Some of you may have noticed amid all the hubub that the price of oil has dropped about $12.00 per barrel over the past couple of weeks. And though this may be good news for American motorists, the reasons for this price decline are decidedly bad news for a lot of people, whether they are motorists or not. What happens in Greece, as well as the other Club Med nations, matters very much for the U.S. It goes without saying that there is no good outcome to Greece's debt workout. The damage has already been done and the questions remaining are: who suffers more or less and, what reverberations will be felt around the world as a result of the measures taken. The scariest might be the deflation of Club Med economies that is ongoing and soon to be accelerating because of the austerity measures (cuts in government spending) that will shrink economic activity. This will likely make the debt concerns even worse by shrinking the economies ability to service that debt.
The fall in the price of oil is basically the markets opinion on the future of the global economy. Oil is falling for two reasons. The first is because the demand forecast has dropped due to worsening economic conditions. The other reason is that the dollar, which most oil contracts globally are traded in dollars, has strengthened against the Euro. But the stronger dollar, despite the benefit of cheaper oil, has a downside that American policy has been trying to avoid for the last decade. This downside is the worsening trade deficit, which should be getting more press time as the Euro drops in value against the dollar. The trade deficit is the undereported twin sister of the national debt. It is the trade deficit with China and others, notably Saudi Arabia, which helps the U.S. fund it's debt. This is likely to continue and does not bode well for anybody. The falling price of oil (copper, too) is saying that America's trading partners are going to demand much less oil in the coming months, and it also means they will be demanding fewer American-made goods as well.
The only thing governments fear more than inflation is deflation. Deflation means the economy gets smaller. Technically it means that money is destroyed. Ok, that's not technical, but that's what it means. Deflation is what American federal economic policy has been fighting against since October of 2008. It is why the inflation worry is fairly remote for the time being. This worry-free approach is being vindicated as the price of oil and copper falls sharply and overall prices fall in Greece, Spain, Portugal, and Ireland. It is the effect of a massive drop in government supports for those economies. What happens next is anybody's guess, but deflation in these countries likely means further crises are bound to happen in those economies most closely linked to them. And all countries economies are linked in one way or another.
I can't say for sure what the best response is to this crisis. It seems likely that there will be mistakes made over the coming weeks because governments are in a panic and mistakes are made in that situation. But the aim of all these machinations is to essentially keep a failed system going for a little while longer. Until something happens. Maybe they think it will eventually get to rights again if they just provide enough monetary loving care. But I think Europe should be planning for a decline in economic activity and policy should be to soften the landing and make contraction fair to all parties. This cannot happen in a vacuum. It requires an unusual burden sharing by those who are less effected for the sake of those who are more effected. Europe has the opportunity to lead the world in this. If the European governments realize that the fundamental crisis of economics as currently practiced is the growth imperative, then policies can be shaped to find a lower order of economic activity and minimize the social disharmonies that often accompany declining national fortunes.
Hard choices await the people of Greece and of Europe generally. What reducing economic activity ultimately means is asking people to give up something they already feel they deserve to have. It also means asking people who don't have to give up wanting to have certain things, a certain lifestyle that they see others have and want for themselves. So called developing countries will be countries-never-to-develop, at least along the lines of Europe and the U.S. In the meantime, the Europeans, and eventually, Americans, will be rearranging their lives to deal with their return, after many centuries, to living within the natural limits of the Earth's energy supply.
I have hope and am rooting for Europe because it probably represents the best hope for the rich countries in terms of recognizing the energy and climate predicaments we face and acting on them. Certainly it is better understood there than in the U.S. Having said that, it is perhaps a faint hope. People are people and they tend to act when crises of the kind like climate change and energy descent are upon them instead of off a few years into the future. But maybe Europe will clear a path for Americans to follow after the smug and haughty certainty of America's superiority has been wittled away by events.
Sunday, May 16, 2010
Sunday, May 9, 2010
The High Cost of Growth or, Two Tales of Diminishing Returns on Complexity
One of the weirdest and most consequential weeks in a long time has come to pass and it leaves me wondering what the heck it all means for the future. It's hard to even know which story is the most significant in terms of the immediate or long term consequences. Of course, not everything happened this week but were extensions of what happened the week before. The effects of these happenings are sure to last well into the future and cause other problems down the road.
The market, for starters, seems to have judged debt overburden a real problem. The threat of sovereign default by Greece unraveling a series of other sovereign defaults was enough to drain the entire years worth of gains in the S & P and the Dow Jones, not to mention stock markets in Asia and the rest of Europe. Now, after a weekend of scrambling, the European Central Bank has declared a TARP-like bailout fund for all the troubled PIIGS's worth a whopping $928 billion. I imagine that should cover it. The stock market futures are already eating up the news and indices look to start off the day very well. Now it is incumbent on the economies of Europe and the world to grow enough to make good on all the debt that has been transfered to the ECB. The prospect for that might look good in the coming year but further out the debt, among other looming concerns, will likely make economic growth a more difficult than it was before.
