The current period can be undoubtedly characterized as an economical, ecological, cultural, political, but also moral crisis. The solution seems to be as far off as ever and problems seem to be getting worse by the day everywhere. Why is that, what can we expect in the future and what are the safe outcomes from this future bottleneck? We have been talking to Nathan Hagens at the latest ASPO conference in Vienna, who holds a PhD degree in Natural Resources at the University of Vermont, MBA degree with honors from the University of Chicago in the field of finances. Nathan Hagens is the author of Trading Algorithms for Commodity Systems and was a Vice President of Salomon Brothers and Lehman Brothers. Currently he serves on the Board of Directors of the Institute For Integrated Economic Research in Switzerland and the Post Carbon Institute in the United States.
Nate’s presentation at the Conference can be found here
- There is enough energy for meaningful life of everybody, but there is not enough energy to grow our economies globally
- There is a relationship between the abolishing of the gold standard (1971) and peak oil in USA (1970)
- Relation between money and energy is underestimated
- Debt is an extractor of wealth from the future
- Peak credit is a more imminent and rapid problem than peak oil
- We should aim for “Peak Oil Keynesianism” but instead are pursuing “Turbo-finance Keynesianism”
- Old investing paradigm is dying
- New socio-economic paradigm is on the way during the next decade
- 5-10 % of population can lead the rest on the way
Q: You talk a lot about that our problem is not a shortage of energy, but a longage of expectations. What do you mean by that?
Nathan Hagens: Energy has always been the main driver of societies, but for the last 30 years we were unable to pay for the energy supply we wanted on a real time basis, so we issued more money-as-debt to pay for it. So, the amount of financial claims that people think they own in aggregate now, is much larger than the ability of our productive infrastructure and natural resources to pay it back. So, even though our economic problems originated from the impact of harder and harder to extract and thus more expensive energy, the story now is the enormous amount of financial obligations in the developed and developing world. This dominates the energy story. For example, if interest rates go up everywhere 100 basis points, or from 1% to 2%, or 4% to 5%, the impact on the world economy would be the same as if oil prices rise from 100 dollars to 200 dollars per barrel. In other words, right now, we have built up such a huge financial balloon, that the risks from that popping and the likelihood that aggregate demand is going to decline will for the foreseeable future be even more severe than a 3 or 4, or 5% natural decline rate in oil. And of course once this happens, and commodity prices drop, a significant amount of what we have labeled as oil ‘reserves’ will disappear as prices go below marginal cost. It has never been about how much oil there is, only about the profits left over to society after extraction costs.
In America we still have an energy footprint around 100x our caloric use though – so there is huge room for constructing a different cultural narrative that uses less energy. Basically, we do not have enough cheap energy to continue a growth path, but we have a plenty of energy to have a meaningful, robust society at a lower level of output. Yes, we have an energy shortage, but it is not a true one. It is only one that does not allow us to continue global economic growth in the way that our politicians and institutions expect. This is important because the majority of peak oil aware people think we should be devoting our resources towards energy alternatives. The reality is that our system is out of ‘capital’ (low cost liquid fuels and by proxy, available credit) and lots of other aspects of society that we take for granted need more urgent support. We are getting lulled into thinking that efficiency and renewables are the answer to what we face when the more pressing problem is our dependence on globalization built on assumptions that are no longer valid.
Also, when I talk about expectations I mean in a brain/behavior sense. Our society -Europe and US and increasingly China and elsewhere – is habituated to high stimulation and high consumption. The key point I’ve learned from studying neuroscience and evolutionary biology is that it’s the ‘wanting’ that drives our behavior, not the ‘having’. And in our fast paced, gadget saturated world, our neural high water marks keep getting reset higher and higher. Every day we wake up expecting/needing a certain amount of dopamine/neural stimulation – and our culture has set us up to get these brain chemicals by consuming and competing for status using resource intensive ways. On a world with finite resources this is a problem as everyday people who already have everything they need, strive to get ‘more’. This ‘more’ ends up being taken from other people, other species, and other generations. We have to find ways to get our evolutionary derived brain ‘cocktails’ in more benign ways. This, combined with the energy/credit constraints we face, is why I label our situation a ‘longage of expectations’, as opposed to a ‘shortage of energy’.
Q: But you can’t tell that to 2 billions poor people without the access to our energy and to poor people in rich countries.
Nathan Hagens: Actually you can. People in, say, India are going to have much easier transition to an end to global growth than people in the US, because they have never got dependent on all these complex international flows and their brains have not gotten dependent on high level of stimulations and novelty, which when it goes away, people in the US and Europe are going to freak out from withdrawal. People in India are largely just going to keep on going thru their daily routines. So I think equitable distribution of energy and resources is important, but I think that to try to bring the 3rd world up to a industrialization trajectory, there is not enough energy to do that and it would not make their life better. I think there is a lot of low energy ways to improve poor peoples standard of living without going fully industrialized.
Q: Do you think there is a relationship between peak oil in the USA in 1970 and the abolishing of the gold standard by President Nixon in 1971?
