Wednesday, September 17, 2008

The Effluent Society

The latest round of convulsions in the world’s financial markets has caused a great deal of panic among pundits and ordinary citizens alike. I have to admit, though, that I don’t share their consternation. One benefit of living on a writer’s limited means is that I don’t have the funds to spare for investment – like most of my generation, I’ll never be able to afford the luxury of retirement; unlike most of my generation, I’m well aware of this fact – and the lack of any personal stake in the fate of Wall Street makes it possible to sit back and watch the carnage with a certain degree of detachment.

Of course it doesn’t hurt that most of the money lost in the recent troubles never existed in the first place. The wealth allegedly created by rising house prices, for example, consists of nothing more than the belief that a great many houses could be sold by their owners for more than their previous purchase price. Only a small fraction of said owners can actually sell their homes at any one time without crashing the price – this is, after all, how housing bubbles inevitably end – but while the bubble lasts, even the most theoretical increase in value is treated as cash on the barrel. The popping of the bubble, in turn, simply dispels the delusion that these evanescent gains are actually worth anything.

Still, my habit of reaching for the popcorn instead of the panic button when the stock market swoons has another source. It’s sitting on a bookshelf a few steps from the desk where I’m writing this: a much-read copy of The Great Crash 1929 by the late John Kenneth Galbraith. The Great Crash is considered the definitive history of the speculative bubble and bust that ushered in the Great Depression; it is also the funniest work of serious economic history ever written. Galbraith’s wry humor and his superb grasp of economic process make it arguably the best introduction to the way that markets run amok and bring about their own worst nightmares.

As this suggests, bubbles rise and burst with tolerable regularity. The crucial lesson of Galbraith’s book is that what’s happening now has happened before. Dozens of times in the past, people convinced themselves that the world had entered a new economic era in which getting something for nothing was the way things worked. Dozens of times in the past, markets driven by this giddy conviction soared to absurd heights, then plunged back to earth with a resounding thud. Even the rhetoric repeats itself so precisely that you can time the market by it; when leading political figures respond to a market slump, for example, by insisting that the economic fundamentals are in good shape – an utterance that has already passed the lips of several American politicians, including John McCain – it’s always time to head for the exits.

What this implies, of course, is that the end of a bubble is not the end of the world. This is not to say it will have no impact. A great many people who thought they had huge amounts of money, and who made dismally bad decisions on that basis, will have to deal with the consequences. A great many companies made the same mistakes on an even larger scale, and face bankruptcy in many cases and massive layoffs in others; the impact on employment levels, tax revenues, and many other aspects of our collective life will not be small. If the consequences are handled clumsily enough by government and the upper levels of business, the end result could be – well, since the word “depression” has been gently shepherded out of the realm of public discourse, let’s call it the Great Recession, a period of economic contraction and retrenchment that could easily run on for a decade and leave America’s economic and political life in shreds.

All this has happened before. Only the comfortable delusion of American exceptionalism – a belief that manages to ignore all of American history before 1950, and assumes that the second half of the 20th century will repeat itself in a tape loop until the end of time – makes many Americans think that it can’t happen now, or that it won’t happen again. Yet that same delusion makes it hard to remember that our society survived this same process many times before, and will doubtless survive it once again. Nations have perished for many reasons, but curiously enough, financial collapse is not one of them – a reminder, if one is needed, that money is not wealth, but simply a tool for facilitating the exchange of that real wealth that consists of goods and services provided by people for people.

Over the last two decades or so, I’ve had quite a few occasions to reflect along these lines. Beginning with 1987’s Black Friday, which ushered in the current era of financial instability, economic crashes and convulsions of one sort or another have come at fairly regular intervals, and each time Galbraith’s book has offered a useful counterpoint to the pronouncements of the moment. This time, though, has been spiced with an additional dose of irony, for a few weeks ago one of the used book stores here in Ashland provided me with a dog-eared old copy of what was once Galbraith’s most famous book, The Affluent Society.

Some economists spend their lives writing in obscurity, and some become famous without seeing their ideas put into practice. Galbraith was not so lucky. Published in 1958, The Affluent Society argued that the United States had achieved a self-sustaining level of opulence to which the old laws of economic scarcity no longer applied, and that this abundance could support sweeping public programs to eliminate poverty and provide amenities for all. These claims became holy writ in mid-20th-century liberal circles, and drove most of a generation of American public investment, from Johnson’s Great Society on down. In the process, it committed America to unsustainable public expenditures that set the stage for the economic troubles of the Seventies, and helped drive the backlash of the Eighties that replaced tax-and-spend Democrats with borrow-and-spend Republicans. By the time Galbraith died in 2006, he was treated by most economists with that dismissive fondness reserved for proponents of failed ideologies.

The Affluent Society has been much critiqued by those economic thinkers whose faith in the omniscience of the free market rivals a medieval peasant’s trust in the miracle-working powers of the bones of the local saint, but it seems to me that the book’s major flaw has been missed by these writers. Ironically, Galbraith in The Affluent Society fell into the same trap he critiqued in The Great Crash: the belief that economic reality had changed and the old rules no longer applied. He was quite correct to note that America in the 1950s had become stunningly wealthy, but he was quite wrong to think that this wealth was more than a temporary phenomenon.

Two factors gave postwar America the longest period of sustained economic expansion in its history. First, the accident of geography that put nearly all the battles and air raids of the Second World War on other nations’ territory left the United States in a unique position at the war’s end. Every other industrial power on the planet had had its factories and cities pulverized by enemy action; America, and only America, was left with its industrial plant intact. For more than a decade after 1945, as a result, America dominated the world’s markets for most industrial goods, and profited mightily as a result. By the time The Affluent Society saw print, though, this dominance was already fading, and within another decade it would be a thing of the past.

