ECONOMIC OBSOLESCENCE
by Andrew McKillop
Author & Consultant
April 27, 2009

PREFACE

The most recent and perhaps last 'classic growth bubble', starting in 2002-2003 after the dotcom and hi-tech crash and post-911 crisis of confidence, and ending in 2007-2008 with the subprime crisis and massive upward price speculation in energy, food and mineral commodities, is followed by what the IMF calls "the worst recession since 1945". It may or may not end in late 2009 or early 2010. It may drag on for years. Any 'classic economic recovery' that does flow from incredibly massive injections of borrowed and printed public money is however almost fatally doomed to rapidly abort. This could arise from another spiral of oil prices, the return of inflation, or from interest rate hikes to defend national currencies under increasingly vigorous attack. Other reasons for rational pessimism abound. The 'survivability' of a hoped-for classic economic rebound is threatened by geopolitical conflict and rivalry left over from the Bush years, by trade tensions and rivalries, by climate change and by environmental, food supply, and resource limits. It is also threatened by what at present is only dimly perceived, but will leap to prominence: that is simple obsolescence of 'classic economic growth'.

In 2003 the outlook seemed different. From that standpoint in time it was possible to predict a mild but constant growth in Commodity prices driven by oil supply shock and Chinese industrial growth, a grumbling-and-whining rise of oil prices from around $ 55 per barrel to not much above $ 100, the right level to constantly stimulate global economic growth by what I call ‘Petro Keynesian Growth’. This in fact happened for three years: the 2005-2007 Petro Keynesian Growth interlude. For many reasons – behind which the looming threat of economic growth itself becoming obsolete - this spiraled into economic slump.

Oil prices overshot, food prices overshot, credit growth and debt overshot. Global economic growth undershot. Although strong relative to the troubling 'underperformance' of economic growth in the OECD countries that has continued since the 1980s, it was finally not strong enough to save the US finance and bank sector – and those of most other OECD economies – from meltdown. The feedback of falling economic growth in the 'real economy', from the implosion of the paper mountains of notional and fictional assets cobbled together and frenziedly traded by the so-called financial community, was radical. Some estimates, for example by the IMF in April 2009 suggest that perhaps $ 3 000 Billion of notional asset value has been lost by the US bank and finance sector, and a suspiciously smaller and more moderate $ 1 900 Bn has been lost by European and Japanese 'players'. Overall, some estimates suggest that major banks in the US, Europe and Japan still hold about $ 150 000 Bn of vulnerable derived financial products, as of March 2009.

We can already be sure that this paper asset implosion will not be followed by a quick and reassuring 'real economy bounce', as in 1987, or following the crises of the 1990s, or in fact what happened in appearance from 2002-2003. In other words the 'real economy' was quickly, or relatively quickly able to shake off the paper asset losses, and return to hewing wood in the world's disappearing tropical forests, and drawing oil from its now rapidly depleting oil-bearing source rocks. The new industrial powerhouse of the world, China, burning about 2.2 Bn tons of coal per year, was there to reassure that 19thC industrial growth was still possible. Even today, in 2009, perhaps with a trace of nostalgia and certainly with plentiful naivety, some political and business leaders in the OECD countries still talk of 'China and India decoupling'. This now outdated and unrealistic theory allowed, or for some still allows hope that these two emerging economy giants will play locomotive, and pull the rest of the world out of recession, through their copybook and classic, but totally unsustainable economic growth.

For the OECD countries the reality of economic obsolescence is harder to shrug off. One easy conclusion is that most, or nearly all of the OECD economies, led by the USA, have for at least 20 years made a one-way shift towards economic growth only coming from completely unsustainable and fragile, credit-based personal consumption growth. Since the 1990s this has been given an additional, but fixed-term lease of life through massive imports of decreasingly cheap Chinese industrial goods, and decreasingly cheap services from India and elsewhere. This 'structural problem', of course generating permanent and sometimes massive trade deficits, is today openly admitted by several leaderships. After this mea culpa, due of course to bad advice and briefing from their former advisers, they quickly pass to pro-active page 2 of their speech. This announces that yet more billions of borrowed and printed money must be 'injected' into the economy, to repurchase 'troubled assets' placed in 'bad banks', and to encourage purchases of cars, or houses, or machines and equipment, or offices and financial trading terminals, using credit from newly confident and solvent 'high street' banks.

To be sure, this touching faith in 1930s-style Keynesian solutions is joined in practice by continuing faith in the so-called global economy and its capacity to grow. The reason is simple. It is the only choice for solving the 'growth deficit' of the mature or postindustrial OECD countries – whose societies have never consumed so many industrial goods and hi-tech services, nor exercised such intense pressure on the environment and global natural resources in any past period of human history. The now desperate quest to restore economic growth, to avoid financial and monetary armageddon when the billions have to be repaid, reveals a problem that goes very deep. The economic model, even the structures and infrastructures of what New Economists claimed was the 'no alternative' model for future prosperity of the entire world are increasingly obsolete.

BOUNCE – NO BOUNCE

Previous boom and bust sequences for paper asset value, for example after six years of recession in the later 1930s, again in the 1970s, in 1987 and after the financial crises of the 1990s, tended to show a comforting long-term trend: the real economy always bounced back, faster each time. This of course ignored the painful and very slow 'economic adjustment', or permanent austerity cure forced on the low income developing countries through the 1980s and 1990s, or Russia's own 'adjustment to the market' of about 1992-2000. For the OECD richworld, however, it was possible to imagine that 1929-type crises were themselves obsolete, being consigned to the wastebin of history by the no alternative diktat of the New Economy whose mix-and-match rationales, or slogan pack also included the so-called Death of History.

