Gail E. Tverberg writes: We all know the world isn’t flat. Any of us would be laughed out of
the room if we built a model with a flat earth as one of its major
assumptions.

We also know that the world isn’t infinite. There are
a finite number of atoms in the earth and its atmosphere. The ability
of our atmosphere to absorb pollutants is limited. The ability of our
soil to withstand repeated mistreatment is limited. The amount of our
non-renewable resources is limited.

Fossil fuels, especially oil,
are a particular problem. Even though the amount of resources seems
huge, the cost of extraction (in terms of fossil fuel resources,
man-hours, and fresh water) increases greatly after we have extracted
the easy-to-extract oil, natural gas, and even coal. Substitutes (such
as ethanol and solar voltaic) are expensive in terms of fossil fuel
use, man-hours, and fresh water. It is also difficult to ramp up
quantities to the level needed to substitute for fossil fuels.

In spite of the clear issue of a finite world, the financial community has taken as one of its central beliefs that Economic Growth is Good, and is in fact to be expected. A close corollary is that Leverage is Good.
Our monetary system is very closely tied to debt, and would come to a
screeching halt if lending stopped. Our banks and insurance companies
depend on lending, with banks using lending as their primary source of
revenue, and insurance companies using bonds for much of the asset side
of their balance sheets.

How did we come to believe that never
ending growth was possible? One way was a simple look backward. Growth
has continued since the industrial revolution. There was a tie-in with
energy resources all along. The industrial revolution brought coal to
make creation of goods easier. We later added oil, natural gas, and
uranium as additional energy sources. The world’s use of energy has
ramped up over a long period, practically without interruption.

Another
way we justified the idea of unending growth was through economic
models that ignored the contribution of energy and, of course, ignored
the fact that we are living in a finite world. Economic models of this
type include the Solow-Swan Growth Model that considers the
contributions of labor and capital, and the Cobb-Douglas production
function that considers labor, capital, and productivity. Neither of
these models has built in limits, either. …

In a finite world, we will soon find ourselves in a level or
declining economy, simply because there are not enough
easily-extractible resources to support growth without causing huge
price spikes, followed by debt defaults, and another round of credit
contraction and commodity price crashes. The only solution I can see is
to develop a new monetary system that is not debt based, and is not
expected to grow. Ideally, it would decline as there are fewer
resources, and as the economy naturally declines.

With a flat or
declining economy, long-term debt no longer makes sense. The likelihood
that borrowers will be able to repay loans with interest becomes quite
low, because the economic system as a whole is not growing and
producing a surplus that can be used toward interest payments. It is
much easier for a borrower to repay a 20-year mortgage with interest
when he is getting promotions and salary increases than when his
employer is downsizing and cutting hours.

Somehow, a monetary
system needs to be devised which operates without debt, except for very
short-term debt to facilitate commercial transactions. In addition, we
need to extract ourselves from the debt morass we have created. There
is now far more debt and far more promises like Social Security and
Medicare than can possibly be honored with existing resources.

The
only way I can imagine transitioning to a new form of monetary system
is by having an overlap period in which both monetary systems are in
place. The new money might initially be limited in supply and only be
good for food and energy products (somewhat like a rationing system).
People would receive some pay in each monetary system. Eventually, the
new monetary system would replace our current seriously problematic
system. (11/21/08)
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James Howard Kunstler writes: Alas, the financial impairment is still on-going world-wide and has quite a ways to run before it’s finished working its hoodoo on the so-called advanced economies. The lame duck US economic posse so far has done everything possible except the two things that really matter: allow the fraudulent securities at the heart of the problem to be exposed to the light of day to determine their actual value; and allow those companies who trafficked in them to suffer the full consequences by going out-of-business. For the moment, they’re content to shovel cash into the truck-bed of every enterprise in America that shows up at the Treasury loading dock. This can only have the effect of eventually destroying the value of that cash. …

The world has changed faster than anyone realizes. One big question is how long the American people will stumble around in a daze before we get back to work doing constructive things in this country — and by that I mean activities scaled to the resource realities of the years just ahead. More specifically, I mean how we are going to grow the food we eat without massive quantities of diesel fuel and petroleum-based “inputs” and also how we are going to make any of the useful products we need in an energy scarcer time.

Perhaps Mr. Obama knows that we’re not going back to anything even close to the business-as-usual that shaped our lives for the generations born after 1945. I would advise him to begin thinking about this by dividing the problem into two parts. The first part is how his government might handle the sheer emotional fallout of a people whose standard-of-living will be pulled out from under them. For a while, perhaps the first year or so, the public is apt to be trusting and generous, especially regarding a president who has had some acquaintance with being short of cash himself, and who can speak English both clearly and empathetically. Mr. Obama stands a good chance at playing that role successfully, at least for a while.

The second part, though, is the more difficult operational and administrative matter of promoting the necessary downscaling of all the essential activities of daily life. This is especially difficult given the current trend of the government suddenly taking ownership of everything, from the banking system perhaps to certain areas of heavy industry (if Detroit gets its way). The Obama government will have to resist the temptation to prevent enterprises from failing. These failing things have to get out of the way before new activities can get underway. It will also require government leaders to tell the public the hard truth that it can’t do everything we would like it to do. (11/21/08)
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