An interesting take on the financial crisis from Nicole Foss, a.k.a. Stoneleigh from The Automatic Earth. She gave this talk at the Transition Network Conference in June.
I personally fear inflation ahead, but it’s quite possible that my thinking is elementary and not deep enough if what Nicole is saying is right. As I understand her, she asserts that the enormous increase in credit since 1980 but especially after the dot-com bust has vastly inflated the money supply.
This is not, however, the same mechanism as governments printing money. Up to 2007, it had the same effect, witnessed by the real estate bubbles in the UK and US which is where the extra money went to find a home.
Believing their houses were worth more, people then “used their homes as ATMs” to extract equity, and spend it on foreign holidays, fine living and dancing girls…
That’s fine, as long as they’re on the pre-2007 side of this graph
Post 2007 these homeowners are dead men walking. For a start, if you have a mortgage then you are not a homeowner. At least in America, you can walk away from the home and the debt if you are in negative equity. Unlike in the UK, the American ex-“homeowner” may not have a home if he walks away, but he also doesn’t have any debt from the negative equity…
Stoneleigh’s argument is that what is happening is that the credit component of the money supply is being reduced by the destruction of the loans advanced against these ‘assets’ by the borrowers defaulting. This, she expects to cause an environment where cash is king, ferocious unemployment, credit hard to come by, but surprisingly little inflation.
A recording of the talk is available here – it’s about an hour and a half long. It is well presented, the slides are no longer there, but anyone familiar with the concepts will understand it without the slides. I find it reasonably compelling, and an interesting twist. The takeaways from this talk include many PF mantras. Her action plan includes:
- Eliminate all debt. Your bank may well go bust but your debt then can get sold on to people with thick necks and wide shoulders. Debt is bad in a deflationary environment because it gets bigger in real terms as time goes on.
- that means mortgages too – rent rather than buy if you can’t buy outright
- beware of future promises, ie pensions, shares and the like. They are unlikely to be honoured due to the suppliers going bankrupt.
- cash will be king, but don’t hold it in banks, which will be destroyed by the bad debts (again). NS&I Linkers and physical notes in ‘creative places’
- Gold is not as valuable as it might be in the short term, because people forced selling to buy essentials will drive the price down short-term. Over the long term, >20 years, it will serve as the traditional store of value. That’s physical gold, not ETFs which will be destroyed by counterparty risk.
A summary of the talk from someone who has been to a similar one called A Century of Challenges. TAE has a post that expands on forestalling options.
Stoneleigh’s viewpoint is that we are about six months away from the verge of a Great Depression the like of which has never been seen before.
So what am I doing about it? Well, I own my house, and I have an interest in land, though I have no food producing skills personally. These I have done independently illuminated by my own fears, mainly to hedge against a financial crisis by turning a significant part of my net worth into real stuff.
As for the rest of my net worth, it is in a mixture ofa pension, ETF’s, investment trusts, linkers and cash in a bank ISA. All of which, according to Stoneleigh, will be written off to zero in the coming months, with the possible exception of the NS&I linkers. Seems nuts, given that my own fears gel fairly well with hers, and the difference between expected outcomes of inflation and deflation is a technicality which probably reflects her greater understanding of economics.
I do that because the bear case is always more attractive, and it is writ larger on the backdrop of our nightmares, there is an inherent conundrum.
Nobody knows when or where the cross-point will come, when energy supply will be outstripped by demand and we go into something like Stoneleigh’s Long Depression, or the financial and potential societal failure I feared before.
I therefore want to have some exposure accounting for both views, accepting that to hedge some of the unknown I will lose money. I’d much rather this view turned out right, and my shares ISA and pension do the heavy lifting of securing my future, rather than Stoneleigh’s, where I end up possibly digging on the land or patching up generators using wood gas and scavenged car parts from the shattered streets to retain some vestiges of light and communication before they are extiguished for five thousand years in some dark Mad Max/James Kunstler future.
I do find Peak Oil reasonably convincing, from two viewpoints. One is the shape of oil consumption has flatlined
The Oil Drum has more, as to why this is a Limits To Growth sort of thing rather than Americans deciding to turn the A/C down and drive/fly a bit less.