This ignores the real fundamentals of the New Economy. These have drifted, one-way only, to something a lot closer to No Future than No Alternative. Already from the later 1980s but especially since 2002-2003, real economy growth of the OECD countries is fleeting, low, unstable, inflationary, and shorter following each asset bubble. It is nothing like Chicago School 1960s dreamings of sustained belle epoque growth. This long gone nirvana for liberalism included yearon- year growth at 4% or more, with no inflation, cheap oil and natural resources, balanced trade accounts, low unemployment and confident consumers, and above all for political and business leaders, economic predictability and manageability.

The New Economy of the 1980s supposedly set out to recapture this lost age of bliss, but is now identified as a dangerous and unsure model, delivering ever shorter cycles of unstable growth and more violent meltdowns. The present crisis could be the first of a new-old genre, closer to 1929-36 than the previous New Economy crises, of the 1980s or 1990s. The reasons for this are perhaps not evident, and certainly easy to deny, but whether or not it is driven by credit-based growth of personal consumption, or investment in unsustainable infrastructures, machines, equipment and processes, the New Economy is obsolete. It only answers obsolete social anticipations and outdated historical and economic worldviews. Its sustainability is shrinking with each short growth surge in the crippled real economy. If this is the 'No Alternative' we may only have one 'No Future' sequel to the present financial-and-economic crisis: Long recession.

PAPER ECONOMY DISCONNECT

Warnings came thick and fast through the long period of 2003-2008. Paper economy asset values were, in fact still are extremely high. The hi-tech Nasdaq, for example, was estimated by some reputed analysts as having a real purchasing power and asset inflation adjusted P/E ratio of around 150 or 200 : 1 in October 2003 ! By early 2009, after massive inflation of share value, followed by 33% or 50% write-downs in these notional values, not much had changed. Closely linked in real terms, although this linkage is usually ignored, world moneys used as market gaming chips have also been subject to massive and speculative overvaluation.

Through G W Bush's second term the only question was how much to trade down the dollar against the Yen and Euro this week. Today, the somber magic worked by a fantastically overvalued Euro and Yen will probably soon lead to a blowout, or 'major correction', as currency traders switch to betting against the Euro and Yen. Almost ritually too, the price of most any Commodity or real resource was able to be talked up, for example through invoking China + India decoupling, and by the unpleasant long-term reality of declining resources. For Equities the party ended by late 2007, but for Commodities drifted well into 2008. Since then, of course, short selling commodity futures has often been an even better trading strategy than short selling equity futures, but is now less sure, due to commodities having entirely different underlying fundamentals.

For world moneys the current (April 09) context is where three extremely overvalued, or semi worthless moneys issued by hyper indebted public institutions of national economies in deep recession fight it out, across the world's FX gaming tables. Dollar devaluation was officially imagined by the Paulson team of G W Bush as one magic solution to the incredible, untreatable US trade deficit. This however requires that everybody forgets all about ‘the J-curve’, at least until very late in the day. Devaluing a currency in order to shortchange creditors and gain leverage in world trade, that is increase the trade deficits of trading partner countries instead of letting them increase your country's trade deficit, can in fact only be a short-term remedy. Other players, or rivals, can play exactly the same game using the same New Economy soothsaying, and latter day Keynesian illusion to justify their play. The chorus is always the same: the real economy's physical structures and social infrastructures must be modernized and reformed, in the ever lengthening meantime of recession. This needs government bailouts and competitive devaluation. There is only one background assumption, or prayer: Sooner or later the global economy must grow.

When the devaluation 'strategy' drifts along over years, then decades – the 1985 Plaza accord dates from nearly a quarter century – the need for serious structural change, instead of short-term palliatives, begins to dominate. Declining trend rates of economic growth only intensify the problem. Absence of economic growth in a context of massive public and/or private debt creates the possibility of catastrophe. Any quick check on the history of 'trading your way out of recession' will show, that the strategy of competitive devaluation is not only low performance, but during long recession is also politically dangerous. Theoretically friendly trade partners soon show themselves to be real rivals. After that, they can become determined political enemies.

Underlining the diabolical or at least highly perverse nature of New Economy solutions, the 1948 Keynesian type Marshall Plan and its linked Bretton Woods dollar-based world trade system – to pull the western world out of economic meltdown, and save it from communism – was only possible because the USA ran huge capital surpluses at the time, and economic growth expanded very fast in the 1950s. This is absolutely not the case today. For the OECD and Emerging Economies, or 'Global Economy', no single country locomotive solution is possible. US trade surpluses disappeared even before communism of the Russian type disappeared, almost exactly 20 years ago. Expecting or imagining that coal-fired communist China and coal-fired India might come to the rescue and run their own Marshall Plan, anyplace outside Africa in the case of China, is one striking example of belief in obsolete economic notions. The simple fact that today, in April 2009, some G-7 political and business leaders continue to mutter asides, on the supposed potential for Chindia decoupling 'pulling us back into growth', only underlines the pathetic inability of most G-7 leaders and business circles to face reality.

Even in 2002 or 2003, a perspective of rising interest rates was logical, in the USA and other OECD economies, notably due to ever rising trade deficits and clear inflationary trends. Many economic commentators made this conclusion, but they ignored what we can call the structural obsolescence of the New Economy, and the policies that go with it. Simply through fear of recession and by executive decision of the world's central banks and monetary authorities, interest rates were in fact only slowly raised, then lowered. Reducing interest rates that were already low was set in the crosshairs of economic and political deciders as the only target for keeping growth alive. Since late 2007 this No Alternative has been pursued to the point that interest rates are now at epic or historic lows, beyond which no further cuts are possible.

In 2010 we can therefore easily bet interest rates will be rising almost as fast as inflation. Only in theory would we be as wrong as commentators in 2003. Unfortunately, if this forecast is right - and interest rates rise with inflation - the global economy will tilt back into yet more ferocious slump. Everything will be in place for long recession.

