The Automatic Earth (TAE) is now five years old (as of January 22). That's five years of wide-ranging discussion on a huge range of issues, in the process of developing the biggest possible big picture of our present predicament. We are reaching limits to growth in so many ways at the same time, but it isn't enough to understand which are the limiting factors, but also what time frame each particular subset of reality operates over, and therefore which is the key driver at what time.
Our job has been to explore those subsystems, how they fit together, and which will be the key driver in the short, medium and longer term, in order to prioritize action. We can think of the next century as a race of hurdles we need to clear. We need to know how to prepare for each as it approaches, as we need to clear each one in order to be able to stay in the race.
We are known primarily as a finance site because finance has the shortest time frame of all, hence we focus on it. So much of finance is virtual that changes can unfold very quickly. There are those who assume that changes in a virtual system can happen without major impact, but this assumption is dangerously wrong. Finance is the operating system - the interface between ourselves, our institutions and our resource base. When one crashes the operating system, nothing much will work until the system is rebooted.
Mother and child of Arkansas flood refugee family near Memphis, Texas. These people, with all their earthly belongings, are bound for the lower Rio Grande Valley, where they hope to pick cotton
The next few years will see that crash and reboot. As financial contraction will occur first, before other limits are reached, finance will be the primary driver to the downside for the next several years. After that, we will be dealing with energy crisis, other resource limits, limitations of carrying capacity and geopolitical ramifications. Finance is the first hurdle in the race - the one we must clear if we want to be able to tackle the other challenges to come.
I am very much inclined to agree with Bill Gross' latest assessment that we stand on the brink of a Minsky moment, or as he describes it, a Credit Supernova. This is the inevitable result of decades of ponzi finance as our credit bubble expanded relentlessly, leaving us today with a giant pile of intertwined human promises which cannot be kept. Bubbles create, and rely on, building stacks of IOUs ever more removed from any basis in underlying real wealth.
When they implode, as they always do, the value of those promises disappears as it becomes obvious they will not be kept. Bust follows boom, as it has done throughout human history. The ensuing Great Collateral Grab reveals just how under-collateralized our boom has become, and just few claims to underlying real wealth can actually be met with the available resources. The rest of the outstanding claims will fail to be honoured, and will be rapidly and messily extinguished in a deflationary implosion.
Resettled farm child. From Taos Junction to Bosque Farms project, New Mexico
Despite the current extreme of market optimism, this will be the reality we will have to address. Things never look so good as they do at the top of a bubble, when there is nowhere to go but down. While we cannot tell you exactly when the bust will unfold in specific locations, we can see that it is already well underway in some parts of the world, notably the European periphery. The fear that is driving contraction in countries like Greece and Spain is highly contagious, and the contractionary dynamic is set to spread.
Given that preparation takes time, and that one cannot be late, now is the time to prepare, whether one thinks the Great Collateral Grab will manifest close to home next month or next year. Those who are not prepared risk losing everything, very much including their freedom of action to address subsequent challenges as they arise. It is a tragedy to fall at the first hurdle and then be at the mercy of whatever fate has to throw you. The Automatic Earth has been covering finance, market psychology and the consequences of excess credit and debt since our inception, providing readers with the tools to navigate a major crisis.
- From the Top of the Great Pyramid
- Look Back, Look Forward, Look Down. Way Down
- The Infinite Elasticity of Credit
- Hornswoggled Absquatulation
- Meet China's New Leader: Pon Zi
- The Resurgence of Risk
- Inflation Deflated
- The Unbearable Mightiness of Deflation
- Debunking Gonzalo Lira and Hyperinflation
- Dollar-Denominated Debt Deflation
- Deflation Revisited: The Studio Version
- Stoneleigh Takes on John Williams: Deflation It Is
- US Hyperinflation is a Myth
Destitute pea pickers living in tent in migrant camp. Mother of seven children. Age 32, Nipomo, California
Markets and Psychology:
- Markets and the Lemming Factor
- Over the Edge Lies Fear
- Capital Flight, Capital Controls and Capital Fear
- The Future Belongs to the Adaptable
- A Future Discounted
- Markets and Poker, Part I: A Glimpse Into the Stubborn Psychology of 'Fish'
- Markets and Poker, Part II: A Glimpse Into the Self-Destructive Psychology of 'Sharks'
- Optimism Bias
Real Estate, Commodities, Metals, Currencies and Trade:
- Welcome to the Gingerbread Hotel
- Bubble Case Studies: Ireland and Canada
- Et tu, Commodities?
