By Karl North | May 4, 2015
The Crutches and the Consequences
Since the 1970s US economic growth has slowed, resulting in a declining standard of living for the majority in the lower classes. The decline in material standard in the US would be far worse but was artificially propped up in several ways.
First, we allowed foreign imports to replace our industrial production, initially from Japan and Germany, then gradually from Taiwan, Korea, and finally from China and other so-called Asian Tigers. These economies industrialized rapidly, in part because our financial class has increasingly transferred its capital investment to them, in effect moving our industrial economy gradually offshore to foreign lands.
Cheap imports based on cheap foreign labor and unregulated raw materials extraction slowed the decline in US standard of living and actually increased wealth greatly in the US financial class. However, because US production for export declined, one result has been a ballooning trade deficit, which we paid for again by artificial means: the printing and sale of federal treasury bonds not backed by the production of real wealth. The enormous US trade deficit compares to a situation where you feed a neighbor from your garden for years on end, which keeps his family from starvation, but he pays you back only with an occasional Twinkie. Eventually such trade inequities have negative consequences. The result over the last decades has been a 75% decline in the purchasing power of the dollar, as measured against the price of gold. The fact that the dollar has any value is only due to the lingering confidence in the economic stability of US as a superpower. As US imperial power is now itself in decline, that confidence will gradually evaporate.
Another negative result of the increasingly off-shored industrial sector was that much of the industrial working class has been pushed into lower paying retail, clerical and service economy work. Fifty years ago, one job assured a family a middle class standard of living; now a family needs 2-4 jobs to maintain the same standard.
The second prop for the US standard of living, especially in the last twenty years, has been the accelerating expansion of credit fostered by a policy of abnormally low interest rates. Today credit or outright subsidy is necessary to sustain economic activity at all levels – consumerism, government programs and core industries like energy, agriculture and automotive. Also, low interest rates have fostered a speculative economy, creating artificial bubbles like the real estate bubble that burst in 2008. Little of this activity is backed by the production of real wealth in our economy, so ultimately cannot be sustained.
Unfortunately the only possible outcome in the coming years of this sort of financial engineering to paper over systemic economic problems in the US is the failure of the two props, the trade deficit and the credit explosion, which will leave US society to face the full force of economic decline. The temporary saving grace is that the credit disease along with the tendency of the vast increase in upper class wealth to seek increasingly riskier investment opportunities, has spread to the other mature industrial economies – Japan and Europe – making their currencies even weaker than the dollar, and making the dollar seem strong, for now. On an increasingly energy scarce planet, those nations suffer from an additional handicap vis-à-vis the US: they have little or no domestic source of oil. As the ‘fracking frenzy’ in the US reveals itself to be a short-lived and partly artificial bubble, constantly dropping US conventional oil production will gradually put this country in the same situation as Japan and Europe.
The Perpetual Motion Bailout Machine
One could explain the passivity in our society in response to decades of slow decline due to de-industrialization in terms of the boiling frog effect: it was so gradual that we just got used to it. On the other hand, the ongoing government bailouts of our main private financial institutions have pandered so blatantly to the upper investor class that the public, while not yet in revolt, now senses a rottenness in the very core of our system of power. On top of some of the biggest lump sum bailouts in history, continuing injections of $85 billion per month into our financial system did not stimulate the economy or produce jobs as proclaimed; instead these policies fed speculation and an artificial stock market bubble that, again, benefited only the upper investor class. And since these funds were created with no basis in the production of real wealth, eventually the public will suffer for it one way or another in lost purchasing power. The low interest and bailout policy is now in a dead end street: to avoid an immediate melt down of the financial system it has become a perpetual motion machine, but the longer it continues to in effect print money, the more disastrous the eventual breakdown.
The Underlying Erosion of the Economic Resource Base
The processes of financialization and deindustrialization have been obvious to anyone who looks for them. However, few people other than students of ecology and natural resources have become aware of the effects of global resource depletion, whose costs, like a subtle undertow at the beach, are gradually dragging down the global economy, slowing growth, and eventually throwing it into reverse.
Because nothing happens in an economy without energy consumption, energy is the master resource. Also, cheap energy is responsible for easy access to other resources that are essential to operate an industrial society. Hence a decline in available energy causes an economy to stop growing and begin to shrink. Technologies, no matter how spectacular, will in the end not solve the problem, for technologies consume energy too, usually more than the economy consumed before they were brought online. The ability of technologies to conserve energy by improving efficiency is limited, and the energy conserved usually gets consumed elsewhere in the economy, depleting the resource base even faster.
The present situation of the human species is that the combination of cheap energy and policies of unrestrained growth over the last two centuries has accelerated depletion of energy and other resources to the point that they are becoming too scarce and costly to be affordable for more and more of the uses that are customary in an industrial economy. This happens because increasing amounts of energy are necessary to extract and process the fossil energy and other raw materials that we have come to depend on. Hence this energy is no longer available for other purposes. On a finite planet, no solution exists for an economy that is running out of easily obtained nonrenewable resources. Thus as the hundred year oil extravaganza ends, the global economy will inevitably shrink to the point where it can operate on currently available sunlight, as did all the world economies until the advent of fossil fuels in the late 18th century.
The economic effects of depletion are varied, and are subtle at first. The declining material standard of living of the US working class since the 1970s is partly due to the rising costs of depletion. Also, our industrial infrastructure was built with cheap resources and can no longer be maintained as their scarcity/costs rise. So we have let US infrastructure deteriorate: transport system, utilities, essential medical and educational institutions. Methods of production in most sectors of the economy, designed to consume energy extravagantly when it was cheap, are becoming increasingly uneconomical. The transport system, especially in the US where it was shaped primarily to maximize private profit, is extremely energy inefficient. In US agriculture over 80% of the prodigious quantities of energy consumed comes from oil. However, in the present US political climate, policy changes to mitigate or adapt to the effects of the energy descent are inconceivable, for they would subject our privately run economic system to massive public intervention, which we have been programmed to believe is taboo.
The weapons industry – one of our economy’s few remaining profit engines – is still helping to provide a semblance of normality in the US economy and keep public discontent from spilling over into revolt. Because the weapons industry depends on constant warfare to market and consume its ‘products’, US foreign policy is driven toward serial wars, partly to sustain the ‘health’ of this prop for an otherwise stagnant economy. But because a trillion dollar federal budget for warfare displaces the funding needed for social services – especially in a failing economy – the end result is the same: rising discontent.
Here I have only summarily described the forces driving our political economy at the start of the era of energy descent. The Interdependence of Phantom Financial Wealth, Phantom Carrying Capacity and Phantom Democratic Power attempts to explain in more detail how our form of capitalism has shaped these forces over time.
As the props described above have a short half life, eventually they will no longer work to mask the decline of industrial civilization due to resource depletion and associated ecological damage. Hence it should be clear that the next decades will be nothing like the last ones. What will happen in the future depends partly on how we respond to the inevitable changes these forces are bringing about. Potential responses as a nation to the forces described above are explored in Scenarios of Political Response to Energy Descent Crises and Locked In: The Paradox of Capitalism.