THEN AND NOW

During any classic stock market crash there is a near obligatory collective loss of reason. Rigid tunnel memory is applied even to the recent past: anything beyond 3 years back is distant history and therefore "never happened". Any shard or facet of reality is reacted to like vampires react to garlic. This traditional, normal, and systematic reality denial is exactly what occurred in 1929. Various books, studies and films about the 1929 crash and its Great Depression sequels underline this mass psychosis, which normally and rationally can only generate the worst possible outcome. The big irony is that Keynesian solutions invented after 1929 but mostly not applied at the time, which are feverishly applied in both OECD and emerging economies today, could work in the 1930s but almost certainly will not work today.

The world’s financiers and policy maker herd are today responding present and 'Forget Nothing- Learn Nothing' to the lemming call of cobbling and fudging together what can easily become another long recession. Examples abound, starting with massive gifts of public money for finance and bank players whose 24-hour, 365-days-a-year gambling party on the world's financial gaming tables can only beat the certainty of loss if the real economy 'performs'. They continue with lukewarm but real attempts at protectionism by the Obama team, and include ferocious, big ticket attempts to Save Automaking almost any place in the OECD countries, and in China, India, Brazil, Russia, and elsewhere in the industrialising and urbanising world. To be sure, we are told the saved and restored car industry, "by about 2011" will be producing considerable numbers of electric cars with Bolivian lithium-based batteries. The New Economy abhorrence of anything that smacks of regulation, planning and control dangles the prospect of an ultra classic bourse boom and crash in electric cars and battery tech, similar to the early 20thC railways-and-copper booms. Much nearer to the present, the coming electric car and battery tech boom threatens a remake of the 2005-2007 biofuels boom and slump, which resulted in hundreds of million of US dollar losses for unwary investors and unlucky gamblers.

Upstream from today's atavistic attempt to save automobiles, we have major 'cognitive dissonance' on how far the growth of deficit financing can go, and what will be needed in the way of real economy growth to service, or repay this new debt, some day. One neglected entropy related factor can be represented by the 'paradigm of compound interest': a rebound in global economic growth becomes more necessary with each extra billion of borrowed or printed cash 'injected' into the economy, and for each day that global economic growth does not recover.

Rigorous and systematic reality denial will ensure the worst possible sequels to what appeared only to be a stock market crash, in 2007-2008, before it mutated and struck, or 'fed back' into the real economy. G-20 leaderships, the Davos conclave, financial and business media, TV talking heads - all stoically deny there could be any resource, environment or climate limits, let alone geopolitical limits to growth, when this elusive Graal is found and restored. This flies in the face of basic facts. All effort, and possibly 4 000 Bn dollars of printed and borrowed public money is directed to the quest of restoring global economic growth, as soon as possible, as much as possible. Perhaps one of the most acute weaknesses and defects of the rigorous public optimism that surrounds this quest is a somber but traditional time quirk : Tomorrow doesn’t exist. Because of this, interest rates and inflation will not and cannot increase, even if they are sure to increase in 2010. Forward time available for achieving the hypothetical rebound, by the same quirk, is imagined to be unlimited – that is the rebound can come in 2011 if not 2010, or in 2012 if not 2011. Two or three years ahead therefore sets the forward limit of the time telescope: Recovery must come by then, beyond 2012 we pass into unknown dimensions.

We could make an analogy from astrophysics. The real world economy, specially through its Petro Keynesian growth surge of 2005-2008, showed a disconnect with the paper economy that can be compared with the expanding Universe. A kind of ‘Hubble constant’ was in place. The faster the growth of paper asset values at the core of the OECD consumer economic galaxy, the faster the real bashed metal and coal-fuelled, CO2-rich and wage poor environment destroying industrial economy expanded at its Chinese, Indian, Brazilian, Russian, Turkish, Pakistani and Indonesian periphery. Scale-up was rigorously exponential on the paper economy side, making even the slightest downward ripple in real economy growth - the underlying asset - a mortal threat.

LIMITS TO GROWTH

This global economy model and it growth process are increasingly obsolete. The oil limit itself is now almost traditional. Since the 2002-2003 recovery from 911 and the dotcom crash it is firmly in place. Through the first 8 years of the 21stC, for example, Chinese and Indian oil import demand (according to the IEA) increased at an annual average close to 400 000 barrels per day each year, raising their 'call on world exports' from near zero to about 7% of total. We can compare this with the approx. 26% of world export supply taken by the USA, and another 26% taken by the EU-27 countries, or the 11% of world oil exports taken by Japan. Chindia oil import demand is modest not only because of poverty, but also due to King Coal. Combined coal and lignite burning of China + India was about 2.6 Bn tons in 2008, near 40% of world coal and lignite output, and growing fast. Without this massive, and massively polluting coal burn Chindia 'call' on world oil exports would, of course, be much higher - and would also be completely impossible to service and supply.

The CO2 limit to 'conventional' economic growth was surely perceived and described in the 2006 Lord Stern report, which at 2006 is now almost at the backward limit of "real time" that New Economics and the Death of History impose. Death of the world's climate stability for centuries ahead, and sure, certain and continual increase of world sea levels for a century or more will rather surely and certainly reawaken history - if ever it was slumbering deeply, through boredom or while awaiting the cue for a very triumphal return.

One scenario in the often maligned Stern report, criticised for its 'strange methodologies', suggests that rigorously doing nothing about climate change could terminate, in several senses of the term, around 2045 with annual economic losses about 50 000 Bn USD, 2006 value. This is about equal to the nominal value of world total GNP in 2007. Other than creatively flimsy, fragile and unworkable notions and glimpses of 'the sustainable economy' little or nothing has yet in fact percolated back down from climate change handwringing, to the real world. In the paper economy, climate change and natural resource limits have been integrated, in a small way, in the eternal process of creating and inflating new asset bubbles, followed by a shrug when massive losses of notional value are suffered by credulous investors and bad gamblers as the game implodes under the weight of its own speculative fantasy. Through 2005-2007 growth of notional value for paper assets loosely backed by, or underlain by growth of the real economy - for example automaker, cellphone and shopping mall stocks - exploded in gung ho fashion, as the real world fossil fuelled, climate changing and resource depleting 'classic' economy crunched ahead. Since 2005, as a sop to the 'sustainable economy', the paper asset circus includes small ticket, opaque, rumor driven and volatile CO2 credits trading, in Europe, with derived and voluntary emissions credits trading in the USA and elsewhere.

