Overview of the unfolding of
recession and depression as the oil economy fades
can be emailed or posted using this shorter
version of the location -
Can oil prices
continue the recession caused by the collapse of the housing bubble?
Yes. This speculative
'think piece' is related to conditions in the Eurasian, and North
American (and Oceanian) universally well educated technology-based,
democratic and weakly democratic societies; specifically, societies
that live in the
warm temperate zone.
The on-going assumptions are
that the American
presidential/business/military administration has almost full control
of Iraqi and has de facto
control of Iranian oil and gas, and that all
Middle East states are
being 'directed' to accept US dollars only
for oil. Backed by oil, the USA
dollar does not suddenly
This is a 'soft descent' into ultimate depression scenario, not a 'hard
note 2008: the unforseen 'domino
effect' of collapsing bank
mortgage ponzi schemes has now thrown the USA and Eurozone economies
cliff - a hard fall into recession. The power of these same forces
continues, and may cause a 'hard fall' into depression.
the US dollar
backed by oil has prevented a USA depression; in
the medium run, depression
no matter what.
The timing of these events can fairly confidently be given as occurring
at some point between 1 and 30 years time [Note
2008: the recession 'event' turned out to be 3 years time, relative to
when this opinion piece was written]. The timing of
the tip from
deep recession into depression is hard to predict.
In the very longest run, depression fades into a changed paradigm of
daily life where our understanding of energy, work, and what we value
have shifted dramatically.
"Our window of opportunity is slowly closing... at the same time, it
probably requires a spiral of adversity. In other words, things
get worse before they can get better. The most important thing is to
get a clear picture of the situation we're in, and the outlook
future - exhaustion of oil and gas, that kind of thing - and an
appraisal of where we are and what the time scale is. And the time
scale is not centuries, it is decades."
- Dr. M. King Hubbert (1903-1989), principle predictor of "peak oil',
speaking in 1988.
It is difficult to think about 'how things will play out' when an
oil-based global economy loses its cheap energy source. It has never
happened before. It will never happen again. All the recessions and
depressions of the past were relatively brief. New energy sources and
new technologies saw human populations put their inventiveness and
industry into the newly opening opportunities, and recession soon faded
to a distant memory. But in a society
built with cheap oil, a society utterly dependant on cheap oil, a
recession rising from permanently expensive oil will not be 'over' for
very long time.
The slide into recession is unlikely to be dramatic or continuous. The
impact will vary between countries. If the 1973 oil shock and
subsequent recession is a guide, industrialised countries with the
lowest rate of growth in the working age population have the least
unemployment, albeit the overall hours of work reduce.
There will be periods - especially at the start of the slide into
recession - when fossil fuel prices drop dramatically in the face of
widespread unemployment and an oil demand that falls significantly
[Note 2008: crude oil prices dropped heavily at
the beginning of the 'global credit crisis' that steepened the onset of
recession] Conditions will improve. But growth off
the back of these relatively
brief intervals will be both limited and
[Note 2008: new information suggests that at some point within the next
3-4 years deepening recession will meet
dropping export oil volumes. Export volumes will fall due to oil
producing countries increasing
their own internal consumption. Oil producing countries internal
consumption is rising year on year due to increased population growth
increased wealth. Less and less is therefore availble for export.
In addition, megafield oil production rate declines of at
least 6% to 8% year on year will eventually cut absolute
available for consumption anyway, whether in the oil producing country,
or in oil-importing countries. In summary, low oil prices due to
reduced oil consumption in a recession, will be replaced by inexorably
increasing prices as decline in both oil availaible for export
geological decline cut in. This suggests that there is unlikely to
be any brief
resumption of growth in most
In the longest term, if well educated technologically advanced
societies prevent the degradation of their greatest asset - universal
science-based education - the huge problems
of adjusting to the economics of sustainability will slowly and
The change will initially traumatise many; but most people will
eventually adjust. The human spirit responds with determination and
resilience when crises face a nation.
The following 'unfolding' of events is pure speculation. The sequence
of unfolding may be marginally wrong. The speed at which is happens may
be wrong by several decades, both in duration of some conditions, and
when they occur. The depth of effects at each 'stage' may also be wrong.
It is certain that the unfolding will be different in each country,
according to its resource base, population levels, economic, political,
and social structure. It may be accelerated or made much worse by
environmental degradation, such as salination or erosion, or by water
shortages and cyclic crop failures.
But, in general, this is roughly what might be expected. Why? Because
all industrialised temperate zone nations - and therefore their
governments - are in the same boat. No nation is exempt. Their freedom
to choose strategies is restrained by the reality of expensive fossil
fuels. They cannot do what they want
to do. They can only do what is
possible. What is immediately possible is very limited. What
ultimately be possible will
take many generations to make real.
Unfolding Global Recession
in Gross domestic product (or more sensitive/sensible indicators) for 2
A 'recession' is 'officially' 2
successive quarters with no growth in business and economic activity.
The cause is generally the same - higer interest rates, loss of
business confidence, lowered business investment, 'rationalisation' and
closing of industries, unemployment, fall in retail sales.
Example: once the statistical 'noise' is removed, it can be argued the
west had 3 recessions in the last 40 years - in contrast to the idea
they go in a recurring ten year 'business cycle'.
1974 - 1975 First oil shock - Oil prices skyrocket by 400% due to OPEC
to limit supply. Prices reach $US25, about $US40 a barrel in todays (Q1
2005) dollars. Inflation in western oil-dependant economies is
11% - 15%. In the USA, the consumer price index
increases by 12%. Recession results, with low economic activity
and high unemployment.
1982 -1983 Second oil shock - Iraq invades Iran in late 1980. Oil
prices reach an all time high by the end of 1980 - $US35 a barrel end,
$US92 when translated to todays (Q1 2005) dollars. Actual shortages
persist in some area. Structural oil-inflation helps overall inflation
digits (over 12%), unemployment in USA is 8%, interest rates reach
Double digit interest rates mean some businesses and households can
no longer pay their savings and loan debts. The USA Federal
Deposit Insurance Corporation fails and is bailed out.
1990 - 1991 Third oil shock - Iraq invades Kuwait, sabotaging or
setting fire to 700 oil wells. Oil price almost
doubles, from $US15 to more than $US30 (dollars of the day) as 4
million barrels a day (544
000 tonnes/day) are removed from supply. Asian imprudent loans,
overvalued stocks, and wild betting on currency futures combines with
the oil shock to trigger the Asian debt crisis. Overblown Asian
property values crash by up to 70%. Recession results.
Oil price skyrockets. Traders place their bets on price at future
delivery. Oil price goes higher. In the 70's a 5% shortfall in oil
supply resulted in prices rising 400%. But this was from an
artificially low priced base. In an slower developing supply:demand
prices may only double, as they are coming off an already much higher
[Note 2008: while oil prices were already trending up by 2005
when this article was written, by 2006 they were 100% higher than 2004
prices; by 2008 they spiked to more than 100% higher than 2006 prices;
before dropping in the second half of 2008 to a level roughly 10%
higher than 2006 - about $70 a barrel. Demand is likely to remain weak
as jobs are lost and businesses slow down or fail. But by the end of
2010 declining major oilfield production may well drop below even weak
demand, raising prices once more.]
Higher energy cost of
increases the price of almost all goods and services
Spending power is eroded. Retail spending flattens. Factories costs
(mostly fuel and the 'oil component' embedded in manufacture of
imported or locally purchased parts and equipment) typically increase
at about a quarter of the increase in price per barrel of crude.
Initially, these permanent inflations are absorbed by decreasing the
profit margin. Ultimately, they must be passed on.
[Note 2008: most businesses have now
trimmed as much margin as they can bear. Many are holding lower
inventory as bank credit to buy and hold stock is unavailable.]
Consumers meet higher costs with
bank-promoted personal debt
As oil prices ratchet up, vast waves of oil profits end up in banks,
who must re-lend the bonanaza to whomsoever they can. Consumers
in many western countries meet rising costs by
borrowing against their mortgage or credit cards, with the active
encouragement of banks 'aggressive' lending policies. This is a
temporary phenomenon, but creates an extraordinary consumption and
employment 'boom'. It is an 'oil-profit' credit boom - the bubble
on continuously low interest rates.
