John Michael Greer explains what will eventually happen to debt-infested and overspending governments who use financial paper to pay for real goods and services. Excerpts below.
Over the last century, with the assistance of the economic hypercomplexity made possible by fossil fuels, the world’s industrial nations have taken the process of economic abstraction further than any previous civilization. On top of the usual levels of abstraction – a commodity used to measure value (gold), receipts that could be exchanged for that commodity (paper money), and promises to pay the receipts (checks and other financial paper) – contemporary societies have built an extraordinary pyramid of additional abstractions. Unlike the pyramids of Egypt, furthermore, this one has its narrow end on the ground, in the realm of actual goods and services, and widens as it goes up.
The consequence of all this pyramid building is that there are not enough goods and services on Earth to equal, at current prices, more than a small percentage of the face value of stocks, bonds, derivatives, and other fiscal exotica now in circulation. The vast majority of economic activity in today’s world consists purely of exchanges among these representations of representations of representations of wealth. This is why the real economy of goods and services can go into a freefall like the one now under way, without having more than a modest impact so far on an increasingly hallucinatory economy of fiscal abstractions.
An economy of hallucinated wealth depends utterly on the willingness of all participants to pretend that the hallucinations have real value. When that willingness slackens, the pretense can evaporate in record time. This is how financial bubbles turn into financial panics: the collective fantasy of value that surrounds tulip bulbs, or stocks, or suburban tract housing, or any other speculative vehicle, dissolves into a mad rush for the exits. That rush has been peaceful to date; but it need not always be.
Finally, of course, bubbles always pop. When that happens, the speculative vehicle du jour comes crashing back to earth, losing the great majority of its assumed value, and the mass of amateur investors, having lost anything they made and usually a great deal more, trickle away from the market. This has not yet happened to the current money bubble. It might be a good idea to start thinking about what might happen if it does so.
The effects of a money panic would be focused uncomfortably close to home, I suspect, because the bulk of the hyperexpansion of money in recent decades has focused on a single currency, the US dollar. That bomb might have been defused if last year’s collapse of the housing bubble had been allowed to run its course, because this would have eliminated no small amount of the dollar-denominated abstractions generated by the excesses of recent years. Unfortunately the US government chose instead to try to reinflate the bubble economy by spending money it doesn’t have through an orgy of borrowing and some very dubious fiscal gimmickry. A great many foreign governments are accordingly becoming reluctant to lend the US more money, and at least one rising power – China – has been quietly cashing in its dollar reserves for commodities and other forms of far less abstract wealth.
Up until now, it has been in the best interests of other industrial nations to prop up the United States with a steady stream of credit, so that it can bankrupt itself filling its self-imposed role as global policeman. It’s been a very comfortable arrangement, since other nations haven’t had to shoulder more than a tiny fraction of the costs of dealing with rogue states, keeping the Middle East divided against itself, or maintaining economic hegemony over an increasingly restive Third World, while receiving the benefits of all these policies. The end of the age of cheap fossil fuel, however, has thrown a wild card into the game. As world petroleum production falters, it must have occurred to the leaders of other nations that if the United States no longer consumed roughly a quarter of the world’s fossil fuel supply, there would be a great deal more for everyone else to share out. The possibility that other nations might decide that this potential gain outweighs the advantages of keeping the United States solvent may make the next decade or so interesting, in the sense of the famous Chinese curse.
Over the longer term, on the other hand, it’s safe to assume that the vast majority of paper assets now in circulation, whatever the currency in which they’re denominated, will lose essentially all their value. This might happen quickly, or it might unfold over decades, but the world’s supply of abstract representations of wealth is so much vaster than its supply of concrete wealth that something has to give sooner or later. Future economic growth won’t make up the difference; the end of the age of cheap fossil fuel makes growth in the real economy of goods and services a thing of the past, outside of rare and self-limiting situations. As the limits to growth tighten, and become first barriers to growth and then drivers of contraction, shrinkage in the real economy will become the rule, heightening the mismatch between money and wealth and increasing the pressure toward depreciation of the real value of paper assets.
Once again, though, all this has happened before. Just as increasing economic abstraction is a common feature of the history of complex societies, the unraveling of that abstraction is a common feature of their decline and fall. The desperate expedients now being pursued to expand the American money supply in a rapidly contracting economy have exact equivalents in, say, the equally desperate measures taken by the Roman Empire in its last years to expand its own money supply by debasing its coinage.