. And electricity failure would compromise other critical infrastructure such as banking and IT systems, sewage and water.
The wonder of our globalised economy is that in all this globalised integration and complexity there is no one in control. It emergent property of billions of people, businesses and institutions interacting through infrastructures, cultures and behaviour to create the order of the globalised economy. Like rafters down a white-water river, we do not set the route or the rate, we are tossed and buffeted. We can trim the craft, avoid an obstacle, and if wise ensure we do not tip it over. But the driving dynamic, just like the globalised economy, is riding down an energy gradient.
Our identification with national or inter-national political economy and the psycho-drama therein obscures our real dependencies. So while national economies may have an individual character, they have no autonomous existence in anything like their present form outside the globalised economy, just as an arm, lung or heart cannot declare independence from the human body. Continuing the analogy, our global economy’s metabolism has become increasingly complex and high speed. The globalised economy is more than the sum of its parts, but without the contributions of each, the whole would be diminished or fatally compromised. Because of this we might say that our local welfare is embedded within a high-speed de-localised fabric of exchange.
Misreadings
In The Birth of Plenty: How the prosperity of the modern world was created, Bernstein writes “prosperity is not about physical objects or natural resources. Rather, it is about institutions….” He lists four: secure property rights, the scientific method, capital markets, and communications. While his institutions are certainly important, essential even, they could not have developed without the energy and other resources that underpin the economy. It is like claiming I live by my wits, charm and intelligence, while assuming food and water are a trivial side-show. A reasonable assumption in an age of abundance when our basic needs are met without comment, and what counts in terms of social status are personal and contextual differentiation.
In such a way we privilege human culture, and its sense of ingenuity and control over its own destiny. Like the God of Genesis, we looked upon our civilisation, its extent and complexity, and saw that it was good and ingenious. We thought we did this! And if we did this, surely we can do anything we set our minds to. If there are challenges to our civilisation, from climate change or resource constraints, they can be surmounted, for we have faith in our abilities. Our self-reflection through economic growth provided the super-structure for the humanist idea of progress, which the political philosopher John Gray dubbed the “displaced religious impulse”.
As our self-regard has grown, the foundations of our complex civilisation and welfare- soil and bees, forests, natural gas, rivers and rain, worms and sticky hydro-carbons, beasts and ferrous oxides-have been largely framed as issues of managerial utility. Our welfare is assumed to depend upon politicians, entrepreneurs, competitiveness, the knowledge economy, our innate inventiveness, and so on. Outside of utility, the environment has been sentimentalised or used as a signifier of higher feeling.
Yet our feet of clay is that our economy and civilisation exists only by virtue of resource flows from our environment. The only laws in economics are the laws of physics, everything else is contingent, supposition or vanity. An economy, growing in size and complexity, is firstly a thermodynamic system requiring increasing energy flows to grow and avoid decay. Waste, be it greenhouse gasses or landfill is also a natural outcome of such a thermodynamic process.
News from Elsewhere
It’s been part of the background noise for over half a century, warnings about resource scarcity, biodiversity loss, soil erosion or climate change. But impacts were always on the imaginative horizon. Sometime, far enough into the future to be re-assuring to a species that evolved with a clear preference for the short-term. Or on the hinterland between our safe European home and the barbarian other, where starvation, environmental disasters, angry mobs and crazy despots have always demanded our attention, at least while on TV.
Yes we can! Yes we can! – chanted the posse of teenagers following Al Gore through a pavilion in Poznan, Poland for the annual gathering of climate policy acronyms.
When not distracted by the ever-present, we’ve responded to these warnings with treaties and laws, technology and exhortation. Of course, every ecological indicator kept getting worse. And we kept on about treaties and laws, and break-through technologies. Our mythic world-views gave us the shared faith that we may not be there yet, but we could, once a brilliant scheme is in place, a climate law passed, technologies adopted, evil bankers restrained, or once people just realised our predicament. Yes We Can! Yes We Can! Indeed, we could transcend our grubby selfishness and short-termism so we tied together the belief that we could will ecological sustainability and global equity. Still, our resource and environmental sink demands keep increasing, ecological indicators decline and inequality rises.
The reality is that we are locked into an economy adapted to growth, and that means rising energy and resource flows and waste. By lock-in, we mean that our ability to change major systems we depend upon is limited by the complexity of interdependencies, and the risk that the change will undermine other systems upon which we depend. So we might wish to change the banking or monetary system, but if the real and dynamic consequences lead to a major bank freeze lasting more than a couple of days we will have major food security risks, massive drops in economic production, and risks to infrastructure. And if we want to make our food production and distribution more resilient to such shocks, production will fall and food prices will need to be higher, which will in the short-to-medium term drive up unemployment, lead to greater poverty, and put even greater pressure on the banking system.