[Note 2008: This artificial boom ended
about mid-year. The collapse was precipitated by global banks, money
traders and hedge funds buying or inventing extremely high risk 'ponzi
scheme' paper promises whose
true 'junk status' finally had to be admitted, even by highly
compromised bank 'auditors'.]
The world is largely fed by converting nitrogen in the air into mineral
nitrogen fertiliser pellets, which is then applied to the soil thus
allowing grain crops and grass to grow. The process of extracting
nitrogen from the air includes the use of large amounts of natural gas
as a 'feedstock'. This is only one of the costs of oil-based
agriculture. Diesel is another major cost of production. Food prices at
the store will
probably not rise dramatically, but initial indications are that they
will rise by around 10% for each doubling of
price per barrel, using a $US30 baseline. At $60 a barrel food might be
10% more expensive, at $90 it might be 20% more expensive relative to
the date oil was at $60 a barrel.
Example: When oil prices doubled in late 1990
(due to Iraq invading Kuwait), the cost of urea (the
most widely traded nitrogen fertiliser, and made mainly by gas-rich
countries of OPEC) increased by a third.
Example: following the 1973 oil shock, the price of USA wheat exports
tripled. Other factors were at play (mainly exports of a large USA
grain surplus in a grain short world), and not all this is due to rises
in the cost of oil as an input into production of wheat. Nevertheless,
USA domestic food price increases were 14% by the end of 1974.
Example: As at
every $US10 rise in a barrel of crude adds around 10% of additional
costs to agricultural contract ploughing and harvesting. Contracting is
fiercely competive, and these costs must be passed on to the farmer, or
the contractor will become insolvent. The farmer may have to absorb
some of this cost increase, or may pass some or all of it on. The
consumer at the very end of the supply chain is faced with cost
increases in groceries from every link in the chain, not just the
farmers increased costs. These are attributal to fuel increases on the
farm, the off-farm transport, the warehouse, and the costs of transport
from the warehouse to the retail outlet.
Workers costs of
getting to work increases
The cost of transport is a major cost for those on low wages. There is
very little discretionary spending available. It is relatively so small
that if they cut it all out,
it wouldn't help much anyway. The better paid are relatively oblivious.
They either cut back on some discretionary spending, or save less. Oil
prices act as a tax on wage workers, with the burden
disproportionately heavy on the low paid.
Example: As a general rule, every time a barrel of oil goes up 1 US
dollar, the price per US gallon at the petrol station forecourt
increases by US 2.5 cents per US gallon.
1 US 'short' gallon is 3.79
litres, so for most countries, a one $US1 rise in the price of a barrel
of crude translates to US 0.65 cents price rise per litre.
As oil can for the greatest part only be bought with US dollars, any
weakening of a countries currency against the US dollar has the effect of an increase in the price
of a barrel of oil, even if the actual price is static.
[Note 2008: The USA and Eurozone
central banks and treasuries issued billions of dollars and Euros to
'pay off' worthless ponzi
bank and commercial promises to pay. The banks do not receive the money
as a windfall 'profit', it simply goes to nullify a huge bank debt - a
debt previously listed on the bank books as an 'asset', or hidden the
accountants 'off-book'. The conversion
of the 'asset' to its true nature, a liability, would bankrupt the
business if not 'offset' by the government printing presses cash
injection. This money is unlikely to feed inflation as very little of
it - if any - is likely to ever 'trickle out' of the banks balance
sheet and into the economy. Mostly,
it solidifies into extra banks stocks, to be held by the government. A
further tranche of write-downs will occur in in 2009 when trillions
of dollars of derivatives
hidden 'off-book' finally have to be accounted for in the banks books.
$540 billion has been set aside so far to pay the shortest term and
most viable of the money market and commercial paper portion of these
debts. The government takes - unbelievably - collateralised debt
from the financial 'managers' as 'security' for shouldering the burden
of paying back the investors! Collateralised
debt is known as 'derivatives' - the same ponzi paper that collapsed
the USA and Eurozone banking system in the first place...However, the
dollar will continue to be backed by
oil, and so the dollar may not weaken severely until late 2009 to
2010, in spite of the
'usual' spikes and falls outside a recession-constrained band. Gasoline
for workers is likely to remain relatively cheap until then.
Ultimately, the dollar must either weaken under the burden of unfunded
and failing liabilities from every direction, or re-value itself in
with other major currencies. When it does, much government debt will be
written off, either due to a lower value dollar, or as a government
default on bond maturities. The end result will be the same - a sudden
increase in the price of gasoline.]
As prices inflate through the increased cost of oil, so workers look
to retain their spending power. A much
larger proportion of lower paid workers
wages is eaten up by constant rises in essential, non discretionary
spending - petrol cost of getting to work, food, electricity, heating
[Note 2008: businesses in the real,
i.e. productive, economy are now cutting costs, including labour.
Orders are down, and there is large, and increasing, industrial
overcapacity. Factories and plants are underutilised. The
leverage workers had to demand compensatory wage increases in the
artificial boom prior to october 2008 was almost full employment. This
phase is now history, the leverage no longer exists, wages will remain
static, or fall in real terms.]
Central banks attempt to prevent a
Believing increased prices and increased wages cause inflation
(unable to recognise that permanently expensive oil creates a
inevitable structural price increase), central banks raise interest
[Note 2008: The collapse of the
greed-induced financial ponzi schemes have forced banks to lower
interest rates in order to re-start stalled cash flow. This histroric
event has resulted in an accelerated fall, rather than slide, into recession. As a result,
this phase has been 'skipped' and the environment, for the moment is
of business confidence and
continuing flat spending causes some cut backs
Businesses trim the only costs they can - staff numbers and working
hours. Slight rise in unemployment ratchets the retail spending
slow-down. Gross national product cuts back.
[Note 2008: well under way. In the
USA, cuts to manufacture of energy wasteful SUV results in job losses
in Chysler. The number of job cuts in the financial 'services' industry
continues to increase - 130,000 jobs have been cut in the banking,
broking, and money managing industries since mid 2007. Hedge funds -
due to collapse starting 2009 - will likely lose at least 10,000 jobs
by year end.]
Banks try to stall the deflation of the
People with little or no assets or equity who bought
houses with the intention of selling in a rising market are now unable
to meet the interest payments. 'Subprime lenders' cannot pay the banks
that loaned the money for high risk lending. Banks try to stall
revealing the level of repayment defaults by its subprime lender
clients. Revealing the increasing level of bad debt exposes the banks
to credit rating downgrades; calling in the loan to the subprime lender
simply gives the bank a larger portfolio of poor loans and increases
the banks mounting poor performing debt. Banks work to minimise their
losses by stopping risky lending cold. At the same time, they play for
time, restructuring debt over longer terms and offering 'repayment
holidays' in an effort to slowly deflate the housing bubble, rather
than allow it to collapse. The gamble is that economic conditions will
'improve' and most debtors will be once more able to repay their debts.
[Note 2008: Aided and abetted by hedge funds, banks
continued to promote securities
distantly held over mortgages they knew had a strong probability of
default. Some banks engaged in a complex 'shell game', 'reparceling'
the makeup of these notes as they corroded in value, moving defaulting
mortgages to 'someone elses' notes - without consultation - so that
'favored' investors held 'less toxic' notes. Banks did not stop
gambling via 'extremely risky lending' until september 2008, when it
was far too late. Their gamble
High interest rates bankrupt over-committed
As fixed term mortgages come due, people are faced with rates of
interest on high capital loans that exceed their ability to repay from
the weekly paycheck. Defaulting on home mortgages and lifestyle loans
increases. People see house prices start to drop. Those who bought at
inflated prices see their equity in their home evaporate as its value
falls on a market with more sellers (due to loan defaults) than buyers.
People 'hang out' for recovery in house prices in the longer term. It
Example: In the 1990 - 1994 recession in the UK following the Iraqi
invasion of Kuwait (when oil prices doubled) house values declined and
resulted in 2 million people whose mortgages were larger than the value
of their house (negative equity). By 1995 this resulted in 350,000
mortgage defaults - a nearly threefold increase in mortgage
repossessions relative to the previous decade.
