Tim Watkins today published a superb big picture essay explaining the troubling trends in our economy that everyone sees but few understand.
It’s a great primer for anyone curious why the stories they hear from their leaders and news media don’t make sense.
If you’re the kind of person that needs hope, Watkins advises to pray for a very large discovery of low-cost oil or a breakthrough in nuclear energy.
Or, if you’re the kind of person that likes to know the most probable outcome they should prepare for, Watkins advises to get used to living with less in a more local economy.
Despite the cheerleading efforts of the legacy media, the economic storm clouds are growing on the horizon. Oil – the economic “master resource” – passed $80 per barrel yesterday. Meanwhile, central banks around the world have begun to unwind the stimulus packages used to bail out the economy in the aftermath of the 2008 crash. And all the while, governments are struggling to balance the need to manage their borrowing while maintaining the value of their currencies. Add to that the politics of the new nationalism and you have a recipe for turbulent economic times in the very near future.
By far the biggest blind spot in economics, however, is its treatment of energy as just another cheap resource to be exploited. In fact, energy should be treated as a separate category alongside capital, labour and resources in any model that seeks to explain the way the real world works. This is because energy is the transformative force that allows us to (temporarily) defy the second law of thermodynamics, which says that things move from order to chaos; they break down not up. As Steve Keen puts it:
“Capital without energy is a statue; labour without energy is a corpse.”
Another way of understanding this is to see that for a mere $80 dollars we get more than $350,000 worth of work (if we had to pay a human the average wage to do it). This also explains why relatively small changes in the price of energy (particularly oil because its use is ubiquitous) have such a dramatic impact on the monetary economy. Just three years ago, for every $40 spent on oil, companies were returning $350,000 worth of productive work. Today, the same $40 is returning just $175,000 of productive work; something that largely explains the so-called “productivity puzzle,” as well accounting for why ten of last eleven recessions were preceded by a spike in the price of oil.
Without the net energy to allow for genuine economic growth, sovereign debt becomes as unpayable as consumer and corporate debt. It can be defaulted or it can be inflated away; but it can never be repaid in real terms. States, however, are unlikely to concede this point until it is too late. To put it another way, states will use all of the power at their disposal to maintain the exchange rate of their currencies even if this results in economic ruin for their national economies and their citizens.
These, then are the three vortices which (in the absence of some new high-EROEI energy source) are gradually choking the life out of our global industrial civilisation. As the net energy remaining to us declines, an ever greater proportion of our currency and useable energy will be sucked into them until such time as our economy consists of nothing else but the growing of food and the generation of energy in the service of an ever more capricious state. This process will inevitably involve the acceleration of the decline in living standards that those at the bottom of the income ladder have been experiencing since the 1970s. It will also result in a re-localising of economies as the energy required to maintain global supply chains disappears. In this respect, the conservative nationalism of Brexit and Trump may simply be the relatively benign early manifestation of the politics of our energy-starved future.