Economic Contraction

Just like peak oil and global warming, economic contraction is a "game changer."  As the economy we now know crumbles, the far-reaching repercussions will sculpt every aspect of our future.  In my opinion, any long-term plan -- Transition EDAPs included -- must anticipate that it will unfold amidst a world of economic contraction.  We have to plan for it, and put alternative financial tools in place to weather it, or it will undermine all of our other efforts.

This post is an excerpt from a longer paper, "Economic Resilience," which is being posted online in serial form.  Part I (this post) explains the problems, because we have to understand what we are working with in order to begin to solve it.  Part II critiques what several economic theorists see as possible routes forward for the “big picture” economy.  But the central question of this document is what we can do at the grassroots level.  Part III (approximately 70% of the document) offers a panorama of ideas for building local economic resilience. Links to the full document can be found here.

 

SEEING THROUGH THE SMOKESCREENS

"The scale of denial is breathtaking." --Jerry Mander

It might appear that there are very contrasting takes on what is happening in the economy, but remember there are all kinds of commentaries denying peak oil and global warming as well -- and the well-informed can see the gaping holes in the arguments.  It takes self-study and work to learn to see through the smokescreens that have been painstakingly erected to obscure the stark realities. 

Just as in the field of global warming where there are individuals who are well paid to distribute bad science to "prove" that global warming isn't human caused, just as the companies who stand to profit on oil don't want to admit it has peaked, there is a similarly enormous financial incentive for people to declare that there will be a lasting "recovery" -- that growth will resume, and that collapse fears are unpatriotic (so we should all go shopping).

In economics, it takes more than work to see the holes in their arguments -- it takes raw courage.  With the economic issue in particular, each one of us is wrapped up in it.  It is our bread-and-butter, it is the roof over our heads, and it can be truly horrifying to look deeply.  Perhaps four, maybe five years ago, I followed a link from one of Hopkins' pieces to an article by a different author who referred to "the triple crisis" of global warming, peak oil, and economic collapse.  That was the first time I'd ever heard it put that way.  At that time my stomach turned.  I actually felt sick for a few weeks.

At that time I was simultaneously reading the work of Robert Prechter, Warren Buffett and Sy Harding.  Prechter taught about the Fibonacci patterns and the effect that the rise and fall of cumulative human emotions builds into every market -- that after the exhilarating crest, there is an inevitable fall.  Buffett taught readers to analyze the underlying fundamentals -- yet in company after company that I was testing at the time, his formulas proved out; the companies were already ridiculously overvalued for their underlying worth.  At a time when the front pages of the newspapers were celebrating the nosebleed pinnacle of stock gains, Prechter and Harding wrote of preparing for the great bear market.

In my presentations here in Southern California, when I do the part of my talks where I explain the problems we face, I present it as "the triple crisis."

In the Totnes EDAP, Hopkins indicates his acceptance of "the end of economic growth" as part of the triple crisis that affects every aspect of our future course.  But what we face goes far beyond “the end of growth.”  By the end of this piece, I think you will see that the economy as we know it today is inevitably going to contract, grow smaller, "powerdown."

Whether it will be a full-scale collapse into chaos like Jared Diamond writes about or Stoneleigh forecasts , or whether we will be successful in creating locally-managed "surge breakers" in time, remains to be seen.  But either way, we'd better try our best to get something in place.

 

 

POSSIBLE WAYS OFF THE MOUNTAIN

“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.”

--Kenneth E. Boulding

I usually begin the economics portion of my talks with an overview: that we're coping with a triple crisis.  I follow that with a detailed view of each of the three elements: 

(1) Climate change: what the Union of Concerned Scientists forecasts for climate change here in my state of California;

(2) Peak oil: what ASPO, the U.S. Department of Energy, and the International Energy Agency anticipate as the future of petroleum, together with possible repercussions as outlined by Richard Heinberg, James Howard Kunsler and company.  Peak oil is really a subset of “peak everything.”

(3) Economic contraction: more on this in a moment.