Example: by 1990 the booming Japanese economy had led
speculators to drive land and stock prices in Japan to fantasy levels.
Very average homes just outside Tokyo sold for more than $US2 million
in 1989. 'Churning' of ever-rising stocks led to big profits and a
euphoric belief the 'bear' market would never end. Many borrowed money
on the strength of the increased value of their home or business to
invest in the stock market boom. In 1991, the Japanese Government
raised interest rates to cool the creation of new money. The
Nikkei stock index crashed by over 30,000 points within a few months.
(It hit an historic low of 8,000 in 2003). Japanese housing prices
dropped like a stone. They continued to slide year on year for 14
years, a pattern that
continues to this date. Both the Japanese government (via their
backed banks) and Japanese corporations are still saddled with huge
speculation-derived debts from the1980’s.
The difference this time is
that the recession may not end.
variablity ratchets down the slide in coastal property values
Coastal property values erode with the rest, but at a much lower rate.
Some highly desirable properties in highly desirable locations don't
lose value at all. But extreme climatic events caused by shift in
climate event intensity and locality with increasing sea temperatures
can change everything. Storms of unusual intensity driven by warmer
oceans, in turn caused by unprecedented increases in the 'greenhouse
effect' gas carbon dioxide (from coal, oil, and gas 'unlocked' from its
geological tomb) can abruptly turn an entire generations mindset from
coveting coastal land to despising it. At the point of greatest fear,
property prices for coastal land collapse. The cost of repairing
coastal infrastructure destroyed in tidal surges and hurricanes is far
greater than in the peak of cheap oil. The burden falls on local
counties and ratepayers, saddling them with debt stretching far out
into the future. Worse, the insurance companies start to draw red lines
around low-lying coastal areas. They will not write insurance for any
home or business within these zones. Values for uninsurable properties
Example: In the 1920's buying and selling Florida real estate became
known as a road to instant riches. In the height of the bubble, real
estate prices quadrupled in less than a year. When the bubble burst,
property speculators were forced to sell to try to avoid bankruptcy. Most failed. The lack of buyers was
made very much worse when an unusually strong hurricane hit Southern
Florida in septemeber 1926. Wind-driven tidal surge turned large areas
of low land into swamps, and a huge storm wave slammed into several
coastal towns. In all 13,000 homes were destroyed and 415 people died.
forces mortgagee sales of deeply indebted rental properties
Many of those who bought one or two rental properties at cheap interest
rates and with almost no deposit find the value of the speculative
rentals is now far less than than the amount paid. Once the landlord is
unemployed, mortgage repayments cannot be met from rent in a 'renters
market', and the cost of repairs and maintainance far exceeds rental
income. Some lose both their rental property and their family home, as it was
used as 'collateral' for the loan. And the banks call in their
collateral to cement-in some return on their reckless lending while
they still can.
trend of layoffs, business
The energy intensive and discretionary-spending based airline
businesses are hit hard. There are airline bankruptcies and more
layoffs. Society is now well aware of the reality of the fading of the
oil economy, largely due to uncensored access to information via the
[Note 2008: Commencing.]
Managers are increasingly pessimistic, and
act accordingly. Vacancies are left
unfilled. Staff numbers are reduced. Investment is put on hold. Salary
increases are stopped. Business decision-making is taken in 'cautious'
mode, emphasising short-run objectives rather than planning
for what is an uncertain future. Gross
national product falls.
[note 2008: The current environment is deflationary.
Most of the bad bank debt will
be bought by the Government, in return for equity in the form of
preferred shares in the banks. The
shares have a rising interest rate, the object is for the banks to
ultimately buy the shares back. But as economic activity stalls, there
is a real risk banks will default on their interest obligations to the
government. There is no-one to lend to, but interest on the money in
the banks accounts still falls due. Virtually all the loosely regulated
banks - those of the USA and the Eurozone - are unprofitable. Thus
on-going losses in both profitability and asset base will be borne by
stockholders - and a major stockholder is now the taxpayer.
The taxpayer is likely to have to take an even larger stake - perhaps a
full stake - by the end of 2008, and certainly by the end of 2009. Thus
all risk and real losses that should be borne by the bank
stockholders will now be
transferred to the taxpayer.
Credit will remain very tight. Business will be slow. Unemployment will
creep up. Spending will fall. Stock markets will be down. Investment in
new enterprise will be limited by overcapcity in almost every sector.
Savings will increase.
inflation is likely around about 2011, resulting in energy-structural
inflation within a deflationary environment - stagflation.]
Some inefficient giant businesses living on
corporate welfare are severely affected, crippling local economies
Large businesses whose inefficienceis are protected with taxpayer
subsidies and 'pork barrel politics', or which are living off
sequestered earning generated by pension investment funds mostly owned
by their employees, go to the wall. There is large damage to local
towns dependant on the work and flow-on income from the mega-plants.
Example: The Boeing Corporation, while a Government 'favorite' in the
era of the American war against Vietnam, nevertheless had massive
layoffs in 1970.
To avoid bankruptcy, it laid off 35,000 people, from managers, through
engineers to general hands. The next year it laid
off 15,000 more. The supplying contractors
and contract machine shops consequently lost work and also laid off
staff. Local businesses had fewer customers, many of whom spent less.
They too laid off workers in the slack trading conditions. Unemployment
in Puget Sound reached 17%. Job vacancies locally were
non-existant. Available unemployment insurance was used up.
Governmental 'top ups' were also exhausted. Charities had to give out
food parcels. Government vouchers (food stamps) for basic food supples
were issued to the most desperate unemployed. Suicides rose dramatically. People sold whatever
they had, from household items to cars to try to raise money. So many
goods were on offer locally that they sold for a fraction of their
usual resale value.
Welfare costs to government balloon. Governments slash public servant
numbers, trying to strike the balance between retaining the experience
and deep institutional knowledge of older workers closer to retirement
age against the desire to retain the young and those with dependant
[Note 2008: Many USA states are deeply
in debt, and need still more debt to pay public service. Directly and
indirectly public service may account for 30% - 40% of jobs in some
states. The response so far is to reduce public service jobs. The
retrenchment is likely to accelerate as State budgets blow out.]
desperately try to
offload their requirement to fund retirement and create a boom
Knowing that pensions will be a large burden on a shrinking taxpayer
base, some governments attempt to 'privatise' social security by
forcing people to subscribe to 'managed funds', based largely on
In spite of negative returns (losses) for some managed funds, and
despite the certainty of savings being severely eroded in a permanent
recession, governments point to the (largely pension - fund driven)
historically ephemeral period of very good returns from managed funds,
trying to sell the idea 'good times' always go on forever. The
hope is that forced 'investment' in the stock market will create a boom
and restore 'confidence'.
[Note 2008: The value of managed funds
reflects the investment strategy of fund managers. Many funds
'invested' in real estate 'backed' ponzi schemes. Bankers in USA 'lent'
stocks they held in trust for investors (i.e. didn't actually own) to
speculators to 'sell short', thus attacking the value of the stock of
productive businesses, and raising the cost of funding to those
businesses. These stupid and destructive 'investments' have destroyed
the large part of the value of investment funds (about $US2 trillion in
retirement savings by USA taxpayers have been lost over the last 12
months according to testimony from the USA Congressional Budget
Office). Commission and fees to
banks and fund managers and advisors continues to be paid, however
negligent their strategy and advice may be. Government strategy remains
evade future government retirement money liabilities by forcing private
savers to rely on an out of control 'cowboy' money market. A market run
by individuals deeply imbued with an immature, selfish, short-termist,
high-risk attitude. Secure, sustainable, long term investment for
retirement through these people was bound to fail. And patently has. No
one trusts the financial 'geniuses' and their 'managed' funds. There
is a rush to security, such as government bonds, with returns on
investment virtually ignored. As at november 2008, 30 year bonds teild
4% - a negative return, in real terms. Worse, 2 year bonds return just
over 1%. The hoped for boom will not
Example: In 2008 New Jersey's
government pension fund lost over $23 billion in the collapsing
sharemarket and hedge bets promoted by banks and fund managers.By
the end of 2008 the fund had a value of less than half the $US118
billion in benefits it is ultimately committed to meeting. If the
Standards and Poor 500 drops to 600, the $5 billion draw per annum
versus the annual addition of about $1 billion will fairly quickly run
the fund dry.
