In some ways it's even difficult to grasp the economy as "thing." Economy is what people do when they interact and exchange goods, so it's pervasive, social, cultural, and intertwined in everything we do. The economy today is one highly networked, globalized system where jobs and employment in China (or anyplace else) depend on supply, distribution and consumption in Canada (or anyplace else). The old distinctions between "capitalism" and "socialism" no longer really exist, perhaps with a few very minor exceptions. What really exists is "globalism." National and regional economies are linked together by complex ties of trade, debt, and money circulation. While there are various differences in the level of public and private sector participation in economic activity, all of the actors are constrained by a single ruling principle: continual growth and expansion. The chart below shows this growth at a global level from 1950 to present.
In the quest for continuing exponential economic growth, debt is one way to stimulate real activity and consumption. By making debt more available to producers and consumers, more capital can be developed and more products can be consumed with just the promise of future repayment. Since the 1980s, all forms of debt have seen a rapid expansion- from mortgages to credit cards to the debts of entire countries. When fossil fuel resources were first tapped and provided a high energy return on investment, growth was organically rapid. As extraction costs rise and the return on investment shrinks, it takes more and more debt to get the growth engine to continue at it's previous pace. The next chart illustrates the rapid increase in debt and it's relationship as a percent of Gross Domestic Product (GDP).
This drive for growth is entirely baked into the economy as an underlying assumption of the entire monetary system. Few people stop to realize that the issuance of money is equivalent to the creation of debt in the form of principal plus interest- therefore there will never be enough money in circulation to repay the outstanding debt. This is a part of the "trap" that keeps the system functioning: we take on debt to secure the basics of survival, and then must compete for a limited money supply that does not equal outstanding debt in order to attempt to repay what we owe.
“It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.”
--Henry Ford, founder of the Ford Motor Company.
It isn't necessary to our discussion to explore the dynamic of money creation, but it is a fascinating topic. If the reader is unfamiliar, I'd suggest watching "Money as Debt" for a simple, animated explanation.
One further element of the current state of the economy that is important to recognize is the prevalence of derivatives. These are a particular type of debt instrument defined by a contract on the performance of other assets. These are the tricky financial games that allow leveraging of debt and money supply far beyond the original value of either. They help to fuel booms in industries like real estate, technology, and energy by making investment in those areas highly lucrative.
The unwinding of derivatives in a deflationary environment of debt defaults was largely responsible for the rapid acceleration of the housing crisis. Since that time, there has been no progress in the regulation or elimination of derivartives, and they have grown to dwarf every other aspect of the financial and monetary systems. The infographic at the following link provides an elegant illustration of the various supplies of money and debt (notice how debt far outstrips the money available to repay debt), compared to the total value of derivatives. This should go onto our list of "very scary charts" because we know how dangerous these financial instruments can be. The massive value of derivatives, far outstripping any other financial asset, should make us question what would happen if the growth engine stopped or even reversed for any extended period of time. It would seem that any reversal could be highly unstable and unpredictable.
So getting back to the vital tie-in between debt, the economy and energy: We know the cost of pumping oil out of the ground and delivering it to market, and it's based on the availability of easy-to-extract oil. However, the cost of production is not the same as the price that the economy can afford. The complicated interplay of price and affordability is apparent when looking at the 2007-2008 period when oil prices nearly tripled from $50 to $140 in the initial stages of the Great Recession. The high price of oil exacerbated the economic crisis unfolding at all levels. Simply put, the economy needs oil cheap enough that workers can still afford to buy the energy and products being produced. When prices get too high, recessionary forces come into play and oil prices drop again like they did in late 2008, back to below $40 by early 2009.
Since 2009, oil prices as well as the prices of many other commodities have been buoyed by increasing levels of debt, financialization, and monetary stimulus (the printing of money). The Federal Reserve's rounds of quantitative easing (QE) and near-zero interest rates have allowed a massive shifting of newly created money into the energy extraction industry, where Wall Street math whizzes package, leverage, and re-sell the debt of energy companies as derivatives. The same thing is being done in countries around the world, some of which have even ventured into negative interest rates. This is essentially the same set of practices that led to the housing crisis only multiplied and amplified, and the result this time is the development of the Shale Oil Boom and the expansion of otherwise unprofitable oil extraction methods like the mining of tar sands.
Sitting where we are, in the middle of 2016, we can reflect on a chart of oil prices and notice that the point where the price of oil took off coincides with the launch of QE1 and the point where oil lost it's support and began plunging coincides with the end of QE3. Basically the accumulation of debt has allowed oil prices to rise enough to support higher cost methods of extraction. But since 2015 the world economy, and particularly the energy sector, has been approaching the limits of debt to support these higher oil prices.
For further explanation of the dynamics of oil and energy prices there is no better source than professional actuary and internet blogger Gail Tverberg. I'm attempting to summarize a few key points, and this relationship between debt and oil price is a critical element; but I could never do justice to the level of detail on this topic presented by Gail in her blog https://ourfiniteworld.com/ . Gail also does a good deal of predicting what happens next, which perhaps gets ahead of our exercise at hand, but I will again refer to her work when we detail projections of future conditions.
In 2016 we are seeing extreme tension between two trends: the need for lower prices to power a faltering economy and lower-income workers versus the need for higher prices to justify costlier extraction methods. This is another major red flag that there will likely be a break in the trend that doesn't match up with past experience. If prices get too high then consumption falls and recession resumes; if prices get too low then energy companies go bankrupt and production is impacted. It appears that $100 oil was difficult for the economy to bear, and now prices have fallen so that oil is much more affordable but no longer economical to extract. Oil is not the only commodity facing the same downward pressure on price, it's just the most important one.