Just as important as America’s industrial predominance was its role as the world’s largest producer of crude oil. In 1950, for example, the United States produced as much petroleum as the rest of the world put together. Its huge market share allowed it to prosper in the same way that oil sheikdoms are prospering today. By the end of the 1950s, however, the vast American thirst for cheap energy had turned the United States into a net importer of oil; by 1970, US petroleum production peaked and began its irreversible decline as America’s oil reserves began skidding down the far side of Hubbert’s peak. All this made the opulence of the Fifties a passing phase, and turned Galbraith’s prescription for a better society into an expensive flop.

Behind both these failures, it seems to me, is the besetting sin of modern economics, the failure to ground economic factors in their historical and ecological contexts. The index of The Affluent Society contains no entries for “energy,” “coal,” or “petroleum;” while Galbraith briefly raises the issue of resource depletion at the end of his book, he presents it purely as a challenge that could be solved with an adequate supply of scientific talent. The role of contingent historical events in launching American society on its trajectory through affluence and out the other side gets equally short shrift in Galbraith’s book. Neither of these faults is unique to Galbraith; they pervade the entire discipline of economics, which has consistently tried to impose timeless laws on the grubby historical realities of economic life, and has just as consistently ignored the role of natural systems as a primary source of economic value.

It’s for these reasons, I’ve come to think, that a society guided by economic ideas treats pollution as an amenity problem, rather than a factor that can reduce the Earth’s ability to support human societies, and treats resource scarcity as something that can be solved by investing more money, rather than a hard limit to growth. On a larger scale, it’s for these reasons that the three-hundred-year boomtime of industrialism looks normal to so many people today. Looked at with an eye tempered by the cycles of history and the principles of ecology, it takes on a very different shape; its similarity to a speculative bubble is hard to miss; its dependence on reckless, unsustainable exploitation of half a billion years of stored photosynthetic energy, in the form of the Earth’s fossil fuel reserves, becomes just as visible as the dependence of the late housing bubble on wild overestimates of how much future buyers would pay for homes.

Thus the last three centuries of industrialism have given us, not an affluent society, but an effluent one: effluent in the literal sense – one that pours out its waste on the living Earth that supports it – and also in the deeper sense of its Latin roots, ex-fluere, to flow out or away. By ignoring its own dependence on functioning natural systems and the nonrenewability of the resource base that allows it to function, it is causing the historic and ecological conditions that allowed it to emerge and flourish to trickle away out of reach. The history of industrial humanity may therefore turn out to be a repetition, on a much larger scale, of the same sequence of bubble and bust that is heading to its normal conclusion in the world’s financial markets right now; it’s pleasant to think that a future equivalent of John Kenneth Galbraith might someday write the history of that larger boom and bust for the edification of our descendants.


Brian said...

Great article John. Just wondering what you think will happen if foreign governments withdraw their support of our government funding, via either scaling back their treasury purchases or outright refusal to buy?

I'm 26, single, have no kids and have little to lose capital wise, but I'm still a bit worried that this could be much much worse than the great depression.

Bootstrapper said...

Hi John,

For those of us who do have a stake, the carnage in the world's financial markets is a problem. ;) If you live in an industrialised country, you have some stake however indirect.

As a pilot, I like to use flying analogies; An aircraft, if disturbed from straight-and-level flight, will execute a series of climbs and dives. If it's stable (sustainable economy) the amplitude of these 'phugoids', as they're called, will reduce until the airplane is flying s&l again. With an unstable aircraft (unsustainable economy), the phugoids will increase in amplitude until the airframe breaks up, or the aircraft impacts the ground during a descent.

Only the intervention of the pilot can prevent an unstable aircraft from crashing. But the pilot has to understand the nature of the instability in order to apply the correct control inputs to stabilise the machine. The theory of flight must match the reality - your life depends on it. At four thousand feet and one hundred knots, if the left wing drops, you roll the stick to the right. On short-final approach at fifty five knots, the same action will roll you into a left hand-spin and an instant funeral-pyre. (The correct control input by the way, is a boot-full of 'top-rudder'.)

Regretably, the theory of economics no longer matches the reality. Contemporary economic theory doesn't even acknowledge the existence (let alone the validity) of Peak Oil or rescource depletion. The era of cheap abundant energy is anagolous to the airplane flying at altitude and speed. If you'd been born and grew up on this airplane, and had to learn theory of flight, you could be forgiven for missing the signifigance of how differently it flies, close to the stall.

Everyone alive in the industrialised world today, is in that situation. Except that the aircraft has 'stalled' many times in the past. What made those past stalls different, was that they all occured at altitude and there was enough height (energy and rescources) to effect a recovery, after a precipitous plunge. Not this time.

"Dozens of times in the past, people convinced themselves that the world had entered a new economic era in which getting something for nothing was the way things worked" simply demonstrates how far contemporary economic theory has drifted from reality.

So, I'm strapping on may parachute now and bailing while there's still enough altitude for a soft landing. Tally-Ho!

Regards, Paul

John Michael Greer said...

Brian, if foreign governments stop funding the US, the US will simply default on its debt, the way Russia and Argentina did in the 1990s, and the US itself did at least once in the 19th century. Sooner or later that's likely to happen, and a cutoff of foreign funds would make a great excuse.

Paul, the problem with your airplane metaphor is that the only thing that will 'crash and burn' in the event of a financial collapse is a great deal of money. As a wholly arbitrary measure of value, in turn, a money system that crashes and burns can easily be replaced -- you might look into the way that 1920s Germany rebuilt its money system after its bout with hyperinflation. As for economic knowledge, I'm unimpressed with the current set of economic ideologies, but the equivalents in past examples were no better. While peak oil will unquestionably have a massive impact, I'd be slow to jump to the conclusion that the current economic crisis has much to do with that.

