The Breakdown Of Economic Expansion In The 21st Century

Although the International Monetary Fund (IMF) assures us that global economic growth is proceeding apace, there are good reasons to believe that GDP numbers recording that growth exaggerate the economic expansion underway. The United States has experienced a statistical recovery in which GDP grows due to the enormous fiscal and monetary stimulus, but without creating many jobs, and despite the fact that the housing market is only a pale semblance of what it once was.

Growth in the European Union is jeopardized by the debts of several of its member countries. Japan's economy was languishing before the devastating earthquake. The emerging economies are said to be booming, but the growth numbers in China are suspect. Do newly constructed ghost cities where no one lives count? Or newly constructed ghost malls?

We have witnessed a substantial breakdown of economic expansion in the developed (OECD) economies, and there are good reasons to believe that whatever growth the emerging economies are experiencing will not last forever as many optimists predict. Does it seem plausible that China's future growth will be as vigorous and longlasting as Japan's long expansion (circa 1960-1989) after World War II?

My thesis is that global economic expansion has broken down, and where there are pockets of economic growth as in China or Brazil, it is unlikely that growth will continue for much longer. (I am thinking on decadal scales.) Clearly this is a subject for a book, whereas today I am going to outline why this thesis is credible in a blog post. It's been decades since the "Limits To Growth" crowd published their systems analysis of what might happen in the 21st century. There has been one update to  their "World3" model since then, but decades have passed in which we have gained valuable experience not captured in that model. A number of independent researchers have investigated these problems since the 1970s. Today it's my turn.

I am going to list the primary reasons why I believe it is reasonable to expect a breakdown of human economic expansion in the 21st century. Underlying everything I say is the ultimately impossible requirement of exponential growth in economies to meet the needs of exploding human populations. But long before humankind hits a strict mathematical wall on a finite planet, things start to fall apart. That is where we stand in 2011. And now, here are the five main causes of slowing and ultimately waning economic expansion.

1. The adoption of fiat money — when the United States abandoned the gold standard, all limits on the expansion of the world's reserve currency (the dollar supply) were lifted. The debasement of the dollar has proceeded as expected. Fiat money paved the way for unlimited expansion of credit (debt). After the oil price shocks and inflation of the 1970s, this expansion made it possible for growth to occur as it had after World War II. However, the replacement of economic growth based on savings and investment by growth based on the expansion of credit was a devil's bargain. The advanced economies have now hit the limits on debt-based growth. One nasty side-effect was the financialization of everything (including commodity markets) and an astonishing expansion in derivatives of all kinds. Thus did gambling replace savings & investment. As a result, there has been an inevitable trend toward more mal-investment and unwarranted asset price inflation (bubbles). The explosive expansion of credit/debt has also created the astonishing and growing income & wealth inequality we see not only in the United States, but all over the world. I contend that such inequality stymies "real" economic growth everywhere it occurs, as opposed to growth measured by GDP. Does a feudal economy "grow" if only the landowners get richer?

2. Higher energy costs — energy imports are a tax on economies. The world has entered the era of permanently high oil prices, although there is great volatility as we've seen over the last 4 years. Despite fiat money expansion and inflation, the taxes paid by developed economies are rising in real terms, and will continue to rise over time. It is notable that most of the world's 15 largest economies, including emerging economies like China and India, are net oil importers. The relationship between oil price shocks and recessions is well-established. There are a number of reasons for the increasing scarcity of oil, and thus its rising price over time. I will not go into those reasons here. However, the classic economic theory of non-renewable resources predicts a switch to substitutes for oil which has not occurred, or has occurred unsustainably at great cost (e.g. biofuels). Thus we can expect the energy tax on growth in the world's largest economies to continue to increase.

3. Growing external costs — this is a catch-all cause of the breakdown. Name your favorite environmental or resource shortage disaster! Economists view the costs of climate change and other disasters as external costs, also known as negative externalities — "when the private calculation of benefits or costs differs from society's valuation of benefits or costs. Pollution represents an external cost because damages associated with it are borne by society as a whole [societal costs] and are not reflected in market transactions." I can not even begin to list here all the external costs being imposed upon modern societies as a result of human population and economic expansion, but consider the costs imposed by 1) anthropogenic climate change; 2) overfishing and destruction of the oceans; 3) growing freshwater shortages; and 4) various threats to future crop yields. Societies must bear these growing costs, which severely crimp economic expansion in the traditional sense. Bear in mind that we are still in the early stages of most of these disasters—we have already reached "peak wild-caught fish"—and thus external costs will rise inexorably over time. For example, consider the costs of (only) a 1 meter rise in sea level by 2100. If the big ice sheets (Greenland, West Antarctica) react to greenhouse gas forcing in an unforeseen, detrimental way, an outcome which is possible based on our evolving knowledge of their behavior, 1 meter of sea level rise could easily turn into 2 meters.