The problem is simple: Any attempt at imagining China and India could cut their coal burn, to fight climate change, would instantly translate to a huge increase in their call on world oil export 'offer', with prices quickly off the high end of the scale. Downstream attempts to do anything serious about reducing coal-based CO2 emissions would be prohibitively high cost. Back of envelope calculation of what it would cost to retrofit every coal fired power plant on earth, presently supplying about 55% of world total electricity, with CCS (clean coal and carbon sequestration) tech, if it was technically feasible, generates completely unreal numbers. Replacing 10% or 15% of present day oil and gas energy supply with renewable energy within 15 or 20 years is however quite often bandied around as 'probably feasible'. Taking a target date of 2025, and heroically imagining that world energy consumption would not increase at all in the next 16 years, this 'modest target' of about 25 Mbd oil equivalent 'clean energy' supply might need 11 000 Bn USD of investment spending. This target for energy transition is in fact about the lowest possible, and assumes, with the OECD's IEA, that about another 25 000 Bn USD would be spent to slow depletion impacts on world oil and gas supply !

THE DECOUPLED GROWTH ILLUSION

The only hope, of decoupled and classic economic growth somewhere over the horizon where coal is at least abundant if not cheap, is resolutely fantasist. Chindia economic growth rates are rigorously close-coupled to their ability and need to burn more fossil fuel, produce more iron and steel or aluminium, produce and import more food, build new cities, ports, airports, roads and ever more cars, and receive large capital inflows from their OECD trade partners - who run ever bigger trade deficits with Chindia. Obviously the Chinese and Indians, with a combined population 5 times that of European Union countries and nearly 8 times that of the USA, are ‘doing something' with the 2.6 Bn tons of coal they used in 2008. Massively aiding world climate change was one sure spinoff, other than the certainly fragile dream of 'decoupled growth'. Fossil energy based ultra classic economic growth featuring growth of bashed metal industrial exports and domestic economy consumer goods is ultra certain to run out of fuel, but will we wait for it to also deliver catastrophic global climate change, or war for the world's remaining oil reserves, before declaring it obsolete ?

This is the classic growth model. It is the only model if we ignore 'sustainable economy' reality denial and its mickey mouse offshoots such as the Cleantech investor asset bubble and CO2 permits trading circus. The entire modern world, starting with the OECD economies, depends on extreme high energy industries, resource intense technologies and environment damaging processes. The classic model sets extreme high dependence on fossil fuels, fossil mineral resources, and bioresources extracted so fast from the environment they behave like depleting fossil resources – world fish resources being an example. China and India are firstly expected to conform with this model - to save the day for the imploded OECD economies through decoupling. Chindia is then expected to renounce this model for the good of climate stability and to permit the OECD postindustrial societies to maintain a few of their own Sunset Industries, but not pay too much for the oil and natural resources used to produce a wish list of industrial gadgets and gimmicks, called 'hi-tech lifestyle goods' ! The schizophrenia is so thick it could be cut with a knife. Imagining Chindia will not tread the OECD's highway to success, or to hell, is an illusion but its sequels are far from illusionary. Industrial growth needs a lot of fossil energy – and if oil is too expensive then at least there is coal. This neatly places us right back in the 19thC, when the story began.

CLASSIC GROWTH - CLASSIC STOCK MARKET CRISES

Since around 1870 stock market crashes (for example 1873, 1882-84, 1890-93, and 1900-03, 1929-36, 1968-69, 1973-74, 1987, 1991, 1997-1998 in Asia including Russia, 2000-2002, post 2008) have tended to change in two key ways.

They happen with less prior warning, are more uncontrolled, longer and deeper - measured by the time taken for them to drive notional or paper losses, by the amount lost of notional or fictional value, or by the size of notional losses relative to GNP. The other key change is that recovery becomes less real and more ‘virtual’, and shorter, after each paper asset crisis. This trend is clear from at least the 1980s – but this reality is masked by the appearance of quick and complete rebound and recovery of the real economy, at least until the period since the 2000-2002 crisis.

The apparent 'quick rebound' only in fact concerns paper asset values. Plenty of collateral damage extends through the real economy and increasingly fragile society, each time. One clear and undisputed example, or victim is fast rising national debt and its feedback to chronic vulnerability of national moneys. This reality is known by G-20 leaderships. As shown by various media feeds at the 2009 London summit, G-20 leaders today feel obliged to mumble mystic phrases about 'new Bretton Woods' and 'Bancor type world money', of course without doing anything about it. Bancor with a CO2 handle is easy to suggest as a Nice Idea, but is unlikely to pass muster before we have another asset meltdown. And to have that, we first need the asset recovery. To generate the asset recovery, there has to be at least some recovery of its underlying security, global economic growth. Apart from changing the world's climate this growth process is demonstrably running out of cheap oil and gas, cheap food, water and non-food bioresources, even iron ore and aggregates for cement making. Hitting supply and price limits after ever shorter interludes of what is called belle epoque growth, say 4.5% per year for the global economy, the model is almost sure not to perform.