- Commodities and Deflation: A Response to Chris Martenson
- A Golden Double-Edged Sword
- The Special Relativity of Currencies
- The Rise and Fall of Trade
Family walking on highway, five children. Started from Idabel, bound for Krebs. In 1936 the father farmed on thirds and fourths at Eagleton, McCurtain County. Was taken sick with pneumonia and lost farm. Was refused relief in county of 15 years' residence because of temporary residence elsewhere. Pittsburg County, Oklahoma
Affluence, Poverty and Debt:
- Trickles, Floods and the Escalating Consequences of Debt
- Crashing the Operating System: Liquidity Crunch in Practice
- The Impossible and the Inevitable
- The View From the Bottom of the Pyramid
- The Lord of More
- The Last of the Affluent, the Carefree and the Innocent
- The Worth of the Earth
The second hurdle is likely to be energy. Changes in supply and demand for energy are very much grounded in the real world, albeit in a highly financialized way, hence they unfold over a longer time frame. Over-financializing a sector of the real economy leaves it subject to the swings of boom and bust, or bubbles and their aftermath, but the changes typically play out over months to years rather than days or months. Financial crisis can be expected to deprive people of purchasing power, quickly and comprehensively, thereby depressing demand substantially (given that demand is not what one wants, but what one can pay for).
Commodity prices fall under such circumstances, and they can be expected to fall more quickly than the cost of production, leaving margins squeezed and both physical and financial risk rising sharply. This would deter investment for a substantial period of time. As a financial reboot begins to deliver economic recovery some years down the line, the economy can expect to hit a hard energy supply ceiling as a result. Financial crisis initially buys us time, but at the expense of worsening the energy crisis in the longer term.
On the road with her family one month from South Dakota. Tulelake, Siskiyou County, California
Energy is the master resource - the capacity to do work. Our modern society is the result of the enormous energy subsidy we have enjoyed in the form of fossil fuels, specifically fossil fuels with a very high energy profit ratio (EROEI). Energy surplus drove expansion, intensification, and the development of socioeconomic complexity, but now that we stand on the edge of the net energy cliff, that surplus (above that which has to be reinvested in energy production) is rapidly diminishing. We would have to greatly increase gross production to make up for reduced energy profit ratio, but production is flat to falling. Net energy available for all society's other purposes will fall even more quickly. The implication is that society will inevitably be simpler.
A plethora of energy fantasies is making the rounds at the moment. Whether based on unconventional oil and gas or renewables (that are not actually renewable), these are stories we tell ourselves in order to deny that we are facing any kind of energy scarcity, or that supply could be in any way a concern. They are an attempt to maintain the fiction that our society can continue in its current form, or even increase in complexity - an attempt to deny the existence of non-negotiable limits to growth. The touted alternatives are not energy sources for our current society, because low EROEI energy sources cannot sustain a society complex enough to produce them.
We are poised to throw away what remains of our conventional energy inheritance chasing an impossible dream of perpetual energy riches, because doing so will be profitable for the few in the short term, and virtually no one is taking a genuine long term view. We will make the transition to a lower energy society much more difficult than it need have been. At The Automatic Earth we have covered these issues extensively, pointing particularly to the importance of net energy, or energy profit ratios, for alternative supplies. We have also addressed the intersections of energy and finance.
Energy and Finance:
- Energy, Finance and Hegemonic Power
- Oil, Credit and the Velocity of Money Revisited
- Jeff Rubin and Oil Prices Revisited
Unconventional Oil and Gas:
- Get Ready for the North American Gas Shock
- Shale Gas Reality Begins to Dawn
- Unconventional Oil is NOT a Game Changer
- Peak Oil: A (Short) Dialogue With George Monbiot
- Fracking Our Future
- The Second UK Dash for Gas: A Faustian Bargain
Electricity and Renewables:
- Renewable Power? Not in Your Lifetime
- A Green Energy Revolution?
- The Receding Horizons of Renewable Energy
- Renewable Energy: The Vision and a Dose of Reality
- India Power Outage: The Shape of Things to Come
Farm Security Administration emergency migratory labor camp. Calipatria, Imperial Valley. Daughter of ex-tenant farmers on thirds and fourths in cotton. "Back in Oklahoma, we are sinking. You work your head off for a crop and then see it burn up. You live in debts that you can never get out of. This isn't a good life, but I say that it's a better life than it was."
