On the Wealth of Citizens: An EU Perspective

 

The UK voted to leave the EU yesterday.

What’s really going on?

In an industrialized world with abundant resources citizens typically prosper in economies of all sizes.

As populations rise faster than finite resources, the growth rate of per-capita resources slows and eventually must decline. Over time it becomes more difficult to increase the wealth of citizens. In a resource constrained world there are two methods available to grow the wealth of citizens: efficiency and debt.

The first method available to grow the wealth of citizens is to increase the efficiency of producing and using resources. We have done an excellent job of improving efficiency:

• We optimized the type of energy we use for each application such as using coal and hydro instead of oil to generate electricity, and using oil instead of coal or horses for transportation.
• We learned how to squeeze oil from sand and rock, how to drill for oil in mile deep oceans, and how to mine coal from the surface with giant machines.
• We optimized our machines such as switching to lighter fuel-efficient cars, using heat pumps, and abandoning supersonic air travel.
• We learned how to convert oil and natural gas into cheap and durable materials like plastic.
• We used electronics and computers to more efficiently control just about everything.
• We optimized communication with the internet and cell phones.
• We reduced waste such as insulating our homes.
• We recycled energy intensive materials such as aluminum cans.
• We optimized the productivity of our arable land with Haber-Bosch factories that convert natural gas into nitrogen fertilizer, by replacing horses and rain with diesel powered tractors and pumped irrigation, and by growing mono-crops.
• We optimized the cost of calories by manufacturing high-fructose corn syrup and vegetable oils, and by operating concentrated animal feeding operations.
• We optimized the harvest of our oceans with powerful ships that net and scrape everything.
• We optimized the efficiency of global trade with agreements between many countries.
• We optimized manufacturing by moving it to locations with the lowest labor and energy costs, and the fewest pollution regulations.
• We optimized shipping with standard containers and ships and trucks to carry them.
• We optimized distribution to consumers with Walmart and Amazon.

The laws of thermodynamics and the cost of technology and transport mandate a limit to efficiency gains. We are approaching the limits to efficiency improvement.

The second method available to grow the wealth of citizens is to borrow resources from the future. This amazing trick is done with debt. Cash and credit behave the same when spent. Credit however commits us to produce wealth in the future to repay it. This future wealth represents yet to be produced resources. Hence debt’s magic of letting us spend future resources now.

We started using debt in the 80’s to support the wealth of citizens and total debt has grown exponentially since. There are limits to how much debt can be carried by a citizen or government. Money available for living equals income minus interest payments plus any change in debt plus any change in savings.

The combination of stagnating or falling income due to declining per-capita resources and/or rising interest payments eventually imposes a limit on the total debt an individual or government can carry. There are three methods for extending this limit on debt.

The first method for extending debt is to increase the size of economic organizations. Size matters to debt. The larger an economy is the more internal and external resources it can control, the more taxes it can collect, the larger military it can afford, the more confidence and fear it can inspire, and as a consequence, the more credit it can generate. A good example is the USA and the privileges it enjoys from having the world’s reserve currency.

As the wealth of citizens became increasingly dependent on debt there was pressure to increase the size of economic organizations. This in large part explains the formation of the EU. The majority of European countries were keen to join the EU because it promised them access to more debt. Imagine, for example, how much debt and purchasing power an independent Italy with its own currency could have compared to today as a member of the EU.

The second method for extending debt is to reduce the interest rate. We have steadily reduced the interest rate since the early 90’s. We reached the limit of 0% shortly after the 2008 crisis and the interest rate has remained at 0% for an unprecedented 90 months. Some countries are experimenting with negative interest rates however it seems unlikely that this technique will work without dramatic and improbable changes to the rules of money and banking.

The third and final method for extending debt is to print and give money to citizens and/or governments. Most countries have not yet used this method because it reduces confidence in a currency and risks hyperinflation that destroys wealth and can cause war as happened with Germany after WWI. There will be a strong temptation to try this method in the future because it can work well for a period of time. For example, it took 10 years for hyperinflation to take hold after money printing started in Zimbabwe. A politician forced to choose between riots now and hyperinflation 10 years later might well choose to print money.

As an aside, I leave the reader with a question to ponder about the dark side of debt. What will happen if the depletion of finite resources and climate change prevents us from producing the future resources our debts commit us to? The answer to this question explains why I frequently call for reduced public debt.

In summary, a resource constrained world has two methods for supporting the wealth of citizens, efficiency and debt, and as explained above, we are already at fundamental limits for both efficiency and debt.

What must happen next, and what is already starting to happen, is that the wealth of citizens will decrease. This will create social unrest, and given our genetic denial and the difficulty of understanding our complex world, citizens will seek someone to blame.

Yesterday UK citizens blamed the EU. Because most UK citizens do not understand the underlying forces that are causing their hardship they probably have made things worse for themselves, at least in the short-term. Longer term, when there is insufficient affordable oil to support long distance trade, all communities will have to re-localize to survive.

Other independence movements within Europe are building momentum for similar reasons. A primary message of Donald Trump is that “others” are to blame for the hardship of US citizens.

A recurring theme on this blog is that some form of civilization collapse is inevitable and not too many years away. If the majority of citizens do not understand and/or deny what is going on the collapse will be much worse than it needs to be.

We still have sufficient resources to prepare a softer landing zone.

The first step is an adult conversation about what’s really going on.