Ken said...

The death of JK Galbraith was in 2006. Here is Galbraith on consumption and he is clearly not quite the person you portray.

"It is also suggested that uninhibited consumption has something to do with individual liberty. If we begin interfering with consumption, we shall be abridging a basic freedom.

I shan't dwell long on this. That we make such points is part of the desolate modern tendency to turn the discussion of all questions, however simple and forthright, into a search for violation of some arcane principle, or to evade and suffocate common sense by verbose, incoherent, and irrelevant moralizing. Freedom is not much concerned with tail fins or even with automobiles. Those who argue that it is identified with the greatest possible range of choice of consumers' goods are only confessing their exceedingly simple-minded and mechanical view of man and his liberties.

In any case, one must ask the same question as concerns growth. If the resource problem is serious, then the price of a wide choice now is a sharply constricted choice later on. Surely even those who adhere to the biggest supermarket theory of liberty would agree that their concept has a time dimension.

Finally it will be said that there is nothing that can be done about consumption. This of course is nonsense. There is a wide range of instruments of social control. Taxation; specific prohibitions on wasteful products, uses, or practices; educational and other hortatory efforts; subsidies to encourage consumption of cheaper and more plentiful substitutes are all available. Most have been used in past periods of urgency.

And here, indeed, is the first reason we do not care to contemplate such measures. The latter forties and the fifties in the United States were marked by what we must now recognize as a massive conservative reaction to the idea of enlarged social guidance and control of economic activity. This was partly, no doubt, based on a desire to have done with the wartime apparatus of control. In part, it was a What should be our policy toward consumption?

First, of course, we should begin to talk about it -- and in the context of all its implications. It is silly for grown men to concern themselves mightily with supplying an appetite and close their eyes to the obvious and obtrusive question of whether the appetite is excessive.

If the appetite presents no problems -- if resource discovery and the technology of use and substitution promise automatically to remain abreast of consumption and at moderate cost -- then we need press matters no further. At least on conservation grounds there is no need to curb our appetite.

But to say this, and assuming that it applies comprehensively to both renewable and nonrenewable resources, is to say that there is no materials problem. It is to say that, except for some activities that by definition are noncritical, the conservationists are not much needed.

But if conservation is an issue, then we have no honest and logical course but to measure the means for restraining use against the means for insuring a continuing sufficiency of supply and taking the appropriate action. There is no justification for ruling consumption levels out of the calculation." from

Perspectives on Conservation: Essays on America's Natural Resources. Henry Jarrett - editor. Johns Hopkins Press. Baltimore, MD. 1958.

Jacques de Beaufort said...

Richard Heinberg has written and talked about the curious relationship between recession and oil supply. If I remember correct, he describes economic slowdowns as mitigating events that prolong the peak curve descent by damping the demand side of the algorithm. In this regard, as demand lessens, oil is imagined to be cheap again - the recession seems to fade and everyone begins to think that things have normalized. Unfortunately the respite is temporary, and as the industrial engine accelerates once more, it encounters the same limiting reality that slowed the engine previously. The net effect is a long series of wave like recessions, each with recoveries that are less substantial, and each longer and deeper than the last. It makes me think of an airplane, I guess, but one that is losing altitude and slowly gliding towards the ground in a series of dives, short upward attempts, and momentary stalls.

It's really depressing to think that so many people will never fulfill their dreams. Lives will be lived with expectations measured against the normative fantasies that have become the cultural mythos of domestic America.

Do you think I should worry about paying back my student loan debt or is it all so hopeless that it doesn't matter anyways.

I'm thinking of buying a van and just living in it. It's hard to make a living as an adjunct faculty, and I'm tired of the stress of teaching 6-8 classes at 4 schools all over the LA area to make 1/3 of what a full-time teacher teaching 2 classes does. There's so much exploitation already in academia, I suspect it will only worsen as the institutions become more and more cash strapped.

Sometimes it's hard for me to tell if I'm thinking clearly. Is this all real or is it some sort of schadenfruede ? As a doomsayer, are we actually rooting for the misfortune of others ? Do we become distressed when our predictions of gloom are foiled ? I guess that's an open question to anyone....

The North Coast said...

John, my dear, make sure you are stocked up on popcorn, for there is no way anyone in this society, least of all those of us who are non-rich or near-poor, are going to be able to be islands unto ourselves and isolate ourselves from the cascading nightmare of economic collapse and disorder that is now upon us.

We will soon start to see mass movements of millions of impoverished, desperate people from one crumbling place to another, in the belief that they can find a haven somewhere.

Millions of jobs will disappear, and our essential water, sewer, and power infrastructure will continue to decay, only much faster, as our governments lurch toward insolvency in misguided attempts to prop up the tottering financial structure with massive bailouts. The bailout of GNMA and FNMA, and now of AIG, will only hasten us on the road to complete ruin. Somehow,our august leaders seem to think that the ability of the taxpayers to finance this is unlimited, but we will see staggering drops in tax revenues alongside the increasing inability of government on all levels to do the jobs that only the government can do, such as police and fire protection, and maintenance of essential large infrastructure. Look for more collapsed levees and bridges, more water-boiling alerts, more epidemics, and more violent crime.

Let's just hope the grid holds up so we can at least talk about it.

I will almost certainly lose my moderate-income job in finance before the end of the year, and there is no surety that I will be able to replace it. Maybe my consultancy will pan out, but it's expensive to promote yourself. Many millions more people have no hope at all of replacing their jobs and have much larger debt loads and far greater responsibilities.

