Friday, February 13, 2009

It's Not the Economy, Stupid

Beginning next week I will be posting a set of thoughts on the economy: Growth; Debt; Work; and, I hope, a concluding post with "Another Way." This post is something of a promissory note and a prolegomena. I have been waiting and thinking, trying with some effort to get beyond the din of voices at a time when everyone is an economist and no one has a very good "answer." It is difficult to gain perspective amid the avalanche of expert views.

I am not by training nor inclination an economist. Still, as a political theorist, the economy is an area of deep concern - it is one of the major forces that is shaped by our deepest political assumptions, and in turn shapes our politics. I can claim no special expertise about what sorts of policies are needed, but I can point to a considerable "public" record of deep concern over the direction of our economy that dates back to the very inception of this "blawg." At a time when so many of our professional economists are wondering what happened and why the crisis wasn't widely anticipated by the purportedly most scientific of the social sciences, there were some - and I would include myself - who foresaw a painful and wrenching reckoning. I wrote here nearly two years ago of a "global ponzi scheme," of the excessive indebtedness of our fellow citizens born of deep irresponsibility, of the general narrowness of our temporal horizon, of our generational neglect.

I sought out the views of experts who were inclined to see and understand our economy as due for a fall - people like James Grant and Jeremy Grantham, viewed by many (for a time at least) as doomsayers in the wilderness (and now, perhaps, as Cassandras). I began writing about the implications of peak oil before the atmospheric rise in the price of oil, thinking especially about the implications of an energy constrained and growth-challenged future in ways that the field of political theory almost entirely neglected (indeed, my fears and concerns about oil depletion was the reason I considered first starting this "blawg"). I suggested that it would be wise to consider shorting the market (and lamented that my retirement fund only allowed the default assumption of permanent growth) and suggested that gold was something worth acquiring.

I note my apparent precocity not to crow, but to stress that my general accuracy bore no relationship to my economic acumen. I was drawn to read the "bears" and pessimists not because I had special insight into their correctness, but because of a pre-existing set of assumptions that drew me to their conclusions. I would submit that it was that same existence of a very different set of pre-existing assumptions about the permanence of growth that attracted most Americans to the predominant views of most of our economist class.

In short, my interest in, and fears for, the state of our economy was born of a set of moral concerns. It arose from the belief that our economy was built on a set of deeper behaviors that were ultimately self-destructive. I believed that our impending crisis - and believe our current crisis - is moral, not merely economic. And, to the extent that most of our chattering classes suggest that the "problem" can be fixed by this or that policy - example number 1, a "stimulus package" - we remain in deep self-denial about the source of this crisis and the true path to its resolution.

Indeed, our self-delusion commits us to further self-destruction. The dominant "debate" in this country is about the best means of restoring our economic "health," whether through tax cuts or government spending. Both major parties fundamentally agree that what is desired is the resumption of our "normal" economy, unwilling to face the fact of the matter that our economy is not, and has not, been "healthy." Our economy - premised upon permanent growth within a closed system - is based on profound falsehood. The implicit belief that unleashed appetite and consumption represent "health" is a stunning faith commitment among our elders. The claims that we can square the values of social justice (among the Democrats) or family values (among the Republicans) and a rapacious and presentist economic order is deeply self-delusional. We still refuse to see the moral dimension of our crisis, and to that extent will only deepen and prolong it. The "stimulus package" continues the basic bad habits we have developed, premised upon the belief that deeper debt produces greater growth. If it weren't so colossally tragic it would be risible.

Our deepest problem perhaps lies in our compartmentalization of the nature of this moment. In viewing it as "economic," we obscure from ourselves the deeper connections between our economic collapse, the ravaging of the natural world, the lack of self-discipline of our "personal" moral behavior, the daily growing illegitimacy of our republican government. All of these phenomena - and many others, more wide to be expressed in one post or by one person - are deeply connected to, and ultimately derive from, the deepest presuppositions of our modern age - namely, the unleashing of the human appetite in the belief that it constitutes a positive good. Our incapacity and inability to exercise self-government lies most deeply across the spectrum of our current crises. All around us we face a denouement of our deepest philosophical convictions, a perfect storm of the logic of the age. To think for a moment we require the some perfect "fix" for the discrete problem in our economic system is a self-delusive luxury we can ill afford to believe and act upon any longer.