Other problems abound - and make for difficulty understanding the often arcane and opaque linkages between the real economy, and the vast balloon of paper assets reposing on this fragile pivot. There are for example many problems for gauging what has been lost, in a crash. How do you value an 1870 dollar against a 2009 dollar? Or compare a Reichen mark against a Renten mark, or against a Deutschemark of 2001, before it was replaced by the Euro ? Has today's Euro lost at least or about 45% of its real world value since 2002, or this another illusion? Imagining we choose a datum, for before-and-after comparison, we are often forced to admit we do not know what real-tovirtual asset multiplier was operating, before the crisis. Even comparing the global or OECD economies of the 1980s with today is difficult, for example comparing the value of a gallon of gasoline and 1 Giga bit of computer memory at the two dates. The reason for this is however not instantly evident – because it is due to accelerated obsolescence: when we run out of gasoline to run farm machinery we will not be eating silicon chips to make up the food deficit.

TECHNOLOGICAL FANTASY IS OBLIGATORY

Bill Gates likes to say that if technology progress in automobiles had kept pace (he meant to say/ was comparable) with technology progress in PCs then a family auto of today which cost $5000 in 1979 would now cost $15 and do 150 miles-per-gallon. Thanks to the Cheap Oil interval of 1986-99 and the Sunset Commodity fantasy incorporated in New Economics, that oil and gas production will increase the faster we deplete their underlying reserves and resources (!), average car prices were closer to $15 000 or $20 000 and fuel demand was closer to 15 or 20 miles-per-gallon, in the real world USA of 2008.

We can use the biofuels boom-bust sequence as an excellent example of accelerating aging and obsolescence in the New Economy. The biofuels boom opened in 2005-2006 with august patronage, and speculative investing by never-wrong Bill Gates and Vinod Khosla, among others. By 2007 share values in the biofuels sector had often fallen 90% since Initial Public Offer, when it was not a simple case of total business failure and liquidation. When or if Gates' PC-style autos arrive, they will not be running on biofuels as they were in the 2006 sustainable economy fantasy, but on Lithium-Ion batteries recharged by windmills in the 2011 sustainable economy fantasy. The biofuels 'solution' aged so fast, became obsolete so fast that it is now an ideal candidate for polite forgetting. Cleantech ikons rush to explain that 'next generation' biofuels will be entirely different, exactly like newly respectable 'next generation' offshore tax havens, following the 2009 G-20 meeting.

To be sure, wind-powered electric cars using Bolivian lithium for their batteries are sighted by the Cleantech fraternity, and even by politicians with tech savvy scriptwriters. Necessarily the ramp-up multiplier, every bit as unsure as Keynes' multiplier, has to be huge. Depending on country, supposed 'production targets' for electric cars in 2011 run into the millions - exactly like the 2.2 Mbd oil substitution target for US biofuels by 2017, announced by G W Bush in 2007. Electric cars of 2011 have now almost entirely replaced the entirely virtual biofuel car fleets that were forecast, for the same forward date of 2011, from the standpoint of 2006. What is vastly different is that nearly three years has been lost. The time horizon has been telescoped, making the challenge and the costs yet higher.

Exactly as for the biofuels boom, few persons talk about the troubling details. For example how to recharge 'a few million' electric cars when the wind isnt blowing, or what tooling-up time and investment costs would be needed for 'ramping up' to say 65 million cars-per-year. This is the present Deep Crisis level of output for the economically obsolescent and financially crippled world car industry of 2009. Could this production rate be achieved ? Are we simply going to write off both assets and debts of the present car industry ? Assuming we did, and after this heroic act of Eco- Keynesianism we chose the 'simple target' of replacing the world's present car fleet – of about 925 million cars about 98% running on oil - with PC cars (PC also signifying Politically Correct), we can generate some ideas on investment costs. There are however immediate and numerous problems - sarting with write-down of present car industry assets: who will accept these losses and how will they be financed ? We also have a simple problem of production capacity needs. Choosing to 'simply replace' the current world car fleet with 925 million PC cars by about 2040 is already a simply heroic target, but will the Chinese and Indians accept having 20 to 50 times fewer cars per thousand population, relative to OECD countries today ? The 'best by' date for oil-fuelled cars, presently about 98% of the world fleet, is 2040. This however assumes world oil producers will continue producing at the maximum possible rate, stoically depleting their national wealth in the form of remaining fossil resources at the maximum possible speed, preventing world oil exports from falling to zero until about 2040. We could therefore 'rationally' suggest PC car targets of say 1.25 billion all-electric cars by perhaps 2030, if we wanted to go further with fantasy economics, but as we can easily see, this paradigm like a Russian doll contains a set of interdependent and interrelated supporting myths and legends. Some of these are so recent and so unrealistic that we don’t yet interpret them as simple fantasy.

When or if some Tata Super Nano car becomes the world car, perhaps selling at $ 2000 and running 45 miles to a US gallon or using less than 1 kWh per mile in its all-electric version, the rest of the world car industry is dead. Cars will have become like cellphones, that is throwaway or at least very cheap. They can be rented at $5 a day. Total numbers can be almost 'unlimited', perhaps 2 500 million, compared with today's puny oil-fired fleet of about 925 million. After that or at the same time, of course still in theory, we move to homebuilding at comparable and related costs and prices, more like $ 500 per square meter than $ 5000, usind recycled plastics, metals and glass from the pre-PC world car fleet, for example. In a trice, vast swaths of the existing building stock are made as obsolete as the world's present car fleet and car production infrastructures. What we do about airplane transport and cargo shipping, needless to say, is another fertile area for sustainable economy sci-tech fantasy.

THE CLEANTECH ILLUSION

The Cleantech illusion craftily telescopes the real world industrial present, into a total fantasy future for "some time after 2035", or, due to open crisis, to as near-term as "around 2011 or 2012", when PC cars will be coming of the production lines "in large or massive numbers". In either case, we are beyond the time limit set by New Economics for real world concern, that is 3 years. Rarely remarked but absolutely vital for the Cleantech asset bubble to first grow, before its classic boombust meltdown, is growth of the real economy. Dealing only with fantasy economics, real world questions of what happens to Old Economy assets, when the cleantech nirvana arrives, are carefully eluded, but can be approximately quantified.

