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PaulS's picture

Temporary recession or the end of growth?

Temporary recession or the end of growth?
by Richard Heinberg

Extracts from this extremely well reasoned article. A must to read if you wish to understand where we are heading and why. And what you and I could perhaps do about it right here and right now.

Full article here: http://www.energybulletin.net/node/53766

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Everyone agrees: our economy is sick.
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But why: these recent troubles are primarily due to a combination of bad real estate loans and poor regulation of financial markets = conventional analysis
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If we don’t understand why the world’s industrial and financial metabolism has seized up, we are unlikely to apply the right medicine and could end up making matters much worse than they would otherwise be.
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Alternative Diagnosis... not for the faint of heart because, if correct, it implies that the patient is far sicker than even the most pessimistic economists are telling us. But if it is correct, then by ignoring it we risk even greater peril.
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The axiomatic limit to growth means that the rapid expansion in both population and per-capita consumption of resources that has occurred over the past century or two must cease at some particular time.
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Energy is the ultimate enabler of growth (again, this is axiomatic: physics and biology both tell us that without energy nothing happens—certainly not growth)... our main source of energy, fossil fuels are by their very nature depleting, non-renewable resources...
So, by this logic, the end of economic growth (as conventionally defined) is inevitable, and Peak Oil is the likely trigger.
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Given that growth cannot continue on a finite planet, our embeddedness in the institutions of finance, can be said to constitute history’s greatest Ponzi scheme. We have justified present borrowing with the irrational belief that perpetual growth is possible, necessary, and inevitable. In effect we have borrowed from future generations so that we could gamble away their capital today.
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studies showing a tight correlation between oil price spikes and recessions.
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The Peak Oil thesis predicts that, as world oil production reaches its maximum level and begins to decline, the price of oil will rise dramatically. But it also forecasts a dramatic increase in the volatility of prices.

The argument goes as follows. As oil becomes scarce, its price will rise until it begins to undermine economic activity in general. Economic contraction will then result in substantially reduced demand for oil, which will in turn cause its price to fall temporarily. Then one of two things will happen: either (a) the economy will begin to recover, stoking renewed oil demand, leading again to high prices which will again undermine economic activity; or (b), if the economy does not quickly recover, petroleum production will gradually fall due to depletion until spare production capacity (created by lower demand) is wiped out, leading again to higher prices and even more economic contraction. In both cases, oil prices remain volatile and the economy contracts.
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now the potential for renewed high oil prices acts as a ceiling for economic recovery. Whenever the economy does appear to show renewed signs of life (as happened in late 2009 and early 2010, with stock values rebounding and economic activity increasing somewhat), oil prices will take off again as oil speculators anticipate a recovery of demand.
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At this point in the discussion many readers will be wondering why alternative energy sources and efficiency measures cannot be deployed to solve the Peak Oil crisis.
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My conclusion from a careful survey of energy alternatives, is that there is little likelihood that either conventional fossil fuels or alternative energy sources can be counted on to provide the amount and quality of energy that will be needed to sustain economic growth—or even current levels of economic activity—during the remainder of this century.
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however it is negotiated, the transition will spell an end to economic growth in the conventional sense. And that transition appears to have begun.
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The perpetual growth of human population and consumption within the confines of a finite planet seems like a very long shot indeed, especially since warning signs are everywhere apparent that ecological limits are already being reached and surpassed.
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If the physical scientists who warn about limits to growth are right, confronting the global economic meltdown implies far more than merely getting the banks and mortgage lenders back on their feet. Indeed, in that case we face a fundamental change in our economy as significant as the advent of the industrial revolution. We are at a historic inflection point—the ending of decades of expansion and the beginning of an inevitable period of contraction that will continue until humanity is once again living within the limits of Earth’s regenerative systems.