More, much more needs to be said. I will try, in coming days.


Empedocles said...

Wow, it sounds like our way to identical conclusions took similar paths. My interest in economics came from my concern for the environment, which lead me to understanding peak oil, and then to an interest in economics. I too found all the bear blogs just in time and found their arguments convincing (or just coincided with my general view of the world). It is ironic that discovering peak oil is one of the things that lead me to stop being a liberal or a supporter of any growth ideology (the other was my realization that the self is an historical kind). I say that it is ironic because I realized that sustainability and localization, ideas mostly associated with the left, are in fact conservative ideas (but of course not neo-con ideas). As an environmentalist this was something of a jarring realization.

Clifford J. Wirth, Ph.D. said...

"Peak Oil and the Global Economy"

Recent news headlines reveal that the U.S. economy is deteriorating rapidly: “Be Prepared for More Cutbacks,” “Mass Layoffs Continue at Rapid Pace,” and “Economy’s Plunge is Worst in Quarter-Century.”

The Work Bank forecasts that the recession of 2008 will extend into 2009 and probably to 2010:

“A pronounced recession is believed to have begun in mid-2008 in Europe, Japan, and most recently, the United States. This recession is projected to extend into 2009. The possibility of a serious global recession cannot be ruled out. Even if the waves of panic that have inundated credit and equity markets across the world are soon brought under control, the crisis is likely to cause a sharp slowdown in activity stemming from the deleveraging in financial markets that has already occurred and that is expected to continue.”

The World Bank sees some signs of optimism for 2010, but concludes that “global recession is likely to be protracted” and “an even sharper recession is likely.”

A variety of analysts of The Wharton School, forecast a deep recession extending through 2010 and possibly beyond.

Gerald Celente, Editor and Publisher of "The Trends Journal," forecasts a global economic collapse beginning in 2009 (interview summary, not quoted directly):

The global economy will collapse in 2009, resulting in the worst recession in the post WW II period. The commercial real estate sector is highly leveraged and will collapse beginning in late February or early March as major retailers fail, leaving vacant rental space that will not be filled. This will lead to further failures in the finance and banking sectors and higher unemployment which is at 13% and growing.

Some two-thirds of the U.S. economy is based on consumerism, which is declining rapidly due to increasing unemployment. Declining personal income means a shrinking tax base and a need to raise state, local, and federal taxes and user fees.

This economic collapse, Celente believes, will lead to the "Greatest Depression," more corporate fraud, increased street crime, taxpayer revolts, rioting, and revolution. Survival is now a real concept as people lose investments and jobs. A return to frugality and self-sufficiency will characterize the economy in years to come.

Financial analyst Gail Tverberg explains the economic crisis in terms of a “Tower of Debt.” Because most debt ultimately rests on personal income, as personal income declines most debts are at risk: unfunded pension liabilities, unfunded Medicare and Medicaid, Social Security debt, publicly held federal debt, government sponsored enterprises (such as Fannie Mae and Freddie Mac), state and local government debt, financial businesses, businesses, and household debt (mortgages, credit cards, and education loans). This supports Gerald Celente’s forecast. When personal income declines (due to increasing unemployment), consumerism declines, retails businesses fail, highly leveraged commercial centers fail and default on loans, causing banking and financial institutions to collapse.

ASPO-Ireland examines the economy in light of Peak Oil (excerpts from the ASPO Newsletter):

“Oil demand had begun to outpace supply around 2005, when the production of Regular Conventional Oil passed its peak. The shortfall was however relatively small and was partly met without undue difficulty by a modest reduction in consumption.

But as prices began to firm, oil traders and other speculative financial institutions began to take a position in the market, which had the effect of driving up the price. Gradually the process built momentum as huge notional profits were reaped from the appreciating asset. In a conventional market such movements would soon be countered by increased production, but in the case of oil, there was no spare capacity to release, and the speculative surge fed on itself leading to an extreme escalation in price which reached about $150 a barrel by July 2008. However as this peak [in prices] was approached, the traders began to conclude that a limit was close and began to buy future options at lower prices, which began to undermine the price in a self-fulfilling process. In parallel the high prices began to undermine many other aspects of the economy with for example airlines and automobile manufacturers facing difficulties. They themselves relied heavily on debt, which itself was traded between banks without adequate genuine collateral, and were forced to unload their speculative oil positions in order to try to shore up their failing businesses. Gradually the whole edifice collapsed, and oil prices fell to around $50 a barrel, although nothing particular had changed in the actual supply/demand relationship.