Basically the choice is simple: these obsolete assets can be written down fast, in Bad Bank style, or we can agonize a little or a lot, waste time in hallowed style, and make the final asset write down a panic-driven superproduction, like the present bank and finance rout. Several basics shine out from the wraps of opaque and often deliberate confusion that surround Cleantech pie in the sky. The New-New Economy of 2035, of course sustainable and renewable energy driven, and such as it can be perceived or described today, will not only be old-style industrial, but also very high-tech. It is therefore called "hybrid future" quite often, but we can be very sure the Old does not mix too well with the New. The reason is simple: Much or most of the New simply makes the Old obsolete. Most or perhaps all of the Old Economy's productive assets will rather surely need the same gung ho, deficit financed write down that is applied with Obama's blessing to US banking, finance and insurance industry "bad assets". These are bundled together, and in theory kept out of harm's way forever, like a new 30 000 ton sarcophage covering the exploded Chernobyl reactor – by about 2013 in the case of Chernobyl's new look, 500 million US dollar sarcophage.

Lithium is one small example: who can bet that 'ramped up' production of electric cars, if this reaches only a very modest 1 or 2 million per year by 2020 as some analysts are presently forecasting, will not heavily strain Bolivian supply of the metal, however moderate Evo Morales is becoming these days ? Each PC car will need about 40 kgs of lithium metal, perhaps more, if micro-cars are sized up, to attract consumer citizens balking at downsizing from a 2-ton 500 HP four-wheel drive. Raising the above production target to 25 million all-electric PC cars per year will surely be an heroic target. Replacing the world's current 98% oil fuelled car fleet with PC cars, assumin it was ever feasible, would imply simply fantastic investment in new car technology and infrastructures - and fantastic write downs of current automaking assets.

We however face yet more heroic quests. Other than replacing the world's car industry, and at least as urgent, is replacing today's coal, oil and gas burn with non fossil energy. This of course has unleashed a storm of imaginative scenario building. For oil and gas replacement, this scenario building can be given quite tight time lines, due to depletion and not at all to climate change handwringing and tub thumping. As can be expected, the implied write downs of current oil & gas industrial assets will be extreme.

LOST VALUE - LOST CAPACITY

Asset depreciation is not only a game for short selling traders. Assets that are unable to perform in the future logically have no present value at all. When or if we imagine a complete restructuring of the global economy, predicated by climate change and oil depletion among other Horsemen of the Apocalypse, past and even present notional asset value losses pale into insignificance. To be sure, from the 1929 crash through 1979, 1987, 2001 and today these notional asset value losses, write downs or write offs have climbed, into the trillions of dollars. Through 2008-2009 to date (April) estimated losses from the present crisis are periodically 'updated', that is increased, by the IMF and others, but this is very far from looking at what is obsolescent and what is not. We could recall the Stern Report's estimate for the potential economic damage that simply ignoring climate change could cause, one scenario suggesting 50 000 Bn USD losses in 2006 dollar value, per year, by around 2040-2050 !

Coming an awful lot closer to the present and much harder edged in the numbers, oil depletion is sure to set limits on how much the global economy can rebound. Both the IEA and ASPO, and some oil industry majors such as Total oil SA indicate that world conventional oil production capacity could fall by about 25 Mbd (million barrels/day) in the period 2007-2015 and that world total hydrocarbon liquids output, including biofuels and tarsand oil, will be unlikely ever to exceed about 89 Mbd. This rate of daily demand was briefly attained in 2008, before the global economy nosedived into its current recession freefall.

The world oil & gas industry is not so different from the global auto industry. Being radical, we can suggest that most of its productive capacity is obsolete, or becoming so quite fast, depending how we define obsolete. Spending needed to "fight rust" in the oil & gas industry is known to be climbing so fast that without a very quick rebound in oil prices, to perhaps 75 USD/bbl, accelerated depletion losses and "rust losses" of capacity will push us beyond peak oil faster than was predicted before world oil demand fell with recession. Not facing the obsolescence issue, the future will come even faster than we feared.

The IEA suggests the world oil and gas industry will have to invest and spend up to 26 000 Billion dollars in the next 20 years. Estimates by Matt Simmons for this spending need are vastly higher, perhaps 100 000 Bn dollars, but both scenarios only concern stopgap or 'bridging investment'. In both cases the final splurge in spending is followed by inevitable decline in total output. As for the auto industry, should we write off this hyper-spending to beat rusting and depletion in the oil & gas sector, and focus only on investing in renewable energy and the sustainable economy ? If that was a good choice, how do we execute or impose it on the world oil & gas industry ?

NEW INVESTMENT - NEW CONSUMPTION

After the 1929 crash, more precisely after the 1929-31 sequence of economic meltdown triggered by the financial crash, there was no bounce back or rebound in the real economy, the underlying asset on which paper asset value creation feeds. It took about 7 years for the real economy to claw back. At the time, real world economic deciders were fixated by ideas of strong money, low debt, low inflation, balanced trade, investment rather than spending - and other key slogans that were given a recent whirl by New Economy prayer wheels.

Today, Keynesian intervention and 'injections' of printed and borrowed cash with a possible cost to future taxpayers and the future economy of around 4 000 Bn dollars by end 2010, is supposed to jumpstart the real economy recovery process. Whether this is investment-led or consumption-led is of course carefully confused, country by country, but evidently the recovery has to be either through new investment or new consumption, or both. Repayment of newly accrued and massive national debt, due to this deficit spending binge, is of course 'long term' and equally surely is imagined to be made possible though bountiful government tax receipts on the back of sustained economic growth.