The second reason is, let us assume this were a limit to production but not a decline, China and India’s consumption will grow rapidly and the people aspire to a US lifestyle. Population growth in all these countries will need proportionally more energy to maintain the same lifestyle.
What can you do about peak oil? Not much. What’s great about oil is its remarkable energy density – ever since the first lumps of coal went into Newcomen’s steam engine in Victorian Britain, fossil fuels allowed humans to punch above their weight. There were 1 billion of us in 1804, and next year we are due for 7 billion. Cheap oil is what has enabled much of that increase, and there is an obvious corollary to that oil becoming scarce.
We have made scientific and intellectual progress since then much of which will serve us still, though the boosters of genetic modification etc are talking out of their hats IMO. That might have worked/be worth the risk in a world flush with cheap energy. Post peak oil the world with become a much larger and much more localised place, unsuited to that sort of centralised control and distribution model. We will be working with soils that have been horrendously damaged by 50 years of external fertiliser input – an input that won’t be there any more.
The Transition Network – an approach to Peak Oil and Climate Change
Although I occasionally drink beer with the Transition Ipswich guys I don’t really get the community angle from a gut feel. Growing up in London probably queered the pitch for me, and having benefitted from a long career in a reasonably good job makes me favour self-reliance over community.
However, I can understand the intellectual basis for a community response, which is more eloquently expressed here. Basically, human beings are social animals with the need to sleep a third of the time. Turning up in a remote area bristling with guns and cans of beans sets up an indefensible high-value position, and you’ll get sick of beans, sleep deprived and jumpy. What kind of a life is that…
Transition does tend to be an awful lot of talking and not enough doing, but it is as good a start on responding to Peak Oil as any.
Simple Living In Somerset 
Like you, I’m thoroughly convinced that peak oil is upon us, and although we can only truly see the peak in the rearview mirror, I do believe we’re now on the downslope. I’ve been to both extremes in my expectations – ‘it’s all going to collapse tomorrow…’ through to ‘long slow decline over the next 5 decades’. I’m now veering back towards the slow decline.
When ‘they’ pulled the finance system back from the cliff-edge in 2008 I realised I had underestimated ‘their’ power and commitment to BAU. I’m still not convinced they have a viable descent plan, or if they have, whether it is a palatable one, but I’m also fairly sure now I won’t be yomping across the moors with my bug out bag anytime soon.
So I’m basically in the same quandary, and hedging my bets in the same way! Mortgage is nearly gone, beans rice and gold are stacked up, spuds growing out back… but I also have an S&S ISA and plan to stock that with shares that look well-positioned for the descent scenario. Yes, I admit it – BP is in there…
I believe the economy will become increasingly low-tech, low-energy & local. I’ve gone from seeing ‘World Made by Hand’ as a ‘doomer’ scenario, to being quite a positive one – once we get past a few bumps. It’s that locality that brings community to the fore over ‘self-reliance’. I’ve noticed a lot of ‘self-reliance’ is dependent on being plugged into the global economy (being self reliant in the woods with a petrol chainsaw, or self-reliant on a hobby farm with a John Deere tractor etc etc) Much of it is an illusion which will crumble if the wider context changes. Community is a more reliable asset, IMHO.
We have to remember life wasn’t impossible before we had oil, but it was very different. Without oil, it will change, but not necessarily end. I think the Transition Movement is our best hope for managing that change.
Thanks for the interesting article. Cheers, Macs
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I would agree that if the current status quo is maintained then the scenario you have described is possible. However I would recommend you seek out the TED talk given by Richard Sears who is at the forefront of this area. He avoids the doomsday scenario by simply stating the facts. I especially enjoyed his quote “the stone age didn’t end because we ran out of stones…”
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@Macs, I’m not sure at the moment that the financial crisis has anythng to do with peak oil as opposed to being the natural denouement of some crazy behaviour throughout society. That’s not totally comforting regarding peak oil showing up to spoil the party’s aftermath 😦
@Steven I think you mean this talk. Sears is a clever chap, without a doubt, but he lost me when he stated around 3:22 that humanity has been becoming less carbon-intense decade over decade ,century after century. That’s BS. He refers to peak wood – well, wood is considered carbon-neutral, so going to coal, then oil, then natural gas were all an increase in carbon-intensity. His graph of increasing renewables looks lovely, but the problem with renewables is they are so diffuse. In Suffolk there is a nuclear power station which produces over 1GW. Compare that with the seven sites that produce 2GW wind capacity. Wind runs at a typical load factor of 30% so all these sites together produce less than Sizewell integrated over time.
