Ruminations of a Rundown Replicant

Debt and Energy

Modern economies run on affordable, finite, dense energy (coal, oil and gas).1

The master energy resource is affordable, finite, dense, transportable crude oil.

Diesel, a refined product of crude oil, does the heavy lifting. If diesel trucks stopped running, economic collapse would be almost immediate.

Diesel, and gas, fuel food production which enables population growth (from 1 billion pre-burn to 8 billion.) Any interruption to supply of these fuels would be catastrophic.

Oil and gas are contained within borders. Most people don't live within those borders.

Money is a claim on energy.

The money system's been rigged so that material wealth, created by affordable dense energy, flows to an elite. Who they are is subject to conjecture.

Inequality is achieved, in part, by making the masses eat credit. The money is created out of thin air when banks lend to them. That is, loans are not funded by household and business savings or reserves held by central banks.

Much of this credit boosts house prices, forcing more and more households on to the debt merry-go-round.

If the credit flow stops, the value of houses plummets to values that reflect markets rentals in a stagnating economy.

Another source of inequality is austerity spending by government which forces up unemployment, and use of debt to make ends meet.

Again, like bank lending, government spending is created out of thin air. It's not funded by taxes, and government doesn't need to borrow to make up any tax shortfall (deficit).

A deficit is not debt to be repaid.2 That's a myth. Why would government, that creates money out of thin air, need to borrow its currency from the non-government sector, and then pay interest for the privilege? It's primarily business welfare. Bonds are a safe place for business to put money that's not being invested.

Let's stop here because the number of ways that the system is rigged is many and varied, and time does not permit. Racketeering can be found in every nook and cranny.

It's a parasitic arrangement, and we, the host, are hanging on for dear life. Much of our debt will never be repaid because there's not enough income derived from making goods and providing services to repay it.

More and more household and business income is going to those who earn while they sleep (bankers, landlords, insurers).

More and more household and business income is going to energy producers faced with increasing energy costs of production (We used the most affordable dense energy first, and now we're left with increasingly costly dregs).

Neo-liberal governments, on behalf of the parasitic classes they serve, are reluctant to spend on the masses (their host), and to write off the host's debts.

The world's in an impasse waiting for something to give.

Nuclear armed powers, China and the US are at loggerheads over the remaining oil. Who knows how that will end? Are we waiting to see who blinks?

If you understand this graph3,4, you'll have a better understanding of what awaits you.

The impact of USD denominated energy prices on highly indebted AUD households

If the price of oil goes up, economies falter. If the price of oil doesn't go up, oil producers falter (and economies falter).

If interest rates go up, borrowers en masse will default, and mass evictions will follow.

High oil prices generate recessions (See chart).

Every recession is accompanied by inadequate and ill-directed government spending (that's driven by neoliberal ideology). That spending is required to counteract the fall in consumer spending and business investment in the real employment generating economy (often called Main Street).

Instead, neoliberals direct money created out of thin air into assets (property, shares) making the elite momentarily richer. Very little finds its way into the productive (versus speculative) sectors of the economy. Obama famously saved Wall Street instead of Main Street.

Now, we're waiting for the next oil price spike, and the next recession. As you see, oil prices are on the rise, up from last year's US$20 a barrel to over us$70.

This can't go on forever. Each recession is worse than the one before because, after each one, debt service represents a greater proportion of income. Over us$100 a barrel triggered a major recession (GFC). That trigger price is much lower now because the debt proportion of income is higher.

The next one might be the last. Prolonged economic stagnation will become the new norm as the big burn finally comes to an end.

Australia didn't experience the GFC because the government spent big, and it's largest trading partner, China did likewise. The lack of a neoliberal austerity response saved us.

Neither of those factors apply this time.

Australia has little manufacturing capability, China is turning its back on us, and globalisation is coming to an end.

...and there's a pandemic.

The current neoliberal government is still practicing austerity, driven by fear of inflation and deficits.

Australia is the most highly indebted nation on the planet, and its neoliberal government is encouraging more borrowing. That's what happens when you sail through a GFC, and don't know why.

Anyway, there's nothing to worry about.

Should we worry that we don't have oil? Should we worry that we don't own our gas (or pretty much anything else).

Hubris is what emerges when things are too good for too long. We've maxed out the credit card having a good time, and now the day of reckoning is upon us.

Nothing to worry about.

Well, maybe we should worry that any conflagration in the Middle East will spell curtains for us.

Maybe we should worry that allowing the US to put a target on our back isn't a good idea.

Thank GOD that we're well governed, and lead. Thank GOD that we're in denial, and don't know what the hell is going on.

  1. supplemented by heat and light energy from the sun, and nuclear energy. Nuclear is a dense fuel but it's proven to be unaffordable, and potentially, very unsafe. There are no votes in it.

  2. Stephanie Kelton's TED talk

  3. International Monetary Fund, Global price of WTI Crude [POILWTIUSDM], retrieved from FRED, Federal Reserve Bank of St. Louis;, September 12, 2021.

  4. International Monetary Fund, Household Debt to GDP for Australia [HDTGPDAUQ163N], retrieved from FRED, Federal Reserve Bank of St. Louis;, September 13, 2021.

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