Nathan Hagens: I do, of course I do but it is not only that. 1970 was also peak genuine progress indicator (GPI). If you look at GDP and subtract all the negative things, our peak GPI was in 1970. Also in 1973 real wages in the USA peaked after going up for 13 decades in a row and yes, all these peaks were related. We had a credit crisis in 1920s and 30s, but then we had a plenty of cheap energy and natural resources left. In the 1970s we had a resource crisis and in order to fight that we opted to go to a credit based economy. We went to dollars being global standard and creating of massive amounts of private and public debt. But now we are faced with limits on both: a true crisis where resource and credit drivers are both not what they need to be to power growth. So I do not think that there is any way that we are going to grow in the future, from these levels. And I do think that there is a clear, but not well recognized, relationship between money and energy. Money is a claim on future energy and resources. Debt is a claim on future money. Debt doesn’t create energy, but its availability allows us to extract existing energy faster. Just like drilling horizontal wells and nitrogen injection in a field like Cantarell draws out more oil temporarily at a cost of steeper decline, debt does the same for an economy. In this case, the world economy.
Q: So since 1973 the debt grew faster than the real GDP.
Nathan Hagens: By far. By far.
Q: There is an intense debate in the financial circles if the credit crunch will result in inflation or deflation (analysts like Steve Keen or Nicole Foss). How you see the things to play out?
Nathan Hagens: To your question, I think both are possible. I do not think we will have an inflation other than very mild inflation. There is so much debt out there in existence that even what the governments are doing right now with the quantitative easing is very small compared to that. So in generally I side with Steve Keen’s view that we are more likely to have deflation than inflation. There are some possibilities that end in hyperinflation too. It all depends on how our leaders and citizens react to events. I don’t think any trajectory is certain. But in a broader sense your question relates to a dying paradigm – of ‘investing’ and trying to accumulate excess marker wealth (via positioning for deflation or inflation). I think peoples priorities and goals are going to shift dramatically in the next decade and the wealth amplitude that we’ve seen over the past generation is going to dissipate.
Q: What is the reason that mainstream economists largely ignore the macroeconomic role of debt in the economy? Recently Paul Krugman published an article in which he showed that it is the redistribution of debt that matters. So, why is that?
Nathan Hagens: Because for most of the time macroeconomic theory kind of was aligned with human nature, because everyone could get more and everyone’s lives were better off, but the last 30 years when we kind of shifted to this corporate model, advertising, having people to compete for things they did not really need or want, they were told they need it. Supply side economics and debt creation is just too embedded in the economic establishment. Debt doesn’t have to be a bad thing. It is only bad when what we spend it on isn’t productive enough to pay it off. What we need is Peak Oil Keynesianism. What we are getting is Turbo-finance Keynesianism.
Q: Recently Dennis Meadows said that instead of warning people against the limits to growth we should better help them to cope with them, with the consequences. Do you agree with that?
Nathan Hagens: I do agree with that. As I said in my talk, I think there need to be people to work on what does a sustainable system look like, how do we marry our evolved human needs with our natural resource balance sheets. But there also need to be people looking at a transition, looking at what sort of lifeboats are important/feasible and then building the lifeboats, changing supply chains, strengthening local and regional basic service chains, and I do not think we will have a long lead time for this. So although I think people should be more active and involved in physically and emotionally preparing for a world with less, it is incumbent on the worlds governments and institutions to work on the big macro issues, even if they don’t get the go ahead from the media and economists that this trajectory is going to happen. For governments, and for people, it is very difficult to have one foot in this world and the other foot in a future paradigm that hasn’t arrived yet – it is against our nature. But I think if there were 5 or 10% of people that clearly and vocally going in that direction, a great many others would follow. People intuitively know something is wrong with our current system and I think as long as all/most lifestyles/throughputs declined in tandem, lots of people would sign up for a simpler world with less stuff and complexity.
Q: Are you more or less optimistic about the future trends than 10-15 years ago?
Nathan Hagens: Well, I am far more pessimistic than I was15 years ago, because I was ingnorant about much of this then. I thought the world was our playground. But I am more optimistic about the future than I was 5-10 years ago, when I first learned about peak oil, peak credit, you know, overshoot in general. Now I realize that we are still incredibly rich, and have a lot of cushion, and untapped ingenuity and a human spirit to cooperate. It is possible that things will be fine after some bottleneck/disruptive event. I am not saying that is for sure, there are humans involved and humans make mistakes and stupid decisions. The system risks are about as high as they’ve ever been. But the opportunities to shape a meaningful future are also high. We are firmly entering transition territory and pro-social behavior from all of us will be a big counterweight to the inevitable stresses that will arise in this situation. And from my perspective, we are in profound need for a new cultural narrative away from conspicuous consumption and turbo-finance. We live in interesting times -our decisions and behaviors will have impacts on what the future looks like. Everyone has to live and enjoy their lives, but hopefully with an eye on the future and sense of responsibility and community.
Interview prepared by Alexander Ač, PhD, Global Change Research Center, Czech Republic