An equally grave and solemn tragedy is that of the blowout of the Deepwater Horizon oil rig in the Gulf of Mexico. Nobody can say for sure how much oil is leaking out of the ocean floor but it could easily be understated. The risk of the tube breaking off the wellhead could increase the output by as much as ten to twentyfold, thus foreclosing any chance of avoiding what can only be considered a catastrophe of the first order. The oil floating on the waves would be sure to enter the gulfstream and coat the coastlines of several states. I can only imagine what would happen to Florida if huge stretches of beachfront property is soaked in hydrocarbonic sludge. Perhaps even Rush Limbaugh will call for an end to offshore drilling once his slice of Florida beach smells so bad that he won't even visit and he can't find a buyer. Though it's early, it might not be too early to consider that there could be a whole lot of internal migrants from the Gulf coast states to other parts of the country to try their fortunes elsewhere.
The market, for starters, seems to have judged debt overburden a real problem. The threat of sovereign default by Greece unraveling a series of other sovereign defaults was enough to drain the entire years worth of gains in the S & P and the Dow Jones, not to mention stock markets in Asia and the rest of Europe. Now, after a weekend of scrambling, the European Central Bank has declared a TARP-like bailout fund for all the troubled PIIGS's worth a whopping $928 billion. I imagine that should cover it. The stock market futures are already eating up the news and indices look to start off the day very well. Now it is incumbent on the economies of Europe and the world to grow enough to make good on all the debt that has been transfered to the ECB. The prospect for that might look good in the coming year but further out the debt, among other looming concerns, will likely make economic growth a more difficult than it was before.
An equally grave and solemn tragedy is that of the blowout of the Deepwater Horizon oil rig in the Gulf of Mexico. Nobody can say for sure how much oil is leaking out of the ocean floor but it could easily be understated. The risk of the tube breaking off the wellhead could increase the output by as much as ten to twentyfold, thus foreclosing any chance of avoiding what can only be considered a catastrophe of the first order. The oil floating on the waves would be sure to enter the gulfstream and coat the coastlines of several states. I can only imagine what would happen to Florida if huge stretches of beachfront property is soaked in hydrocarbonic sludge. Perhaps even Rush Limbaugh will call for an end to offshore drilling once his slice of Florida beach smells so bad that he won't even visit and he can't find a buyer. Though it's early, it might not be too early to consider that there could be a whole lot of internal migrants from the Gulf coast states to other parts of the country to try their fortunes elsewhere.
What these ongoing stories have in common is that they are both consequences of the drive to maintain the growth machine of the global economy. Time will tell what BP was thinking when it drilled so deep underwater without taking special precautions, but saving a few million dollars on a state of the art drilling rig which now rests in peace at the bottom of the Gulf of Mexico looks really, really irresponsible. My guess is that the finance guys made the final decision and not the engineers. But it underscores a lesson that the diminishing returns on the oil based economy that we will be learning over and over again in the coming years. Dmitri Orlov makes an insightful comparison on his blog Club Orlov between Chernobyl and the Deepwater Horizon disaster. This isn't simply an accident. It is, as the Soviets called Chernobyl, a "technogenic catastrophe". The origin of the catastrophe is in the technology used for the extraction of oil from the ground. The more complex the technology, and the larger the scale, for the complexity is dependent on the scale of operations supporting it, the greater the scale of the catastrophe whenever one occurs.
The European situation exhibits the same predicament of complexity. This time it was the financial instruments used to deal with the planet-sized debt required to keep the global economy chugging along at 3% growth per year. The current European troubles are really just a new chapter of the continuing economic crisis that began in earnest with the credit meltdown of 2008 that started in U.S. banks. The cost of this to the Europeans may be too much, and the debt issued may never be paid back. Economists would say this is why we need to keep growth going because the consequences are too horrific to contemplate. But the chapter on growth just might have ended with this bailout in real terms. What the economists don't appreciate is that an energy crisis, and the ensuing resource scarcity that will follow, will make those debts unpayable because the instruments used to make the debt possible are sure to blow up again.
There's plenty that can still be done to salvage our economy but it involves much that is unpalatable to many people and especially to corporations. It will be apparent once the decline rate of oil extraction falls every year by 3-5%, causing a like fall in economic output. So imagine every year being like 2008-9, when everything hemorrhaged value and people lost their jobs by the hundreds of thousands. Our project should be to make this less painful by building the kind of society we can afford indefinitely according to the natural wealth provided by the planet, identify the simple and effective tools that can be employed, and rid ourselves of the manic need to continually acquire more and more useless crap just so we can maintain growth of the money system.
The European situation exhibits the same predicament of complexity. This time it was the financial instruments used to deal with the planet-sized debt required to keep the global economy chugging along at 3% growth per year. The current European troubles are really just a new chapter of the continuing economic crisis that began in earnest with the credit meltdown of 2008 that started in U.S. banks. The cost of this to the Europeans may be too much, and the debt issued may never be paid back. Economists would say this is why we need to keep growth going because the consequences are too horrific to contemplate. But the chapter on growth just might have ended with this bailout in real terms. What the economists don't appreciate is that an energy crisis, and the ensuing resource scarcity that will follow, will make those debts unpayable because the instruments used to make the debt possible are sure to blow up again.
There's plenty that can still be done to salvage our economy but it involves much that is unpalatable to many people and especially to corporations. It will be apparent once the decline rate of oil extraction falls every year by 3-5%, causing a like fall in economic output. So imagine every year being like 2008-9, when everything hemorrhaged value and people lost their jobs by the hundreds of thousands. Our project should be to make this less painful by building the kind of society we can afford indefinitely according to the natural wealth provided by the planet, identify the simple and effective tools that can be employed, and rid ourselves of the manic need to continually acquire more and more useless crap just so we can maintain growth of the money system.
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