But there are few signs that policy makers understand any of this. Their thinking appears to be shaped primarily by mainstream economists’ assurances that growth can and must continue into the indefinite future, and that the economic contraction the world has recently experienced is only temporary—a problem that can and must be solved.
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Still, the problem is not a minor one in the eyes of economists and policy makers... $23.7 trillion were committed in “total potential federal government support.” This is expensive medicine indeed. It takes a moment to even begin to comprehend the enormity of the figure. It represents about half of annual world GDP, and is over three times the total amount spent by the U.S. government, in inflation-adjusted dollars, on all wars combined, from 1776 to the present.

Other nations, including Britain, China, and Germany have committed to paying for stimulus packages and bailouts that, while much smaller in absolute terms, represent an impressive (or should we say frightful?) share of national GDP.

If the Alternative Diagnosis is valid, none of this will work in the end...

In using up non-renewable resources like metals, minerals, and fossil fuels, we have stolen from future generations. Now in effect we are stealing from those generations the financial wherewithal that could have been used to build a bridge to a sustainable economy. The construction of a renewable energy infrastructure (including not only generating capacity, but distribution and storage systems, as well as post-petroleum transport and agriculture systems) will require enormous investments and decades of work. Where will the investment capital come from if governments are already buried in debt? If we have committed nearly $24 trillion to propping up an old economy with no real survival prospects, what’s left with which to finance the new one?
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If the Alternative Diagnosis is correct, there will be no easy fix for the current economic breakdown. Some illnesses are not curable; they require that we simply adapt and make the best of our new situation.

If humanity has indeed embarked upon the contraction phase of the industrial pulse, we should assume that ahead of us lie much lower average income levels (for nearly everyone in the wealthy nations, and for high wage earners in poorer nations); different employment opportunities (fewer jobs in sales, marketing, and finance; more in basic production); and more costly energy, transport, and food.

Rather than attempting to prop up banks and insurance companies with trillions in bailouts, it would probably be better simply to let them fail, however nasty the short-term consequences, since they will fail anyway sooner or later. The sooner they are replaced with institutions that serve essential functions within a contracting economy, the better off we all will be.

Meanwhile the thought-leaders in society, must begin breaking the news—in understandable and measured ways—that growth isn’t returning and that the world has entered a new and unprecedented economic phase, but that we can all survive and thrive in this challenging transitional period if we apply ourselves and work together...

Without cheap energy, global trade cannot increase. This doesn’t mean that trade will disappear, only that economic incentives will inexorably shift as transport costs rise, favoring local production for local consumption. But this may be a nice way of putting it: if and when fuel shortages arise, fragile globe-spanning systems of provisioning could be disrupted, with dire effects for consumers cut off from sources of necessary products. Thus a high priority must be placed on the building of community resilience through the preferential local sourcing of necessities and the maintenance of larger regional inventories—especially of food and fuel.

Obviously, alternative energy sources and energy efficiency strategies must be high priorities, and must be subjects of intensive research using a carefully chosen spectrum of criteria. The best candidates will have to be funded robustly even while fossil fuels are still relatively cheap: the build-out time for the renewable energy infrastructure will inevitably be measured in decades and so we must begin the process now rather than waiting for market forces to lead the way.

In the face of credit and (potential) currency crises, new ways of financing such projects will be needed. Given that our current monetary and financial systems are founded on the need for growth, we will require new ways of creating money and new ways of issuing credit. Considerable thought has gone into finding solutions to this problem, and some communities are already experimenting with local capital co-ops, alternative currencies, and no-interest banks.

With oil becoming increasingly expensive in real terms, we will need more efficient ways of getting people and goods around. Our first priority in this regard must be to reduce the need for transport with better urban planning and re-localized production systems. But where transport is needed, rail and light rail will probably be preferable to cars and trucks. (31)

We will also need a revolution in the built environment to minimize the requirement for heating, cooling, and artificial lighting in all our homes and public buildings. This revolution is already under way, but is currently moving far too slowly due to the inertia of established interests in the construction industry.

