2 Views Of The Current Economic And Energy Crisis

As the US heads toward debt default and continues with government shutdown, the underlying reason for the predicament is generally not clear to the American people or the world. The story that the press has generally been feeding us places the problem as basically a temporary one, caused by conflicts between the Democrats and Republicans.

It seems to me that the problem is much deeper. In this post, I summarize the two views, and provide reasons why the Predominant View is very far off the mark. We may be headed for a financial collapse that the Predominant View misses completely.

Predominant View of our Current Economic and Energy Predicament
The world economy under “normal” circumstances grows. Economic growth can sometimes slow a little, and then a little Keynesian stimulus is needed. Such stimulus would typically include deficit spending and low-interest rates. Perhaps it would include “Quantitative Easing” as well, since it tends to stimulate interest in buying assets of all kinds.

With the Predominant View, economic growth can continue indefinitely, without slowing down or stopping. In fact, the pursuit of economic growth becomes almost a national religion, with Ben Bernanke (probably succeeded by Janet Yellen) as its high priest. With unlimited economic growth, it is easy to have our current monetary system, since debt, and the repayment of debt, “works” well indefinitely. In fact, we can have pension plans, Social Security, and the many wonders that our financial system can deliver. We also can have more and better technological innovations, because there is always an abundance or the resources needed to make these innovations.

The late economist John Attarian describes this secular religion under the name “Economism” (Weissbach et al. 2013 ). EROI comparisons are distorted, because they do not reflect this cost.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Government Tie to Collapse Issues

Governments are perhaps the most vulnerable part of the system, if collapse hits due to continuing high oil prices.

Governments are the ones charged with bailing out banks and providing benefits to unemployed workers, at the same time that their own tax revenue is down due to reduced employment. In fact, many of the governments of big oil consuming nations (US, most of Europe, and Japan) are in very vulnerable positions, because their debt levels are very high, and they keep adding more debt. At the same time, they are pulling out all of the stops to keep their economies from collapsing, including very low-interest rates and Quantitative Easing. Because they are already so stretched, it is doubtful that they could do another round of bailouts.

The US government shutdown and debt cap limit debate is indicative of very serious problems–more than a conflict between two political parties. With slowing economic growth, there is a huge gap between what has been promised and what the government can in fact afford. No government official wants to explain to voters how bad the situation really is. So we end up with gridlock. See my post from November 2012, Stiglitz 2010 ). In that scenario, there was still plenty more cheap fossil fuels in the ground. Therefore, more debt and stimulus programs could re-inflate the economy, because it could lead to more use of cheap fossil fuels in non-agricultural sectors of the economy.

We are now at the edge of a very different scenario. We are reaching debt default limits because we have extracted the easy to extract oil. Additional extraction can only be more expensive and thus push us further into Stage 3 of the production function, or more toward financial collapse. As the economy naturally shrinks, there is no longer a way that more debt can re-inflate the system. Instead, the use of debt must reach a new, much lower equilibrium. Because of debt’s tie to banks, pension funds, insurance companies, and the rest of the financial system, this is a huge problem.

We can think that the growth of human systems, including the economy, will go on forever, but we are almost certainly kidding ourselves. At some point, when Nature decides, new species will dominate–perhaps plants that can use more CO2. The transition will be the transition Nature dictates.

We are kidding ourselves if we think that we can decide to slowly reduce oil and fossil fuel usage over the next 40 or more years. If oil prices drop to, say, $30 barrel because of debt defaults, oil production will drop very quickly–not based on some slow decline curve. Natural gas and coal prices will drop dramatically too, essentially putting an end to their production. Jobs will disappear with the lack of fossil fuels. Eighty or ninety percent of us will again need to work in manual food production without fossil fuels. Education, government, and services of all kinds will shrink rapidly.

Nature is deciding for us right now what is ahead. We likely will have little choice in the matter. If we do have a choice at all, it is likely to be in the direction of serious back-pedaling, in terms of population, and in terms of learning to live essentially without fossil fuels. The future is likely to be very different from the past.

Written By: Gail Tverberg