The oil price crisis (it is not a supply crisis, and never will be -
there is ample supply for those who can afford to pay; nor is it an
energy crisis yet - it is a cheap
liquid fuels crisis) eclipses all
other topics in the media. People reduce spending, try to pay off as
much debt as possible. Non essential items - eating out, coffee house
lurking, going to movies and theatres, profligate texting, heavy phone
use, broadband internet access, new clothes etc - are cut back or
abandoned. Layoffs in the service industries abound, further ratcheting
the slow-down and loss of confidence.
Example: in USA in 2005, over 41% of people were working in the service
in isolated communities lose money by commuting to low-paid work
Low income people in isolated rural communities with little or no
public transport and travelling large distances to get to their
poorly paid jobs now find the costs unbearable. Travelling to work eats
a disproportionate part of their daily income. Some quit their jobs -
the cost of getting to work in distant towns uses up such a large
proportion of their daily wage it simply doesn't make sense to
continue. Local spending decreases as peoples incomes fall and as
petrol, basic food, and rent costs leave almost nothing left to spend
in the community.
Example: In 1999, households in USA earning less than
$US15,000 spent 8.2% of their income on gasoline. By september 2005 low
income earners were spending 10.4%
percent of their income on gasoline. In contrast, households earning
than $US80,000 spend only1.9% of their income on gasoline.
Example: The 7.5 million rural Americans on low incomes have to spend
about 15% of their income on gasoline relative to the urban poor
spending about 10%.
for oil drops
Lower income people are first to cut back on petrol
spending. With little means, they are unable to trade up to more
economical vehicles. Their older high-gas-use vehicle are unsaleable.
But even middle income people curb petrol spending to degree. The drop
in consumption depends on the ratio of lower income to middle/higher
income in a country, and on the effectiveness of campaigns to conserve
fuel by altering driving practices, but more importantly, on the effect
of the inevitable very high interest rates on spending in general. The
drop in consumption eases
prices temporarily, but doesn't re-create jobs.
Example: In the second oil shock of 1980 - with its consequent
'recessionary' very high interest rates - world oil demand declined
around 63 million barrels a day in 1979 to about 55 million barrels a
day in 1983, a roughly 12% drop in consumption for the 4 year period.
If the year-on-year increase in consumption that would be expected in
'normal' times is also taken into account, the drop in consumption is
[Note october 2008: As noted above, the collapse of
financiers foolish ponzi money schemes has forced central banks to
offer low interest rates in order to try to keep commerce flowing.
However the sharp introduction to recession - triggered by the ponzi
schemes - means sharp oil-demand drop. If demand drops 2.5% per
year - and more sharply later - 2009 will see this taken off an
estimated about 90 million barrels a day by year end 2008. Consumption
is then 87.75 million barrels a day entering 2009. However, others
estimate year end production of 80 mbd, dropping production to 78.2 mbd
beginning 2009. As 'production = demand' figures were published in july
2008 for all liquids at an average of 87 mbd for 2008, this is likely
to be around the ultimate average for the year. Production capacity
drop and demand drop are likely to be about matched, even with 2.5%
annual demand decline, until end 2013. However, sadly, oil producers
export capacity will drop more sharply before this - due to increased
internal consumption. By about the end of 2011 we may see insufficient
oil exported to meet a reduced global demand. Prices must then rise
defaulting on loans for homes and speculative property
As unemployment and interest rates increase, more families can no
longer pay their
interest on the loans they took out on overpriced houses, and on car
holiday purchases. These loans were leveraged by previously rising
equity in their home.
Unemployment means few house buyers, and the downward pressure on house
prices continues inexorably. As banks are forced to sell into a market
where there are few buyers,
the downward ratchet continues. Many people still paying a mortgage now
the equity they had in their home has gone. Some are paying off loans
are significantly greater than the current market value of the house.
markets shake out
Stocks whose price is based on expectations of future price gains -
rather than on actual earnings - are 'loss cut'. Share market
nervousness could see some stocks in some exchanges achieve 'junk'
status. Other stocks, especially mature energy stocks and some gold
stocks, do well, as do stocks in fundemental commodities.
[Note 2008: october sees stocks fall
as steeply as in the 1929 Wall St collapse.]
funds found deficient
Lowered business profits lead to cuts in dividends. Low
dividends, coupled with high unemployment, decreases the demand for a
given businesses stock. Lower demand cuts the stock price, making it
difficult for the pension funds to pay
its retirees even by liquidating some equities. Employer contributions
have been unrealistically low, as contributions have been cut,
based on the assumption of future rates of fund growth that are
quite unrealistic. Some businesses cannot meet their contribution to
the pension fund. Some go bankrupt. Government fund guarentee trusts
don't have enough to cover the failed funds, and themselves go into
privatisation of social
Those governments that forced taxpayers to invest in
'managed funds' now have to face anger over the unecessary enrichment
of fund managers and impoverishment of taxpayers as the value of the
fund is dramatically slashed and taxpayers lose the largest part of
More people are out of work. Government welfare payments increase
dramatically at the same time as the tax payer base is shrinking and
the population aging due to the 'baby boom' demographic bulge. Some
governments are technically bankrupt - they have overspent on military
and corporate welfare (subsidies). The economy is stagnant ('not
moving'), by all measures, including gross national product.
Example: in late 1974, following the oil shock of october 1973,
people registering for jobless benefits peaked at one million new
registrations in a single week. The US Federal-State
Insurance payments were triple
the amount prior to the oil shock. By
early 1974 they were expected to be running at around $US17 billion per
Technically bankrupt administrations print more and
more money via government bonds. The value of the bonds has to be made
more attractive by increasing the interest rate payable to holders.
Banks in those countries are then forced to put up the interest rates
on existing loans as well as the few new loans they write. The value of
the currency falls and falls. This is inflation at work within a
[note 2008: To date, USA has exported its inflation via sale of
overseas. As a spectacular sideshow, it is using its ability to print
money to buy into a huge slice of the global banking business. The
banks are willing partners because many either are, or soon will be,
technically bankrupt. Around US 82
trillion dollars of derivatives are due to come back onto the banks
books from 2009 onward, according to this years Bank of
International Settlement figures. This vast sum - a significant part of
which will be loss -on the Financiers and
downstream 'investors' account, will be neutralised with Government
money, freshly minted to buy the banks.
Baskets of regional reserve
currencies, plus gold, may be needed to regulate exchange rates, as no
currency - apart from perhaps the Swiss franc - is stable enough to be
a 'safe haven' from the dollar, the euro, or the pound.]
Central banks sell gold to hold confidence
in major trading currencies
As long as people have faith that gold is a 'reliable' store of value,
it tends to erode faith in currencies, especially the USA dollar, which
have little or no gold or 'black gold' backing. In a vain artificially
erode a move to gold in order to bolster confidence in the USA dollar
and hold its value, central banks dump gold on the market to drive the
Example: in the pre-recessionary conditions of july 2007, with a
steadily weakening US dollar and oil a few cents off its all time high,
there is evidence central banks moved in a concerted fashion sell off
bullions - or at least sell off notional ownership of bullion.
[Note 2008: Consequent on the collapse
of the money market ponzi schemes, central banks abandon attempts to
hold down gold prices. Eurozone banks announce they will no longer sell
gold. The status of USA gold reserves is uncertain. The USA mint slows
issue of gold coins right down. The amount of gold listed by treasury
has remained static for some years, in spite of sales. It is uncertain
if the gold held in USA government vaults is US gold, or gold being
held on behalf of overseas central banks. Auditors are refused
permission to physically closely examine all the USA gold bars]
forced to pay bank interest from cost-saving 'austerity measures'
Local governments, deeply in debt for roading and other infrastructure,
are unable to meet their interest repayment committments. The overseas
banks that made the loans force local government to introduce
'austerity' measures to 'balance their books'. As
a result, spending on roads, rail, medical care, schooling and other
municipal services is cut. Thousands of government workers lose their
jobs. Those cities and municipalities with
worker pension funds are forced to hand over control of those funds to
Example: In December 1974, following the 1973 'oil shock'
US and London banks forced the heavily indebted New York City to meet
its interest payments by handing over control of the cities pension
funds to the banks, cutting costs by severely cutting spending on
infrastructure (roads, hospitals, schools etc), and dismissing
thousands of city hall workers.
