Can the center hold?

Greetings

      Around 2008, there was a lot of talk about how peak resources would undercut the current assumption  of infinite economic growth that underlies our financial activities, and bring down the economies of the world.  And of course that very nearly happened.  But , we are told, the central banks came to the rescue, and  injected lots of money, and set things to right.  Of course some may argue that the fix was temporary  or merely made the system even more unstable.  Waiting for the next shock.

  Gail Tvberg at Our finite World is of that school.  In this essay   How resource Limits Lead to Financial Collapse, she goes into some detail, and explores some of the approaches to  societal collapses through out history.  She argues that societies tend to go though three stages , and expansionary one with rising wages all around, a stagnation phase marked by wage disparity  and falling wages for common folk, increased governmental support, and debt, Finally there is the crisis stage, where the governments can no longer raise enough in taxes to cover its costs,  and the commoners wages fall below an acceptable level.  This phase is marked by wars, rebellions,  economic dislocations, disease, and malnutrition.   This phase normally lasts 50-60 years.   This is the stage she thinks we are now entering.    

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Those of you interested in exploring this topic may also be interested in a couple of reports from The Foundation For the Economics of Sustainability or FEASTA.  

Tipping Point: Near-Term Systemic Implications of a Peak in Global Oil Production-An Outline Review

FEASTA argues for a fast crash due to the highly integrated nature of the world economy:

"The collapses in the Roman Empire occurred over centuries; collapse of the Greenland Viking settlements in decades. We suggest a hypothesis here that the speed of collapse is a function of the level of integration, coupling, and the key operational speeds of the systems that support the stability of the pre-collapse state. For us that includes the behavioral change in financial markets, food flow rates, and replacement lifetime of key components in infrastructure. In discussing the feedback processes in the next chapter we will see processes are indeed fast."

Essentially, they argue that once we are past the "plateau" the oil production decline will be too fast for any combination of efficiency, oil field technology, or other energy substitutes to fill in. 

"In the most straightforward way we are expecting a gap to open up between the oil production required to keep the global economy growing, which has averaged about 1.6% per annum over the preceeding decades, and the net energy available after the energy costs of extraction has been removed from gross production."

 They expect the economic system to cross a "tipping point" similar to a climate change tipping point, where the increasing energy costs cause increased financial instability, and visa versa.  The financing needed for high cost energy development requires a stable financial system.  But a stable financial system requires  low cost energy.  

  Once this dynamic becomes understood, people and firms will attempt to trade in their financial assets for real ones.

"The acknowledgment by market participants that peak oil is upon us, coupled with an understanding of the consequences is likely to permanently crash the global financial system. That is, the behavior of the market is based on fundamental physical constraints, such as rising loan defaults induced by the current economic crisis further constrained by energy and food price inflation-and its interactions with the hopes and fears of market participants, particularly their faith in the overall stability and continued growth of the system. The transition from few market participants accepting the idea, and large-scale acceptance can be very rapid, though the onset of the fast transition can be difficult to predict. In other words: growing government, corporate, and public acceptance of peak oil, will initiate a fear-driven conversion of a mountain of paper virtual assets into a mole-hill of resilient real assets which will help precipitate an irretrievable collapse of the financial and economic system. Such a transition can be expected to be fear-driven and mutually re-enforcing. This is part of the reflexivity of markets, in George Soros's phrase; or an example of a positive feedback, in the language of dynamical systems. In this context we can understand reported pressure placed upon the International Energy Agency by the United States to overstate future production in its World Energy Outlook 200959.

"The end result for market participants would be a rush to extract virtual assets (money, bonds, shares, derivative instruments) to convert them into productive, non-discretionary assets (resilient energy assets, land, farm tools, gold). However, there is a vast inbalance in their respective size. In all total paper assets are probably valued at over $300Tr, supported on a Gross World Product of about $55Tr, which itself must collapse. For a comparitor, the total clean -tech market capitalisation is about $1 Tr. In order to get an indication of the ability of the clean-tech sector to absorb investment, we note a record global investment in renewable power of $140 billion in 2008. The vast mismatch is clear, even assuming there were willing sellers of renewable assets or land. Green-field renewable infrastructure investments (building wind turbines, solar PV cells, DC cabling) are likely to have limited ramp-up rates, which if on the scale of investment increases between 2007 and 2008 would be of the order of 16%. This means pension funds, sovereign funds, insurance funds, and other major holders of such assets will loose everything, with little hope of asset conversion. Maintaining value in cash is likely to be ineffective because of deflation blocking conversion, or extreme inflation eroding the valuation of cash holdings.

