Anyone devoted to the study of resource economics, especially peak oil, must finally abandon the comfortable foundations of geologic science and face up to the much messier and much less predictable economic side effects implied by the end of cheap energy.
The end of cheap oil is now deeply intertwined with a growing sovereign (meaning national government) debt problem in such a way that treating either problem generally tends to make the other problem worse. Global economic stimulation, if effective in leading to global recovery, probably soon leads to a rise in global oil demand.
Three gifted analysts of the political economy, Goldman, Williams, and Wallerstein, recently seem to be in agreement on some important basics, notably that the prospect for many economically stressed countries, especially the USA, to try to create enough fiat currency to revive their domestic economies is not likely to work out very well. Once you start down this immediately seductive path, it keeps getting harder to turn back.
The initial stages of economic stimulation through the injection of stimulus money into the economy are broadly popular and are thus supported or tolerated as beneficial.
The downside comes later, when the psychology of spending starts to turn around. At some point, people tend to realize that there seems to be more money at hand than there are certain types of goods in the marketplace – and of notable interest, food and energy.
When prices rise noticeably, average people start to hedge further increases by buying useful goods, in contrast to hoarding money before its buying power seemed to shrink. As the “velocity of circulation” of previously sluggish money increases, it appears out of hiding, and so does its apparent abundance increase. This feeds a classic human behavior syndrome that leads easily to hyper-inflation. The Weimar Republic was a classic example.
Today, as David Goldman nicely documents with official bank data, the giant U.S. investment banks and the U.S. government are locked into a co-dependency that obliges them to cooperatively increase the money supply, in effect running faster and faster to delay a general crisis.
…It wasn’t simply a matter of the banks hiring ratings agency experts and gaming the models for their own benefit; the ratings agencies themselves were making most of their money from the CDO [collateralized debt obligations] market, and volunteered their time and advice to help the banks issue more.
These issues come up because the banks and governments are partners in the attempt to reflate the world economy through deficits comprising a double-digit proportion of GDP in most of the major economies. The banks finance the governments, with money that they borrow from the governments. That’s why many banks showed a profit during every single trading day of the first quarter: with a steep yield curve and nearly zero-cost funding, you have to go out of your way to lose money…
Like Goldman, Williams points toward a general governmental inability to control spending. Deficit spending will, despite deflation in the consumer sector, lead at some point to another rise in oil prices through competitive bidding. Williams sees dollar devaluation raising oil price (rather than peaking oil supply) as the factor leading the way to renewed cost-push inflation. When the price of oil rises, the price of nearly everything else is soon to follow.
…You can also have inflation, which is driven by factors other than strong economic activity. That’s what we’ve been seeing in the last couple of years. It’s been largely dominated by swings in oil prices. That hasn’t been due really to oil demand, as much as it has been due to the value of the U.S. dollar. Oil is denominated in U.S. dollars. Big swings in the U.S. dollar get reflected in oil pricing. If the dollar weakens, oil rises. That’s what you saw if you go back to the 1973-1975 recession, for example. That was an inflationary recession.
Indeed, the counterpart to what has been suggested about strong demand and higher inflation is that usually in a recession you see low inflation. The ’73 to ’75 experience, however, was an inflationary recession because of the problem with oil prices.
That’s what we were seeing early in this cycle, where a weakening dollar rallied oil prices, and then the dollar reversed sharply and oil prices collapsed. We have passed through a brief period of shallow year-to-year deflation in the consumer price index, but, as oil prices bottomed out and headed higher since the end of 2009, we’re now seeing higher inflation, again…
A central feature of Williams’ thinking is that the real rate of inflation, as opposed to official rate of inflation, is now above five percent; the buying power of the total M3 money supply is actually shrinking.
The good news is that Williams thinks the U.S. will probably manage to survive, but under distinctly different circumstances, as part of which, however, the US downturn will be felt globally.
…There’s strong evidence that we’re going to see an intensified downturn ahead, but it won’t become a great depression until a hyper-inflation kicks in. That is because hyper-inflation will be very disruptive to the normal flow of commerce and will take you to really low levels of activity that we haven’t seen probably in the history of the Republic…
Finally, Wallerstein views the big picture of generalized investment fears, much as a global psychologist might.
Looking back, there have been long stable periods in USA history when capital, plus advancing technology plus geographical isolation, have generated a mighty nation that seemed blessed with permanent good fortune. However, in the unsettled investment times we see now, those who risk capital on investments have legitimate fears that broadly inhibit recovery. Seen in the light of peaking oil, Wallerstein describes the political and economic outcome of attempting to sustain exponential growth.
“…The Greek government’s problem is quite simple. Its tax revenue is too small and its expenditure level too high for its current and prospective future income. So it must either raise taxes (if it could collect them) or cut expenditures or both — and drastically. This is however also the problem of Germany, France, Great Britain, the United States, and the list goes on. Nor are the few countries that seem to have their fiscal heads above water at the moment (such as Brazil or China) exempt from this contagion. The Greeks are taking to the streets to protest. But this will spread. And, as it spreads, the world market will become ever more volatile, and the fears will expand, not contract.
The major policy response everywhere has been to buy time with paper money that is borrowed or printed. The hope is that, somehow, during the borrowed time, renewed economic growth will occur and restore confidence, ending the real and latent panics. Politicians grasp every little sign of such growth and over-interpret it. A good example is applauding recent job creation in the United States, when that job creation was less than the size of the population growth in the same period.
The fear is not irrational. It is the consequence of the structural crisis of the world-system. It cannot be solved by the band-aids that governments are using to treat the serious ailments we confront today. When fluctuations get too great and too rapid, no one can rationally plan. So people no longer act as reasonably rational actors in a relatively normal world-economy. And it is this degree of heightened fear that is the fundamental reality of the present era.”
Roger Baker is an Austin-Texas-based, transportation-oriented environmental activist, recently with a particular interest in energy-oriented economics. He is a founding member of and an advisor to ASPO-USA, is active in the Green Party, the ACLU, and others. He writes for the Texas-based cyber-journal, “The Rag Blog”.
(Note: Commentaries and interview remarks do not necessarily represent the ASPO-USA’s position; they are personal statements and observations by informed commentators.)