Crash Course Chapter 17c: Energy and the Economy

Okay, now we are finally ready to marry the Economy to Energy. Finally!

In a recent interview, Peter Schiff of Euro Pacific Capital described economics as “the science of satisfying unlimited demand with limited resources.” Given our druthers, most humans would choose to live the life of a billionaire, but this is clearly not possible, even with our current massive abundance of surplus energy. Luckily for us, we’ve had massive amounts of surplus energy to work with over the past 100 years.

And here’s where the story gets really interesting. Remember all these exponential graphs? In theory, there’s nothing problematic with living in a world full of exponential growth and depletion curves – as long as the world does not have any boundaries. However, exponential functions take on enormous importance when they approach a physical boundary, as seems to be the case for oil in the very near future. Both discoveries and production indicate that we could be at oil’s exponential boundary already.

Population, money, and oil demand are all exhibiting exponential behavior. Of the three, we can make a very strong case that both population and our money system are utterly dependent on the continued expansion of oil energy.

And here are the questions that arise from that line of thinking. What if our exponentially-based economic and monetary systems, rather than being the sophisticated culmination of human evolution, are really just an artifact of oil? What if all of our rich societal complexity and all of our trillions of dollars of wealth and debt simply are the human expression of surplus energy pumped from the ground? It’s an interesting thought.

More immediately, you and I would be perfectly within our rights to wonder what will happen when, not if, but when oil begins to decline. What will happen to our exponential, debt-based money system during this period? Is it even possible for it to function in a world without constant growth? These are important questions, and they deserve answers.

My opinion is that the financial instability we are now experiencing is due at least in part to the early stages of this process.

And by placing oil consumption on a four-thousand year timeline, all sorts of troubling questions pop up when we overlay a population curve on top of it. Together, these graphs say that we might want a little dose of adult-sized planning to go with our usual election year hoopla.

Central banking just happened to come into maturity coincident with an exponentially exploitable energy source, and became all-powerful and revered within a very short period of time. Fiat money systems have come and gone, but this one had a trillion barrel energy tailwind that is about to turn into a headwind.

Distributing ever-larger shares of money during a period of constant growth is a pleasant job that enjoys broad political and popular support. Operating in a world of declining energy is an utterly new prospect for every single political and financial institution. It makes the science of meeting unlimited demand with limited resources even trickier, if not impossible, if the system is not up to the task.

And so now it is up to us, you and me, to wonder what we should expect in the future from a money system whose most very basic assumption of them all might be in error. What if the assumption that the future will not just be bigger but exponentially bigger, than the present is incorrect?

This assumption is on full display in the debt chart of the US as compared to GDP. The red circle betrays a profound belief that the future will be much, much larger than the present. Consider that the total economy of the US is only some $14 trillion dollars, while the total credit market debt of the US is more than $49 trillion dollars. Lop off a few zeros and round things off, and this is the same as a bank loaning 500 thousand dollars for a home against a salary of 140 thousand dollars.

If we knew that the current tax bracket of the borrower was going to double and then triple, would this be a good loan to make? To our nation, the end of cheap oil means a sustained and permanent reduction in our after-tax take home pay.

My question is, who in their right mind loans more and more money to someone whose earnings are all but guaranteed to decline?

Here’s how it all sums up. There are some knowns. We know that energy is the course for all growth and complexity. We know that surplus energy is shrinking. We know that the age of cheap oil is over. And we know that because of this, oil costs will consume an ever-greater proportion of our total budget.

And because of these knowns, there are some risks. There is the risk that our exponential money system will cease to operate in a world of declining energy surplus. It might simply not be suited to the task.

And there is the risk that our society will be forced to become less complex. If you really think about it, that is a very loaded sentence right there.

And finally there is the risk that even as oil winds down, the momentum of the money system will create conditions ripe for hyperinflation.

Each one of these knowns adds to each one of these risks, and that is what this course is about: assessing those risks, and deciding what, if anything, a prudent adult should do about adapting to these realities and facing these risks.

When I put these together, I feel comfortable making these predictions. Remember, I reserve the right to change these with the arrival of new information at a later date.

The status quo will be preserved at all costs. Politicians will hide the truth, economic statistics will become even fuzzier, and central banks will continue to throw more and more money at a system that, at its core, is out of tune with reality.

Number Two, hyperinflation, will result. The price of anything is a function of how many dollars are floating around and how much of that product, or good, there happens to be. Because literally every single failed fiat currency regime has failed for the same reasons, we can reasonably conclude that the future will be filled with ever more dollars. At the same time, declining surplus energy will assure that there are fewer goods floating around. Together, these spell inflation.

Number Three is the logical outflow of #1 and #2. Standards of living will decline. However, I am living proof that even as ones standard of living declines, one’s quality of life can go up.

Yes, it is entirely possible that I am raising issues here that will play out over many years, or even decades, and almost certainly will be influenced by changes in behavior and technology. But the point cannot be denied – we are squandering precious time and remaining energy in a desperate, certainly foolish, and, possibly, ultimately unpleasant bid to preserve the status quo. We must not fall into this trap.

And on that note, we’re almost through. Next we tie the first two E’s to the Environment, where I will focus on the exponential extraction of resources and modification/depletion of critical support systems.

Please join me for Chapter 18: The Environment.

Thank you for listening.

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