Nobody is going to get through this unscathed, but government interventions will aggravate the misery greatly, just as government interventions enabled and aggravated the credit bubble.. and just as massive government intervention in the economy over 80 years drove the creation of a totally unsustainable and hugely wasteful economy based on incredible waste of irreplaceable resources. We would never have had the massive credit bubbles of the 20s and the early 21st were it not for the offices of the Fed, Congress, and all the other government agencies they promulgated, with their unlimited power to manipulate the money supply and credit, and to drive policies that promote overspending and waste on every level, and to allocate vast amounts of public money to wasteful and unsustainable uses, such as the construction of our interstate highway system, and multi-billion dollar water-reclamation projects in the middle of deserts with populations of 40,000 people, so that cities with 2 million people could be built in the absence of a reliable water supply.

I enjoy reading John Kenneth Galbraith, but he got it wrong on so many levels, most of all in his core idea that free markets caused the crash of 1929. In a truly free market, credit would have tightened and the markets would have corrected from a much lower level long before the massive farm credit bubble of the 20s could even form. Yes, the economy expands and contracts at regular intervals in a market economy, but only government intervention can throw massive amounts of EZ money at the symptoms of a contraction, thus masking the feedback that would herald the problem and also act as a corrective. The Fed created the bubble of the 20s, just as it created the massive bubble of the early 21st century.

Siobhan Blundell said...

Dear JMG
Great post, as usual. It resonated hugely with me, as in two reasured books in my collection are The Affluent Society, and another, The Effluent Society, (published in 1971) by Norman Thelwell, a British cartoonist better known for his drawings of ponies and horses. His work was brilliant, in my opinion, and I have always enjoyed the pun of the titles. And curiously enough, although the two books are worlds apart in their subject matter, they share an attribute that is very important to me: they are both funny, and are rendered so by the skill of their authors.
One of the ideas I took from The Affluent Society was, at least as I understood it, that because historically, people have been poor, they didn't know how to use their wealth wisely. This observation was as true then as it is now. But you are quite right about economists operating in a vacuum, with seemingly no regard for the realities of life.
Perhaps YOU should write the history of our boom and bust, for the edification of our descendants!

Bill Pulliam said...

For those of us who have a background in ecosystem science and who tend to look at economies as flows and storages of materials, resources, energy, production, consumption, waste, etc.. NOT as the flow of money... this "financial crisis" is hardly surprising. In fact it seems rather overdue. We've been shaking our heads for decades watching the replacement of tangible activity with imaginary financial constructs, saying "this can never last." Think about it.. an economy whose largest sector is "retail sales???" Selling stuff is NOT a sound fundamental to base an economy on. It is not productivity no matter how many accounting schemes claim it is. Likewise the consumer debt cycle driven by appreciating house prices... any fool should have been able to see that this game only lasts until the median home price becomes unaffordable to the median household; of course when that did happen then all these bizarre mortgage schemes were concocted to try to keep it going beyond the point of reason, which of course just made the end of the pyramid scheme more dramatic.

So John Michael, how do you see what would have been the retirement years playing out for we of a certain age (i.e. just about the same age as you), after pension funds, 401ks, and IRAs have been reduced to a fraction of what we were promised they would be, government assistance has been whittled to bare bones help-you-if-you-are-starving-to-death-on-the-street-maybe-if-we-have-a-vacancy-in-the-program levels, etc.? Are we just gonna work until we drop? Are we going to have to somehow reassemble something resembling the extended families that used to take care of the elderly? Not asking you for a crystal ball view, just curious as to what your own imagination might have come up with?

Traverse said...

John, this article contains my new favourite quote. I have a nasty habit of arguing with those who support the idea that simply getting rid of government and allowing the market to do its own thing will make everything perfect forever... and the quote about the bones of the local saint has been added (with correct attribution) to my e-mail signature.

Andy K said...

In this time of instapundits and other insipid talking heads, I find this blog to be a refreshing breath of proverbial fresh air. Now that that is out of the way, as a moderately young person with some savings, and some money vested in the whole economic situation, I do find the current gyrations slightly distressing. Not so much that I intend to pull all my money out of the deferred compensation system, and not so much that I would pull my savings out of the bank, but distressing none the less. As both a professional nerd (system administrator) and a budding photographer, I don't think I fear for my ability to ever have employment, but still, this current round of insanity gives me pause. At least this place exists to put the current round of hue and cry about the economy some greater scale, and perspective.

John Michael Greer said...

Ken, if you'll reread my essay you'll find that I was talking specifically about Galbraith's views as expressed in The Affluent Society. Of course his thought changed over time; that happens to anybody who isn't dead from the neck up.

Jacques, I'd encourage you to consider moving out of the LA area, preferably to a small city or large town, and either getting a teaching job in the public schools or finding a new career. There's an oversupply of would-be academics these days, and the situation is likely to get worse.

North Coast, yes, I figured that somebody was going to bring up the desperate roaming hordes that play such a large part in current survivalist fantasies. Let's just say that I don't find your scenario plausible. Will I be affected by the unfolding economic crisis? Of course, but economic crisis is manageable; for the generations before the boomtime of the 50s, they were a routine occurrence -- there were massive economic crashes before the Fed, you know. (That's one of the awkward facts that the true believers in the free market tend to glide past.)

Siobhan, many thanks! I didn't know about Thelwell's book -- it was clearly too good a pun to miss.

Bill, none of us below the age of 50 or so will be able to count on receiving a cent in social security, and only the very well off will have pensions or the like. Extended families and other groups that span the age spectrum are the necessary replacement. It's already starting to be common for adult children to live with their parents; it's not too long a step from that to the sort of arrangement where Grandma takes care of the kids and Grandpa tends the vegetable garden while Mom and Dad work.

