Coming Chaos – Part 3

Post-Peak Economics

by Peter Goodchild

Related: Coming Chaos:  Part 1 – Systemic Collapse.  Part 2 – When The Lights Go Out

Almost everything in the global economy is either made from oil or requires oil to manufacture it or operate it. As the price of oil goes up, so does the price of everything else. This rise is referred to as “stagflation” — stagnant incomes combined with price inflation. The hardest hit will be those who have lost their jobs, followed by those with limited disposable income, which means those most likely to have debts: car payments, house mortgages, credit cards, student loans. But everyone will find that a dollar just doesn’t stretch.

That will be Phase One: economic hardship. Besides stagflation, the major issues will be unemployment and a falling stock market. While money is still real, it will be everyone’s obsession: as in Weimar Germany, it will take the proverbial wheelbarrow of money to buy a loaf of bread. The world of Phase One can be depicted as shoddy, dirty, and disorganized.

Phase Two, much longer, will be genuine chaos. It will be characterized by the disappearance of law and order and capable government. As these fade away, money will have no use as a medium of exchange. When there is no more faith in money, it will be replaced by barter. From economic hardship of a financial kind we will pass to economic hardship of a physical kind: manual labor and a scarcity of basic goods. The world of Phase Two will be a different picture: shocking, horrifying, and deadly.

Phase One has already begun to some extent, to judge from four related events:

1. In 1970, US domestic oil production went into a permanent decline.
2. Global oil production per capita reached its peak in 1979 (BP, 2010, June).
3. Retail gasoline prices in the US, which had been fairly steady for 20 years, suddenly doubled from 2002 to 2008 (EIA, 2009, January).
4. Finally, around 2005 the energy required to explore for, drill, and pump a barrel of oil often exceeded the energy gained from it (Gever et al., 1991).

Phase Two can be envisioned by looking at events that unfolded when the Soviet Union collapsed in the 1990s. Within a short time, people simply gave up using money and switched to other items of exchange. One of the most common items was bottles of homemade vodka (Orlov, 2005). It seems that vodka was popular because it was easy to carry, of great practical value, and rather fixed in exchange value (since, presumably, it was either real vodka or it wasn’t). But there are many cases similar to that of the Soviet Union. One might, for example, consider Argentina in 2001 (Aguirre, 2005, October 29). Or we might consider the American Civil War — after that time, Confederate dollars were literally just paper.

In other words, at one point the money problem will be everything, and a few decades later, the money problem will be nothing, because there won’t be any. Money is only a symbol, and it is only valuable as long as people are willing to accept that fiction: without government, without a stock market, and without a currency market, such a symbol cannot endure (Soros, 1998). Money itself will be useless and will finally be ignored. Tangible possessions and practical skills will become the real wealth. Having the right friends will also help.

It’s important to remember the old clichés around the general idea that “money only exists as long as people have trust in it, whereas a currency that becomes suspicious simply dies.” More specifically, money only exists as long as there is a government to produce the money and then to keep it alive. When a government utterly loses its power over the country, the money simply melts like snowflakes on a hot metal stove.

Will life be better or worse in a world without money? That’s hard to say. When I lived for several years in a rural community in central Ontario, Canada, there seemed to be advantages to the rather casual and offhand bartering that went on. If one person left a gift on a neighbor’s porch, and a few days later the neighbor left some other item on the first person’s porch as a gesture of appreciation, it was not even clear if such behavior could be considered barter.

There are parallels between the Great Depression of the 1930s and the present oil crash, but there are also important differences. The Great Depression was caused by over-speculation in the stock market, which led to the 1929 panic (Galbraith, 2009). The rapid sellout of stocks caused the collapse of many businesses. These businesses laid off many workers. The workers then had insufficient income to buy whatever was available, even though prices were low. The Great Depression, in other words, had an amazingly artificial cause, although the ensuing suffering was by no means artificial. The oil crash differs because its cause is not artificial; in fact, its cause has a rather uncertain relationship to the abstractions of economics. And although many people will lose their jobs, there will be no reduction in the prices of goods, at least in Phase One.

The Great Depression was a time of deflation. The basic cause was massive over-speculation, a great bubble that just burst. The problem today, on the other hand, is that our Commodity Number One, which is petroleum, is beginning to run out. That means that virtually all other commodities will likewise run out.

The era of the Great Depression, however, closely resembles the coming years in other respects. In particular, the poverty of that earlier time, and many other aspects of daily life, will be repeated in the events of future years — although that would be putting it mildly (Broadfoot, 1997).

