second Great Depression, with the government and Fed creating unprecedented sums of money to throw at the problem and markets reacting accordingly. We'll get raging inflation, but that's of lesser consequence than keeping people gainfully employed, and something to worry about next year. Welcome back to the 1970s.
So what comes next? Where is our global economy headed after the turnaround? There is a vocal minority that say we're going to briefly peak and then crash permanently, that there is no way that the quality of life can continue increasing, and will in fact decrease as energy and food supplies no longer support the increasing world population and demands. This "deindustrializing economy" or "Malthusian Catastrophe" is a dystopian world that includes a constant state of war, terrorism, extreme weather, and massive poverty. Its followers are getting ready for this by learning farming and back-to-nature survival techniques, preparing themselves for a future of sustinence living.
I have one suggestion for these folks: prepare your children to program a computer, not how to churn butter. You can learn the ways of the Mennonites if you want, but it really isn't necessary.Here are the most popular doom and gloom theories, all based on the assumption that we've peaked and it's all downhill from here.
Peak Oil
Blogs like Life After the Oil Crash give detailed crash predictions while hawking various kinds of survival gear. Our increasingly-populated world is demanding an exponentially increasing amount of energy, mostly from easy-to-find oil, of which we're running out. The Hubbert Peak Oil Plot shows that the number of proven oil reserves is tapering off, and oil production has nowhere to go but down, which means our quality of life has nowhere to go but down.
Natural Law of Ecosystems (unsustainability)
Similar but more general than Peak Oil, this theory states that we are all part of a global ecosystem, and that economic growth cannot continue expanding without detrimental effects to
our planet, which in turn will force a reversal. Compare this to the solution of a Lotka-Volterra equation, which describes the dynamics of biological systems where two species interact in a predator-prey relationship. The predator will increase its population exponentially until the prey's population dwindles. In time, the predator's population will decrease from starvation, yielding an increase in the prey, and continuing a periodic cycle. It can be argued that man is on the first part of this equation, hungrily consuming resources until they peak (which hasn't happened yet, but will soon). Once the party is over, the painful contraction occurs, until the equilibrium of sustainability happen, then the cycle repeats.Fiat Currency Crash
This one has been predicted for years, and is especially timely now with the global economic meltdown. Our currency and most all world currencies are not tied to any real value (like gold), so governments can play tricks with their currency for short-term gain, like doubling the money supply to escape a severe recession. Fiat currencies are based on a perpetuation of debt and the populace's faith in the system, and once the faith is broken, the demand for the currency falls, and the "value" of the currency falls, sometimes precipitously. The massive printing (or devaluing) of money succeeds in driving overall demand and expansion, but then causes inevitable inflation and economic instability. One website declares that:
EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.
Since we are throwing massive amounts of dollars at our current problems ("creating them out of thin air"), we should be prepared for the beginning of the end of our prosperity.
Why the world as we know it won't end
Yes, there are some huge problems that we need to solve, and we're certainly not out of the woods yet. However, between my faith in human ingenuity and human greed I believe we will continue to solve (or at least mitigate) any problem that comes our way.
Certain trends, like population growth and resource usage, start out like any system where there is a limitless supply of resources and a subsequent exponential increase in population and consumption of the resources. In 1968, Paul R. Ehlrich's The Population Bomb predicted disaster for humanity due to the "population explosion". He made the mistake that many people make about growth trends. At first, there is a small but rising trend, then a steep part of the curve that appears that the trend will continue exponentially without bound. However there are always limiting factors that cause the seemingly limitless growth taper off and flatten out. Typically this trend follows a sigmoid curve. When you are at the -1 point of the x axis in the figure below, it appears that there will be no limit to the growth. Consider fast growing company stocks: eventually market forces or their sheer size cause their growth to limit and flatten.
Notice how 1968 on the population graph looks like -1 on the sigmoid graph. So much for that prediction
The key point to note is that with time things change, people's behaviors change, and trends change. Humans are suprisingly adaptable, and can adjust fairly quickly.