Traverse, you're most welcome!

Andy, as long as your bank account is below the FDIC limit, you should be fine there, though your deferred comp may be toast. Photography's a difficult gig at the best of times, but there were plenty of professional photographers at work during the Great Depression, and plenty of portrait painters (the 19th century equivalent) during the economic crises of the 19th century, so it's by no means hopeless.

Nicolas said...

JMG: Argentina's default was actually in the first quarter of 2002.

Brian said...

John, right you are! I'm 26 and just moved back in with my parents. I've been thinking about selling my car and moving to Portland though. Buy a bike and work jobs up there. As much as I love my parents, living out the rest of this existence in this town of 5,000 people full of rednecks doesn't exactly appeal to me. My parents do have 12 acres, cows, chickens, room to garden, but I can't stand the mentality here.

Do you think Portland will be a safe city during the decline?

Danby said...

The North Coast said
"but only government intervention can throw massive amounts of EZ money at the symptoms of a contraction, thus masking the feedback that would herald the problem and also act as a corrective."

Ludicrous, cf. The South Sea Bubble, the Mississippi Bubble, the Panic of 1819, the Panic and Depression of 1832, the Depression of 1837-1843, the Long Depression of 1873-1896 and a plethora of other financial crises and depressions that have taken place in the first 200 of the last 300 years.

The FED was founded to prevent precisely the wild seesawing of the business cycle seen in the 19th century financial free market. To a large extent it has succeeded. Since the founding of the FED, the US experienced only one major depression and one major and two relatively minor bank panics. Compare that to 8 panics and 5 depressions (two more severe and longer than the Great Depression) in the period of 1830-1902.

I realize one is not supposed to question the sacred and holy free market, but why do you suppose the freedom you seek was abandoned? Because it failed at the primary good of any economic system, which is to provide prosperity and security for the people subject to it. Why did it fail? Because the free market can only be free in the absence of fraud. When lies are bought and sold as if they were goods of value, eventually that market blows up in the faces of those who believed it. That's what a bubble is, an economic lie which has gotten big enough that large numbers of people believe it to be true, whether it's "the stock market always goes up in the long term" (1928) or "Home prices always go up" (1999).

The business cycle is a direct child of fractional reserve banking, which existed long before the Fed or any other central banking authority. At the heart of fractional reserve banking is a lie. A banker holds your money, supposedly available "on demand" he then loans out that money to another. If it's loaned out, how can it be held "on demand"? If in fact a large number of depositors call the bank on their lie, and demand their money, the bank will be unable to meet their demands. That is a bank run and a bank failure. Any system based on a lie will in time fail. The bigger the lie and the longer it's believed, the farther it has to fall.

Danby said...

If the FDIC fails to bail out any insured depositors at any failed bank in the country, the entire banking system is toast. Immediately, Right Now, No Exceptions. The banks themselves will not allow this to happen, even if they have to tax themselves at 80% and have their CEOs crawl on their bellies though broken glass. Any insured deposit is fine, so far as it goes.

I only hope that the $180bln created out of thin air to nationalize AIG is not a forerunner of how the next few financial firm collapses are handled. Gold jumped $100/oz in one day because of that. A few more of those and we're looking at Deutschland 1922.

John Michael Greer said...

Nicolas, you're quite correct. I was remembering the earlier round of economic chaos there.

Brian, do you mean Portland, OR or Portland, ME? The first is a little large -- you might consider Eugene or Corvallis instead, as the culture in either town will probably be to your taste. I've never been to the latter, so can't advise about it.

Dan, nicely put. Checks and balances are as necessary in the world of economics as they are in politics; unchecked, the rule of the free market also becomes tyranny.

Yiedyie said...

Does any one think that there is a possibility even though money is not wealth, these "adjustments"(which consume useful human resources and energy) between money and wealth have the potential to make the descent on the oil curve more steep, and act as a catalysis, and in the end to remain with more oil in the ground. I think the oil industry is not financial collapse proof an its not ran by robots. Maybe more peaceful now countries may become like Nigeria!
I think also that a Great Depression worsens the situation because gives one big problem to solve to the two predicaments(PO & GW).
Who knows! The more you get deep! The more mud there is !

Brian said...

Sorry about that. Portland, Oregon. The reason being is that I have a few friends up there. I don't really want to move somewhere where I don't know anyone at all. I'm an introvert and don't meet new people very easily.

Nicolas said...

JMG, I'm lucky that I don't need to remember it since I lived though it, I was in High School at that time. Fortunately for us we lived in Patagonia, so the big chaos that happened in Buenos Aires didn't touched us.

Any time you need the local point of view I'll be around to tell it.

Bootstrapper said...

Hi John,

Your assessment is correct; It's the money system that will crash-and-burn. However, the money system is the lubricant that allows the rest of the economy to function. The U.S. can, like Germany in the 1920s, replace it's currency with a new one. But until it does, the productive sectors of the economy will seize. Money is, literally the Oil in the engines of my metaphorical airplane. What concerns me, is the nature of the replacement.

I'm not an economist, just an interested amateur. I've reached a number of conclusions about how the (economic) world works: 'Money' and 'wealth' are two quite different things. I think Industrialism is like a computers operating system - it's a wealth producing mechanism. I see the 'isms' like Capitalism or Communism as being like computer applications - they're wealth distribution systems. The American Civil War was fought over which wealth creation system (Industrialism or Agrarianism) would dominate. WWII was fought over which wealth distribution system would dominate - capitalism, Communism, Facism.

Futurist, Alvin Toffler (The Third Wave) talks about Industrialism (industrial civilisation) as an integrated system of wealth production. It has many facets - 'Info-sphere', 'Techno-sphere', 'Socio-sphere' and so-forth. All of these components dovetail together to form an integrated, interrelated, interdependent system. The money systems used by all industrial societies work the same way and are as much an artifact of Industrialism as are factories, assembly-lines, fossil energy and the mass media.