The flaw in the system was to treat a finite resource whose production was largely controlled by the immutable physics of the reservoir as if it were a normal commodity capable of responding to ordinary market pressures. If the price of potatoes increases, farmers can grow more and the market responds, but oil is different.

Governments responded to the crash by pouring yet more money, itself lacking genuine collateral, into the system in the mistaken belief that this would restore the position of assumed eternal growth, and quite possibly the stock market will respond positively as traders sense a new upward direction. They have no real interest in reality: their job being to try to reap rewards from short term movements.

But if there is an economic recovery, that would serve to increase the demand for oil, which is in a sense the lifeblood of the modern world, and oil prices would again begin to surge. Probably, it will take several such vicious circles before governments and, more important, people at large at last come to grasp the reality of the situation, which will likely prompt radical changes in the human condition.

Meanwhile, desperate efforts are being made around the world to shore up the crumbling financial system. For example, the Bank of England has radically reduced interest rates in a country facing a severe recession, effectively taking money from savers to give to spenders.

The Government has evidently failed to grasp the underlying causes of recession and hopes that pumping a bit of money into the system will restore it to its previous condition. That was premised on eternal economic growth, which is a somewhat unrealistic proposition for a Planet of finite dimensions, but Governments subject to re-election are by nature short-term in their thinking.

One is led to conclude that the entire Stock Market, including especially the oil market, has become a thoroughly debased speculative institution. In earlier years, investors clubbed together to build a specific project, such as a canal or railway, with the resulting dividend being the prime motivation. Things seemed to have gone wrong when such investments were traded on markets by financial institutions which naturally can have no serious knowledge of the underlying business or the true value to be placed upon it.”

Energy investment banker Matthew Simmons, like ASPO-Ireland, notes that today’s low oil prices and credit shortage will reduce investments needed for oil production, resulting in lower oil production in the future, followed by increasing oil prices as demand out strips supply, which will then cause another economic downturn in the future. Simmons also notes that the aging oil infrastructure of drilling rigs, rusting platforms, pipelines, and refineries must be renovated, requiring trillions of dollars in investments at a time when credit is tight..

Independent studies indicate that Peak Oil occurred between 2005 and 2008 and that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil the U.S. conserves will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly. More and more oil is expended in oil production and processing as lower grades of oil are extracted from an increasing number of smaller oil fields that are located in hard to access ocean depths. These factors will increase the oil production decline rate above the six percent that is forecasted in a few years

These Peak Oil factors suggest that there will be no economic recovery following the economic collapse of 2009 and that the recession will deteriorate into a permanent economic depression that will worsen over time.

In 2007, the U.S. General Accountability Office (advised by a panel of 13 scientists of the National Academy of Sciences) examined the potential of alternative energies for replacing liquid fuels (that are vital for transportation and food production):

“An imminent peak and sharp decline in oil production could have severe consequences. The technologies we examined [ethanol, biodiesel, biomass gas-to-liquid, coal gas-to-liquid, and hydrogen] currently supply the equivalent of only about 1% of U.S. annual consumption of petroleum products, and DOE [U.S. Department of Energy] projects that even under optimistic scenarios, these technologies could displace only the equivalent of about 4% of annual projected U.S. consumption by around 2015. If the decline in oil production exceeded the ability of alternative technologies to displace oil, energy consumption would be constricted, and as consumers competed for increasingly scarce oil resources, oil prices would sharply increase. In this respect, the consequences could initially resemble those of past oil supply shocks, which have been associated with significant economic damage. For example, disruptions in oil supply associated with the Arab oil embargo of 1973-74 and the Iranian Revolution of 1978-79 caused unprecedented increases in oil prices and were associated with worldwide recessions. In addition, a number of studies we reviewed indicate that most of the U.S. recessions in the post-World War II era were preceded by oil supply shocks and the associated sudden rise in oil prices. Ultimately, however, the consequences of a peak and permanent decline in oil production could be even more prolonged and severe than those of past oil supply shocks. Because the decline would be neither temporary nor reversible, the effects would continue until alternative transportation technologies to displace oil became available in sufficient quantities at comparable costs. Furthermore, because oil production could decline even more each year following a peak, the amount that would have to be replaced by alternatives could also increase year by year.”

