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The decline of an empire

 
Given that City of Detroit has now officially filed for bankruptcy, it is worth looking at the bigger picture. Is the fate of a once mighty city just a short pause on the way to further prosperity? Or is it rather a symptom of something bigger and more widespread regarding the future of a post-industrial society? 

Without exaggeration, Detroit was once a symbol of the “American Dream”, characterized by the highest per capita income in the entire country, growing population, industrialization, mass production, growing wealth, etc. The population reached almost 2 million people.

Now, Detroit is more the symbol of an “American Nightmare”, with a declining population* increasing poverty and criminality, declining property values, declining public services, etc. Now the population is bellow 700 thousand people.

The period after WW2 was characterized by an explosive growth of population and energy consumption, tremendous increases in productivity brought by cheap energy, globalization of trade, technological innovation, especially in fields of computers and communication, increasing quality of healthcare, and hopefully the collective growth of happiness.

The same period can by also characterized by several fundamental trends, which probably explains a lot. Let’s look at the following graph:

Fig. 1: Graph shows evolution of primary energy consumption per capita in Btu (blue line) and the ratio of total debt to nominal GDP (red line in %) from 1950 to 2011. Vertical dashed lines show approximate thresholds of different growth/decline phases of USA. (Source: EIA, St. Louis Fed).i>



Expansion phase (1950-1979)

This period can be broadly characterized by a rapid population growth, rapid total energy consumption per capita growth (2% p.a.), infrastructure construction, and relatively stable debt/GDP ratio (0.3% p.a.). We could talk about the “expansion phase”, from which most of the population benefited in terms of increasing quality of life. Increasing safety, better access to health care, better education and freedom of almost everything were a given fact of life. Even the environmental conditions might have improved in some or even most locations. And global warming was not of a serious concern at that time.

Slow decline phase (1979-2009)

This characterization of 30 years following the peak in per capita energy consumption might be surprising to many, but should not be really. Many of the great achievements of science and technology started to be slowly overrun by resource depletion. This trend was largely undetected, since increased level of debt masked the real price of the energy. We decided to pay less for prosperity (better call it consumption) today, in exchange for more tomorrow, assuming that happy days of cheap energy would return at some moment in the future. Human naivety is endless, as we can easily observe. But during the phase of exponential growth in the debt to GDP (almost 5% p.a.) and slowly declining per capita energy consumption (0.5% p.a.), many of the previously positive trends turned negative. Here is a list of just some of them:

 

    • Growth in the income inequality between rich and poor
    • Declining fertility growth rates
    • Growth of the financial sector as the share of GDP
    • Outsourcing of the energy intensive industrial jobs to foreign countries
    • Increasingly negative trade balance
    • Declining quality of education
    • Increasing healthcare costs
    • Declining added value of further debt
    • Increasing oil dependency upon Middle East countries
    • Ageing infrastructure (what you build during 10 dollars/barrel era is difficult to maintain or even expand with 100 dollars/barrel era)


Fast decline phase (2009-???)

These and others long-term negative trends ended up with a financial crisis in 2008-9, which turned out to be global. Debt to GDP ratio peaked in the US, and its decline started off what we might call “fast decline” phase. Close to zero Fed Funds Rate or “quantitative easing” policies are not going to change fundamental evolution of the US economy. There is no new “industrial revolution” behind the corner, no matter what “shale oil” or “shale gas” money losing/climate catastrophe ignoring propaganda wants you to convince.  We have plundered the cheap resources and now we have to face the consequences. If we are collectively wise enough, which is not happening yet, we might have a small chance of avoiding WW3 in coming years and decades. Unfortunately, history seems to predict a different outcome.

* Keep in mind that under a global decline scenario people have nowhere to migrate, unlike in the case of local decline, such as for Detroit.

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