I've reached the conclusion that the nature of a society's money system - its form and rules of issue, circulation and redemption - determines the structure and function of its economy. Debt-based money mandates a growth-based economy. Such a system is only sustainable for as long as the supply of energy can be increased. This is why politicians and economists chant the mantra of 'economic growth'. If it stops, the money system collapses.

However, it doesn't stop there. The so-called 'Business-Cycle' (of booms and busts) is the built-in outcome of a money system that must inflate or collapse. Regardless of whether the economy can grow or not, the money system eventually disconnects from reality and a 'bubble economy' forms. In my opinion, this disconnect occurs when the money supply increases to a point where there's nothing left for the finance sector to invest in, except itself. Recessions and depressions are the 'circuit-breakers' which bring the money supply back into alignment with the 'real' economy. The more effort a government or finance sector puts into delaying a recession (or depression), the worse the crash will be.

However halucinatory the 'wealth' created in a bubble is, the Dollars (Yen, Roubles, Yuan, Deutchemarks, or Pounds) created are indistinguishable from the Dollars made from producing real, tangible goods and services. Because the dollar incomes of those engaged in the bubble economy are typically far larger, these 'playerz' (as Jim Kunstler calls them) can outbid people engaged in the productive economy for those goods, services and assets that are available for exchange. A recession or depression therefore, becomes a wealth-transfer event - from those who produce it, to those who have privatised (acquired the exclusive privilege) of issuing society's money, and have used it to acquire title to real tangible assets.

And, there's a third insidious aspect. Money is essential to the function of any civilised society. You can't have a complex division of labour without a mechanism through which people can exchange goods and services - a Market. Barter can and does work, but not on the scale that's required by a complex society/economy, even an 'ecotechnic' one. A market can't function without a medium of exchange and an agreed measure of (relative) value - Money. But for around three hundred years, it's been corrupted into a catylist that's used to leach wealth out of the productive economy in a process anogulus to the use of Cyanide in a Gold mining operation. The miner walks away with the Gold (wealth), the landscape is left polluted with toxic waste (money).

Industrial (debt-based) Money adheres to Toffler's six guiding principles (in this case, Concentration and maximisation) just as every other component of the Industrial system does. The primary function of 'Nnational' currency is to concentrate wealth at the centre.

Regardless of whether an individual has a stake in the financial sector of the economy or not, it's collapse will adversely affect everyone, if only indirectly. I agree with your assessment that Industrialism will be with us for as long as fossil energy can be extracted in commercial quantities, regardless of cost. It's simply the most efficient way to convert feedstock into wealth. Peak Oil renders the growth business model unworkable and this in turn, renders the debt-based money concept unworkable as well.

However, those who enjoy the privilege of issuing society's money aren't going to give up a lucrative scam like this easily. My concern is that the replacements for collapsed Industrial currencies will just be more debt-based toxic waste, but the constrictions on economic growth will fuel a greatly telescoped business cycle. This can only serve to extend unnecessarily, the time needed to effect a transition to a new economic model and to waste rescources enriching the group that's largely responsible for the problem in the first place.

The only viable response to this mess that I can see is economic relocalisation, as you've advocated, but I advocate that this must be accompanied by the adoption of local currencies to avoid the risk of wealth being siphoned away. Your blog so far, has been a brilliant exposition of the the fundamental principles that a 'post-growth-industrial' society will need to adhere to, to be viable. The only ommission I can find is a discussion of the role of money. I hope that you'll consider discussing this subject in a future post.

Regards, Paul

markincolo said...

Great post, again, thank you.
Don’t know much about economics per sei, however I do like the way E.F. Schumacher puts the analogy of natural resources as capital and renewable's as income. If we can think of wealth in theses terms, that and think of economics as if people and the planet that we so rely on for our life really do MATTER. The problem as I see it is that the economic models that are being fallowed now were good in a time of cheap and abundant energy resources, and those resources were treated as income not capital.

roy said...

Greetings all, An image I've heard of regarding the "great depression" is of people putting their cars up on blocks to keep the rubber tires from rotting as they couldn't afford to renew their plates,etc.. Obviously "law enforcement" was a problem that didn't go away due to the depression. Considering we're in the midst of a great transfer of wealth and the "law" is used ,for the most part, to protect property owners I suspect our tilt towards fascism will be a serious obstacle to rebuilding community.

Hokey said...

When a country's financial system begins to collapse, historically, they often start wars.

If fact, they often go for broke, double or nothing, and attack their creditors.

This always fails but does not seem to deter this behavior.

I can very easily see the US starting a war, even one involving nuclear weapons, in a mad act of desparation, either with Russia and/or China or just joining in with Israel to bomb Iran, as a grand diversion.

I don't see the US quietly withdrawing back into it's borders peacefully.

It has the largest standing military in the world by magnitudes over all others.

Historically, this type of large standing military presence turns inward on it's own people when it has no other bone to gnaw on.

This will get us back to a much earlier level of living (19th century) much faster many people appreciate.

Megan said...

Danby's comments on the limits of conventional banking has got me thinking.

I've been considering transfering my savings to a credit union for a while now. The problem is, I live a fairly mobile life, and I rely on being able to access funds via debit card or ATM wherever I am. So far as I know, credit unions do not offer such services.

What does our host have to say about credit unions? It strikes me that they fit in with the 'small and local' ethos, but I don't know enough about their function to know if they would be a safer or wiser choice than a large bank during an economic crisis.

Aja Oishi said...

