Tuesday, December 15, 2009

Addicted to Growth

Do you know what fractional reserve banking is? If you don't, you really should.

If you do understand fractional reserve banking - and its consequences - then you understand that our civilization is hooked on an economic growth cycle that can't be broken without destroying the very economy that our comfy, greedy civilization is built upon.

We, as a civilization, are addicted to debt. We're also addicted to debt's alter ego: economic growth.

You can't repay debt without economic growth, and you can't grow the economy on thin air. Economic growth is based on having more stuff to sell, and more (or wealthier) people to sell it to - which is achieved via all kinds of activities, ranging from pulling energy and minerals out of the ground, to importing new consumers from foreign countries. Unfortunately, most of the things we "make money" from are unsustainable in the long term.

Anyone who sits down and really thinks about it can understand that perpetual growth on a finite planet simply isn't possible. If your body kept growing and growing and growing, it would eventually collapse and die. Similarly, if the human population keeps growing, eventually the ecosystems that sustain us will collapse and die. (Whether the planet can sustainably support 1 billion people or 1 trillion people is beside the point. The point is: there are physical limits to growth, beyond which life-supporting systems cannot survive). Obviously, the growth has to stop at some point in time - and when it does, it's going to be very, very ugly.

Fractional reserve banking is a form of black magic: it is the system that conveniently allows banks to reach into thin air and bring previously non-existent money into existence. The banks then lend that money to their customers, with a handsome interest rate attached to the loan. That debt is paid back via economic growth.

If you've ever borrowed a 5- or 6-figure sum of money (to buy something like a new car or a house), I'll bet you 50 magic bucks that you never saw that money as cash. You never held that money in your hands, did you? Why not? Because, thanks to the magic of fractional reserve banking, most of that money doesn't really exist.

Do you know what a "cash reserve ratio" is? It's the minimum reserve of cash that each bank must physically hold in relation to customer deposits and notes. So, if you deposit your hard-earned pay of $1,000 into a bank with a cash reserve ratio of 10%, then the bank is only obliged to keep $100 of cold hard cash on hand to cover your deposit. It's free to lend the remaining $900 (your $900) to whomsoever it pleases - and, at a much higher interest rate than you receive on your deposit.

Do you know what the cash reserve ratio for Australian banks is? It's 0%. Yes: zero percent. In other words, an Australian bank is not obliged to hang onto a single dollar in cash to cover your deposit.

The really tricky part comes next. When you transfer your borrowed money to the seller of your new house or car, the money almost inevitably goes into the seller's bank account, which means the bank can lend that same money out again ... and again ... and again. That is the magic of fractional reserve banking! And that is why we can't collectively choose to simply hop off the debt/growth merry-go-round. If we did, the banks would collapse, and they'd take our economy down with them.

But if we don't remove ourselves from the debt/growth cycle, then sooner or later, our life-supporting ecosystems will collapse. Hence, we find ourselves in a sticky Catch-22 situation: stuffed if we do, and even more stuffed if we don't.

If everyone went to the bank today to convert their money into cash, the banks would all collapse before morning tea time. When that happens, it's called a run on the bank, and a run on the bank is a scary prospect for anyone who cares about their money. The current global financial crisis has witnessed numerous runs on banks, including the one that sent Bear Stearns down the toilet.

I'm taking steps to reduce my debt, and to make my life as sustainable and self-sufficient as possible.

What are you doing?

Monday, December 14, 2009

Addicted to Oil

Today, in Australia, almost everything we own, buy, or do is brought to us by oil. Plastic is made from it, food is grown and transported with it, cars and planes run on it - the list is practically endless. There is no doubt: our civilization is addicted to oil, and our lifestyles are utterly dependent on it.

And, unfortunately for our civilization, oil is a finite resource.

In 1956, a geophysicist by the name of M. King Hubbert published the curve that he predicted world petroleum production rates would follow. Hubbert's Peak (as it's now known) looks like this:
All the evidence suggests that Mr Hubbert was basically on the money. The peak and decline of oil production that he predicted has now been observed for many oil fields and oil producing regions. For example, oil production in the continental US peaked in the early 1970s, and has been in general decline ever since.

However, while global oil extraction follows something like a bell curve, global oil consumption has been marching ever-upward, following a line that looks like this:

The term "Peak Oil" does not mean that oil is about to run out. However, when the world oil supply peaks (i.e. when we reach global Peak Oil) then it won't be too long before demand begins to outstrip supply. This will send the price of oil up until, one day, you won't be able to afford fuel for your car.

"So what?", people say. "If I can't afford fuel for my car, then I'll walk to the shops!"

But what if, when you get to the shops on foot, you discover that the farmers and the truck drivers and the food processors can no longer afford fuel, either? What if, when you get to the shops, you can't afford what little is left on the shelves? What if the shelves are empty?

If you think that this can't happen, then look at the historical precedents, of which there are many. Look, for example, at Haiti in 2008: Food riots turn deadly in Haiti

I'm doing what I can to reduce my dependency on oil. What are you doing?

Apostrophe Why?

One day when I was trying to spit out the word "catastrophe", it got tangled up in my brain with the word "apocalypse", and what came out of my mouth was the word "apostrophe".

I have a real problem with spoonerisms, malapropisms, and similar linguistic slips. But I like the word apostrophe, and it struck me as a neat and slightly surreal condensation of the words apocalypse and catastrophe. And, I ask you: what is an apocalypse, if not surreal?

As for why I was trying to spit out the word catastrophe in the first place - well, because that's where I think we as a species are headed: for a full-blown apocalyptic catastrophe. And it bothers me.