Over the course of industrialized civilization we have experienced an enormous assent of consumption of raw materials and consumption of energy.  In his Energy Descent diagram, David Holmgren depicts this as the climb up the mountain.  Right now, at the peak of the mountain, what are our options?  What are the possible ways forward?

The first option, the orange line, “Techno-fantasy,” is the business-as-usual, eternal growth scenario.  It says We’ll just keep going the way we are now, with more of the same.  Keep on shopping!  Don’t worry that we don’t have the oil to keep going like this, we’ll just send an army over and conquer the country that has it ... We’ve heard this one before, and you’ll note the word “fantasy” in the name.

The second scenario, the “Green Tech Stability” model, says Okay, we know that eternal growth isn’t possible, so we’ll ditch the growth idea.  We’ll just continue along at a reasonable level, kind of steady, right where we are now.  So we’re running out of oil: we’ll use wind and solar and biofuels and all that renewable stuff to replace it. 

But there are some serious problems with this Green Tech proposal.  One is the idea of energy density: oil gives us tremendous power, and no combination of renewables can possibly replace what it does for us.  The second is timing: those renewables aren’t in place now, in anywhere near sufficient quantities, to avoid the pain of energy shortages.  We will still have to powerdown.

The third problem is that our entire economy is built upon the presumption of everlasting growth.  Everything from our stock market to our accounting systems is founded upon the premise that growth is good and lack of growth is failure.  Thus even the adjustment from that steeply ascending line to the flat line is a very significant one.  We will feel the ouch.  The fourth is the “peak everything” issue.  There is a serious problem with the level at which we declare that stability (but we’ll get into that in Part II).  For those four reasons, we should be calling this a Green Tech fantasy scenario.

The third scenario, the red line, is the Crash scenario, the Mad Max scenario, the collapse of civilization as we know it.  This is what happens if we keep on going with the Techno-fantasy and ignore the problem a little longer.  Now, I have two children; I say, there’s got to be a better alternative than this.

Holmgren presents another scenario, the Energy Descent scenario.  This scenario says we can take the boundless creativity that got us up the mountain and apply it toward actively designing a careful way down.  This is the approach that the Transition movement embraces.

It is very important to understand that inherent in the Energy Descent scenario is the downhill slope – the understanding that there must be a descent.  There must be a powerdown.  There must be a significant decrease in consumption overall.  And as you will see in the following discussion, that means there will inevitably be a severe contraction in our economic systems.

 

 

A BASIC EXPLANATION: ECONOMICS

We have an economic system that is based entirely upon the presumption that growth will be ongoing, unceasing, and unlimited.  This in turn requires ever more extraction from the earth.  Thus at the most basic level, our tour of economics begins with biocapacity, a.k.a. global footprint.

Global footprint is how much raw materials we use and how much waste we generate, compared to how fast the planet can make more resources and clean up the mess in the same time period.  Humanity as a whole has been using more resources and generating more waste than the planet can make and clean up.  It is called ecological overshoot and we have been moving deeper into this state since the 1970s.  Humanity is simultaneously experiencing peak oil, peak natural gas, peak coal, peak copper, peak uranium, peak phosphorus, peak fresh water, peak arable land, and more.  Richard Heinberg calls it “peak everything.”

It gets even worse when we look at it by continent.  Again, if we take all the "stuff" there is on the planet -- all the fresh water, all the arable land, all the fisheries, all the forests, all the energy resources and more -- and we divide it up by the number of people we have here today, we get a figure we can call our "fair share." 

Our fair share is 2.1 hecatres (they measure this stuff in an equivalency unit called "bioproductive acres").  Humanity as a whole uses on average 2.23 hecatres.  2.23 world average consumption is bigger than our 2.1 fair share.  Right there you can see the ecological overshoot.

Here in North America, we consume at a rate of a whopping 9.4 hecatres.  That is nearly five times our fair share.  In other words, if everyone on the planet consumed the way we do -- the way we tell each other is "normal" -- it would take FIVE PLANETS to provide for it all.

At this point in my talks, I often throw five earth beach balls out at the audience.  It makes a lasting impression.

All this means that we would have to go to six, seven, eight planets-worth-of-consumption in order to "grow" this economy. 