Surge of interest in
gold and silver
The value of some currencies erode. Share market blue chip stock
profits fall. Stock values re-adjust downward. Mortgage defaults erode
the value of bonds. Real estate investment falls with falling
availability of credit and negative returns from many rental
properties. People are uncertain how to retain the value and safety of
their savings. Some people secure physical value in precious metal -
gold and silver. Prices are bid up. Demand for gold and silver for
manufacture falls in the face of high prices falls; but is
substantially overtaken by demand for gold and silver as a safe haven.
Marginally profitable gold mining
companies become profitable.
[Note 2008: October saw a surge in
gold demand, especially for coins and small bullion bars. Mints are
unable to keep up with orders for coins. The broad trend for gold is
High oil prices causes some 'oil-economy-structural' inflation. That
is, while businesses can absorb costs for a while by reducing profit
margins, at some point higher costs of production have to be met by
prices increases. Obviously, structural inflation is in effect the higher
oil-cost-component in an economy. Ignorant
economists advocate that government Treasuries and Reserve banks
uncontrollable structural inflation. Gullible Reserve Bank govenors
raise interest rates to 'drive down' inflation into an 'acceptable'
band. Low cost imported goods that normally keep western inflation
figures down start to rise in price as the cost of commodities from oil
to plastic feedstock, to steel to copper inexorably rise.
interest rates collapse the
High interest rates on the big loans taken out in the decade after the
mid to late 90's are now unpayable for almost all ordinary people. Most
declare bankruptcy as soon as possible in these circumstances.
ask taxpayers to pay for their business mistakes
attempt to recover some of their lost profits by trying to gull
governments into taking over written-down mortgage debts.
Banks create money by lending more than the money taken in as savings
and deposits (typically ten times the actual amount physically 'in the
bank'). This system to create capital from nothing first arose in
the18th century as coal energy was first harnessed to the new steam
engine, factories, cheap labor, cheap raw materials, and exploding
technological advances. Banks became aware creation of 'book entry'
money via loans in excess of actual deposits was workable so long as
were used to 'bankroll' viable new industries, were prudent, and under
tight managerial control. Banks, aware from historical cycles of
property boom and bust that capital 'created' for speculation in
housing is quickly wiped out in recessionary times, attempt to plead
ignorance. They loudly and persistantly represent themselves as
'innocent' victims of 'unforseeable' circumstances, while at the same
time try to dupe society into paying their wealthy shareholders an
amount equal to the shareholders loss.
[Note 2008: As noted above, bank
losses go far beyond reducing value of a mortgage book backed against
declining property valuations. Governments have involuntarily aquired a
share in the mortgage portfolio of banks, not because the asset value
good mortgages is falling, but because banks were complicit in creating
trading them as if their value was increasing, disguising their true
worthlessness, and continuing to create and hold such large amounts
that the sheer volume and global pervasiness of these loss-making
instruments destroyed the banks balance sheets. Global bank
forced governments to create government backed credit - not necessarily
tax money - to keep banks in existance simply to keep the wheels of
commerce - the usual temporary and long term business loans - oiled.]
taxpayers to subsidise their profits
Demand for rentals increases markedly as mortgage sales puts people out
of their homes. Landlords have increasing demand, but tenants have
decreasing ability to pay, as many are the unemployed. Large corporate
landlords, and banks forced into the 'landlord business' by a large
stock of unsalebale foreclosed properties see a way of socialising
their costs - they demand a subsidy from the taxpayer to 'make up' the
difference between the ability of the unemployed to pay rent, and a
'fair profit'. Weak governments heavily influenced by banks and the
ultra wealthy capitulate and donate taxpayer money to banks and
landlords via tenant subsidies.
democratic Governments act to prevent rent racking and house price
subsidies to banks
Some governments reject the self-serving
arguments of the banks and landlords and refuse to artificially
support rent prices by giving substantial gifts of taxpayer money to
set up more and more low cost emergency shelters and mobile home parks
as a 'step-through' measure to 'face off' the banks and landlords. House
prices fall further as landlords quit the business. A pool of community
owned housing stock is accumulated at prices
advantageous to the community as a
market force to prevent landlords profiteering.
Banks offer the government 'cheap' foreclosed housing stock.
governments use the state-owned temporary accomodation and housing to
screw the price
banks are asking for family homes right down to bedrock. This ensures
the banks experience the 'instructive loss' that flows from bad
business decision-making (reckless "aggressive" lending). It helps them
terms with the reality of the power of the buyers market, where that
buyer is holding all the cards, and is the community.
[Note 2008: The speed of the global
credit crisis has largely - but not entirely - prevented governments
from screwing banks down and acquiring cheap community housing assets.
Governments, having now bought shares in the banks, could direct that
selected mortgages be rewritten to reflect the new lower value of
houses. The government could then purchase those very heavily
discounted mortgages. The power is with governments to aquire good bank
assets as well as
bad, but the USA - in particular - seems reluctant to pass on to the
taxpayer any community 'dividend' for shouldering the huge risk
arising from the greedy capitalism of the rich financiers.
Corporate-corrupteded, weak, 'pseudo-democracy' continues in the USA.]
Some governments try to spend their way out
Not recognising the structural (expensive transport energy) nature of
the recession, some governments resort to the classic device of
borrowing huge amounts of money and immediately spending it on public
works. This is very successful for a while (effectively ending
unemployment and keeping money circulating quickly in the economy), but
money 'created' from government bonds or 'created' from bank bonds
(loans) brings with it higher interest rates, and a wages and prices
spiral. In the end, inflation can no longer be controlled.
[update 2008: The failure and subsequent bailout of the
USA/Eurozone banking system means lending has slowed right down. Bonds
issued by large economies such as USA are sought as security, even when
yields on 10 year USA government bonds are as low as 4%, and therefore
negative because yeilds are under the rate of inflation. Inflation
is around 5% in USA, using 'massaged' government figures, and the true
rate is closer to about 10%. Bond
interest rates are held down in order to encourage banks to borrow and
loan out once more. Dramatic fall into recession now prevents a
wage/price spiral. 'Official' inflation rates will likely be
relaitively moderate for the next few years. There is now
a window of opportunity for governments to invest in productive
long-term sustainability assets, such as 3rd generation nuclear plants
or wave energy power generation.]
Some governments let the market decide the
Other countries don't 'turn on the printing presses'. Their currency
floats, according to what the international currency market (and
speculators) think it is fundementally worth (true value). Interest
rates are lower, but little capital from bonds is available for public
slows right down
combination of high unemployment and high gas prices causes a massive
stop in discretionary spending. Prudent governments don't have the
money to 'stimulate' the economy with 'public works'. Government
cost-cutting to retain money replaces borrowing money.
Everyone is trying to
sell to the rich.
Most people, by and large, spend only on essentials, and watch every
cent. Competition for existing customers is intense. The customer you
have is tended like a rare plant. If you lose her/him to a competitor,
you may not be able to find a replacement.
'Big ticket' items are bought with caution and after much investigation
as to durability, reliability and availability of parts. The spending
cycle on these items stretches out and slows down.
The speed of 'significant' money circulating in the economy slows right
Bargaining, trading, and opportunistic 'tax free' jobs rises steeply as
the 'black economy' starts to expand. This is the beginning of market
forces at work. This is deflation
at work in a recession.
Example: in the 1974 oil shock low skilled wages were
driven right down, people accept any work
but most was part time or temporary and often very poorly paid. Some
'odd jobs' were paid in food. Consumer spending fell as
underemployed and unemployed people end all unessential travel, could
phone services, could not eat out, and turned to 'making do', for
example by repairing and sewing clothes. The amount of consumer money
circulating through the economy fell significantly.