It should be clear from the body of the text that one could expect much of the greentech sector to collapse due to failing operational fabric, so the rush will be to secure actual turbines/solar PV panels, or to produce them before systems begin to fail.

This means that there is a very small conversion window and that only a tiny fraction of investors will get out of virtual assets, to secure the small amount of real resilient assets"

They offer some challenges to the view that the crisis can be contained by "de-growth" techniques, especially at this late date:

"So let us ask the question, could we do a managed de-growth and what might it imply? In the dynamical systems perspective could we find a stable or semi-stable path to a steady-state economy with much lower energy and resource flow throughput? The following reasons, in no particular order, suggest it is a vain hope:

We Can Turn on a Pin

We are close to, and may have passed the peak of global oil production, we are in denial with no preparation, we have little time, torturous decision making structures, multiple competing interests, and live in a hyper-complex environment. We are locked into many welfare supporting structures. We are about to be hit by a full spectrum systemic crisis (in food security, mass unemployment, monetary system, global financial system, health, education, industry, security, public works, IT and communications…..). As this is far beyond what any government or civil society has ever anticipated and planned for, how can we be ready for it in the next year, maybe two?

Missing the Train

Once collapse begins we will lose the tools and infrastructure we would need to manage the collapse.

The Myth of Potency

We may look at our complex civilisation and say ‘we did this, and if we did this, we surely can do almost anything!‟ However we did not do this intentionally, with a plan that was executed, it is a self-organised system. The complexity is beyond our comprehension or ability to manage.

Control

Governments do not control their own economies, neither does civil society. The corporate or financial sectors do not control the economies within which they operate. That they can destroy the economy should not be taken as evidence that they can control it (this author cannot drive a car, though he is quite confident he could crash one).

Lock-in

We are trapped in the current system. It has locked us into hyper-complex economic and social processes that are increasing our vulnerability, but which we are unable to alter without risking a collapse in those same welfare supporting structures. For example, our current just-in-time food system and agricultural practices are hugely risky. As the current economic crisis tightens we are driving further efficiencies and economies of scale, particularly in food production, as deflation drives costs down. This helps maintain social peace, and supports debt servicing, which supports our battered banks, whose health must be preserved, or the bond market might not show up to a government auction. Which all makes it very hard to do major surgery on our food production. There are countless examples of lock-in.

Uncertainty and Dynamical Chaos

Collapse breaks up the familiar stability of the processes we take for granted, and which provide the frameworks to make judgements about the consequences of actions. The release of stored energy within the complexity of the global economy by collapse, will make the prediction required for large scale control impossible to maintain.

Competing interests

Nationally and internationally we all hold different assets and liabilities (some carry deficits, some carry surpluses, some oil, some land, some have armies, and some think it‟s all a conspiracy). From a game theoretic view, there is no stable solution that would give a fair distribution of risks and reward for everyone. Initiating a managed withdrawal, and instituting a new one, irrespective of complexity, would probably trigger a stampede.

Financial Feedback

We saw that one of our positive feedback processes was driven by market recognition of the problem. The more we do to prepare the more we confirm the hypothesis, which itself drives the collapse.

Stop Consuming/ Green Consuming

If we consume less of the trivial, we may reduce energy flows, but this will lead to rising unemployment and reduced discretionary income. We have also noted that the trivial

cross-subsidises the critical. So as the critical begins to decay, it will hamper our ability to manage the transition. We could mandate the redeployment of workers into new „green‟ businesses (an upfront cost-where are the credit lines?), with limited ramp-up rates. This would of course cost more energy, just as energy supplies are declining.

Monetary Magic

It is relatively easy to concieve and introduce a local non-debt based money system. It is quite another to unweave the current system from the operational fabric, while keeping the operational fabric viable continuously so that people can be fed, employment maintained, the trade system operational etc.; never mind doing it in a way that lets creditors, debtors, pension funds, and petro-dollars find a happy accomodation.

Complementary currencies may be introduced, which may provide some support. It must be born in mind that the great models of such currencies particularly those introduced during the Great Depression, were built upon local economies that already had a significant local base of indigenous non-discretionary production. In our locally hollowed out economies, whose value and skill base is dependent upon globalised trade, little production is available to be traded whatever currencies are used."