4. Faltering technological progress — the primary driver of economic expansion is technological progress. If such progress fails to materialize—to abate external costs, for example—or does not materialize at a sufficiently high "rate" to support economic growth, that growth will not occur. In recent decades, technological progress has continued in areas such as wireless communications, nanotechnology, biotech, and so forth. However, to support economic expansion, such developments must be commercial and widely deployed. While we have seen an explosion of wireless devices that make entrepreneurs like Steve Jobs wealthy, we have not seen a comparable expansion of commercial technnology in almost every other area in which research is ongoing. For example, improvements in transportation technology (plug-ins, etc.)  have been painfully slow. Ditto with energy technology. While incremental improvements happen all the time, breakthroughs, as the name implies, are rare. As things stand in the early part of the second decade of the 21st century, commercial technological progress has not been sufficiently robust to support continuing economic expansion. Sorry, Ray Kurzweil!

5. The problem of complexity — as globalized human economies expand, the complexity of the systems (e.g. fossil fuel energy extraction and distribution) required to support those economies explodes. As Joseph Tainter has noted, there are diminishing returns on such complexity, meaning you are getting less bang for the buck (a lower cost-to-benefit ratio) as systems become more complex. Unfortunately, that is not all there is to it. Human beings vastly overestimate their ability to manage risk in such systems, a subject Nassim Taleb has spent considerable time elucidating. Not only are there unintended, disastrous consequences—Black Swans!—but it is also the case that human beings vastly underestimate their own ability to subvert the complex systems they create—no system is human-proof. The financial meltdown of 2008 demonstrates all this beyond any doubt. It would be naive to expect there will be no future economic catastrophes like the ones we've seen in the last decade. Before the world became so economically interconnected and interdependent, financial blow-ups could be contained locally. Clearly, global economic expansion can not proceed apace if it is more and more frequently thrown for a loop.

I am going to leave it at that this morning. As I see it right now, these are the main causes of a breakdown of economic expansion in the 21st century. I considered adding other causes, e.g. the dangerous hubris of the United States. Readers may want to add to this list of causes, or consolidate different causes, or expand on certain causes. I have stuck to a high level of generality here, and the causes of the breakdown interact in myriad ways.

My apologies to all those who have also thought about these problems for many years now. I thought I'd throw my two cents in, having also thought about these problems on and off for a long time. In fact, I have lived long enough to watch the disaster unfold, which is not an outcome I expected.

Unless humankind engages with what appear to be clear limitations on its economic prospects in the 21st century, we will be completely unprepared for the chaos to come. Lack of preparation is the outcome I expect.

Comments

[Remi]

I'm not sure how to define it, but one of the failures has to be with ordinary citizens and their willingness and even desire to continue with the broken system we have. Is it human nature, is it something specific in the socio-political systems we have adopted...

I know far too many people that have a cursory understanding of certain issues, but they refuse to get informed and read fact based studies that outline the true depth of our problems. They knowingly prefer to live in ignorance, for fear of being too depressed. So for now they continue to live their lives blissfully ingnorant. That might change when they lose their jobs, or pensions...

[Usman A.]

Great post. Concise and meaningful.

[sharonsj]

I've taken a look around at all the people I know, and very few of them actually have a high-paying job that allows them to pay all their bills, have good medical treatment, heat and light their homes, and eat in a restaurant. I estimate they are about 20% of the total, while the other 80% is going broke. Many of those going broke are college graduates in professional careers; I estimate they are about a third of that 80%. The rest are lower middle class or poor.

I'd say those numbers are pretty scary. At the same time, everybody I talk to, who comes into my store (and business is very slow, by the way), is up front about extreme anger and frustration with our politicians. We either have to have real leaders or we need Americans to put their bodies in the streets. This can't go on.

[anon-anon]

Very nice and concise synopsis. I really don't think you need to add anything to the list. The upshot is that the global teaming hoards of landless and productively skill-less are in for a tough ride no matter what happens.

[Tony Weddle]

Good post. The point about technological progress (or lack thereof) is one I've raised a few times. So many cornies seem to think that technological progress has continued apace and even accelerated but it's difficult to come up with real breakthroughs (the ipadN is not a breakthrough), as you say. I think Richard Heinberg covered this in one of his books and showed that innovation is actually on the decline.

Speaking of Heinberg, he's also been thinking about this subject and has been putting a book together, The End Of Growth. I think it's out in July or thereabouts. His site, and the Post Carbon Institute, have been running chapter excerpts for a few months.