Government support for higher education
Layoffs amongst the educated middle class continue. Governments
question why they are subsidising people to attain degrees that have no
job-value in the market. Funding for many University courses in
business, legal, and social areas is slashed. Funding for some
'socially useful' engineering, medical, agricultural, and teaching
degrees is by and large retained, as is funding for trade degrees
relevant to sustainable living.
for business shrinks
Reckless investments in the 80's mean many banks are
technically insolvent. Some banks fail and are propped up by the
taxpayer. Some 'Investment' Banks fail, wiping out the savings of
thousands of people. There is deep distrust of the safety of banks and
of businesses. People are reluctant to invest in bonds and other debt
instruments. Capital for business and student loans shrinks.Commercial
activity is severely restrained, with flow-on
effects to employment.
For example, in the first quarter of
2007, that is, before the crisis hit, capital markets sold about
$US1,500 billion in bonds and other debt instruments issued by federal
agencies, municipals, corporates, mortgage prospectors, and asset
bundlers. In the third quarter of 2008, only about $US680 billion was
sold, a drop of around 55%. And debt-sales dropped off even further
Increased pace of
As the downward spiral continues, each business that closes reduces
the pool of customers with cash to spend at other businesses. This
pushes businesses already on the brink of viability over the edge.
Closing parts-manufacturers causes downstream manufacturing businesses
to interrupt production, or even quit certain lines. Businesses find it
increasingly difficult to find suppliers of the right product in
reliable volume. Businesses caught by manufactered parts supply
problems may have insufficient sales and capital to 'step through'
disconnection and themselves fail. If they are an advanced manufactured
equipment supplier, there may be a further cascade of 'mission critical
equipment failure' in businesses downstream from them.
In the Great Depression industrial production fell by 50% in some parts
of the world (chiefly USA).
people slide into desperate straits
While middle income people spend only maybe
5% of their
income on petrol, low income people are forced to spend proportionately
much more As petrol and other prices rise,
petrol becomes almost
unaffordable. But petrol in our society is a commodity basic to being
able to work, buy goods, and interact in society; it is an essential,
even for the poor. For them, there are now no
discretionary items available to cut out, no fat in the system. People
become desperate. People sell possessions at far less than their value
to pay for petrol. They cannot afford to fill the tank. People cancel
meals to save money to pay for petrol to get to work. Un-repayable
credit card debt for petrol and food rises. Borrowing from relatives
for essentials increases. Car repairs are deferred. Many try to do
their own car maintenance, and some repairs. Ironically, there is no
money available to buy a more economical vehicle; the people who would
benefit most by a more fuel efficient car are least able to afford a
better vehicle. They are stranded with their existing gas-guzzlers,
unsaleable at any price.
Rise of unemployed street-side traders
Unemployed people refuse to sit on their
hands and wait. Tiny, local, home based businesses expand, but almost
very low value items and services, helping money circulate, but only
relatively small amounts. Many are 're-cut' businesses - the large
number of people thrown onto a low or very low income may no longer be
able to afford a whole pizza, but can afford a slice. Even a small
over-priced slice is better than no pizza at all.
Welfare schemes in some
countries cannot meet beneficiaries needs
Some retirement fund schemes (especially in USA) no longer have
the cash flow they expected as their investments lose value in the
downturn and few businesses return significant profits to their
majority shareholders. This is made worse by some unprofitable
businesses (especially car manufacturers) using portions of the paid up
share funds to support their failing industry. The retirement funds are
caught with a double hit - many of the stocks are non-performing
no-dividend stocks bought for capital appreciation and thus give no
cash flow, and their value, instead of appreciating, has depreciated
dramatically so relatively little can be made by selling them.
that have tried to encourage savings and cut spending gain no traction
Conventionally, employment is stimulated by productive investment.
Capital comes from savings, not credit creation and expansion of money
supply. Conventionally, when government budgets look like 'blowing out'
and borrowing looks to be inevitable, governments slash government
spending to avoid going into debt. Borrowing creates an expanded money
supply and inflation.
These are unconventional times. Many people save, but don't spend.
Businesses are too cautious to expand or invest. The economy stagnates
Structural inflation from oil prices continues to ripple through the
economy. Stagnation and inflation - stagflation - results.
At the very time these governments cut services, additional services
for welfare and work programmmes are needed. The effect of the cuts are
neutralised by the need for more money for welfare. Services are cut.
Money is borrowed. Inflation increases. Stagnation continues.
Government deficit grows.
Nothing seems to work. Governments seem to gain no traction. They
flip-flop between expansionary borrowing and recessionary austerity. Unrelenting
austerity may cause deep recession to tip into intractable
(lots of savings, falling prices, no spending) and economic stasis -
stagnation and depression.
Governments that have 'borrowed and spent'
try to supress the resultant inflation
The inflation that comes with massive government borrowing and spending
to stimulate 'effective demand' - consumer spending - in the
economy is no longer controllable. Tweaking interest
rates is no longer successful. These governments now put a lid on
prices. They also freeze wages. The result is the destruction of the
value of their currency. Recession may tip into depression with
deflation and economic stasis - stagnation.
Depression admitted in many countries
Widespread repudiation of debts by individuals, banks, businesses,
local governments and countries creates the conditions for a
depression. This massive correction enables societies to "start again"
with a clean slate. But as capital has been essentially underpinned by
cheap energy, new capital investment is very expensive. 'Starting
is therefore slower and far more expensive then ever before, especially
as most surviving business is slow and hyper-conservative about debt.
The best that can be hoped for is periods of brief 'pick up' with
intermittant energy price falls.
[update 2008: Brazil 'raids' its pension funds and moves to
Depression in USA
Falls in the value of the USA currency, the resultant increased cost of
imported oil, the necessary high interest rates on USA
treasury junk bonds, the collapse of uneconomic 'dinosaur' subsidised
industries, and the domino fall of small business after small business
meets a huge budget deficit, unemployment of 20% and rising, high food
prices, high 'relief debt', failing pension funds, desperate personal
indebtedness, and huge loss of confidence in business. Deep recession
has faded into depression.
Initially, the cognitive dissonance of seeing the 'comfortable known'
become the 'uncomfortable unknown' results in widespread protest marchs
and extreme public anger at the government. It soon dissapates as
people are forced to wrestle with the practical difficulties of
organising 'walking-distance scale' distribution of food to a large
carless population - most of whom live many miles away from the nearest
[update 2008: the bailout of the U.S./Eurozone financial system
has cemented in low interest rates on bonds. When USA treasury bonds
lose their appeal as the world economy slips deeper into depression,
the bonds will simply become unsaleable. The USA is likely to then
repudiate a large part of the debt, that is, the bond holder will only
get part of their money back.]
China's money supply about doubled between 2001 (when it was
11.89 trillion) and 2004 (when it was 22.51 trillion). This rate of
money growth is about three
times faster than the growth of the credit-money bubble in the U.S.
from 1921 to 1929. The Chinese real estate bubble bursts, and the
Chinese stock market follows it. (China allowed private home ownership
after 1998, and mortgages have gone from close to zero to more than
US$300 billion in a very short space of time. China's experience of
real estate is only the upside- increasing values. China has never had of experience the
downside of loan-backed private home 'ownership' - value collapse and
China, handicapped by corruption, and with little effective
law, is hit by the three strikes -
1. loss of major export markets,
especially in USA, due
to global recession;
2. banks choked
with non-performing state sector loans that should never have been made
(and illegal loans from state servants to entrepreneurs) for flawed
businesses that should never have been started; and
in the value of the currency.
Low currency value makes oil imports
expensive. When China cashs in USA treasury bonds the money is repaid
in a currency that has depreciated hugely. Many private businesses
fail. Many State businesses also fail, but are supported by central
government credit expansion (money printing). Unemployment sky-rockets.
Structural oil-price inflation ramps up the
costs of food. People move back to relatives in the countryside to
'ride out' the hard times.
Petrol use falls by more than 12%
Unemployment leads to carlessness. The unemployed are not making money,
so they save it by selling their cars. In a
depression' the many unemployed cannot afford the financial drain of
owning a vehicle.
