25 January 2012
Norman Pagett writes:
“We could easily slide into a 1930s moment….A moment, ultimately, leading to a downward spiral that could engulf the entire world.” Christine Lagarde, Berlin International Monetary Fund conference, January 2012
The International Monetary Fund managing director Christine Lagarde has misjudged the world financial problem. Like so many clever economists she is under the delusion that the circulation of money makes everyone wealthy. We are not facing a “1930s moment”; we are facing something far worse. At least Lagarde is right in saying we must look to Germany to help stave off total collapse. It will not make the slightest difference in the long term, but if Germany spends a little more it will provide jobs around Europe for a while longer.
President Franklin D Roosevelt tried spending his way out of trouble in the USA in the 1930s and that worked for a few years too. He spent national capital on the national infrastructure to create thousands of jobs building roads, bridges, dams, schools and public buildings. But that spending could only keep going as long as new primary cheap energy – oil, coal and gas – was dug out of the ground and fed into the system. It was a war against poverty, fought with hydrocarbon energy. Before dismissing that, think of what earthmovers would be without fuel? The answer is little more than scrap metal.
Burning oil, coal and gas provided employment; as more was burned more jobs were ‘created’. America was so endowed with natural resources it seemed that the employment problem was solved: consume energy and everyone can have a job, consuming yet more energy. But by 1939 Roosevelt’s New Deal was floundering, because fuel burning only works when there is a purpose behind it.
Then Germany and Japan kicked off World War 2, starting the biggest job creation scheme of all time. Suddenly fuel burning had a purpose again, fuelling a colossal war machine, and the great powers found themselves engaged in a battle to see who ran out of gas first. The Second World War was not a war of ideology, it was a dash for resources, a desperate bid to get hold of the oilfields and food supplies of the Eastern Europe, the Middle East and Indonesia. America won because of the indigenous hydrocarbon fuel available in seemingly limitless quantities.
War also moved world industrial economies out of the 1930s depression and provided a momentum of full employment that lasted 50 years. We switched production of tanks and planes to cars and even bigger planes. But whether you are in the business of wartoys or peacetoys, you need energy to produce and power them, and that has to be kept flowing to provide employment so that it is possible to keep building and selling products to each other.
Germany is not exempt from this problem. The world has locked itself into an economic system of mutual commerce; a shop full of pretty things is bankrupt without customers.
Hydrocarbon energy, in particular cheap oil, fuelled our delusion of wealth, prosperity and infinite growth. We developed our world economy with oil as our security against future debt, always able to borrow more with the ‘certainty’ that cheap oil would provide future income to pay it off.
We built our economy on cheap energy; now all we have left is the expensive stuff. This is the fundamental truth that eludes our cornucopian economists: our economy functions on energy input, not money output. Without endless cheap energy you can’t have endless employment. Our infinite demand has hit the wall of finite resources, and no job creation schemes are going to make us all wealthy again.