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Giving Birth to a New Economy by a Managed Contraction

deirdre-kent

Guest Blog written by Deirdre Kent, Laurence Boomert and Helen Dew.

This Blog is from a paper was written for Bryan Gould’s think tank and was first published by Deirdre Kent on Transition Aotearoa Transition Towns of New Zealand.

Global economic recovery is not possible because economic growth has been fuelled by a cheap abundant energy supply, and this energy is now reaching the limits imposed by nature.

The world as a whole is either at or just past peak oil, the time when global oil production can no longer increase. Oil is a finite resource, half of it has gone, and we use six barrels of oil for every new barrel we discover. Natural gas and coal production will also both peak. The energy capability of oil is unique and as yet no substitute is available, with long lead in times to change to other second best options.

The website oildrum.com shows that since May 2005 we have been on a plateau of oil production and after July 2008 there was a rather large decline which may now continue. “World crude oil, condensate and oil sands production peaked in 2008 at an average of 73.78 million barrels per day (mbd) which just exceeded the previous peak of 73.74 mbd in 2005, according to recent EIA production data.” ( May 19, 2009)

The continuing trend of diminishing fossil fuel production across the world will cause energy prices to trend upwards, as the remaining supplies are more costly to extract. The impact on fossil fuel dependent production systems will be enormous, causing large scale social, economic and environmental disruption, making it all the more difficult to adequately address any of the world’s major challenges.

“Economic growth” has been the mantra of politicians, economists and journalists. The reason is that the money system is designed to grow. Banks acting together create our money supply. Banks issue loans as interest bearing debt. The assumption up to now has been that the debt can eventually be paid off with interest because economic expansion will continue unabated.

But after peak oil we won’t be able to generate the kind of economic growth that defined our way of life for decades. The primary energy resources needed for it will be contracting.

The new narrative has to be about a managed contraction. By “managed” we mean a way that does not produce civil unrest, violence, food riots, starvation, and public health disasters. If you hear anyone use the term “growth” it will indicate that they don’t understand the kind of change we face.

Unfortunately almost all the governments of industrialised nations are responding to the financial crisis by printing money. A recent commentator observed “we are all Keynesians now”. While this eases the panic for a while, it is going to cause a series of vicious circles, leading to bigger crashes each time. Debt, based on the assumption of growth, goes bad.

The time for solutions is running out.

For decades now environmentalists have been arguing that humanity’s ever-increasing resource consumption is testing the very real limits of our planet. Now we have a global financial crisis as well. The missing factors in these problems are the money system and peak oil. We can no longer structure our economy or our money system on the assumption of infinite growth.

An explosion in population and consumption-fed by cheap, abundant energy-has brought dramatic advances in health, communications and transport. This energy bonanza has given us a period of material abundance undreamed of in human history, but we are now in the period’s twilight. Like it or not, we must transition to a new age of the diminishing availability of fossil fuels.

The twin debts of a flawed money system combined with our binge on fossil fuels are both coming due at the same time. The party is over. We must abandon this money system with its growth imperative and develop a new society made up of communities and economies functioning within ecological bounds.

A self reinforcing cycle of growth will inevitably be replaced with a self reinforcing cycle of decline. For two centuries fossil fuel extraction has brought more available energy, which in turn meant increased extraction of other resources and a growing population followed by a higher energy demand. But now the cycle will reverse. Less fossil fuel extraction leads to less available energy, which leads to less extraction of other resources, which leads to a lower energy demand. And so on.

What we need to manage now is the Great Contraction, managed with the least possible social chaos.

The plethora of overleveraged credit instruments available in the last few decades has enabled speculation in resources such as oil. When investment banks like Goldman Sachs speculated in oil markets in 2008 leading to a huge price rise and fall, we got a taste of the profound consequences of high oil prices.

The price reached $147 a barrel in July 2008 causing aviation fuel to escalate in price and aviation companies to experiment with green fuels. Fishermen staged blockades in France, Spain, Italy, Portugal and the UK. Anger also spread to other sectors, including transport and agriculture. In France, thousands of demonstrating farmers blocked oil depots throughout the country. At the same time, dairy farmers in Germany went on strike, blaming rising fuel prices for pushing up their operating costs. The trucking industry in the UK said that it would be uneconomic to keep supermarket supply lines running. Fertiliser costs shot up.

As we move to a world with less oil, farming will come much closer to the centre of economic life. The death of petro-agribusiness will make food production a matter of life and death. Cuba discovered this during their “special period” after the former Soviet Union stopped their oil supplies in 1991. The period radically transformed Cuban society and the economy, as it necessitated the successful introduction of sustainable agriculture, decreased use of automobiles, and overhauled industry, health, and diet countrywide.

It’s not going to be easy. The truth is we are all going into the same unfamiliar territory. Nature is not going to be forgiving and will make us live within the bounds of our biology. We need a new monetary, fiscal and economic regime that brings the most benefit to the most people, while at the same time protecting all natural systems. That is a big ask.

At national level at least the following must be done:

1. Banks should be required to have 100% capital adequacy ratio. Government has already guaranteed our bank deposits, as the thing banks most fear is a run on the bank. (This is because total deposits in each bank far exceeds the available money the bank has to honour these claims.)

2. Governments must not stand in the way of the creation of regional and local currencies or business-to-business mutual barter. The WIR system is a successful precedent of this latter strategy implemented and flourishing in Switzerland since 1934. This means a change to the Reserve Bank Act and a fundamental change in the tax system away from income tax and GST and towards resource taxes.

3. The Government must plan a post fossil fuel based economy. This is a managed contraction policy where less energy is used each year. We know that it is incredibly hard for any government to change course and turn around, but for the sake of our children, our grandchildren and all of Earth’s natural systems this must be done.

References

We acknowledge Bernard Lietaer, Richard Heinberg, Michael Ruppert, James Howard Kunstler and Colin Campbell.

Contact details

Deirdre Kent is the author of Healthy Money Healthy Planet – Developing Sustainability through New Money Systems. Craig Potton Publishers 2005.
Helen Dew is secretary/treasurer of Living Economies.
Laurence Boomert works for the Wanganui Environment Centre and recently organised a national conference on Community Currencies.

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