For them, it wouldn't matter if petrol was almost free - they wouldn't
be able to afford to keep the machine to use it in. Demand for petrol
is likely to
drop most drastically in car-dependant cultures such as USA (maybe even
by up to 50%), but globally demand is
likely to gradually fall beyond the ~12% demand drop of 1981. In the
at 30-50% unemployment, global consumption could perhaps drop by 25%.
Example: World petrol consumption dropped by
more than 12%
during the peak of the steep and deep recession that emerged in 1979
and continued to about 1984, a time of up to 20% unemployment in some
western industrialised countries. In 1981 petrol prices in USA were
$US3 a gallon in 2005 adjusted dollars - the highest ever.
Demand for cheap consumer goods evaporates,
easing oil demand
As a result of
the severe slow down in economic activity in America and China (in
particular), oil demand slumps dramatically.
[note 2008: this happened with the precipitous onset of
recession. Many factories in China are going out of business as orders
evaporate. It is likely to become even worse over time.]
prices fall dramatically
In what were regarded as 'normal' times (and are now regarded as
aberrant times) around half the oil burned was used in personal
transport. Unemployment and pricing have curtailed use of motor
for non-essential purposes. Demand drops, maybe by 4 million barrels a
day in USA in particular (about 50% of 'normal' consumption). Drop in
from China cements-in downward price pressures. The rate of consumption
drops even lower than the rate of decline in oil
production. Lack of demand causes a rapid fall in the price of oil.
Oil and gas
returns to its 'scarcity
value' once more
Governments hoard as much cheap oil as they can while prices are
relatively low. Oil and gas supply slip back below demand. Prices start
to rise once again. Businesses find the 'recovery' is temporary.
Gas prices make electric power very
Demand for gas for generation of electricity is huge. There is a
frantic scramble to 'fast track' wind, small
scale hydro, and tidal power projects.
Planning for long term huge hydro projects starts with urgency.
Engineering capacity and financial backing is a severe bottleneck.
Governments shift capital to productive and sustainable enterprise
Much of the bank-created illusory 'capital' in housing assets has been
readjusted to its real value at a dramatically lower plateau. Prudent
governments progressively borrow manageable amounts of money locally to
invest with private capital in joint venture that can sustainably yeild
profit in the medium-long term and create long-term infrastructural and
competitive benefits. These projects focus on energy in all its forms,
creating it, and conserving it. Taxpayers capital is more evenly
balanced between sustainably productive high quality government-private
businesses and housing.
When oil prices reach around $US350 a barrel (as measured by 2005 US
dollar purchasing power), all food prices,
including basics, about doubles.
Nations agree to capitalise transparent urgent massive-scale production
of solar arrays at lowest possible price. Agreement is reached to
legislate for compulsory aquisition of relevant patents if the patent
holders do not cooperate fully.
some government coffers
On top of the extra welfare payments and the higher price of oil and
gas, some governments are paying for hurriedly approved large scale
that won't be completed for decades - hydro dams and oil production in
national parks and severe environments. Money comes from petrodollars
once more. The mega-banks, now desperate for high quality investment,
find a lifeline at last. This time, 'low risk' borrowing countries
refuse IMF invervention, denominate the loan in the currency of their
choice (and can switch it) and determine the loan period. Times are
hard enough that any basically sound corruption-free country can call
its own terms on loans. Most desperately impoverished countries cannot
get petroloans for any project - unless the project is energy related,
viable, and the lender is the major beneficiary.
Cuts are made to the medical services the government will pay for.
Repairs to the elderly - hip and knee replacements - are cut right back
in favor of community care by oversupplied community labor. Welfare
assistance is not available until all personal savings have been used
up. Those with assets hidden in family trusts are required to either
unwind them and live off the proceeds, or formally make over all
beneficial payments and assets to the government once in the
beneficiaries hands, or on their death.
Supply chains for business operations
erratic and unpredictable
Conventional business operational planning techniques aim
to eliminate or work around bottlenecks, queues, and varying cycle
times for components and raw materials used in business manufacture.
This 'flow' planning keep plants steadily productive and frees up
capital that would otherwise be locked up in unmanufactured raw
materials, or in as yet unsold inventory. These techniques no longer
work well - they only work well in stable conditions of cheap oil.
Now, supply of raw materials and components is increasingly erratic and
unpredictable. The ideal of 'quick response' and 'just in time' from
component manufacturers becomes a wry joke. Those larger businesses
with sufficient working capital turn back to 'inefficient' techniques
of stockpiling raw materials and components, and warehousing sufficient
spares for the entire product life cycle. Paradoxically, within these
conditions, those who can arrange the least-cost supply lines both into
and out of their factories have a competitive advantage. Those that can
balance reliable long term supply without excessively stockpiling raw
materials or manufactured inventory have a competitive advantage.
Decisions of what products will be supplied to the market and why are
Large manufacturers absorb each other to create more storage space and
reduce the number of products and models. Standardisation increases to
help parts manufacturers remain viable. Planned 'built in' backward and
forward engineering of parts compatibility increases to aid efficiency
and enable more economically viable future 'low cost' repair business
rather than 'high cost' new model business.
interwoven and deeply structured technology experiences 'falling
As more and more small suppliers fail, and as large suppliers cut the
number of lines they manufacture, crucial components in sophisticated
vehicles, plant, machinery, become harder to find. In some cases, a
critical component may be simply unobtainable. Otherwise excellent
machines and plant become inoperable for want of even a low value
relatively trivial component which is no longer manufactured. Some
specialist plant no longer has spares available at any price. Failures
in manufacture, supply and repair lead to domino-like failure of other
component manufacturers further down the chain, who in turn cannot
supply further plant, processes, or manufactured inputs, which creates
yet further breaks in manufacturers chains, or renders a customers
product permanently useless for the want of a minor component or
Shock at long
term joblessness turns to anger
As people who have never been unemployed in their life find
unemployment dragging on far longer than they could have imagined, hope
turns to despair. Some become embittered and angry.
Example: Post the late 1973 oil shock, civic administrations cut staff
heavily to cut costs. In New York City, 700 administrative staff lost
jobs just as large numbers of unemployed were applying to the city for
relief. Anger at the bureaucratic bottlenecks led to predictions of
social unrest and militant popular protest marchs on the state capital.
under-educated urban youths
Unemployment reaches high levels - possibly 35% possibly more -
masked by part-time work and public works schemes. Disillusioned and
bored young men seek the thrills of violent attacks
on 'outsiders', whether authority, as represented by police, or any
identifiable 'different' group in society.
The government is faced with the need to control
the haters and the smashers before they are manipulated by rabid and
violently discriminatory men who, in normal circumstances, would never
have traction in society.
Insurance companies become risk averse
As the pool of people who can afford insurance shrinks, insurance
companies are hit by increased numbers of fraudulent claims from
desperate people at the same time as its customer base is seriously
eroding. Insurance companies, with one eye on the possiblity of
storm-surge from the change in weather patterns (and possible beginning
of sea level rise from Northern ice cap melts), make premiums on
coastal and flood-plain land unaffordable. Many cannot afford to
insure, yet cannot re-locate. Further pressure comes on deeeply
indebted governments to give emeergency grants to those who lose their
house in storms or fires.
and diesel for essential services is subsidised
As time goes by, in spite of massive 'demand
destruction', fuel becomes absolutely short on the downside of oil
production that has peaked. Fuel doesn't have to be rationed - there is
plenty of it, but at an unaffordable price.
Workers in emergency services, health, basic food production and
distribution, water reticulation, sewerage, fuel distribution,
electricity production and distribution, public transport, essential
telecommunications, post, local and central government, essential
banking services, policing and prisons, schools, funeral services,
domestic and industrial waste disposal and the armed forces all have
coupons or subsidies to enable workers to afford petrol and diesel for
travelling to work.
Doing something useful, preferably in a group, is a fundemental and
strong need in humans. But not when it imposes expense on the
already impoverished. Therefore governments subsidise 'socially
managed' businesses that truly benefit the employees and the community.
