The Crash Course: The Unsustainable Future of Our Economy, Energy, and Environment (4 page)

PART I

How to Approach the Next Twenty Years

CHAPTER 1

The Coming Storm

In 2008 and 2009, economic activity in the United States and most other developed nations tumbled off a cliff. At several points there was real panic in the air. Stock markets around the world fell to levels that wiped out more than a decade of gains. Trillions evaporated in the housing market, and global trade plummeted.

Questions remain:
What happened? Where did all our money go? How did 10 years of wealth accumulation evaporate so quickly? More important, when can we expect a recovery?

In truth, our predicament goes far deeper than even these recent, disquieting economic events might suggest. It’s time to face the facts: A dangerous convergence of unsustainable trends in the economy, energy, and the environment will make the “twenty-teens” one of the most challenging decades ever.
The Crash Course
explains this predicament and provides sufficient context to support the idea that it is well past time to begin preparing for a very different future.

The entire developed world is entering this next period of time in a severely weakened financial state. The United States, in particular, is carrying excessive levels of debt and unfunded liabilities and is further burdened by a national failure to save and invest in infrastructure. But the issue is not limited to the United States; every nation will eventually have to face the same realities posed by limited and limiting resources.

As a society, our imagined responses to the future make the implicit assumption that we will always remain within a complex economy that is capable of operating in an effective and orderly manner.
The Crash Course
asks the question,
What if this assumption is untrue?
and provides both data and ideas to support the conclusion that the economic status quo cannot be taken for granted, at least not in the form to which we’ve become accustomed.

Even if the only task ahead of us were attend to the numerous economic mistakes of the past several decades, we would still find this next incarnation of our economy to be extremely difficult. But there are other factors at work.

The big story is this: The world has physical limits that we are already encountering, but our economy operates as if no physical limits exist. Our economy requires growth. I don’t mean that growth is “required” as if it’s written in a legal document somewhere, but it is “required” in the sense that our economy only functions well when it’s growing. With growth, jobs are created and debts can be serviced. Without growth, jobs, opportunities, and the ability to repay past debts simply and mysteriously disappear, causing economic pain and confusion.

In the near future, humanity as a species will have to grapple with a condition that it has never faced before: Less and less energy will be available each year. In the past, there was always another continent brimming with energy resources to tap; another well that could be drilled; more hydrocarbon wealth that could be brought up from the depths. We have always had access to increased resources when we wanted them, and during that long run of history, we have fashioned an enormously complicated society and global economic model around the idea that there always would be more.

Along the way, we moved from burning wood to burning coal, then to whale oil, and then to petroleum. The unanswered question is this:
After oil, what comes next?
What
is
the next source of energy? Nobody has a truly viable answer for that as we cross the threshold of Peak Oil, a concept that represents the moment after which slightly less and less energy comes up out of the ground for us to use as we wish. Many hold out hopes that technology will ride to the rescue, perhaps in the form of nuclear power, natural gas, or alternative sources of energy. But the issues of time, scale, and cost loom large, because we have taken so long to finally recognize the imminence and severity of the petroleum predicament.

With a peak in energy extraction, a host of environmental issues suddenly come into play. Agricultural soils that were forced to produce higher yields via the continuous application of fertilizers derived from fossil fuels will turn out to have been fundamentally depleted. Minerals of increasingly dilute concentrations that require more and more energy to produce will suddenly cost exponentially more each year to extract and process. Where markets once allocated our energy resources according to ability to pay, true scarcity will soon form the dividing line between economic progress and decline for the world’s various nations. How soon will all of this happen? If not this year, then within 20 years, which is a blink of an eye given the scale and scope of the potential disruptions implied by this structural shift.

It is only when we assemble the challenges we find in the economy, energy, and the environment—what I call “the three Es”—into one spot that we can fully appreciate the true dimensions of our predicament. The next 20 years are going to be shaped by fundamental resource scarcity in ways that we have never experienced in history. The developed world is entering this race economically handicapped, with no one to blame but itself.

The primary question is whether we want our future to be shaped by disaster or by design. The set of predicaments and problems that we now face are very different from the conditions of the past 20 years and therefore present a solid challenge to the existing status quo. Those currently wielding power and influence are most likely to defend the status quo, raising the risk that our future will consist more of disaster than design. Further, abrupt changes have the unfortunate tendency of escaping notice by the majority of people, who have been conditioned to expect that the future will resemble the past. This is a perfectly valid assumption for ordinary moments, but it is a liability during extraordinary times.

A lucky few will see the changes coming ahead of time and seize the opportunity to make a more gentle series of adjustments on their own terms, while most will be caught unawares and have a much rougher period of transition. Fortunately, by examining and understanding the ways in which the economy intersects with and depends upon energy and other resources from the environment, it is possible to safely navigate and even predict the coming changes.

That is where
The Crash Course
comes in. I will teach you the system of thinking that I used to foresee the financial difficulties of 2008 and 2009 years in advance. Not only did I survive the great credit crunch of those years, I advanced my wealth handily, beating the meager returns that stocks and bonds would have offered.

Because I am discussing subject matter of a serious nature, I may seem to be delivering a doom-and-gloom message. But truthfully, I consider myself to be a “realistic optimist.” The spirit and intent of
The Crash Course
are to help you see the options and opportunities in this story of change. I have created a better life for myself and my family through the insights developed from this work. You can, too.

