Friday, September 19, 2008

The Last Bailout

My post this week will be short and early as I am on my way to the ASPO-USA conference.

While watching this week's turmoil in the world markets, I thought back to a piece Howard Odum wrote in 1974. In it he wrote:
Worldwide inflation is driven in part by the increasing fraction of our fossil fuels that have to be used in getting more fossil and other fuels. If the money circulating is the same or increasing, and if the quality [of] energy reaching society for its general work is less because so much energy has to go immediately into the energy-getting process, then the real work to society per unit [of] money circulated is less. Money buys less real work of other types and thus money is worth less. Because the economy and total energy utilization are still expanding, we are misled to think the total value is expanding and we allow more money to circulate which makes the money-to-work ratio even larger.

I think what we are seeing is the convergence of colossal financial mismanagement with energy stringency. Not surprisingly the authorities think that only money is the problem, i.e., there isn't enough of it available to fill the holes created by the disappearing value of various types of financial instruments. But if energy stringency is also part of the problem, then merely filling the financial voids with new money will only add fuel to the already potent inflationary mix which I fear is about to ignite.

In saying this, I offer no solution to the problem as stated. The real solution is much harder: deep cuts in energy use, rapid investment in and deployment of alternatives, reworking the infrastructure including agriculture for a low energy society. I'm under no illusion about whether such proposals will be made at the highest levels since there seems to be little awareness of our energy predicament.

I title this piece, "The Last Bailout," because if we are at peak, then financial bailouts will do little to help us. In the past when society had rising energy supplies with large energy profit ratios, these financial bailouts could avert disastrous consequences. They would allow the economy to regain its equilibrium and await the next sustained upturn. But, what if there is no next sustained upturn? If that turns out to be the case, then even if additional bailouts take place after today, they will all ultimately be lumped together into one, namely, the last bailout. And, the last bailout will of necessity fail to work as advertised.


Anonymous said...

Hey Kurt!

I hope you guys all have a great time at ASP, wish I could be there. Jeremy O'Leary will be there, and he is part of the operational Bright Neighbor system deployed in Portland.

It's working... woo hoo! If money is worthless, then we can have solar/pedal powered servers broadcasting the Bright Neighbor operating system for communities via wi/fi and mobile terminals.

The real questions is... without money, do Americans have an incentive to show up to work?

Who will keep the electric plants running?

Randy White
Bright Neighbor

yooper said...

Yup Kurt, I think you're on to something here. Could it be that we've reached our limit of growth, just now? Surely, the higher costs of energy has contributed to it along with reckless financial mismanagement.

The way I see it, the housing bubble was created by the Fed and we were just more than happy to buy into it. This manufactured one final last push, producing growth in the country. This got the country back on track after the bust and 9/11, putting Americans back to work. Think about it, the housing sector is mostly made up with American made products and services, along with the finacial products that enabled this...

Now it appears we cannot grow our way out of this problem.. Hopefully, we can learn from Japan who went through a similar phase back in the early 90's. Like Japan, I don't think we'll ever recover to see the highs we once enjoyed. Just periods of particle recovery, only to be followed by deeper decline..

Here's the catch, investment is made on the assumption of growth, and interest is only realized after it... Where do we go from here?

Rice Farmer said...

Speaking of Japan (where I am writing from), I don't think the economy made much of a recovery after the bubble burst. We didn't have a crash, of course, and banks somehow managed to get rid of bad debt or sweep in under the rug, but since that time the ground reality here has been something akin to "limping along and getting by." I run a small business and I remember the bubble burst and subsequent years well. The business downturn then was nothing compared to the slide we are seeing now. It's happening more slowly, but it feels as though we're sliding down a slippery slope toward a cliff. Basically, the situation now is that energy costs are simply gobbling up too much money, so in that sense it's an example of what Kurt is talking about.

yooper said...

Hello rice farmer! Here's an article for you! , an article by Michael Nystrom, be sure to read the comments, this will better explain, were I may be coming from. The fact that Japan must import almost all their resource, doesn't help matters, either.

Anonymous said...

I doubt that 'inflation is caused in part' by energy recovery ratios. Inflation is monetary phenomenom and comes from printing money out of thin air. If money supply were stable, the price for energy goods may increase if energy recovery ratios fall, but the prices of other goods and services will fall commesurately. And if prices for energy mark its scarcity correctly, then consumers will make appropriate adjustments.