It's quite clear we cannot do that.

 

 

FIVE-PLANETS-WORTH-OF-CONSUMPTION

There are three ways in which North Americans have managed to live at five-planets-worth-of-consumption. I am indebted to Sophy Banks and Naresh Giangrande for an explanation in the Transition Training here in Los Angeles in 2008, which really broadened my understanding.

“Ghost acres” – taking from others.  We have raped and pillaged the raw materials of other continents (leaving the people who live on those continents with far less than their fair share).  We’ve consumed those goods here and persuaded each other that they were rightfully ours.

“Draw down” -- taking from the future.  As we desecrate ancient forests and deplete fisheries, we are consuming today that which should be our children’s inheritance.

“Ancient sunlight” – taking from the past.  Fossil fuels – oil, gas, coal – are captured ancient sunlight.  In the space of a mere 150 or so years out of the entire history of humanity, we are gobbling up and consuming the entire planetary supply.

We have an economic system that is entirely dependent upon taking from others, taking from the future, and taking from the ancient past.  This economic system is built upon the presumption of everlasting growth.  Thus in order to keep it going (keep it growing) we must take more from others, take more from the future, and take more from the ancient past.

Peak oil is the laws of physics telling us it is no longer possible to take more from the ancient past.  Biocapacity is the laws of physics telling us it won’t be possible for much longer to take from the future.  “War that will not end in our lifetimes” is a sign that taking from others has maxed out.

We are at the end of growth.  We're actually beyond the end of growth into the beginning of economic contraction. 

 

 

THE BEGINNING OF CONTRACTION

"Understandably, everyone wants it to get “back to normal.” But here’s a disturbing thought: What if that is not possible? What if the goalposts have been moved, the rules rewritten, the game changed?"  
--Richard Heinberg

Hopkins has written about peak oil that "to argue that within 2 years, peak oil will be an issue of “who lives” is a lazy way to describe it and an unhelpful sweeping generalization. Some places won’t feel much of an impact at all for years." 

In similar fashion, biocapacity and the limits to economic growth are already being painfully felt in some places, while in other places people might have the luxury cushion to go on pretending it isn't so for several more years.  Right now, people in some of the affluent social circles around me continue to carry on in denial.  Discussions of the issues in this document seem absolutely absurd to them.  After all, the newspapers say “the economy is recovering.”

Yet we can't pretend away the indicators all around us.  The fact that we are severely overextended is showing up not just in our ecological systems, but in our human ones as well.  There are no Buffett fundamentals to support the notion of "economic recovery."  In fact the very substance that should be there is hollow.

It calls to mind the times when rats get into my grapefruit tree.  They bore a small hole in one side of the fruit, then crawl inside and eat all the flesh.  You’re left with an empty, hollowed-out rind dangling there on the tree.

Stoneleigh points out how our current economic "growth" figures include tons of transactions which are entirely built upon credit and financial instruments.  There isn't any substance to them. 

The substance that supports many of our conventional economic transactions is rapidly depleting.  Peak oil promises absolutely staggering economic implications.  Already we've seen a doubling of retail gasoline prices over the past three or so years, and the ramifications of that are still playing out across the market.  Fed Ex costs more, postage costs more, moving everything around the surface of the planet costs more.  Food costs a lot more.  And we’re just getting started.

Peak oil will mean the end to globalization as we have known it thus far.  Right now we call it “normal” to harvest raw materials on one continent, to ship them to another continent for manufacture, and to still another continent for sale.  This absurd extravagance -- only possible with plentiful cheap oil – is at its end.  So too is the globalized economy that was built around it.

Conventional wisdom says it takes about three years for an oil shock to play out across the financial markets.  We’re not yet three years out from $147 a barrel in July 2008, thus we’ve barely seen the full array of impacts, and prices are climbing back over $108 for the second time.  Oil industry representatives are now publicly stating that prices will go much higher.  As oil (and now potentially coal too) becomes more precious, this volatility will only exacerbate the existing market instabilities.