In terms of the exigencies of daily life, part of the solution is to give up the use of money well ahead of time, instead of letting the money economy claim more victims. “Money economy” is not a tautology: materials and products were distributed or traded over very long distances long before money was invented; sometimes the process was simple barter, and at other times these matters were handled by a formal governing procedure. Barter would allow people to provide for their daily needs on a local basis, without the dubious assistance of governments or corporations. Such a way of doing business, unfortunately, is illegal if the participants are not paying sales tax on their transactions. Politicians disparage the age-old practice of barter as “the underground economy” or “the gray economy,” but their own income is dependent on taxes. The transition itself would not be simple: there are so many rules, from building codes to insurance regulations to sales- and income-tax laws, that make it difficult to provide oneself with food, clothing and shelter without spending money. Nevertheless, as the economy breaks down, so will the legal structure, and laws will become rather meaningless.

All that is certain about barter at the present time is that sales tax is not being paid, and that a “crime” is therefore being committed. The money economy requires that a large portion of one’s income be paid out in various forms of legalized extortion: taxes, insurance, and banker’s fees (such as mortgages), all of which are justified in our minds largely by the fact that they have been imposed for centuries.

At the moment, taxes alone consume a great deal of our income, especially if we consider that there are, in a sense, taxes on taxes: I am taxed on what I buy, but the price for that object has been raised to cover taxes that were paid in the process of making and delivering that object. Only a small piece of paper is required to make a list of all the benefits one receives from these various forms of extortion.

Within the present economy there are also plain old bubbles, foolish speculation, that cause some huge rises and falls in the prices of things. The most obvious one is housing. Another may be gold — although there are at least some plausible arguments for buying gold, beginning with the fact that it is a fairly hazard-free medium of exchange, at least in comparison with any form of currency.

Although inflation characterizes Phase One of economic collapse, inflation and deflation are never a case of either-or. The two can happen side by side, and usually have. Certainly today there are some things that are cheap, some things that are expensive.

The big inflationary items of today are food, oil, and gold. But they are not all the same case. Oil prices are rising because we are running out of oil. Food prices are also rising because we are running out of oil. In fact, anything is rising if it is connected to oil. Gold, however, is not directly connected to oil; it has value primarily as a preserver of wealth, even if that desire for wealth preservation is partly driven by oil fears.

Inflation, nevertheless, has to some extent been just a bogeyman in previous years (Greider, 1998). It was always the big financiers who did the most complaining about inflation, because they were the ones who had the most to lose — their financial holdings thereby had less value in a fundamental sense. For the person who had no savings at all but whose wages were rising, inflation was really not a big issue. Nevertheless, in the twenty-first century inflation will matter, and very much so, at least until the big finale. The difference between the present and the past is that high prices are no longer connected to high wages.

We must certainly get rid of the old concept of inflationary-deflationary cycles. Toynbee and Spengler spoke of cycles of empires, but when we have all returned to living a simpler life there will be cycles neither of inflation nor of empires.

The economic problem of peak oil is occurring when people in many countries have already gone through decades of being battered by other economic problems. One serious issue is globalization: for many years, big companies have been getting their work done by sending it out to whatever countries have the poorest people and the most repressive governments (Greider, 1998; Martin & Schumann, 1997; Thurow, 1996). The result is that people in the more-developed countries lose their jobs. Even when the official unemployment levels are low, the figures are misleading; large numbers of the employed are no longer working at well-paid, permanent jobs. Many are now working part-time, and others have given up hope of work. These factors are not counted in the official unemployment figures. Closely related to the problem of globalization is that of automation, which increases production but decreases payrolls. Economic disparity is therefore a characteristic of our times. For many years there has been a widening gap between the rich and the poor in the US: while most incomes have either fallen or not changed, the top five percent of families have seen their incomes increase considerably (US Census Bureau, 2010, September 16).

As a result of all these vagaries within the capitalist system, government services are perpetually being cut. The common expression is that “money is tight these days,” although very few people ask why that is the case. Taxes continue to rise, but the individual receives little in return. But the days of globalization and automation are coming to an end.

The connection between oil and money can be complicated, and even economists are mystified. In 2007 an international credit collapse began. In 2008 the price of oil doubled over that of the previous year. The connection between the two, if any, can be interpreted in many different ways. Without drifting into endless guesswork, it can at least be said that the credit collapse, the defaulting sub-prime mortgages, and the regulatory failure could be ascribed to government corruption, which like oil depletion is an aspect of systemic collapse.

Ultimately, of course, all money is “funny money,” because it is only a symbol of events occurring in the real world, and often it is a very inadequate symbol. In particular, the rise and fall of oil prices often has little relation to how much is being produced, or how much is in the ground. The stock market can multiply a symbol in order to create imaginary wealth, but the symbol then fails to reflect reality. On a smaller scale, there is the question of what “one dollar” represents in the material world. If a “constant dollar” differs from a “current dollar,” for example, then the word itself is so fluid that it is not really adequate as a measure of anything tangible.