Bourgeois society stands at the crossroads, either transition to Socialism or regression into Barbarism.
- Rosa Luxemburg, "Junius Pamphlet" 1916

Wednesday, October 26, 2011

Natural resource scarcity and the global debt crisis: exploring the connection

From Gail the Actuary, one of the top peak oil bloggers, comes an analysis of the interplay among resource depletion, pollution, global finance, and economic growth. Or lack of growth, as the case may be. The essay is well worth checking out.

Its bottom line? Physical resources are intimately connected to current economic and political crises. Not someday, in a nebulous worst case scenario, but now, today. Example: feedback loops among oil prices, food availability, and debt levels. Gail the Actuary notes:

[H]igher oil prices tend to be associated with higher food prices... When prices of oil and food rise, consumers (except for those making more money because of higher oil and food prices) tend to cut back on discretionary spending. This cut-back in spending leads to lay-offs and recession in discretionary segments of the economy. Some laid-off workers default on their debts, and businesses scale back their plans for expansion, because of the “bad economy”. As a result, they too need less debt.

So debt works well in a growing economy, but once an economy hits high oil prices and recession, debt works much less well. An economy has positive feed back loops from debt in a growing economy, but once oil limits (in terms of high prices) start to hit, feedback loops work in reverse–consumers and producers see less need for debt, and in fact, may default on past loans. Shrinking debt levels make it increasingly difficult for GDP to grow.

Implication: foreign policy gurus who think about the current global economic crisis without reference to natural resources are getting it completely wrong.

It would be like trying to understand the risks of a forest fire without looking at the current heat, temperature, and humidity, focusing instead only on the drunken dumb-asses who leave smoldering fires all over the place. If you focus purely on the human factors related to fire causation -- e.g. prohibiting intrusion of campers into the forest, closely policing the behavior of human visitors -- you'll miss other causes that have more to do with the broader natural resources context. So while you're busy inspecting a Winnebago for fire hazards, you'll miss the fact that a normally harmless lightning strike on the other side of the forest is setting off a conflagration. Normally, the lightning would have ignited only a nuisance brush fire, if the climate conditions were more benign. But now the random bolt of electricity sets a fire that will be ignored in its early stages, escalating unimpeded to catastrophic dimensions, because you were too busy focusing on the goddamn Winnebago.

Heck of a job, Brownie.

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