It is an oxymoron to say we can do something unsustainable forever. How would you know if we were approaching a limit, the end of growth? By warnings? Listen. By the great and the good, standing shoulder-to-shoulder, saying “Ladies & gentleman we have a really big problem!”? Politicians and civil servants, the IMF and the OECD, all missed the credit crisis of 2007, despite having expertise in the area and an abundant historical literature about asset bubbles. They embody the dogmatism of the age, they are a pivot point about which are world-views are confirmed. They mirror the authority of the court of Pope Urban II, stuffed with astronomer-astrologers, the economists of their age, confirming the earth centric universe against Galileo and Copernicus before him.
What the Galileos of today are saying is that we are at or near the peak of global oil production now. That as affordable oil declines, the global economy must contract. That we do not have the time, nor resources to keep the economy growing by substituting for oil with efficiency measures, renewable or nuclear energy, or technology. That talk of an electric car future, advanced IT-renewable energy convergent infrastructure, and global super-grids is a fancy. The most obvious problem with focusing on this vision at the horizon is that you don’t see that the ground is opening up beneath your feet. We will not get to that horizon because all the things you need to get there- monetary and financial systems, purchasing power and economies of scale, production systems, infrastructure and global trust networks-will be undermined by the convergence of a peak of global oil production, a peak of food production, and a giant credit bubble. The ground is already opening up, we will fall, and our visions will retreat further and further from our grasp.
They are saying that global food production is hitting an array of ecological constraints, while population growth and changing diets are driving up demand. They note that current food production is massively subsidised through fossil fuel inputs, and that as those inputs become less available, and people become poorer due to economic contraction, food productivity and access will be undermined.
In totality, we are at the edge of an evolving systemic crisis. Peak oil and food constraints are already undermining the stability of our credit-strained integrated globalised economy. The core pillars of that economy: critical infrastructure, production flows, economies of scale, the financial and monetary system, behavioural adaptation, resource access and energy flows-are likely to begin forcing contagious failure.
That failure is likely to force a collapse in economic production, and a collapse in energy use and prices. But by then we will be very much poorer, and our capacity to utilise energy will have degraded.
The initial driving force of this failure is likely to be the fastest and most unstable process-the impact of energy and food constraints on economic growth, and an already vulnerable monetary and financial system dependent upon continuing growth.
Tightening binds
Debt is an expression of our faith in continuing economic growth. If expanding levels of credit are required to service debt plus interest, then GDP must continue to grow if the money supply, issued via credit, is to maintain its value in real goods or services.
But even without peak oil and food, the relationship between financial assets, and real goods and services has become untenable. The indebted world is straining at the limits of debt servicing and credibility. Yet it is demanding even more credit, while its ability to service the debt is being undermined by debt deflation, reduced public spending, rising job losses, and defaults. The bank lenders of that money can only lose so much before they are too are insolvent, with serious consequences for depositors, and government and central bank backers guarantors.
Whatever of Ireland’s economic woes, the real debt bubble is global. The debt relative to GDP is far greater now in the US, UK, and much of Europe, than it ever was leading up to the great depression. Like many countries we responded to our debt bubble with more debt, we just shifted it onto the sovereign or the printing press. Our situation is not like that of Argentina a decade ago who defaulted in the context of a strong global economy, and whose inherent economic resilience was greater than our own. We are part of the fragile trigger, which when pulled, could blow the foundations of the global banking and monetary system apart.
Rising food and energy prices are driving the deflationary forces even harder. By deflation, I mean the decline of money flowing through the economy relative to GDP. This declines because while old loans are being serviced, few new loans are being taken out, which is the source of money issue in the economy. Further declines in money flow through the economy is occurring as people save with a view to protecting themselves in a time of economic uncertainty. The higher cost of essentials-food and energy-squeeze out discretionary and even non-discretionary consumption. Debt, which is the basis for almost all money in the economy becomes even harder to service as money supply declines. This leads to even more defaults and job losses. More defaults and job losses reduce even further the rational for lending. Furthermore, as oil prices rise, increasing money is leaking out of oil importers’ economies. And if central banks misinterpret the cause of food and oil price rises, and raise interest rates, the deflationary pressures risk becoming cyclonic. This re-enforcing spiral of decline will increase, and spread to more and more countries.
The fear of contagion from peripheral Eurozone defaults are not merely that they could topple French, UK, and German banks, but that this could brink down US banks and effectively shut down the global financial system in very short shift. The destabilising force is not just that the banks are already in a precarious position, and are structurally vulnerable in that they lend long and borrow short and thus are always on the hunt for liquidity. Nor is it that sovereign debt is uncapitalised on bank balance sheets (because it was supposed to be risk free!) or that a monstrous pile of derivative contracts worth some twenty times the global economy hangs over the financial system. But a growing number of investors realise that the peaking of oil means the end of growth, and will actively look to cash out.