Peak Oil Rebuttal Let's start with Peak Oil. My response to that is...so what? So what if we're depleting our oil? We'll find something else to take its place. It was amazing how fast people's habits changed when gas broke $4/gallon here. The most alpha-male huge SUV drivers were looking to dump them and get a hybrid. Really, it's mostly about economics as argued in The Skeptical Environmentalist (a book I've yet to read, but agree with a lot of the premise).
Recently I was at a party where people were discussing solar panels. We all agreed that since it takes about 10 years for them to pay off, they cost benefit is marginal (the environmental impact is another story, but most people are just driven by the power of the dollar). Imagine if at that same party one of the guys was bragging how he was making $200 per month by powering both his house and his neighbor's houses with his tax-subsidized super-efficient solar panel system and smart grid technology. The herd would flock to alternative energy. Imagine also if we all drove plug-in electric hybrids that tapped this smart energy grid. That would reduce our consumption of oil pretty quickly, wouldn't it?
What about all the other resources we're running out of? Well, is there really a shortage, or has supply just not yet had a chance to catch up with demand? And if there really was a shortage, there will always be efforts into creating methods to work around that shortage.
Unsustainable, or not?
"Well", you may say, "economic progress is based on using our natural resources up exponentially, and between rising population and rising standards of living, we're going to run out soon." I admit that there are some challenges to competitive worldwide demand for limited resources. However, we're far beyond the point where progress and economic expansion is measured by industrial smokestacks. In our information age, the increases in productivity needed for an expanding economy is more how well we organize bits and bytes, and less of how many widgets we can produce. Take information age companies like Google. What does this company really do? It creates a very efficient way to search the internet, and a way to narrowly target advertising. As of today, Google has a market capitilization of over $100 billion, one of the top 100 companies of the world, and although their servers are power hungry, they use a fraction of the earth's resources per dollar than, say, ExxonMobile.
We're still expanding our economy by increasing productivity, and need to use fewer and fewer natural resources to do this. The amount of energy that it takes to create a dollar of GDP, called "energy intensity", has been on a downward slope for many years.I believe that with advancing technology, we'll find out a few to get more and more out of fewer natural resources, and will reach the balance of sustainability.
We've moved from a nation of farmers to a diverse nation of economic and technological leaders, which is why the world trusts our currency even when we print trillions of new dollars from thin air.
The Great Future Currency crash?
And what about our fiat currency? Are we looking at a future when we can no longer print our way out of our mess? When our currency becomes nearly worthless? I don't think we'll ever experience hyperinflation here, although we may be battling some double-digit inflation over the next few years.
Although it's not the best situation to be in, we can thank China and Japan helping keep our interest rates so low. Even as we flood the world with Treasuries, they are there to buy them up just as fast, financing our massive debts on the cheap. Think of it as a near-zero-percentage loan for someone who has less-than-stellar credit. Why would they do this, especially given our recent track record? China and the US have a dysfunctional relationship, much like an alcoholic husband and his enabling wife. The US is the breadwinner and (by buying Chinese goods by the boatload, literally), and China depends on the strong health of the US economy to keep their own economic engine running, and will make sacrifices to prop us up when needed. Yes, they could dump all their Treasuries, send our rates skyrocking and put us in economic dire straights, but then not only would our crisis hurt them nearly as bad, but their artifically low currency would rise, making imports that much more unattractive. In an export-dependant economy of theirs, China is just as committed to this pathological relationship as we are. We know it's not right, but neither of us can end it. Even with China's help, eventually we'll have to face up to the fact that we can't have guns, butter, and lower taxes. We'll have to pay more to the government and get less in return. Will we have the discipline and long-term vision to elect leaders that will take us down the path of fiscal discipline? It remains to be seen, but if we don't, I do see more economic instability ahead for us. I admit it does take a bit of faith in my common man to expect a better world in the years to come. The current economic meltdown has shown a light on the worst of man, the greed and laziness of grabbing short-term gains and risking longer-term disaster. But with all our challenges, I see great things in the future in the way of new advances in energy and medicine, and further advancement in the information age that will improve the quality of life for the majority of the planet.Thanks to my dear dear friend Greg for inspiring me to write this blog post. Although he doesn't subscribe to all of the couterpoints here, his view of the world's future is not nearly as rosy as mine, and he's the guy I'd want as a neighbor if I'm wrong and any of these catastrophes happened.