The mission of this book is larger than helping people build more resilience into their lives and portfolios. At our current pace, we are on track to leave behind more than a few predicaments for our children, as part of a substantially degraded world with fewer opportunities than we ourselves were granted. If we make the right choices from this point forward, we have the opportunity to leave a very different legacy. That is what
The Crash Course
is about—helping us to individually and collectively understand that our choices matter significantly and that the time to make the right choices is running dangerously short.

CHAPTER 2

The Lens

How to See the Future

I would like to share with you the method of thinking that allowed me to skirt the worst of the financial downturn, illuminate the future, and increase my wealth. It has become the lens through which I view the world, combining the economy, energy, and the environment—which I introduced in Chapter 1 (
The Coming Storm
) as the three Es—into a single, comprehensive whole.

The first E, the
economy
, is founded on a workable understanding of how our money system actually operates, as well as basic economic information about debt, savings, and inflation. Not too much; just enough to allow us to assess the sustainability of our current trajectory. A critical understanding rests on the observation that our economy is predicated on growth. It needs growth the way our bodies needs oxygen. Not just any kind of growth, but
exponential
growth, which is a nonlinear form of growth that begins slowly but compounds with urgency toward the end. If you are interested in peering into the future with the intent of predicting how it will unfold, you
must
learn this concept.

Even if we were to limit ourselves to examining just the
economy
while ignoring energy and the environment, we could make a compelling case that prosperity faces the most daunting structural headwinds seen in generations. As baby boomers transition from being net investors and builders to net sellers and downsizers, this change will put downward pressure on the prices of the stocks, bonds, and real estate they will be selling. Further, we might note that the developed world has doubled its debt load over the past 10 years, which was an important component of our perceived prosperity but which, for a variety of reasons, seems unlikely to happen again. Even more dramatically, we have recently seen an explosive expansion in unmatched pension and entitlement liabilities in a majority of developed nations. Without these increases in debt and unfunded liabilities, global growth over the past decade would have been a great deal less dramatic than it was. How will we fuel the necessary growth now required to service our existing debts, let alone double them again? That’s a good question.

However, it’s when we bring in the second E,
energy
, that the story quickly compounds in urgency. Our economy is dependent on growth, and petroleum—oil—is the undisputed king of fuels that drive economic expansion. It has no substitutes, no replacements waiting in the wings, and it is depleting. There is growing alignment between various government and private institutions predicting the date when an irreversible peak in oil production will occur. This does not mean “running out of oil”; it just means that despite our best efforts, gradually less and less oil will be available each year—though at increasing extraction costs. Many confuse technology with energy, but I don’t and neither should you. Technology is a means of exploiting energy more efficiently and effectively, but it is not a
source
of energy. What is our next source of energy? That is the most important question of our time and it remains unanswered.

Oil is not the only critical resource that will be in shorter-than-hoped-for supply in the future. Literally dozens of essential minerals and other natural resources found in the third E, the
environment
(such as silver, phosphate, and possibly even coal, from a net energy perspective) will peak right alongside oil.

Again, this is not a story of “running out”; this is a story where resource extraction gets just a little bit more challenging and a little bit more expensive. Consequently, fewer and fewer resources come up out of the ground to sustain the economy that we know and love. Will all economic activity cease with the depletion of a few key elements? No, of course not. But neither can our economy continue to operate in precisely the same way that it did when demand alone dictated supply.

And that’s my key message here. There is a wealth of data suggesting that a period of profound change is either already upon us or coming soon enough to warrant the attention of every serious long-term investor and prudent adult with an eye on the future. We can no longer constrain our thinking to just one E, the
economy
; we must include the other two Es,
energy
and the
environment
. My background as a scientist forces me to consider all the variables within a system. For far too long, economists have been allowed to behave as if the economy was an independent system all on its own. It is not. It is a subset of the larger world, and I attribute all of my success at predicting the events that have unfolded to the fact that I hold this larger, more complete, and therefore more useful view of the world.

Each of the three Es depends upon the other two. They are utterly intertwined, and that’s why we need to consider them together. When we do, we are using what I call “the lens.” The critical insight that comes from using this lens brings the understanding that continued economic growth is both absolutely essential and also impossible: Essential because our economic system was designed to grow and performs horribly when it cannot, and impossible because nothing can grow forever. The implications are profound and numerous.

Once I developed this lens, I found myself unable to put it completely aside. It has shaped my thinking and my decisions, and was the primary means by which I made sense of new information as it became available. Although I have constantly sought evidence that this view, this hypothesis, might be wrong, it has only been reinforced over the years as the data continues to pile up.

What would I do if new information came along that proved this lens to be mistaken or misleading? I would change my thinking, of course. But as the information has rolled in over the past several years, the validity of this view has only been confirmed. While I am open to the possibility that I may not have everything exactly right, I will present enough solid, fact-based evidence that a reasonable and prudent adult should at least step back, consider the matter, and not reject it out of hand simply because it might seem to be unthinkable.

If I am right, then the next 20 years are going to be completely unlike the last 20 years, and we will be grateful for the foresight that we can gain through the lens of the three Es.