There have actually been a couple of updates to Limits to Growth. I forget the title of the second book but the third came out in 2004, "Limits to Growth: The 30-Year Update". It only had one scenario that avoided collapse but that is already behind schedule. The book tried to be optimistic by pointing out international agreement on the ozone problem (though the jury is still out on that and will be until 2050) but there doesn't really seem to be much cause for optimism, other than I'm amazed that things haven't fallen apart more than they have. Or maybe they have but not many people have realised it yet!

[Gail]

I s'pose you are already cognizant of this:

http://www.youtube.com/watch?feature=player_embedded&v=KqO64-ipqAM

[Dave Cohen]

Gail,

I guess you dont know this, but Mike Ruppert is a paranoid wacko who should be put in a padded cell.

Instead, he makes money running collapsenet and fooling naive people like, apparently, you.

Be sure to stock up on guns, ammo and food!

best,

[JC]

Gail - Don't you need to take a shower after watching Ruppert talk?

Dave - helpful post summarizing many of your major points on this blog. Couple of comments - (1) technological progress seems to be proceeding in military arena (e.g. limited nukes, unmanned drones, satellite related) which leads me to the thought that maybe military over-expenditure may be a cause of decline (I read the other day that half of discretionary spending by US since WW2 went to military). (2) With Fiat currency issue I would add failure of the democratic political process due to corruption, incompetence, lack of vision, lack of intelligence, etc.

[Loveandlight]

I have a more nuanced view of Michael Ruppert. He deserves kudos for being one of the first to catapult Peak Oil awareness into the neighborhood of the mass-consciousness where it has managed to take root, but he also deserves raspberries for linking PO awareness with "9/11 Trooferism". (Not that I think it's impossible that there was US Government complicity in 9/11, it's just really not a good idea to make arcane conspiracy-theories part of one's worldview; besides, it's pretty arrogant for anybody to say that they know what really happened that terrible day.)

The video does serve as an example of his well-known tendency to take something that we all know and use it as an excuse to go off half-cocked. The Fukushima incident is being upgraded by Japanese authorities to a 7, which puts it on the same footing as Chernobyl, so we know that the likely impact on the world's third largest economy is going to accellerate collapse considerably. But Ruppert really does seem to be setting himself up to look foolish yet again by making an absolutist and melodramatic statement that it's all going to go down the crapper by July of this year. (And yes, when I read he was making his website/ blog "pay-to-view", my response was "Screw that nonsense!")

[Morocco Bama]

The Market is not going to collapse in July, unless they want it to collapse. Currently, 70% of trades are conducted in an instant by algorithm, meaning the Market is a rigged game, it's programmed. How else would someone explain the stark contradiction between its performance and everything we are talking about here. The experts know what Dave is saying, and that it's FUBAR, but they're holding out as long as possible so they can concentrate their wealth and positions before the evacuation. They know that once they stop propping up the Market, which is the last support for the Middle Class because it is their retirements, that all hell will break lose. The getaway car must be ready before that fateful day.

One of the things that keeps jumping out at me is how the airlines are still afloat. I believe there are some major shenanigans going on, i.e. some significant off the books, unreported government subsidies, keeping them operating, because it just doesn't make sense otherwise. Considering this depression, the majority of air carriers should have gone bankrupt with no chance of restructuring and we should have seen a major consolidation with only one or two carriers left holding the market share.

[Loveandlight]

Very true, MB. :-)

[Curtis Fromke]

We used to play Monopoly with infinite credit for all the players. For some strange reason we didn't clear the debt, so that I could owe Kenny $3500 and Richard would owe me $2000. This was perfectly ok and we played the game until it was time for supper, even then we would carry it over for the next day. I think this was the training that Bernanke got as well. Everybody knew it was funny money, but as long as people wanted to play, it worked and we moved our tokens around the board. This what happened in South Dakota during 3 day blizzards back before TV.

I've assumed that this behavior is what is currently behind our current economic activity. It is sort of like knowing that Oz is green as long as you keep your green colored glasses on. Note: Even Toto had glasses.

[Gail]

Dave, I meant that link to be amusing. Has anyone ever called you a misanthrope...in the most endearing, fondest sense, of course?

MO - I have wondered about the airlines and thank you for articulating it - because although I rarely fly, my recalcitrant daughters often do, and the prices they pay seem inexplicably cheap.

[Glenn Hughes]

There's plenty to be paranoid about! Our country is run by the military industrial complex with the power of today's info tech. Besides genetically altered and modified food, personal info for sale is one of our only growth businesses. Put that together with the corps running the congress, we're looking scared.
Mike Ruppert may go a bit heavy with the news but he lives and sacrifices for his work and he works hard. My wife died in the WTC and I don't know what to believe. But I believe there was some big time shenanigans.
We all need to work hard to stop this momentum off the cliff.
For many of us this article pretty much ranks with the great documents of time. The question for many is what to do.