These projects will need more than local credit and money; they will also require skilled workers. There will be a call not just for installers of solar panels and home insulation: millions of new food producers and builders of low-energy infrastructure will be needed as well. A broad range of new opportunities could open up to replace vanishing jobs in marketing and finance—if there is cheap training available at local community colleges.
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What would we be getting for our money? A collective sense that, in a time of crisis, no one is being left behind. Without the feeling of cooperative buy-in that such a safety net would help engender, similar to what was achieved with the New Deal but on an even larger scale, economic contraction could devolve into a horrific fight over the scraps of the waning industrial period.

However contentious, the population question must be addressed. All problems that have to do with resources are harder to solve when there are more people needing those resources. We must encourage smaller families and must establish an immigration policy consistent with a no-growth population target.

A case can be made that after all this is done the end result will be a more satisfying way of life for the vast majority of citizens—offering more of a sense of community, more of a connection with the natural world, more satisfying work, and a healthier environment. Studies have repeatedly shown that higher levels of consumption do not translate to elevated levels of satisfaction with life. This means that if “progress” can be thought of in terms of happiness, rather than a constantly accelerating process of extracting raw materials and turning them into products that themselves quickly become waste, then progress can certainly continue. In any case, “selling” this enormous and unprecedented project to the general public will require emphasizing its benefits (Paul:the Transition Movement included).

Can We? Will We?

It is important to state the implications of all this as plainly as possible. If the Alternative Diagnosis is correct, there will be no full economic “recovery”—not this year, or the next, or five or ten years from now. There may be temporary rebounds that take us back to some fraction of peak economic activity, but these will be only brief respites.

We have entered a new economic era in which the former rules no longer apply. Low interest rates and government spending no longer translate to incentives for borrowing and job production. Cheap energy won’t appear just because there is demand for it. Substitutes for essential resources will in most cases not be found. Over all, the economy will continue to shrink in fits and starts until it can be maintained by the energy and material resources that Earth can supply on an ongoing basis.

This is of course very difficult news. It is analogous to being told by your physician that you have contracted a systemic, potentially fatal disease that cannot be cured, but only managed; and managing it means you must make profound lifestyle changes.

Some readers may note that climate change has not figured prominently in this discussion. It is clearly, after all, the worst environmental catastrophe in human history. Indeed, its consequences could be far worse than the mere destruction of national economies: hundreds of millions of people and millions of other species could be imperiled. The reason for the relatively limited discussion of climate here is that (assuming the Alternative Diagnosis is correct) it is not climate change that has proven to be the most immediate limit to economic growth, but resource depletion.

Is this essay likely to change the thinking and actions of policy makers? Unfortunately, that is unlikely. Their belief in the possibility and necessity of continued growth is pervasive, and the notion that growth may no longer be possible is unthinkable. But the Alternative Diagnosis must be a matter of record. This essay, in many ways represents the thinking of thousands of physical scientists working over the past several decades on issues having to do with population, resources, pollution, and biodiversity. Ignoring the diagnosis itself—whether as articulated here or as implied in thousands of scientific papers—may waste our last chance to avert a complete collapse, not just of the economy, but of civility and organized human existence.

But even if policy makers continue to ignore warnings such as this, individuals and communities can take heed and begin the process of building resilience, and of detaching themselves from reliance on fossil fuels and institutions that are inextricably tied to the perpetual growth machine. We cannot sit passively by as world leaders squander opportunities to awaken and adapt to growth limits. We can make changes in our own lives, and we can join with our neighbors. We can let policy makers know we disapprove of their allegiance to the status quo, and that there are other options.

Is it too late to begin a managed transition to a post-fossil fuel society? Perhaps. But we will not know unless we try. And if we are to make that effort, we must begin by acknowledging one simple, stark reality: growth as we have known it can no longer be our goal. That party is over.
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Full article here: http://www.energybulletin.net/node/53766