Here in the First World, we certainly experience wealth disparity- but we are largely shielded from the shocking levels of inequality that our economic system produces on a planetary level. Most of the world lives at a level of destitute poverty we can hardly even imagine.
The chart below reveals the stratification of global wealth by quintile. Those bottom 4 quintiles in the chart- 80% of the world population- are living on less than $10 per day. Do you make more than $10 per day? Then you and I fall into that massively unbalanced umbrella at the top of the chart. Almost half of the world is living on less than $2 per day.
I'd note this as another concerning chart in our inventory- a huge number of the participants in the system are just barely being supported at a level to maintain life. These people would be highly susceptible to any disruption in the system that would result in a reduction in the distribution of those already scarce resources.
The globalized economy is an engine that generates tremendous wealth for a very small minority of the 7.4 billion people on the planet. For most of the world population, only a minuscule amount of the economic output of the system "trickles down." The idea that Civilization is a positive thing for most of humanity is an illusion that we should discard in light of this data. If poverty were just an unfortunate side effect of Civilization, wouldn't there be some equalization of this massive inequality? How can it be that in a Civilization of equal opportunity, and justice, and human rights, the massive majority of the world that is poor and suffering cannot somehow obtain a larger proportion of the world's wealth? These questions bring us to our next topic of discussion.
The reality is that our First World existence is no more fair or equitable than the feudal aristocracies of the past. The luxury and wealth we enjoy is forcibly extracted from the mass of humanity and is then maintained by massive military force with the potential to annihilate the entire planet. Crushing inequality is not an accident- the entire purpose of Global Civilization is to maintain the exploitation and oppression of the masses for the benefit of the few. There is no other explanation for the above chart showing the real distribution of global wealth. We simply do not perceive it this way because we are sitting at the heart of the Empire.
All of the economic and energy drama we have been discussing is playing out on a global scale because the world has grown into a single networked system. It's clear that maintaining these massively complex economic arrangements, where a tiny minority exerts almost complete control over the world's resources, requires an equally massive and complex system of politics, laws, war-making, and general threat of force.
We've previously identified the essential dynamic of 1) the need for constant growth, 2) the criticality of cheap energy to that growth, 3) the impending end of access to cheap energy, and now 4) a Civilization based on a massively exploitative system designed for the benefit of an elite minority. In light of this dynamic it is obvious that understanding efforts of the ruling elite to secure access to energy resources, especially lower-cost energy resources, goes a long way to explaining the political tensions and outright conflict happening today. Overlay this with the reality that there are still nation-states with their own national interests to protect and we have a recipe for intensification. It is no surprise that when the Council on Foreign Relations looks at conflicts most likely to expand this year, they are centered on the Middle East- a desert land with few natural resources worth fighting over, save one.
These countries are critical not only to the extraction of oil, but also to it's processing and transportation. Additionally, we can begin to see the formation of a "front line" in the global military chess game playing out between the world's superpower nation states. Looking more closely at US military deployments and bases a virtual encirclement of Russia and China becomes apparent. This strategic positioning is aimed at securing access to natural resources, cutting off access from enemies, and building up a massive military presence in close proximity to Russia and China. Aside from outright military deployment, the United States, China, and Russia are also actively involved in proxy encounters through puppet regimes in other countries. In 2014 both Russian and US interests intervened in Ukraine, leading to the ousting of the president and his government, the "election" of a new pro-western government, and the breaking-off of the Crimea region in a bid to join Russia.
It is no surprise that these relationships are strained and at times outright confrontational. Can you imagine if we reversed the map below and Russia had military bases ringing the mainland United States, perhaps in Canada, Mexico, and the Caribbean?
In this respect, the United States and it's allies have clearly obtained the upper hand. In any armed conflict there are personnel and equipment right at Russia and China's doorstep, ready to engage. For them to reciprocate, a huge effort to deploy over long distances and vast oceans would be necessary.
This sheds some light on the extent of global nuclear proliferation, as an approach of mutually assured destruction allows some leverage to the underdogs. In May 2016, the US activated the Aegis Ashore missile defense system in Romania, effectively reducing the Russian first-strike nuclear capability. This continues an escalation of the nuclear arms race, as Russia takes measures to regain the upper hand in spite of the newly deployed missiles. This increasing tension is a major driver for the current reading of the "Doomsday Clock" at 3 minutes until midnight (nuclear annihilation). This metric is produced by the Bulletin of the Atomic Scientists, and tracks the relative closeness of a doomsday scenario by it's relationship to midnight. The only time the Clock has been set this close to midnight was in 1984 and 1953: both major hot points in the cold war.
All of this tension, conflict, intensification, and strategic positioning is taking place at a time when the power of government is expanding and the trust of the governed is falling to never before seen levels. Around the world austerity, migration, strained social services, and gridlocked political processes are taking a toll on citizen's faith in the ability of governments to handle these complex problems. The most recent surveys of American citizens show a clear trend of lost confidence, with an astounding 7% expressing a great deal or quite a lot of confidence in Congress.
Hey, with government like this, who needs enemies?
In the next post, we will continue to discuss key topic areas that describe the state of Civilization, including human health and environment.
How to Read This Blog
HOW TO READ THIS BLOG:
To get the most out of this blog, I recommend beginning with the earliest post and proceeding in chronological order. For the most part this blog, like a planning document, builds on data and rationale in a linear manner. You may find value in individual posts taken in isolation, but I suspect your experience will be richer if you follow the intended progression.