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Tuesday, November 1, 2011

The end of growth

The next 20 years are going to be completely unlike the last two decades. How the world works, how stocks grow, the very nature of investing and how our economy functions—all of these are due for fundamental, earth-shaking change. As investors, we have to adjust the way we look at the world.

We want growth. We need economic growth. It's all you hear about when the treasury secretary talks about how we are going to get the economy growing again or when the president talks about jobs. When our money system is growing, things are reasonably happy. When it is not growing, things are very unhappy. As long as everything is growing, our economy functions reasonably well. And when it stops growing, it throws giant fits and gets into trouble. That is why we are always chasing growth. And there is a reason for that: Money. But what is money?
I don't care what color it is or whose picture is on it or what counterfeiting measures you have in place. All money in the world today shares one characteristic: it is loaned into existence. It seems like a simple enough statement, but this has enormous implications. Because it is borrowed, we pay interest on it. That interest drives a peculiar feature in our money system (by "our" I'm referring to all fiat currencies in the world because all of them operate by this same loaning principle). When you loan money into existence, you have to pay both the principal and the interest back. That means there is always more debt than money in the system.
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We have a world where we will face exponentially rising costs if we continue to run our economy in the way it has been running. That is not a great strategy at this point. Our economy must grow by design because of how our money and debt systems operate, but it is connected to an energy system that can't grow. This is the definition of a predicament. No matter what policies we pursue or how clever our technologies get, there are certain things that we just can't undo. When you take oil out of the ground and you burn it, it is gone. And we are burning it up at a faster and faster pace.

Chris Martenson: Peak Oil Could Limit Economic Growth

Well duh

Many Do the Math posts have touched on the inevitable cessation of growth and on the challenge we will face in developing a replacement energy infrastructure once our fossil fuel inheritance is spent. The focus has been on long-term physical constraints, and not on the messy details of our response in the short-term. But our reaction to a diminishing flow of fossil fuel energy in the short-term will determine whether we transition to a sustainable but technological existence or allow ourselves to collapse. One stumbling block in particular has me worried. I call it The Energy Trap.

In brief, the idea is that once we enter a decline phase in fossil fuel availability—first in petroleum—our growth-based economic system will struggle to cope with a contraction of its very lifeblood. Fuel prices will skyrocket, some individuals and exporting nations will react by hoarding, and energy scarcity will quickly become the new norm. The invisible hand of the market will slap us silly demanding a new energy infrastructure based on non-fossil solutions. But here’s the rub. The construction of that shiny new infrastructure requires not just money, but…energy. And that’s the very commodity in short supply. Will we really be willing to sacrifice additional energy in the short term—effectively steepening the decline—for a long-term energy plan? It’s a trap!
The Energy Trap

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