In one bright note, they suggest that this crash may make some of the more drastic climate change scenarios moot.

"The IPCC uses a number of scenarios based upon what they consider to be future growth trends to project future emissions of greenhouse gasses. These scenario families, A1, A2, B1 for example, all assume access to fossil fuels would not be a limiting factor on future emissions. A number of studies have recognised that the implications of peak oil, gas, and even coal on future emissions of greenhouse gas could alter the IPCC assumptions.

Kjell Aleklett has described the UN's future scenarios as “pure fantasy”64. However, researchers have pointed out that even with peak oil, gas and coal emissions could still rise beyond what is regarded as safe. Kharecha and Hansen argue that without corrective measures atmospheric CO2 concentrations could still rise to 600ppm, while the safe level is 350ppm, this rise was mainly due to coal65. Brecha also included oil, gas and coal, but modeled their availability in a more careful manner. He concluded that world energy production would peak between 2030 and 2050, with CO2 concentrations stabilising between 480 and 580ppm66. Nel and Cooper, referred to earlier generated production profiles for the three fossil fuels, and find a peak occurring about 2025, and maximum concentrations of CO2 are 550ppm.

This report takes serious issue with all these studies. Principally, it is because they rely upon the decline curve assumption. They all effectively assume no, or little coupling between declining energy flows through the global economy and the general operability of the economy. Included within this assumption is that there is no or weak coupling between different forms of fossil fuels. What the decline curve assumption gives to researchers are data sets of future emissions to put into climate models, but the decline curve assumption we have argued is wrong. It may be impossible to generate emissions data sets from a collapsing global economy."

see also

Financial System Supply-Chain Cross-Contagion:a study in global systemic collapse.

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All of this fits pretty well looking at the current situation, especially in Europe.  It's interesting to see how the dynamic has changed.  With Greece, Spain and Italy, the "bail-out" package  includes a contribution from tax payers.  With Cyprus, the central banks now are requiring participation of depositors.   Time will tell how this affects depositors faith in the banking system.

Whether a bank or a country is solvent, depends a lot of whether it is " seen" as solvent.

And now,  I see that the "bond vigilantes  are circling Japan.  In a similar strategy to the mortgage backed securities, now Kyle Bass is now making bets against the Japanese bonds.

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Another collapse watcher to listen to is Dmitri Orlov.  who deals with endgames in his recent blog entry "Bangs and Whimpers"

  He also, focuses on the financial markets, and offer this description of a possible scenario from his soon to be released book:  The Five Stages Of Collapse

A likely endgame 

Here is a likely endgame for the finance and import-driven global economy. Supposing global finance suffers another “whoopsie” à la 2008: a “credit event,” money markets lock up and so on... This scenario has been rehearsed once already, and nothing has been done to prevent it from happening again except for some temporary stopgaps consisting of national governments sopping up all the bad debt. What is different now is that all the governments have already shot all of their magic bailout bullets. The guilty parties are still at large, richer than they were before this crisis and probably thinking that the next crisis will make them even richer. The last time it happened, President Bush the younger famously declared: “If money isn’t loosened up, this sucker could go down,” and money was indeed loosened up, and is getting looser all the time. But how loose is too loose? At some point we are bound to hear, from across two oceans, the shocking words “Your money is no good here.” 

Fast forward to a week later: banks are closed, ATMs are out of cash, supermarket shelves are bare and gas stations are starting to run out of fuel. Nothing useful happens when people swipe their credit cards at the few stores that remain open (not that anyone is shopping, except for food and ammo). And then something happens: the government announces that they have formed a crisis task force, and will nationalize, recapitalize and reopen the banks, restoring confidence. In short, the government will attempt to single-handedly operate their corner of the global economy by other means. The banks reopen, under heavy guard, and thousands of people get arrested for attempting to withdraw their savings. Banks close, riots begin. Next, the government decides that, to jump-start commerce, it will honor deposit guarantees and simply hand out cash. They print and arrange for the cash to be handed out. Now everyone has plenty of cash, but there is still no food in the supermarkets or gasoline at the gas stations because by now the international supply chains have broken down and the delivery pipelines are empty. Restarting them requires international credit, which requires commercial banks to start operating normally, and that in turn requires functioning supply chains and retail.