There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and surface mining equipment.

The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work.

We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair.

When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances.

With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

Governments, business and individuals should prepare for the impacts of Peak Oil.

Links to sources here:
Documented here:

Nabil said...

Thank you for your great post. Between 1988 and the present, over twenty years, I have worked as a lawyer representing large corporations and wealthy individuals. I witnessed the inner-workings of how the titans of industry and finance make decisions. These titans explicitly taught that one must shun any talk or thought of "morals" in order to be the best, the wealthiest. The titans' assistants -- lawyers, accountants and politicians -- were silent witnesses and accomplices. The assistants were silent because they believed the titans were the brave ones, the ones who dared to act without any restraint.

We live in a society that worships (or worshipped?) the individual who denies any right of the group to control his desires. The more inflated the individual's desire -- say, to steal billions -- the more the group is silenced into adoration.

The silence has ended because we see the global effects of unrestrained economic theft and limitless individual appetite.

The question now is: How will we instill any sense of morality in a society that for decades actively sought to transcend all limitations, moral or otherwise?

Casey Khan said...

"I believed that our impending crisis - and believe our current crisis - is moral, not merely economic."

As someone who has spent many years as a quantitatively oriented market risk analyst who oversaw the actions of energy traders, I can say that the failure of risk management has been its failure to take a moral account of trader actions. The thought is, that if we can just get better quantitative analysis of the portfolios, we can prevent losses. Absent from the entire process was wisdom, a concept derided by PhD quants as "mystical." While these folks could do differential equations and matrix algebra, the vast lot of them lacked an education in philosophy [in spite of a PhD], literature, or religion. Nor did they have any understanding of the basic principles and virtues necessary to run a successful business [aka a hot dog stand].

Market bears, more often than not, had a grasp of financial history going through the centuries, and tried to cultivate wisdom from that historical memory. They knew basic business fundamentals [ie how to read a balance sheet] and cultivated virtue [thrift]. Market bears in our day are not so much derided because they were contrarian per se, but that they held to claims of wisdom and virtue.

Robb Davis said...

Thanks for this post. I have shared it with a group of friends and requested their help in beginning to articulate an alternate narrative to the one we have come to accept. I look forward to your posts in the coming days and for the opportunity to begin a new articulation of how to be in the world.

Notes from the Underground said...

This is a worthy subject, but there is some need of contextualization given the apparent cause of the financial crisis. The global financial crisis does not appear to have been caused so much by the rising cost of oil as it does by the collapse of the housing market. This may seem irrelevant to the moral dimension of consumerism; it isn't. Real estate is separate from other sectors of the marketplace in that people don't eat houses, they have them. And, while I can't speak for the vast majority of people in the economy, I must say that in my experience living in a house is one of the best means for fostering a sense of self-government and personal responsibility. This, at least, is why I live in a house that I can afford but probably don't need. Instilling these exact sentiments of personal responsibility and self-government were among the rationalizations for the policies that led to the housing crisis; in the early '90s, Housing Secretary Jack Kemp--to name one example--encouraged privatization of housing projects because he thought (correctly, I believe) that people would work harder to preserve projects to which they felt a personal connection. My point is not that consumerism should not be cause for concern; any society that defines itself by what it consumes rather than what it produces is condemned to failure and I, for one, wish that the credit card--or worse yet, the debit card--had never been invented. Rather, the point is that anyone who attempts to reverse this trend should tread softly; sometimes policies which do attempt this feat only get us more mired in our culture of consumption.

Kevin Jones said...

I wouldn't be quick to ignore a possible connection between the housing market crash and oil prices. Surely gas prices pushed some households into insolvency and forced cutbacks in consumer spending, thus creating more insolvency.

Of course there's a moral problem in the housing market crash as well. People were treating their homes like banks, either spending their equity on non-productive consumer products or aspiring to sell high and retire to a cheaper abode at the same time as all the other Baby Boomers.