It is of course assumed that when the recovery starts it will be self-sustained and self-amplifying. Experience through at least 15 years proves this wrong. If the infrastructures, the industries and the energy sources are all obsolete, or becoming obsolete, or should be obsolete, are damaging to climate, able to start or maintain oil wars and trade wars, unsustainable on a shorter and shorter time frame – and so on - how long can we reasonably expect the recovery to last ?

The starting point for the recovery is also important. In the period of 1929-36 there were sheer and stark falls in economic activity. Industrial production fell by 40%-50% in most advanced economies of the time. New house starts fell by 60%-70%. Car production and sales fell by 60%-75%. Steel production and cable laying fell by 60%-75%. Ship construction and operation fell by 50%-70%. World trade volume and value fell by about 60%-75%. Depending on country and on reference dates, eg. 1927 or 1928 against 1933, or 1925-28 average against 1931-34 average, we find general falls in activity/output of around 50%-90%. Unemployment rates were up to 25%-33% of the adult population, not in Albania but throughout Western Europe, in 1933.

The huge compression of activity in the Great Depression perhaps underlays a fond but naturally undisclosed hope of today's G-20 leaders. In their newfound Keynesian dreaming, without the slightest fear that they are rekindling a dying fire running out of fuel, are attempting not only to roll back recession but also time itself, they might imagine there will be a symmetrical bounce. The global economy will bounce back up as high up as its fall was down - but thanks to hyper deficit spending this Happy End will come much faster, perhaps in late 2009.

THE WORLD ECONOMY WAS DIFFERENT

Looking back at the 1930s crisis is legitimately comparable to looking back at the 1987 crisis or its 1990s cousins. In both cases, Keynesian spending or even wait-and-see New Economics prayer sessions could and would work. For the 1930s global economy, around 12 times smaller than today's, Keynesian-type solutions were truly appropriate. Keynes had the right answer at the right time, even though they were applied by the Wrong Leaders. At the time world oil and gas production was rising and could only rise. World population in the 1930s was around one-third today's 6.7 Bn. Climate change was unheard of. Environment crisis was unheard of. Resource shortage was unheard of. Credit cards were unheard of. Lithium was unheard of. The gold standard was applied, to back national moneys of several OECD countries, this being all the easier because world gold production was then increasing and could only rise.

Needless to say food production didnt fall by 60% in the Great depression. Human beings continue to feed themselves even when destroying notional or paper 'value', deciding not to work, and preparing for world war - but there were 10%-15% falls in food produced, all the same. Today, based on current trends and recent past performance, trying to increase world food and bioresource output by 15% across the board and sustain this output level would be a heroic bet, definitely compromised by climate change plus oil shortage, as well as by shrinking arable land and water resources. Well before 2020 and depending on crop type and other factors, some major food basics will have been in annual decline of output for several years.

Trying to raise net output of world oil, or even natural gas supply by 15% in the period to about 2015 is likely impossible. By about 2018 any increase of either will be impossible. Trying to raise world electricity production 15% or 20% in say 3 or 4 years, the recent growth trend, is going to be very difficult, if it is possible. Maintaining this electric power supply growth trend beyond about 2015 will be almost certainly impossible. Raising world coal export supply by about 7% a year, the recent trend, for decades into the future is going to be very difficult – and of course assumes coal remains the fallback, default energy choice whatever its climate change impact. Raising world supply of even basic metals like iron, steel and aluminium, as well as more 'exotic' metals like copper, tin, platinum and rhodium is increasingly problematic, if the 2005-2007 rate of demand growth was set as the rate needed for expanding supply for more than a few straight years. For mineral commodities, recycling will become the No Alternative quite rapidly.

This is not only a simple Limits to Growth resource pinch challenge for 'conventional structure' economic growth: it is also a problem of accelerated obsolescence for the notion, and goals of conventional economic growth. Investing to deliver a conventional structure economic future, then growing from that base, will become as economically worthless, or impossible to redeem, as the paper assets being placed in Bad Banks today.

We can note that Keynesian solutions were applied in the 1930s. Both Mussolini and Hitler applied deficit-financed economic strategies without the hesitations and compromises of FDR and other western leaders. This delivered big popular voting support and very fast falls in unemployment through focusing the car industry, building autobahns and autostrade, then building weapons to prepare for war. In other words, Keynesian recovery in no way guarantees world peace. This could or might be different this time. What is certainly different this time is the 'natural resource deficit' and 'ecological footprint' for constant economic structure growth recovery.

GREAT POWER RIVALRY AND ECONOMIC GROWTH

As evident as it is not discussed, the USA, China and India, Europe, Russia and Brazil, Turkey and Pakistan, Indonesia and Bangladesh will be more or less obliged to fight for bigger shares of smaller markets, bigger shares of declining oil reserves and productive bioresources, defend their moneys against speculative attack, and maintain their 'power, prestige and status' whether economic only, or economic-and-political. Monetary rivalry in particular will surely ratchet up, and may spiral if the recession gets worse and drags on. World food shortages are ever more possible. If they arrive, they will increase geopolitical stress, adding new vital interests to old and new rivalries. Almost inevitably and traditionally, the spark that triggers Big Power war will come without notice or be misinterpreted as 'just a spat'. What seemed only a spat could concern exchange rates and trade deficits, perhaps rivalries for postwar reconstruction contracts in Iraq or Afghanistan, leftover intrigue from the Bush regime's War on Terror, seabed resource rivalry in the Arctic, accidental or other destruction of satellites, provocative military exercises too close to key frontiers, or whatever.

Perhaps little appreciated and another source of increasingly possible tension, the so-called 'Great technology leap forward' of China, India and other formerly very low income Emerging Economies, not including Russia, could or can become a leap into the abyss. Leapfrogging technology implies and commands infrastructure infill, afterwards. If this does not happen, if both the leap forward and the infill are obsolete or too expensive, or take too long, the model can collapse even faster than in the Old World ex-industrial economies. After the collapse, the struggle for recovering assets and compensation for lost earninigs can be a fertile source of international dispute.