Dear JMG,

Fantastic post as always! I've just been reading a copy of the Great Crash of 1929 that i fortuitously found in a thrift store on the day of Lehman Bros. bankruptcy... it's an excellent read, very funny as you say. And I'm completely astounded by the uncanny similarities between that bubble and this one.

You're exactly right that you can almost time the markets by the smug pronouncements made by pundits and politicos about the "fundamentals" and the "strength" of the economy. Reading Galbraith's book is almost like reading today's paper from parallel Earth.

I am a DIYer on a crash course in home economics, and I have very little interest in Wall Streeters' ever-expanding profits. I don't know if I'm a mean so-and-so, but seeing the ruling class so shaken puts a big old smile on my face. I mean, what am I supposed to feel, sympathy for the speculators? Shall we all have a bake sale for them? maybe i'm being petty.

anyway, JMG, what effect do you think these gov't bailouts will have on the speed and nature of the (financial) collapse?

if i'm reading the history correctly, in 1929 the gov't did nothing, but the banks themselves stepped in and tried to buy up stocks after the first crash in october, which worked for about a day before another crash hit. will these modern bailouts keep the weird money illusion going, or will they just inflate the bubble more so when it pops it's even messier?

i guess my real question is, are we dealing with a rerun of the little mini-crash of April '29, or the real deal of that October?

Aaron said...

Brian, Portland, Oregon is a fine place. If it doesn't work out you can go home or look for another city to try out. Rents are raising sharply and the job market is most likely tight (dependent on your abilities). The benefits are that you can live with a part time job or two and not need a car. As a Portland native I will avoid ranting about transplants. In brevity the changes in town have created more good than bad.

------on topic-----

I'm twenty-three and maintain an investment portfolio based around short term gain strategies. The past week has caused my investments to oscillate wildly. Inciting mad laughter from my belly and lucre into my account. I feed initial capital into the unholy beast known as wall street in hopes of seeing more get excreted out somehow or another. But I understand it could all vaporize, beast included, at anytime (albeit unlikely). The idea of the whole show or my shred of it disappearing doesn't bother me. It is money I didn't really need to begin with and might be able to purchase some sort of land with in the future. If it goes bust, life goes on. My strong back and weak mind abilities are always employable for something, more so in a great recession.

As for what these economic disturbances will mean for the future. America will probably see an economic slump similar to the recent one in Japan. Our culture is very different from Japan's, we will react very differently (not for the better). This slump will be funded by the American citizen, the other unlikely path is bust. I would rather take a high-tax slump life continues similar to what average-joe perceived as normal (with omniscient undertones) than an average-joe nightmare/fantasy bust with no IRS or federal reserve. Or civic services for that matter, many average-joes forget tap water and electricity don't come from a benevolent wizard.

Ken, liked your post. Makes me think of Thomas Jefferson and that Locke dude. "no one ought to harm another in his life, health, liberty, or possessions." Simple stuff, strange how so many misinterpret that. Although, "Life, liberty and the pursuit of happiness" allows much more....err...latitude for interpretation. Especially from the myopic lens that so many Americans gaze through.

bryant said...


Most Credit Unions are part of an ATM network and issue debit and credit cards. I travel widely about the American West and I seldom have trouble accessing my money. Well that's not quite true...if a town is big enough to have an ATM I have no trouble accessing my money.

Brian said...

Aaron, I've heard about native Portlanders not liking people moving there. What's up with that? Is it an elitist attitude?

John, have you read much about the credit derivative problems we're going to be facing? I know you aren't worried much about it, but do you think global financial collapse could spell much bigger problems?

dragonfly said...

Some people are working very hard to make sure the bobble head dolls don't notice the reality of the current situation. Basically, that the economy is running on lies and wishes. That's why we must all go shopping. Retailing, new housing starts, the DJIA are fake as economic indicators.
On a tangent, seems like people are thinking of you as an all-knowing being this week, you know, where should I move, is my money safe, etc, so while the crystal ball is out, will I enjoy a happy Yule with three grandsons climbing on me? Or will I be shivering all alone in this gigantic home?

tristan said...

I second previous posts. A column on local currencies would rule.


p.s. I am madly in love with Portland Oregon and I go and pray to Portlandia whenever I am in the city to "bring me home".

Dwig said...

Just a quick note, picking up on the relocalization and local currency idea: I've been looking into this for a while, and I'm seeing a lot of activity in the area. Locally produced food, for example, and organizations like BALLE (Business Alliance for Local Living Economies) are likely to get a shot in the arm from the loss of trust in the previously prevailing ideologies.

Brian, this might be a good time to challenge your introversion (as a long-time introvert who's had to re-educate myself over a few decades, I can sympathize). Definitely leverage your friends, and work to expand your circle. We're going to need strong, viable, learning-oriented communities as a basis for growing local economies, and that means sowing the seeds and nurturing the seedlings whenever and wherever we can. Also, harking back to the Job Postings, these communities will need a variety of skills and personalities.

John Michael Greer said...

Yiedyie, a depression may actually make the challenges of peak oil and global warming easier to deal with, because both those challenges are driven by growth -- and depressions do have a habit of interfering with growth. I'll be discussing this in more detail in next week's post.

Brian, if you've got friends there you should be fine. It's a pleasant town, and as far as I know it's the only city in the US of any size that has a detailed peak oil plan in place.

Nicolas, you might consider writing up an account of your experience and posting it online somewhere -- it would be very useful for those of us who haven't lived through an economic collapse. Have you read Dmitry Orlov's essays on the Soviet collapse?

Paul, I'll consider a post on money but you may be disappointed by it. Local currencies are great in theory, but they survive only because they don't become significant; if they did, you can bet they'd be outlawed, and people who issued or used them would face jail time. Remember also that many societies over the last century or so have experienced the collapse of monetary systems and come out the other side mostly intact.