In the aftermath of the Fukushima disaster, TAE provided coverage of the developing catastrophe, drawing on an earlier academic background in nuclear safety. It will be many years before the true impact of Fukushima is known, both because health impacts take time to be demonstrable and because the radiation releases are not over. The destroyed reactors continue to leak radiation into the environment, and are likely to do so for the foreseeable future. The vulnerability of the site to additional seismic activity is substantial, and the potential for further radiation releases as a result is similarly large. The disaster is therefore far worse than it first appeared to be. The number of people in harms way, for whom no evacuation is realistic despite the risk, is huge, and the health impacts will prove to be tragic, particularly for the young.
Fukushima and Nuclear Safety:
- How Black is the Japanese Nuclear Swan?
- The Fukushima Fallout Files
- Fukushima: Review of an INES class 7 Accident
- Fukushima: Fallacies, Fallout, Fundamentals and Fear
- Welcome to the Atomic Village
- Nuclear Safety and International Governance: Russia and Eastern Europe
The Automatic Earth takes a broad view of the context in which finance, energy and resources operate, looking at issues of how society functions at a macro level. Context is vital to understanding the bigger picture, particularly human context as it relates to the critical factor of scale and the emergent properties that flow from it. We have continually emphasized the importance of the 'trust horizon' in determining what functions at what time, and what kind of social milieu we can expect as matters evolve.
Expansions are built upon the optimistic side of human nature and tend to lead to greater inclusiveness and recognition of common humanity over time. Higher levels of political aggregation, and more complex webs of trading relationships, come into being and achieve popular support thanks to the benefits they confer. In contrast, contractions tend to reveal, and be driven by, the darker and more pessimistic side of human collective psychology. They are social and are political as well as economic. In both directions, collective attitudes can create their own self-fulfilling prophecies at the societal level.
Thirteen-year old sharecropper boy near Americus, Georgia
Trust determines effective organizational scale, extending political legitimacy to higher levels of political organization during expansions and withdrawing it during periods of contraction, leaving political entities beyond the trust horizon. Where popular legitimacy is withdrawn, organizational effectiveness is substantially undermined, and much additional effort may go into maintaining control at that scale through surveillance and coercion.
The effort is destined to fail over the longer term, and smaller scale forms of organization, still within the trust horizon, may come to hold much greater significance. The key to effective action is to know at what scale to operate at any given time. As we have said before, while one cannot control the large scale waves of expansion and contraction that unfold over decades or centuries, understanding where a given society finds itself within that wave structure can allow people and their communities to surf those waves.
Scale, Society and Trust:
- Scale Matters
- The Storm Surge of Decentralization
- Beyond the Trust Horizon
- Economics and the Nature of Political Crisis
- Quote of the Year. And The Next
- Entropy and Empire
- The Imperial Eurozone (With all That Implies)
- Corruption, Culpability and Short-Termism
- Bubbles and the Titanic Betrayal of Public Trust
- Libor was a criminal conspiracy from the start
- War in the Labour Markets
- An Unstable Tower of Breaking Promises
- Fractal Adaptive Cycles in Natural and Human Systems
Stalled in the Southern California desert. 'No money, ten children'. From Chickasaw, Oklahoma
Finally, TAE has provided some initial guidance as to how to position one's self, family, friends and community so as to reduce vulnerability to system shocks and increase resilience. The idea is to reduce the range of dependencies on the large scale, centralized life-support systems that characterize modernity, and also to reduce dependency on the solvency of middle men. The centralized systems we take so much for granted are very likely to be much less reliable in the future. For a long time we have uploaded responsibility to larger scale organizational entities, but this has led to a dangerous level of complacency.
It is now time to reclaim responsibility for our own future by seeking to understand our predicament and take local control of efforts to mitigate its effects. While we cannot prevent a bubble from bursting once it has been blown, we can make a substantial difference to how widely and deeply the impact the impact is felt. The goal is to provide a sufficient cushion of basic essentials to allow as many people as possible to preserve the luxury of the longer term view, rather than be pitched into a state of short term crisis management. In doing so we can hope to minimize the scale of the human over-reaction to events beyond our control.
Over the years of crisis, we intend to continue bringing our readers the biggest possible big picture in order to help us all to navigate a world of change. We very much appreciate your support in this endeavour.
"Toward Los Angeles"