[Gail]

What about this analysis?

http://www.businessinsider.com/20-reasons-why-the-us-economy-is-dying-and-is-simply-not-going-to-recover-2010-2

[Dave Cohen]

Gail --

You have found me out -- I am a misanthrope! But there are many exceptions to that rule, meaning there are lots of people worth talking to about the fucked-up world we live in. Perhaps they need some guidance? No doubt there's lots of confusion out there. I believe -- with good reason -- that I can provide SOME guidance, such as it is, and considering its inherent limitations. There's no straightforward way out of this mess we call Life.

Those are the people I'm trying to reach on DOTE.

best --

[Dr. C]

Re: Limits to Growth. "There has been no systematic follow-up since then, "

I don't know where you get that. The same people that published the original, published book-length follow-ups in 1992 (Beyond the Limits) and in 2004 (Limits to Growth, the Thirty Year Update)

[Tony Weddle]

Ruppert is digging a hole for himself with his near term predictions that keep failing, ruining his claimed 80% accuracy. However, soon after one of his alerts following the Japanese quake, I noticed a not dissimilar alert from Chris Martenson, who's usually a bit calmer. It's the featured blog entry on his website and was originally for paying subscribers (and he charges three times what Ruppert does). Here's the link to his website:

http://www.chrismartenson.com/

Notice that right underneath the featured entry is another one (you need to be a subscriber to read it - I'm not) which also seems to be targeting July, though probably in a more reasoned and less panicked way than Ruppert.

[Morocco Bama]

Who the hell pays people like Martenson and Ruppert for their Doomsday Porn? If things are as bad as we are saying they are here, how can people afford to keep these hucksters in business?

A guy named McGowan took Ruppert apart a few years prior. I'm not saying I agree with McGowan and theories, but what he does elucidate is the obvious agenda of the various players. He strips these arrogant fools of their cloak of all=knowing authority and leaves them naked for all to see. He left Ruppert standing naked in the freezing cold, and it wasn't a pretty sight.

Here's a link to McGowan's site. Like I said, some of the material should be taken with a grain of salt. In fact, a lot of it should, but it makes for interesting reading, if for no other reason than he's a gifted Satirist....something completely lacking in the Doomsday Prophets like Ruppert.

I like Dave Cohen because he's a straight shooting Misanthrope with a sense of humor. I especially like it when he curses. People need to curse more often in seemingly professional correspondence. It shows me they are alive.....and real.

[Dave Cohen]

John D --

I did miss that Limits To Growth update in 2004. I have changed the text to reflect that.

As I say, an update the "World3" model does not capture the insights we've gained since then.

[Chris Harries]

"It is reasonable to expect a breakdown of human economic expansion in the 21st century".

For somebody who has been reading and thinking collapse, that very loose timetable almost makes me relax. There's a lot of 21st Century still to come, and that still leaves stacks of time to correct things. I hasten to add that's not me talking, it is the great unwashed public who find the concept of collapse far too Armageddon-like to even think about.

Psychologists tell us that the human brain is geared to respond to imminent and visible threats, but does not do so if those threats are more than ten years out – no matter how cataclysmic the evidence suggests.

If 'sometime in the 21st Century' is our consensus timetable then don't expect decision makers or ordinary people to respond with the sense of urgency that the situation may warrant.

For my part, I believe things may start to fall apart soon. Well, they already are, symptoms abound. But maybe I'm being far too pessimistic about the resilience of the money economy to repair itself?

[Tony Weddle]

MB.

You missed out the link to McGowan but I'm not sure why you lump everyone who is trying to relate an accurate story of our situation in together as "hucksters". Dave is certainly a doomer, in my book, just as are Martenson, Heinberg, Stoneleigh and a dozen others who are giving carefully considered analyses. I don't always agree with everything they write but many do a fine job of explaining why they see things the way they do. I guess Ruppert is one of the worst in explaining the rationale behind his views.

Some of them are only, or primarily, involved in trying to spread the correct narrative for our situation, and have to make a living on that. Both Ruppert and Martenson (who approach this very differently), as far as I'm aware, initially set up their sites and their content with whatever money they had, so I think it's not entirely fair to chastise them for wanting to get those who they might be helping to dip into their pockets (at varying levels), though there are plenty of others who give their analyses for free (Dave being one of them), even if some of those others ask for donations or have some related income streams (like printed books). Martenson provides a lot of material for free (including his widely viewed and quoted Crash Course).

I like Dave's straight shooting style too. I also like John Michael Greer's and Heinberg's approaches. I dip into the others from time to time, but I read these three frequently.