Wednesday, March 12, 2008

Oil, Debt, and the New American Century

Text message from the Professor:
By the way -- the news is looking damn grim, despite the Fed's efforts, economically speaking. This big time recession, if the "Peak Oil" people are right, is supposed to be part of the plateau phase, prior to the careening downward. Your thoughts?
My thoughts:

There are 2 parts to the coming downturn--one systemic and one structural. Systemically, the economy is based on debt not production. This appears to be true on all levels--not just consumer debt. However, because consumer debt is atomized (much smaller on an individual level, though many millions of individuals), it is more sensitive to marginal fluctuations. The biggest marginal fluctuation we're seeing right now is the increasing cost of energy, particularly oil. That's the structural part.

As the cost of goods increases due to increasing cost-to-market, and personal wealth is put in jeopardy due to the credit pinch, those atomized debt-holders are pinched from both sides. That makes them freeze their spending, which in turn freezes the economy at the retail level. Retail-level movement (even if not growth) is essential to the confidence of the debt-holders. As that motion slows, their confidence decreases, causing them to further tighten at the upper levels (causing the only true trickle-down: concomitant tightening of retail-level debt instruments).

I think it's possible to re-tool the systemic problems, provided we do so quickly. Certain financial industry players will have to get badly stung. A couple of large players will likely have to go out of business, as a true market correction. Our government financial institutions will have to be willing to allow those repercussions in order to truly trim the deadwood and force a market-wide systemic restructuring. ("Capture" is a real problem here.) Probably a good number of ordinaries who have been financing their lifestyles will also have to suffer. Tough shit--you should have read the fine print.

But this has to happen in a structural climate where room for maneuver is rapidly narrowing. Refining capacity is tapped out, even though crude sources are probably not yet flowing as full-bore as they could be. So there's a crimp in the supply chain that our -- I don't want to say "enemies," but -- enemies can exploit if they choose to, a la the 1970's embargo. Combine that with the fact that we're no longer the only player in town (see, China, India), and what ever leverage we once had is totally spent. This is all over and above whatever validity the PO arguments have.

In favor of slowing the collapse is the fact that a high proportion of our debt is held by other nations (notably the far east). They have a huge stake in maintaining the value of those debts and so working to cushion the fall. But it isn't something we should be banking on (no pun intended).

That slow fall (I'm writing my way to this conclusion) is probably going to play out like the 'plateau' market the PO 'optimists' predict. Time is the variable. Someone knows it's value, but I don't know who. With effort, if we're serious, we can probably make the plateau last long enough to prolong it during the coming structural shift. But that doesn't mean it won't express a downward trend during that time. If it's a long-enough time horizon, I don't think we should fully count out the ability of the market to adjust itself to a new reality. The potential is certainly there for an entirely new economy based around alternatives to oil -- on every front. And in this respect, the post oil economy has the potential to be far, far more egalitarian.

I make that assertion based on the 30:1 energy ratio some humans now enjoy from oil. With alternative sources of energy existing more in the 4:1 range, all things will have to involve more humans in sustaining them. If anything, we may be looking at an even more granular economy than we now have. It will take more humans to generate all kinds of goods then it currently does, simply because transfer of all kinds is more costly. Generally speaking, we'll probably see the world economy skew retail, rather than wholesale.

But the key is the length of the time horizon. And in that respect, artificial "propping" of the plateau may be a good thing. Rather than simply delaying catastrophe, it may help us to avoid it? I don't know. I doubt our seriousness. We're placing a lot of hope in the self-interest of the oligarchs. If you want to stay rich in this new world, you're going to have to come up with a structural underpinning that can take the place of oil. You're also going to have to let some of your buddies twist in the wind in order to support a system correction.

Flip a coin, I guess.


LT Nixon said...

Thanks, Brown. This is interesting as I'm trying to learn a little more about all things economic. I just don't see why use Nuke plants for our energy concerns. I worked with nuclear power for 3 years on a boat and it's not like I'm growing a tail or anything.

Brown said...


Thanks for stopping in. Keep your head down out there.

Nuke is an interesting alternative, though not perfect. But not for the meltdown/catastrophic reasons that get the masses all riled. It's two things:

1. It doesn't answer the larger petroleum problem. Think of all the things we use that are traced to oil, starting with the computer and working your way through medicine and science and on into highways and autos. Sure, a tiny reactor could power a sub, therefore a train or a truck. But what are you going to make the train out of?

2. The ratio of energy in to energy out is about 1:4. Oil is 1:30. So you see that we'd need far more reactors than we've ever had refineries.

3. Waste. Wicked dangerous for thousands of years. I don't know if we can trust ourselves that long.

Brown said...

ok, so 2 = 3. I'm getting used to crazy math these days.

crumthekid said...

Have you been following the news on the completely unregulated futures markets? Investment banks have gotten into so much trouble partially because they "bet" on the fact that everyone would be able to pay their mortgage. Fresh Air from April 3 or 4 has it but it is all over the place--and I'm sure you will hear more.