In the last post I made the claim that the American empire topped out in the seventies as the cost of energy rose. It's misleading, though, to look at the price of oil over this time because it doesn't include other costs that were absorbed through other entities, such as U.S. government spending, or through the expansion of the dollar. It's these twin deficits born by American beneficiaries that reflect what is, in essence, the increased demands of the energy system as a whole. This would include military spending, which occurred with the expansion of American military presence around the world, and oil infrastructure like supertankers and pipelines. But it also includes the need for more dollars available to the market for global trade to function, as almost every single commodity on the global market is priced in dollars. The reason the U.S. has run continuous trade deficits since the seventies is because dollars are produced through credit. It's akin to running a four-decade long bar tab and never settling up, with the added counter-intuitive aspect in which the bartender uses the credit represented in your bar tab to make mortgage payments on your house. This last part is why any discussion of money always has a gloss of weirdness. It is an abstract representation of real wealth and not the wealth itself.
As the long as the flow of money has a parallel activity in the maintenance and functioning of wealth, then the money can be said to be good. When the parallels diverge. in other words, when the representation of money rises without a corresponding rise in wealth, then the system gets into trouble. What has been the case since the seventies is that the money system has grown faster than the wealth system, which is evident in the amount of total debt and why the percentage of debt compared to GDP is so monumental. Now we've entered the territory of bad money defined as debt that cannot be repaid. Why? Because the story of the past few decades has told us that wealth doesn't just simply grow in accordance with the growth in the money. To answer this second "why" question it's necessary to talk about what oil is and does.
Oil is a form of natural wealth. In fact, it is the single most important form of natural wealth in the current globalized industrial economy. This is because oil is a concentrated energy source that enables every other form of wealth, natural or otherwise, to come into being. Oil has advantages over every other important energy source, like coal, methane, sunlight, or nuclear in that it has properties, such as it's especially high concentration favorable to all others except nuclear, and it is a liquid which makes it good for storing and transporting, for use in engines, and for extracting from the ground. For all these reasons it is considered the ur-(original) resource. It makes all other forms of wealth much easier to generate than all other sources do. So when oil's costs rise, and they have been rising remorselessly, the cost of everything else rises along with it.
The oil shocks of the seventies destroyed the Keynesian global money system established at the end of World War II. This is not the view of conventional economists, so if you're at a party populated by these or other market creatures, expect pushback. With that said, the inflation brought on by rising oil led to an event not thought possible at the time called stagflation, which simply means that there was a condition of simultaneous rising prices alongside stagnant economic growth. The remedy for this, among other things, was the system of debt based money and the necessary expansion of credit, which served to cause the current crisis, by backing the dollar with commodities rather than with gold. You could say this was the beginning of globalization, or at least a major advance of it, characterized primarily by globalizing markets in currency, credit, and labor. This system is why it now seems like everything is made in China.
So the rise in debt is a measure of decline. If you go back to Tainter's observations, it is increasing societal complexity in order to solve problems. Doing this comes with added costs, fixed costs like infrastructure, that need to be maintained. Think of the container ships that bring goods from China to the U.S. They are both massive and numerous. Or all the new factories that had to be built in China to supply American markets. Because of these new investments, globalization only works if energy is cheap, which it had been for the entirety of the eighties and nineties when globalization came into being. However, when the price rose from something like $15 in 2000 to $148 in 2007, the globalized system began to falter, causing a massive debt unwind, beginning with the sell-off of oil. The system of globalization could not function with such high prices and ultimately manifested itself in a credit crisis starting with mortgages, and then everything else. The entire system of globalized finance was at risk of complete failure.
Increasingly complex systems require an increase in available energy. The increase in available energy effectively stopped sometime in the mid-2000's. The cost of new energy, as seen in North American fracked oil and other non-conventional methods, have not provided the economy with a significant increase in available energy. The reason is that the cost, in energy terms, is too high for getting a new barrel of oil. Here is the point at which you see available energy as the heart of the problem for the system. Each new barrel of oil comes with a lower net energy that can be used outside the system to get the new barrel of oil. By this I mean for the use of society. You may have an increase in the number of barrels on the market, but each barrel now is either less energy dense, as is the case with biofuels, or that the extraction of that barrel cost something like 30% of the energy the oil in the barrel embodies. Either way, you are looking at a reduced available energy and it directly explains the higher cost.
So the narrative goes like this: Since the original oil shocks of 1973 and 1979, the response has been to globalize the economy by off-shoring jobs to save money on labor, to make global arrangements for the free flow of credit and investment to enable a build up of the necessary infrastructure for globalization, and to expand the role of floating currencies like the dollar to create money on demand. This enabled a resurgent economy throughout the eighties and nineties because of the efficiencies of labor and money (with increased energy), helped along by instantaneous transfers of capital to anywhere in the world with computers. Globalization added fixed costs that become burdensome to maintain once the cost of energy had risen to the point that globalization no longer serves as a solution to the problems that began with the first energy shock. So what happens next?
Americans and other Westerners like to talk about the "power of innovation", or believe that the only limit is the imagination, or the will to do something. Hard to prove either way. But I wonder what new system could salvage our current lifestyles here in the rich countries. Aside from the doubtful new energy sources waiting in the wings to replace fossil fuels, what other system could we possibly innovate to replace globalization? How much bigger can it possibly get, given that the system is compelled to grow? Is there a yet-to-be- innovated "super-" or "mega-" globalization out there in the future? Seems unlikely, given the nature of energy supply. Innovation rides on the back of efficiency in money and labor productivity. The entire project of globalization has been built with the collapse of oil prices in the early 80's. The energy shock of the 2000's had a different and permanent cause from the two in the seventies, which was geological rather than political. The question of what the future holds will be a matter of what we can do without and still live dignified lives. It is no longer about having more.
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