These are entities that are businesses whose aim is to employ and
develop their workers to maintain their work ethic, give a sense of
pride and usefulness, and provide a living wage. They aim to make a
profit, but only in order to survive rather than make a 'return on
capital' to a group of shareholders.
They are 'not for profit' businesses. They accept donations (tax
deductible). They receive all kinds of community support. Generally,
they are in service industries, such as 'meet and eat' industries, in
environmental care, and in social support services such as elder care
and mental health support. Subject to strong business discipline to
avoid waste and poor decision-making, there is nevertheless a paradigm
shift that recognises that subsidised and tax free enterprise, while at
one level 'costly', at another level prevents further social costs from
crime, skills slippage, community disintergrations, and disengagement
from society, with its consequent suceptibility to the seductive
'solutions' of psychopathic but charismatic fanatics.
governments cut military and
medical spending, others cut medical spending
Some governments are so afraid of 'losing control' that instead of
cutting 'big ticket' military spending to almost nothing and diverting
the funds to relief, they make minor cuts, and guarantee the military
retirement fund, but no other federal employee funds.
cut expensive military spending and reconfigure military into civil
defense forces, and cut all high tech medical expenses, as well as high
cost prescription drugs.
democratic countries may tip
into one party dictatorships
If civil unrest is widespread, weakly democratic countries with very
powerful and weakly accountable presidential arrangements may suppress
and censor the press, ban public assemblies, and use civilian armies to
bully opponents and oppress freedom of speech. The presidential office
may declare an emergency, and take on sole power as a temporary measure
- which drifts into permanence. In this situation, the power resides
with the presidents party. To get anything done, citizens have to have
'connections' with party officials.
party weakly dictatorial countries
may tip into weak democracies
In one party states where citizens are conditioned not to show any kind
of dissent, palpable public anger in a collapsing economy may be best
appeased by opening up
(as Russia did). When command and control economies have held an
economy back through its inevitable descent into official corruption
and when 'greedy capitalism' has also turned out to be both (literally)
toxic and a barrier
to coping with unavoidable change, the most efficient answer is the
accountability of democracy.
When married to a market economy with just
regulation to keep energy resources
and other monopoly infrastructures in community hands - and to enforce
the primacy of the right to clean air and water - democracy
The danger is that in countries with a huge pool of
under-educated poor people there will be vast
social unrest triggering brutal state suppression before the newly
impoverished middle class people realise
that they must choose now. Either a popular imperfect democracy, or an
party/military/industrial elitist gangster-state.
As climate patterns shift, as draw down of ancient aquifers reach their
limits, extensive irrigation for some crops becomes uneconomic. Huge
social effort is turned to reforesting catchments to slow runoff and
create the 'organic sponge' of deciduous tree leaf litter needed to
absorb and slowly release water. Recreational water use is banned in
many cities. Home rainfall harvesting tanks are subsidised. Water
harvest, storage, and distribution is critically reviewed, along with
the types of agriculture and horticulture land is used for. Small,
labour-intensive, intensively managed farming of high calory yeild
crops such as potatoes and sweet potatoes becomes a central
government-subsidised local social good. In
some favorably located regions it becomes a
viable small scale
Frontier - like
settlements laid out
In the past, small farms were a lifeline for family members that lost
their city jobs in a depression. The farms were able to support many of
the unemployed until conditions improved. Few small farms are left in
the west ( in 1990 there were 117,000 farm units
in the state of Iowa, by 2004 there were only 19,000),
except in the recently democratised east European countries.
a result, government will have to step in to help create the 'buffer'
or 'sponge' of small farm living. It is starting from a low base, as
there is little or no 'good' land close to transport left. The most
productive land is also the most flood-prone land. The best decisions
in the worst circumstances are made.
The government sequesters low-value hills adjacent to flood fertile
plains and coastal margins for low capital communities. People of good
character who are willing to endure isolation are given rights to small
parcels of land and very basic mobile-home type housing. The
expectation is that they will live an impoverished lifestyle, but with
as many elements of self reliance and energy and nutrient conservation
as economically feasible.
Best case - Recession and
depression slowly ease
in the emerging tiny
energy conservation and renewable micro-generation industries
Although hampered by high costs of materials, ingenuity, technical
expertise and small scale government subsidy tips some of the numerous
experimenters and small traders in this area into full scale mass
shipping and local port network reshapes communities
As new small ports, 'barge beaches', connecting inland waterways and
expanded rail networks start to systematically integrate, previously
isolated local communities start to grow, and small service industries
develop. Artisan repair and 'make do' industries follow.
Huge human capital is used widening and deepening canals in Europe (in
particular) to be able to carry useful loads.
gas stops the slide
The worlds vast natural gas resources are useless without well
maintained pipelines within countries, large capacity pipelines between
countries, specialised gas ships, and specialised terminals. Once this
infrastructure is in place, a mini-boom occurs as motive energy,
although still expensive, is cheaper than it was.
Work on using coal cleanly in steam engines begins to show results.
Some coal is gasified, some is ground and direct injected into power
station steam plants to run generator turbines.
Sophisticated steam engines run trains, coastal shipping, large
excavators, and massive trucks such as used in the mining industry.
Where high quality coal is available port to port, steam is used in
conjunction with sophisticated sail technology to power smaller
trans-oceanic ships carrying non-containerised mixed cargoes.
Earlier global crisis meetings that made production of solar arrays a
world priority start to show fruit, with houses being retrofitted with
huge solar roof panels feeding power via embedded small computers
energy starts to impact
Massive investment in electricity generation from stationary
tide-surge-powered generators starts to pay off with reliable supplies
of significant amounts of power.
Market forces make the
So long as subsidies do not cause too much distortion, local, regional,
and international fair trade starts to make clearer what industries and
materials are and are not sustainably economically viable into the
future. Capital flows to energy projects with the quickest returns, as
to those with the best long-term sustainable returns. The best projects
are funded from petrodollars, and consequently owned by oil exporting
countries. In time, foreign ownership is reduced by negotiation or
nationalisation in the public good.
Industry and occupations adjust to the
changed nature of the economy and social values
Long term adjustments to business viabilities are now real. Some
occupations disappear. New needs give rise to new occupations. The
values of energy conservation, innovation, fair play, community, small
business, sustainable material exploitation, re-cycling, and
constrained and intelligent consumption also result in new occupations,
as well as changes to existing functions. Directly-paid employment
rises once more. Those not in directly-paid employment are engaged in
indirectly paid socially useful occupation.
Barter remains strong, black economy starts
More and more black marketers and cashless bargainers become tax
payers once more as the negatives start to outweigh the benefits.
Entrpreneurial skills honed on the streets start to create more and
more small businesses, but this time they are sustainable and highly
and space have changed
Everything happens more slowly. Goods cross oceans in sophisticated -
but much slower- computer controlled hybrid sail/steam ships. Delivery
schedules are partly dictated by the wind, and arrival dates are
items pass through far more hands, with far more pedal power being in
the chain. Airfright is very expensive. People live in far more widely
dispersed communities, albeit they tend to be along rail, canal, and
coaastal shipping routes. Things are much more often repaired than
replaced. This takes time. Everything is much more expensive. Purchases
are considered, valued, and looked after. The cost of machinery is
weighed against the cost of labour. There is an increase in the number
of jobs such as road repairs that are done by hand rather than big
machinery. Only the rich can afford to speed anywhere. Automotive
traffic is much less, the roads are emptier (and poorly maintained),
and traffic is slower.
has changed forever
Public transport - chiefly sophisticated steam
powered rail engine - is king. Personal transport is mostly
bicycle, micro-engine bicycle, hydrogen gas powered bicycle or
tricycle, or lightweight small engine scooter or motorbike.
Visiting takes a lot longer. Trips now involve overnight stays, instead
of the 'there and back in an hour' when petrol was cheaper than water.
Is life better or worse in a society
based on multiple and decentralised sources of sustainable energy?
For individuals and families in democracies, probably basically the
same as it has
ever been. But in different circumstances, and with different values
2005 The Naturalhub
#2 - #19: 2005 - 2006 (minor amendments)
important updates october 2008
version #23 november 2008 (minor amendments)