John House, MD – In the first part of this series, I mentioned that economic growth and energy have been intimately connected since the beginning of the Industrial Revolution. The more energy available to society, the more the economy grows. Now that we have entered into an era of decreasing net excess energy, economies are shrinking instead of growing.
Debt, too, plays an integral part in powering economic growth. In fact, the modern economy can’t function without it. In recent years, debt has been substituted for excess net energy as the fuel for economic growth. The results have been less than stellar and are likely creating a situation that guarantees economic collapse.
In the loosest sense of the word, our economy is debt. Today, there is more debt than there has been in the history of humankind. Without excess net energy, that debt couldn’t be repaid.
Debt has been part of the human experience for thousands of years. It has taken, and continues to take, many forms. At its most basic, debt is the promise to pay in the future for some good or service provided now.
Another way to look at debt is as an advance of future earnings. A person takes out a loan from a bank to buy a house or car, promising to repay that loan plus interest using income that will be earned in the future. Even in such a simple scenario, a healthy economy is required for a loan to be repaid; if the borrower loses his job because a factory closes due to economic decline, for example, he can’t repay the loan.
Since debt permeates every part of our economy, growth is required in order for debt to be repaid or, at the very least, serviced. Everything talked about with respect to the economy revolves around growth. If the economy isn’t growing, it’s bad. And debt is the reason.
The banking system the average person interacts with is designed around a concept known as fractional reserve banking. That means banks are only required to have on hand – on reserve – a fraction of the money that has been placed on deposit in their bank. The rest they lend out, thereby creating money “out of thin air” while also creating enormous amounts of debt requiring a constant flow of new money being put into the system, i.e. economic growth. On its face, this is good for the economy as it spurs development, creates jobs, increases wealth, etc. If the amount of debt grows too large, or the economy slows, a serious problem develops as the debt can no longer be serviced.
Today, the debt system has grown incredibly complex with debt instruments that are convoluted and almost impossible for the layperson to understand. Most of this debt has nothing to do with “Main Street” but it, too, requires that our economy grow indefinitely and without interruption or the whole scheme collapses.
Since everything in our economy is dependent on energy, a decline in net excess energy means the economy can’t grow, leading to debt default. If the amount of debt default is large it can be devastating to the system. Since even the slightest hint of widespread default would elicit panic in the stock and financial markets, wiping out trillions of dollars overnight, it’s no wonder government and industry agencies are less than honest about the decline in net energy and the impossibility of ever paying off mountains of debt that have been created trying to stimulate the economy. The whole financial system is the very definition of a house of cards.
The financial crisis of 2008-9 brought the global financial system to the very brink of collapse. If it had not been for Herculean efforts of central banks around the world at that time, collapse would have been inevitable. That crisis was one of too much debt that couldn’t be repaid. Ironically, the central banks saved the system by creating more debt. Enormous amounts of it, in fact.
The amount of conventional debt today is estimated to be $100 trillion globally. When the derivatives market is included, the amount of global debt surges to the absurdly high number of $1.3 quadrillion. Since declining net energy is preventing the economy from having the energy it needs to grow, it seems very likely there will be massive debt defaults in the near future. When there is widespread debt, default commerce shuts down.
When commerce shuts down, there is economic collapse and many, many people suffer. Very similar events are happening right now in Venezuela, Greece, Syria, Puerto Rico, and other countries.
With decline in net energy affecting every person on the planet, and with global debt already at unsustainable levels and climbing higher every day, there is widespread agreement among financial experts that central banks will be unable to save the system next time. When that happens, every country – including the U.S. – will experience economic disaster.
We are facing some frightening challenges over the next decade. Next time I’ll explore the most serious of them all: climate change.
Thanks for your question. You are absolutely right that we need to be better prepared to deal with the climate chaos developing around us. FEMA and other government agencies will not be able to help us long term. I’ll be addressing preparation in my fourth installment of this series, and solar power certainly can help us when the power goes out – particularly when a person absolutely depends on electrical power (such as a person on oxygen, for example). I just don’t believe it’s a good long term solution.
Solar panels offer an energy return on energy invested (EROEI) of anywhere from less than 1 (meaning that it takes more energy input to produce than it gives back) to 4 or 5 (meaning that you get 4 to 5 times the energy back that you used to produce it). Historically, oil provided an EROEI of 100:1, meaning that for every unit of energy used to produce it, we got 100 units back! Our modern global economy was built on that type of return. The EROEI of oil of all types (conventional, tar sands, fracking, etc.) is falling and is down to the 20:1 range now. There are multiple studies looking at the minimum EROEI that our society needs in order to survive in its current form. That number ranges from 10:1 to 15:1 but some argue that to have economic growth we need 20:1. Obviously, that is significantly more than the maximum 5:1 offered by solar power.
As fossil fuels become harder to reach, extract, and process, they become more expensive. That’s where it fits in to the topic of this essay. The global economy can’t afford fossil fuels at the prices necessary to produce them. That’s the reason that we have a surplus of oil right now. For a brief period, the price of oil increased to $147 a barrel. We couldn’t afford to pay that for long and the economy crashed. Once it recovered, oil crept back up to the $120 range. Then the economy slowed again. There is so much debt that has to be serviced, there’s just not much left over for expensive fuels and the products they offer us.
Since solar panels can’t give us the EROEI we need to run our economy and we can’t afford the expensive fossil fuels, we’re stuck between the proverbial rock and hard place.
Another important note about solar panels. They require large amounts of energy and materials to produce. (For a good description of the process and the greenhouse gasses it produces, see http://www.azom.com/article.aspx?ArticleID=12014). What’s more, solar power can’t replace the fossil fuel feed stuffs that we use to make more than 90% of the products we use today. Virtually everything now is made of plastic – a material made from fossil fuels. Solar power can’t make plastic. Solar power also can’t drive the huge trucks and digging equipment that we require to dig up all the raw materials to make solar panels. There are no solar powered airplanes or submarines or tractors (I did see a proposal for a solar powered tractor once, I think).
I am not opposed to solar power. But, I am confident that it’s too late to use it in any way that is meaningful to preserve our current world. I wish that 150 years ago we had started using solar voltaic systems instead of oil. We would have a very different world today. But, the point of this series of essays is to show that the human species is facing a large number of very serious interconnected problems. If energy were the only issue, then I’m sure we could get very aggressive with solar power, wind power, reduction in consumption, etc. and maybe do okay.
But, we’ve come too far down that road. We now have so many problems facing us that there appear to be no solutions that will give us a good outcome. The last time we lived in a world without widespread fossil fuels there were 6.5 billion fewer people on the planet. Add dying oceans, climate change, water depletion, rain forests disappearing, massive extinction underway, pollution covering the face of the planet, habitat destruction for most other creatures, as well as dozens of other problems, and it becomes clear that solar power isn’t going to make much difference in the ultimate outcome.
Dear Dr. House,
How does distributed solar power systems, the best way to provide electric power to homes, business and communities fit into your Energy model?
The flawed notion “we are running out of coal, oil and gas” has been used to justify wars and give a few people disproportionate wealth. Energy companies have taken surplus fossil fuels from the ground and destroyed mountains for coal. Now we have fuels we can’t burn, and no place to store them.
The recent methane leaks near LA and the out of control Fort McMurray wildfires (going underground near the Tar Sands) show an immense surplus of fossil fuels we should have never extracted.
The attempts to stop the LA methane leak and the efforts to deal with the Alberta, CA wildfires, show Arkansans need to do to be prepared for the extreme weather to come. FEMA does not have resources and is always late. Each community needs to be self-sufficient and be ready to help others.
Looking forward to your comments and prescription.