November 14, 2008
Regarding the article ‘EU agrees joint line on global financial reform‘, published on Friday 7 November 2008, concerning the G20 summit in Washington on 15 November:
It is better, of course, to go to such a summit after having hammered out a common position. But will it be possible to deliver the expected swift decisions without first having understood the real causes?
My own opinion about those causes rests on three basic sets of observations, intertwined with a little analysis.
Reliable data show that the world annual energy production grew at the average linear rate of 0.15 Gtoe/year in the course of the 1945-2000 period, from around 1.5 Gtoe in 1945 to 9.5 Gtoe in 2000.
[Adding up coal, oil, gas, renewables (including hydraulic) and nuclear, those data also show that the total annual amount was barely 1 Gtoe in 1929, at the beginning of the Great Depression, about ten times less than today. After having stagnated within a few years, this amount resumed a fairly strong climbing trend around 1936.]
2. Such fast growth has allowed our world to create more and more money on the credit side of the financial system while creating more and more debts on the liability side of investors, in a context usually enabling those investors not only to reimburse their debts (+ interests) but also to make profits and reinvest part of them in such a manner that fast growth could generally be sustained.
[The process of making money out of debts is remarkably well explained in a video entitled ‘Money as debt‘, by Paul Grignon. The financial system’s high capability to lend money is deeply rooted in this process.]
3. In the course of the last five years, world annual energy production went past a level beyond which our world has ceased to be able to satisfy strong growing demand. As a consequence, the energy selling price increased, increased and increased again.
At first, nobody took any notice, so growth went on as usual, for a while, moved by its previous momentum, with the help of market deregulation and the blessing of heads of state somehow worried about those increases, yet delighted to observe that growth was still going on.
A lot of projects were undertaken, financed with a high proportion of money-borrowing, carelessly discarding the risks that might suddenly emerge either from energy prices getting very high or from deep economic depression settling in and ending with capital depreciation, over-indebtedness, bankruptcies, projects being aborted before being completed, etc.
But something new suddenly happened last summer: crude oil prices went past a certain threshold beyond which an unexpected backlash was triggered.
Then energy demand and consumer spending reduced substantially, provoking a sharp decrease of those prices (within just a few months), abruptly slowing growth in some countries and reversing it into recessions in others.
Therefore, as the previously discarded risks materialised, many financial bubbles imploded (1) and a lot of money capitalised in them disappeared.
And now a severe credit crunch has brutally succeeded former careless lending. Markets have become extremely volatile and unpredictable, compelling states to react, get out of laissez-faire capitalism and take emergency measures in order to avoid a premature collapse of the global financial system.
For the time being, nobody can see clearly what the near future will bring. More losses and bubble implosions are feared, along with high unemployment, disruption of people’s purchasing power, growing social distress, and so on.
By combining the two first sets of observations, I have gathered that the viability of the present global financial system and its lending-money capability basically rest on the world’s aptitude to increase year after year the annual production of cheap energy (Improving energy efficiency may help for a while and provide some delay, but its limits will soon be revealed).
From the third set, I have understood (on one hand) that our world has probably lost its ability to substantially increase such annual production a long way above its present level, and (on the other hand) that fast growth ceases to be sustainable when energy selling prices get well above a certain threshold.
Besides, I have learned from credible scientists that the average cost of producing energy is expected to rise in the future, reducing the pace of growth and hence the investment capability of the real economy. At some point, economic contraction will become inevitable in the face of rising and relentless energy costs. And it is expected that many shortages will accompany cheap energy shrinking.
Such considerations suggest that the world may have lost forever its ability to keep alive a financial system able to lend substantial amounts of money to many people, whatever reform is undertaken. In this circumstances, I wonder what swift decisions can emerge from a meeting of leaders only used to solving problems by perpetuating growth and having suddenly discovered a totally new situation, within a newly emerged difficult world about to reach its growth’s ultimate limits, in which they have become powerless.
I cannot see what is wrong or false in my observations, my analysis and my conclusion. Will somebody find some major fault in my rhetoric and convince me that my Club-of-Rome talk and resulting doom-mongering are unfounded ? I hope so…
Retired physics teacher
(1) I often hear that “financial bubbles burst”, but I think it is more accurate to say that they “implode”.
Within my own representation, a financial bubble is “kept under pressure” when the total amount of capital values written down in it increases with time. It becomes in a “state of depression” when this total amount decreases. It “implodes” if a lot of capital values disappear (bankruptcies) or get highly depreciated.