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Rx: Depression

By the time you read these words they will have been sitting on my computer for most of a week; the chance to attend the annual ASPO peak oil conference in Sacramento was too good to pass up, and I’ll be on the road during the window of time I normally use to compose these essays. It’s an interesting time to be second guessing the future, too, for as I type these words, the world’s financial markets are in chaos. The collapse of Lehman Brothers, one of the longest established brokerage houses in the New York market, followed by the forced sale of Merrill Lynch and the near-collapse of insurance giant AIG, seem finally to have made it clear to the world’s investors that the mountain of unpayable debt weighing on the global economy is a problem that can no longer be ignored.

Just how bad that problem will become is anybody’s guess. Stock markets worldwide are down steeply but, at least as of this writing, not yet in freefall, and massive government intervention in the credit markets has staved off a liquidity crunch. Over the longer term, though, investments supposedly worth trillions of dollars are going to have to be written off, and companies that padded their balance sheets with those investments are now facing a scramble for survival that many will fail. An entire economy built around the exchange of exotic IOUs is coming apart at the seams, and the economic structures that will replace it are not yet in sight.

A growing number of voices are proclaiming that the current crisis marks the beginning of a major economic downturn; the word “depression,” until recently taboo in polite financial company, is even being heard. Now it’s worth pointing out that we have as yet no way of knowing whether or not things will get that bad. The 1987 “Black Friday” crash, which saw the Dow Jones Industrials lose 22% of their value in a single day of trading, was followed by the same sort of proclamations; so was the unraveling of the tech boom in 2000. Both slumps, severe as they were, led to relatively modest recessions. It’s possible – though admittedly not very likely – that the same thing could happen this time.

Yet it also has to be remembered that not too long ago, economic depressions were simply a fact of life. In the 19th century, before government regulation restrained the excesses of the business cycle, major economic depressions happened every twenty or thirty years on average; most people could expect to live through two or three of them. The New Deal reforms of the 1930s, which restricted the vagaries of the business cycle, made depressions a thing of the past; still, those reforms were tossed aside in the deregulatory frenzy of the 1980s and 1990s, and unless they get put back in place, we will all likely have to get used to depressions again.

Counterintuitive though it may seem, furthermore, a serious depression right now may just be the best thing that could happen to the United States. I don’t say this by way of passing judgment, or in the spirit of schadenfreude that seems to surround so many predictions of social catastrophe. Rather, a good many of the dysfunctions that are dragging America to ruin will be immediately unsustainable in a time of depression, and a certain amount of economic suffering now could spare the American people a far worse experience later on. Here are some examples.

1. The End of American Empire

Right now America is as addicted to empire as any inner-city crackhead to cocaine. We support the world’s most bloated military, with troops and bases in more than a hundred countries, in order to enforce a global economic order that allows the 5% of the world’s people who live in the United States to use roughly a third of the world’s resources. At the same time, empires are costly pets, and ours – like every other empire in history – is becoming an economic burden our nation can no longer support; at the same time, the drastic decrease in US living standards that would follow the end of American empire is a political time bomb nobody wants to touch. Caught in that dilemma, the United States seems determined to follow the usual course of past empires, allowing its imperial commitments to drag it down.

A depression, however, would force the issue. In the midst of economic collapse, the United States would be no more able to maintain a global military presence than Russia was after its own collapse. The troops would have to come home – not just from Iraq and Afghanistan, but from the whole far-flung web of US military bases – and resources now being drained by the incubus of empire would be available for more constructive tasks, such as preparing for the onset of peak oil.

2. Energy Availability

A serious depression would also have predictable effects on energy use. The economic troubles of the 1970s and early 1980s, mild as they were by depression standards, played a noticeable role in causing energy use to drop sharply during those same years; when people don’t have money, they don’t spend it on unnecessary energy, and they are also likely to take conservation measures that cut into energy use even further.

By many estimates, we are only a few years from serious decreases in world petroleum production. Any significant response to this crisis will, ironically enough, require more fossil fuel energy – it takes energy, after all, to manufacture insulation, rebuild railways, and make wind turbines, and most of that energy will have to come from existing sources. If energy prices spiral out of sight, many such projects will be out of reach. A depression, on the other hand, will force down demand, keeping prices from rising and making it possible to build for the post-fossil fuel era. Public works projects such as the Depression-era Civilian Conservation Corps could also be directed toward energy conservation and renewable resources.

3. From Offshoring to Onshoring

Another likely result of a serious depression would be the rebirth of a domestic manufacturing economy in America. Right now the US economy produces very little but debt; that’s the way the tribute economy of America’s global empire works. The results have been profitable not only for the political classes but also for the middle class, which gets to buy all the consumer goods it wants without having to pay what it would cost to hire Americans to make them; the poorer two-thirds of the population, by contrast, has been hammered by predatory economic policies that replace well-paid factory jobs with minimum wage positions flipping hamburgers.

The global economy that made offshoring possible, though, will be an early casualty of a serious depression, and when the US either defaults on its national debt or hyperinflates its currency – and it will have to do one or the other of these, sooner or later, to get out from under the burden of unpayable debt – the unraveling of the global marketplace will be complete. Once that happens, goods and services for the American market will have to be produced here, and the rebuilding of domestic manufacturing capacity will follow. This will make it much easier for America to survive the transition to the age of scarcity industrialism now dawning around us.

4. Decreasing Income Disparities

Meanwhile, the huge disparities in income that separate the upper third of Americans from the rest of the population will unravel. Economic boomtimes are always periods of increasing social inequality, because investment income is concentrated in the upper income levels; depressions are income levelers for the same reason. In the 1920s, income disparity soared to levels that were not reached again until the Reagan years; in the 1930s, as investments of all kinds plunged in value, the gap between the rich and the rest dropped to historic lows. The same thing is true today; essentially all the exotic investments that drove the recent boom were available only to the rich, who thus have earned the privilege of losing their shirts as those investments unwind.

The narrowing of income disparities isn’t simply an issue of class jealousy; it powerfully affects the functioning of the economy. When the working classes have money, they spend it on goods and services, helping to maintain economic well-being. When the rich have money, they are more likely to invest it in speculative instruments that contribute much less. Speculation is a parasite on the economy, and it is quite capable of killing its host; that’s essentially what’s going on right now. An economy with lower income disparities is more stable and productive than one with the drastic disparities we have now, and we need a more stable and productive economy in order to deal with the instabilities that will follow the end of the age of cheap fossil fuels.

5. We’re Headed There Anyway

The most important impact depression could have is also the one that most people will enjoy the least: most of us will have to learn to make do with fewer of the comforts, conveniences, and opportunities that we have all learned to expect. For the last sixty years most Americans have enjoyed lives of relative opulence, even as the resource base and manufacturing economy that made that opulence possible has trickled away. The last few decades have seen desperate attempts to replace these losses with exotic financial instruments and an increasingly strident imperial policy overseas. These measures worked for a while, but now the bill is coming due.

At the same time, the end of America’s age of opulence comes as the world’s ability to supply itself with cheap abundant fossil fuels is becoming steadily more problematic. In a world of scarce energy, the opulence of the recent past will no longer be in reach for anybody. The sooner we begin retooling our lives to deal with that reality, the better off we will all be in the future. A depression would thus bring about changes that are going to happen anyway, and would do it at a time when the world could still devote significant amounts of energy to the transition.

No matter what we do, the way there won’t be easy. Hard times are hard times, and it’s a waste of time trying to sugarcoat that fact. Still, an economic contraction beginning now – before peak oil has a chance to force the issue – could give us a crucial margin of lead time.

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