In Jan 2008 Gail from TheOilDrum made a forecast for 2008, a total of 15 predictions. I just read it now and I am in awe how well she hit the nail on the head. I guess she got 10-12 out of 15 right on. I was impressed and scared. Then I found her 2009 forecast, written in Jan 2009. The 2009 forecast is a lot less detailed. But knowing that it came from the person who got 2008 so right, I have to give special weight to this information. I suggest you read the 2008 forecast first and then the 2009 one.
I have been a regular reader of TheOilDrum for 3 1/2 years, and I have always found Gail's analysis to be clear and convincing. I have discussed some of this with a few economist friends of mine who seem curiously unconcerned. They do micro, this is macro, what journal published these ideas? Why would you be worried about that? No big deal.
ReplyDeleteI have been thinking about Gail's predictions for some time and have come up with 3 extreme scenarios:
0) I call this the 0 scenario because it is unrealistic. Economic pain is never evenly distributed, even though this time I think there will be no winners. Suppose the Ayres-Warr model of economic growth was spread equitably and there were no problems in the financial sector. Then peak oil production would correspond to peak "exergy" production which is about 70% of economic output. Therefore a decline rate of 5% energy production leads to a decline rate of 3.5% in economic output so we should all be making 3.5% less each year. This means that in 70/3.5 = 20 years we should all be making about half of what we are making today. This means that one should be very wary of taking on or lending long term because we will have less wealth with which to pay back the debt.
1) If there were no debt, we would have a tremendous financial bubble which I characterize as follows: take the market price for commodities, multiply by the money supply, you obtain a quantity of commodities that exceeds the commodities available on the planet. A commodity bubble like this usually causes rampant inflation. The point is: Take all resources on this planet in existence today (oil, coal, precious metals, grain, soy, etc.). Multiply it by today's prices per resource. This results in the total cost of today's resources. There is a lot more money floating around than the total cost of all resources. Conclusion: There is too much money. The money must lose value to make it even: In very simple terms, total money should equal total cost of all resources.
2) As Gail points out, most of the money in the money supply is debt. Debt which cannot be paid back, because there is simply not enough to pay back. This leads to a negative feed back scenario: debt defaults, fire sales, layoffs, more defaults, more layoffs, etc. This is the hiss of the bubble deflating. If I understand correctly, this is what happened during the 30's. Unfortunately, the great depression in the 30's was much easier to get out of than the current depression, because the depression in the 30's was 30 years before US peak oil production and the current depression is 35 years after peak US oil production.
My guess is that what happens will be some convex combination of these last 2 scenarios, as governments will use inflation to pay off debts, but defaults will occur nonetheless. So I'll guess that we will see deflation in asset classes supported by debt, such as real estate, vehicles, stocks, etc., while we see inflation in consumer items. I also expect to see shortages. If the cost of an item is lower than the cost of production, producers will not work hard to produce. Get ready for the Cuban economy!
My idea of a good economy is very simple: make good investments, you will get good returns. It's not a question of the best system: capitalism, communism, socialism, free markets, regulations. It's a question of good investments or bad investments. Today, I think the best investments are investments in either energy efficiency or renewable energy production. So that's were I'm putting my money, while I can still afford it.