He isn’t the first person to use the quote “the stone age didn’t end because we ran out of stones…”. We didn’t run out of coal either, because a more convenient and even more energy-dense store of ancient sunlight came along, called oil. There isn’t a better replacement to oil in sight. I hope thay get fusion working, but I don’t expect to see it in my lifetime. I hope I’m wrong and Sears is right, but if he doesn’t understand the difference in carbon intensity between wood, coal and oil then I wouldn’t bet on it!
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“I’m not sure at the moment that the financial crisis has anythng to do with peak oil as opposed to being the natural denouement of some crazy behaviour throughout society.”
I think they are linked myself, but I don’t disagree about the natural denouement, though!
Part of that crazy behaviour is directly attributable to the vast amount of energy we have on tap. We’ve become so acclimatised to this huge energy resource we no longer see it for what it is. Someone (not sure who now, may have been Heinberg) worked out that a typical Westerner uses energy to the equivalent of 600x human work capacity – like having 600 ‘energy slaves’ working for us. That is a huge multiplication of our capacity/impact. The problem with peak oil is not that we haven’t found another source of energy that’s good for 600 slaves-worth, but that we have built up an expectation of 600 slaves-worth.
The following is a huge simplification, as the economy is a complex beast, but some of the financials link almost directly to oil use. The oil that drives the commuters from their suburbs two hours from where they work, where the overblown property bubble leads to sub-prime crisis which brings down banks (or brings on taxpayer bailouts). Take away the cheap oil and a lot of dominoes fall.
As for the ‘end of the stone age’ argument, I’ve heard it many times, but what’s the ‘take away message’? From the mouths of the techno-cornucopians it amounts to little more than sticking fingers in ears and yelling ‘la la la’, IMHO. I look at it as meaning the stone age didn’t end, rather the Bronze Age began. And it wasn’t because someone decided one day “stones just don’t cut it any more so let’s go invent something better”. No, it was a serendipitous development, and I believe that has been the case for most technological leaps forward. There is no guaranteed rule that says we will always manage to make a leap forward. Selective attention guides some people away from the fact the Easter Island DID suffer ‘peak wood’. I bet they were congratulating themselves that the stone age didn’t end because they ran out of stones, too.
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An alternative possible sources of stimulus for the financial crisis could be the roles of China and India. All of a sudden the First World economy expands, but aggregate wages fall (when you include the new kids on the block).
Big companies use wage arbitrage, and all of a sudden we look ahead and the prognosis for earning power looks a lot worse. It was kind of tragic that the US finance system had not enough use for the Chinese money flowing in, but it had to lend it out, even if the borrowers couldn’t pay 😦
But heck, it could be the harbingers of PO. It just doesn’t quite feel right to me.
The energy is fair enough. I biked to work and back today, assuming I run at about 50W then doing that for an hour and a half gives me a output of 0.075 kWh. I normally sun at about 3-4 kWh power usage a day, and I have gone a long way to reduce that, so my power usage is about 50 times my work output. Allow for embedded energy in goods and services and the fact that my commute is short, a tenfold increase doesn’t sound implausible.
Thanks for your ideas!
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If everyone is bankrupt (countries included); if property is theft/landlifting; if currency is fiat; if banking is convoluted/fractional/perpetual-debt-based; if money is greed-based/unethical; if economics is unsustainable, growth-based and doesn’t factor in environmental degradations such as species/soil-loss/resource-depletion, etc. (that we all suffer from); then this kind of monetary debt seems meaningless, and/or to suggest paying it back, pointless and/or ridiculous.
If you declare war on me/us and my/our environment, and are stupid enough to loan your money, guess what?
Exactly.
And anyone who would buy someone’s debt, might as well be buying thin air or the proverbial snake oil, in part because you change the relationship and context of that debt.
Besides, money won’t be worth anything soon.
So, if anything, the directive of ‘pay off your debts’ seems only to play into the hands of those at the top of the pyramid scheme, a pyramid that needs to collapse.
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