To intuitively understand why deflation is the endgame of our civilization, divide people into miners and everyone else. The miners are everyone in the business of extracting nonrenewable resources, such as oil and metals. Miners are indisputably subject to diminishing returns as we consume the highest ore grades first, which means rising inefficiency and increased costs for every unit produced. Therefore, to keep civilization running, society must allocate increasing amounts of resources to the miners at the expense of everyone else. In other words, we get poorer, and poorer people are able to pay less, rather than more, for commodities. As natural resources get depleted, it therefore follows from the law of supply and demand that commodity prices will go down, rather than up as is commonly and erroneously assumed. Perhaps this becomes clearer if "demand" is understood as "affordability," without which there can be no demand. As their income falls below costs of production, miners will be forced out of business and the necessities of life will no longer be available to humanity. Some people imagine that they can "save" for this eventuality by hoarding gold or whatever, but that is a delusion because the operational fabric of industrial civilization will be broken, so even the simplest amenities such as a toothbrush or toilet paper will not be available at any price. It will be truly horrific for everyone and we have no contingency plan, nothing to collapse back to except the Stone Age.
So, are we there yet? Considering the ongoing price crash with regard to oil and other commodities, I think there is a strong possibility that this is it. Again, I have to credit Gail Tverberg with explaining how increased depletion leads to falling oil prices, or else I would be just as clueless as most people. She is kind of verbose, however, and uses lots of graphs and supporting data which is all very important, but not really needed to grasp what is going on intuitively. So maybe my putting it into few words can help more people understand. She thinks we have at most two years of business as usual left, and then collapse will occur by the end of 2016. And the only remedy she can come up with is to pray for divine intervention.
If you understand how this works, you will quit worrying about comparatively distant issues such as climate change and realize that falling commodity prices is the most ominous problem of our times. Of course, the problem may well morph into something else before it becomes obvious that there is a resource crisis, such as another World War or a crippling financial crisis. But even if we avoid any other major disturbances, deflation will kill us rather soon. After oil prices go too low to encourage further exploration and drilling, for example, the depletion rate of existing oil wells will be at best about 6% per year. So imagine the economy shrinking by 6% as a best-case scenario. Our financial system is not arranged to handle orderly degrowth, however, so most likely there will be a much more rapid collapse instead, in one way or another.
Saturday, January 17, 2015
Subscribe to: Posts (Atom)