Further evidence of the empty, hollowed-out rind:

Government: Our government is in dire straights: our California and Los Angeles city budgets are completely upside down, forcing them to slash programs across the board.  Our national debt just reached an all-time record high.  As I write this, each citizen’s share of the national debt -- YOUR share  -- is $45,959.  The decreased tax base due to other economic factors will only exacerbate the plight of our government in coming years.

Consumers: Our unemployment rate would display far higher if it weren't for the fact that people's term of unemployment is now exceeding the maximum term over which they can receive benefits, thus they are disappearing from unemployment statistics. (the 99ers) The long-term jobless are no longer counted in the newspaper statistics, but that doesn't mean they now have jobs and their pain is behind them.  Many have given up on finding a job.  Others who have managed to find work are now underemployed, earning far less than their skills once merited.  The number of Americans on food stamps is rising, and so is the demand at food banks.  A recent report indicated that 20% of families in California struggled to afford food last year, and 18% of Americans.

Labor: We have an aging population demographic, with increasing numbers of retirement-age individuals, and social security sliding into permanent deficit.  We have an obesity epidemic among our youth.  These signal increasing hope for oil-intense medical care, which we won’t be able to supply.  All this means decreasing numbers of able-bodied adults to perform post-petroleum manual labor.  Who will create that "more" for this supposedly growing economy? 

Social: The rate of emotional depression in the U.S. has increased more than tenfold in the last fifty years. Some thinkers declare that Western society is in the grip of a “social recession.”  Our population has a psychological and spiritual sense of "maxed out.”   

James Gustave Speth quotes the United Nations Development Programme’s 1996 report (which, rather than being outdated, indicates how very long our society has been desperately off track).  This report lists several ways that economic performance has gone sideways:

Jobless growth – where the overall economy grows but does not expand the opportunities for employment;
Ruthless growth – where the fruits of economic growth mostly benefit the rich;
Voiceless growth – where growth in the economy has not been accompanied by an extension of democracy or empowerment;
Rootless growth – where growth causes people’s cultural identity to wither;
Futureless growth – where the present generation squanders resources needed by future generations.

Our economy is indeed that empty, hollowed-out rind dangling on the tree, without substance, without the materials for “more”.

Every market is an accumulation of human emotions.  From the tulip mania of 1637 to the Dow Jones of today, mass human enthusiasm drives market values higher; mass human distrust and fear pulls economic values down.  (Robert Prechter has written entire books about this.)

When we look at the emotions of a market, we see where we are.  We all heard the "new paradigm" a few years back when media broadcast that it would only get better.  That was right before the first plunge.  In denial, we now desperately search for signs of "recovery." 

To which Stoneleigh declares with bright sarcasm:  "Those green shoots of recovery?  That would be gangrene!"

I don't know about you, but around me there is lots of fear.  In my Pacific Region, the Consumer Confidence index recently hit a record low.  We're in a momentary time when people desperately home that we're "returning to normal."  It's clear where we are on the emotions-of-a-market chart.  And we can see what lies ahead.

Early Transition materials encouraged us to listen to the elders.  Around here, members of the generation that experienced the Depression of the 1930s have been telling us "hold on to your cash."  It looks just like they saw before.

 

Transition movement commentary on the economy

•    Rob Hopkins, “Economics addition to The Transition Handbook”
•    Transition United States, “Economic Crisis”
 

The fundamental problems with the old economy
•    Jerry Mander, "Barking up the Wrong Tree" -- a (brutally) concise, one-page synopsis written by Jerry Mander of the International Forum on Globalization. Page 9 of
this pdf
•    Stoneleigh/Nicole Foss, "Making sense of the financial crisis in the era of Peak Oil," chilling, fast-paced audio talk.  access via this post

The full text of "Economic Resilience: What We Can Do in Our Local Communities" can be read free online at http://EconomicResilience.blogspot.com/

 

Joanne Poyourow is the initiator who brought the ideas of the international Transition movement to many areas of Los Angeles.  She is actively involved in the Transition Los Angeles city hub.  She was a CPA in public practice for more than 13 years and holds a degree in Business Economics from the University of California at Santa Barbara.

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