Markincolo, excellent! Yes, it's precisely the fact that our entire way of thinking about economic issues was evolved in an age of cheap energy that makes so many of today's problems so difficult to understand.

Roy, rebuilding community needs to begin with individuals reaching out to individuals; fascism -- whatever you mean by that much-misused word -- has very little impact on that. It's when phrases such as "rebuilding community" become labels for political agendas that the problems emerge.

Hokey, you might want to check your claims against actual history. Nations rarely start wars when they're in economic crisis; war is expensive, and the breakdown in foreign trade that accompanies war can shred even a fairly healthy economy. It wasn't until most of the world was out of the Great Depression, for instance, that the major moves toward the Second World War began.

Megan, most credit unions out here, at least, have ATM services, and all the other functions of a bank. We'll see how many of them had the common sense to stay out of the more delusional ends of the mortgage market; those that did may be well worth supporting.

Aja Oishi, if I knew the answer to that, I'd be in a position to play the market and make a killing. I don't; we'll just have to see.

Aaron, the Japanese slump of the 1990s is a good model for a best case scenario. I doubt things will turn out as well; we've got an empire dragging us down, as well as an entire economy geared to extravagant consumption of energy, and Japan had neither of these handicaps. Still, we'll see.

Brian, the derivatives situation is a very large mess indeed -- a huge mass of financial fictions held together by little more than blind optimism. Once it starts unraveling, as it almost certainly will, we'll see a lot of wealthy people lose their shirts, and a lot of big corporations pop like soap bubbles. That'll be a good time to get another pan of popcorn going.

Dragonfly, a nice touch of satire! Rather than prophecy, I recommend magic: in other words, decide which outcome you want to achieve, and then take concrete actions to bring it about.

Dwig, locally grown food is the wave of the future; my guess is that a lot of suburbs are going to turn into truck farms and market gardens in the fairly near future. Any business that can produce goods for local consumption, from locally available raw materials, will also be well positioned to deal with economic contraction and costly or uncertain energy supplies. Taking an active role in some local economic sector just now is probably the best investment of all.

jonathanb said...

Hi John, I've been reading for a few months and look forward to each new post. I appreciate your practical approach to these complex predicaments. The discussions that follow are also very thought provoking. Thank you to all.

BTW, readers may be interested in your interview on the C-Realm podcast.

yooper said...

Excellent article, John!

One unescapable truth was taught to me as a very young child from my father. That is, that I'd very likely never be able to retire and would have to work until I dropped dead. Not only that, but would likely have to work 12-16 hours a day working two jobs for seven days a week, to live here....

That is what living from this land has demanded from us for the past 150 years. Starting with my Great Grandfather who worked until he died, my Grandfather who worked until he died and now my father is 77 and still working..

Early on, I almost felt envious of those retiring here from industrialized cities. They had worked all their lives enabling them to retire here. They'd often tell me how lucky I was to have been raised here and able to make a living here...

Soon, I began to see a pattern emerge, most of these retirees would be around for perhaps 10 years (if they were lucky) before they would die or become so sick, they couldn't make it here and would have to move back to the industrialized civilization. Then the next set of retirees would move in and I'd be told the same thing over and over, again and again.

The world that you're describing John, I've lived in my whole life. It's historically been one of the most economically depressed areas in the Nation. The county next to mine unemployment's rate stands in the high 20% range. The recent downturn in the economy, means almost nothing here and the trend I'm discribing seems almost unbreakable.....

Yet, even though I work my fingers to the bone at two jobs (12 to 14 hrs./7 days, drawing an income that many would consider "laughable", I almost feel priviledged to have been enabled to do it. There is no dishonor in the way most have had to live they're lives here and the reward is appreciating what we already have around us, that most are dying to get to......

Thanks, yooper

Mary said...

Hello JMG,
This link is for you to read, you will probably not post it. Michel Chossudovsky writes the very interesting web site called

This article is about what he calls the clash between financial giants world wide. I know you shy away from blaming a "them" but this does seem to be a compelling account of "their" activities.

The Naked Mechanic said...

A relevant podcast from Albert Bates on "Anything is Possible" (JMG gets a mention)
Download the slide show before hand for a powerful presentation

Yiedyie said...

You probably had the oil in the ground and the climate in your mind when you've said that a depression will help PO and GW. I had the social order and social order in the mind. Between peak oil and money in the middle are the people and also in any combination possible people are in the middle. The depression might do good to GW and PO but to the people its fatal, not to mention that the context it's a little bit different than 1929's, then there were a lot of sustainable farms for many people to roll back, the population density was different, the national and international context was different. US has open conflicts all over the world and some might dare to profit on a weaker US like Rusia did also Iran might do that, i think there are many unknowns. I stick to my idea that from a people point of view a depression might add to GW and PO even thou might slow both physicals processes !

Jan Steinman said...

megan said:
"I've been considering transfering my savings to a credit union for a while now. The problem is, I live a fairly mobile life, and I rely on being able to access funds via debit card or ATM wherever I am. So far as I know, credit unions do not offer such services."

All but the smallest credit unions are typically part of one or more ATM networks. I've never had problems getting funds out of an ATM from my credit union.

Karis said...


Your comment "most of the money lost in the recent troubles never existed in the first place" adds insult to our injury. Many many hard-working people who work for hourly wages have tried to be responsible, have saved some money for the future, and have parked it in some of these investment vehicles because they were the only investments available in their 401K's and IRA accounts. Now they are losing it all. Their money DID exist in the first place. They converted portions of their limited time on earth to save for a time when they can no longer work. To suggest that these ordinary workers deserve what they are getting is cruel.