What everybody wants and needs is a sudden and explosive increase in the production of real goods and services (GDP) to make their continual debt requirements serviceable. But that, even were it remotely possible, would require a big increase in oil flows through the global economy, just as global oil production has peaked and will soon begin its decline. It cannot happen. This means that the global financial system is essentially insolvent now.
The only choice is default or inflation on a global scale. It mean banks are insolvent, because their assets (loans) cannot be repaid; or they can be solvent (assuming appropriate action taken) but their depositors cannot redeem their deposits at anything like their real value, possibly as little as one percent. It means the vast overhang of stocks and bonds, including pensions, and insurance cannot be realised in real goods. It means our monetary systems, dependent on fiat money, fractional reserve banking, and interest can only collapse.
High oil and food prices are essentially probing the limits of the stability of the globalised economy. They will probe until there is a major collapse in global economic production. At which point our energy prices may fall, but our real income and purchasing power will fall faster.
And markets will discover this truth quicker than monetary authorities and governments. Its expression will be in deeper and deeper economic stresses and major systemic banking collapses. Official responses will become more and more impotent, as their fundamental economic and policy tools no longer work, and their patina of control becomes hollow. If and when banking system contagion spreads to supply-chain contagion we may face existential challenges.
Even were we to have the perfect monetary and financial system, without debt and well controlled, peak oil and food would present an unprecedented shock. As incomes shrunk while essentials such as food and energy become more expensive, non-discretionary spending would be squeezed out. In the developed world, non-discretionary goods and services are just about all we produce. So the result would still be mass unemployment. Our critical infrastructure would still be increasingly vulnerable for various reasons, and monetary instability could still destabilise supply-chains.
Facing Ourselves & Facing Our Future
We are at the beginning of a process in which our world-views crash against a fundamentally unstable financial system and ecological constraints. A time where we will learn that what was, will never return; and what was expected, can never be. We are facing a time of loss and uncertainty. A time of bank-runs, lost savings and pensions, of mass unemployment, electricity and mobile phone black-outs, of hunger and empty super-market shelves.
A localised economy will no longer be something environmentalists aspire to develop; rather it will be forced upon us as bank failures, monetary uncertainty, and lost purchasing power sever links in the web of the global economy. But we no longer have indigenous economies to fall back upon.
The gap between expectations and what can be realised is historically a major source of popular anger, and can ignite a cycle of fear, blame, violence, scape-goating, and authoritarian leadership from either left or right. It can give the avaricious the power and cover to appropriate wealth that might better be used for collective welfare. This anger can also be turned inward, leading to despair, alcoholism, and high risk behaviour.
Yet who gave us the right to our expectations? They were built on the semi-blind self-organisation of a complex human society over generations. They were built on deep threads of human behaviour-competition and cooperation, mating selection and status-that result from our evolution over the history of life on earth. They were built on the deposits of ancient sunlight hidden below the Earth’s surface, the minerals in soil, and the global climate that provided the stability for our species to flourish. As a species there is no one to blame, unless we cling to the delusion that we are the displaced God who transcended our own ecology.
Yes, we can and will build a largely local economy out of the ruins of a collapsed globalised one. It will be a much poorer one and one where we will have lost much of what we take for granted. It can also provide a good life, where our basic needs are met, where meaningful lives can be lived, and a rich texture of experience found.
But in the interim we face a huge resilience gap between the basic welfare and social needs once provided by integration with the globalised growth economy and what is available without it. We need urgently to prepare for sudden shocks within transitions, and transitions within crisis.
The problem with such preparations is that in many cases they are likely to be too late. This is because the risk of severe financial shocks is rising all the time, and the issues are complex and often unclear. In addition real preparation would require a new and wide consensus on the nature of our predicament. But the emergence of such a consensus would lead to people and institutions taking rational action such as withdrawing deposits from banks, cashing in financial assets, or the refusing of credit. Such action would begin the re-enforcing process of banking and supply-chain contagion and the beginning of a systemic collapse in the globalised economy. Indeed, the IMF in it’s April 2011 World Economic Outlook makes just such a point about “perceptions of oil supply risk” destabilising an already vulnerable position.
We are present at a unique point in human history, the twilight of an incredible age, the edge of a potentially dark night, and we can, if we respond well, find bright new dawn. A place of good lives well lived, rich in the things obscured by plenty, time for ourselves and others, time to learn and to play. A place free from the relentless consumer culture that feeds on the cultivation of anxiety. If that sounds trite to some, so be it. But surely it is better to make a virtue out of necessity than rail against the inevitable.
We should now be risk-on, from individuals to international institutions. There is much to do, and much that can be done.