The above is itself a theoretical aside. No serious studies look at how and why economic cyclic change and stock exchange crises change – accelerate or slow – the way the economy is evolving, mutating or changing. We must note that Bad Bank asset write-offs face unbelievable quantities of ‘overhang’ due to derivatives – that is shadow value always seeking redemption. Bad assets could or might total over $150 000 Billion ‘notional’. For some writers of economic science fiction, this is a low estimate. Losses in 2008-2009 to date, by the US bank and finance sector, are placed at around $3 000 Billion, a probable underestimate. European bank and finance sector losses are suspiciously underestimated at around $1 500 Billion to date. All these creative instruments ultimately implied conventional economic growth to realize value in the real world economic future.

In some cases, eg. derivatives based on ‘emerging country debt’, these again hang on a knife edge, today as in 1998. The European Central Bank and IMF, notably, have run to the aid of latecomer to the party Global Growth hopeful countries like the Baltic republics, Poland, Romania, Bulgaria, Hungary, as well as Ireland, Spain, Ukraine, Greece, Pakistan and others. However, concerning the biggest ‘underlying security’ and insecurity in emerging country debt instrument trading, the Russian economy, oil prices ticking along just above crisis level (around $50 a barrel in early April 09) are just high enough to prevent the Russian ruble from meltdown. The domino set of emerging economy debt mountains is one that is obligatorily Too Big to Fail, that is must be bailed out. Further financing or recovery do not imply, but demand conventional economic growth.

Very obviously, if the present crisis keeps on keeping on, the semi-latent emerging economy debt and money crisis can mutate to foreign exchange fighting, or Money Wars. Less obviously, cyclic trends in the global economy may tend to reduce, or have already reduced the probable ceiling for economic recovery? This itself will represent a step nearer to reproducing the Great Depression, in 2009-2016. We can note that almost inevitably, but in some ways miraculously, economic cycle theory is back in vogue. Its return signifies plenty of things, specially the hunt for somewhat mystical and hidden pulsations, like quant fund charts or an explanation of how Madoff succeeded for so long, but perhaps even more arcane.

OBSOLESCENCE AND FALLING GROWTH RATES

It is useful to have an idea of what can be called cyclic optimum economic growth rates. At the time of the 1972-85 cycle these were likely 3.75% annual real GDP growth for OECD countries. What counts is they fell by a large amount, and went on falling from about 1985. This was the period when the OECD economy started becoming seriously obsolescent, neatly coinciding with the onrush of Reagan-Thatcher no alternative demagogy.

OECD growth trends fell from around 1985, even before. This simple fact is well known and impossible deny. Restoring economic growth is mostly certain top billing in the New Economics list of fragile hopes and one-liner slogans, called 'deep insights'.If we look at the recipes applied for restoring growth we can note that almost anything directly productive was decreed 'obsolete' by New Economy diktat. The direct result – massive or 'structural' trade deficits for countries applying these notions - is apparently taken as a surprise and disappointment, today. The linked diktat of zero growth of salaries and wages, we can note, helped create the personal debt spiral. The supporting rational or 'doctrine' of liberty and market freedom helped deepen the compulsive gambling streak in the finance and bank sector, to the extent of it becoming a dangerous disease.

One clear and evident reason for this 'secular fall' in OECD growth trends was falling oil and real resource prices, but this is not a Neoliberal-friendly conclusion, despite it being a fact. There are a host of other growth-cutting factors: many of these can be analyzed to show either open, or hidden obsolescence. What we can be sure of is that the capacity for economic growth has most certainly fallen in the OECD countries, for at least 20 years. The cyclic optimum may now be below 2% annual. It might even be less. This could be due to cyclic factors, but it also is due to an economic structure and social anticipations placed on the economy that are outdated and impossible.

We might find this downward ratchet has set a fantastically low ceiling for OECD economic growth before inflation bulges back, interest rates are raised, and economic recession returns – if it ever went away for more than a couple years, a few semesters ! This is one usually not admitted reason for Chindia Decoupling theory, the fond hope that China and India will or could play locomotive for countries like the USA, Japan, Germany, France, Italy, UK.

Stock exchange crises are themselves so old they could be obsolete. Those who claim by intelligent afterthought that the Clinton equities boom of the 1990s was ‘especially unreal’ could compare it with equity numbers growth through 1925-29 and 1985-87. Or they could try the Paris Bourse explosion through 1719-21, in which 4000%-per-year growth of notional ‘value’ was obtained, through a scam operated by John Law. Law's scam was considerably better than Madoff's tacky scam, and used a ‘financiarization’ process to drain real (gold) resources to King Louis’s bankrupt treasury in return for paper equity, on the lure of massive profits that could only arise from growing operations of the Mississippi Company. The Law scam of course bit the dust, like any other, when major players got too greedy and siphoned off too much in the way of real funds, and the performing asset in Mississippi underperformed. Put another way – the expected growth either didn’t happen at all, came too late, or was too weak when it came.

No asset bubble can last too long without some real growth of the real economy. This is the basic need. We can almost calculate the asset depreciation or compression need generated by each day or week that economic growth does not return. Reflecting this, the IMF periodically updates, that is increases its forecasts for net losses to the world's finance and bank sector in 2009-2010. What we can note is that falling trend rates of economic growth, driven by obsolescence will quite soon also affect China, if only for demographic reasons – its aging population. Resource and environment limits are the most evident and strongest anti-growth factors, capping growth the way G-20 leaders say they want to cap CO2 emissions and trade paper promises based on these emissions.

ECONOMIC ENTROPY

Little appreciated but strictly rational in thermodynamic terms, the more we use, the more we lose. This applies to all the fossil fuels, as well as water, iron ore and other resources. Few persons seem to understand what this really means, but world natural gas provides a quick idea. In 2009, at least 200 Bn cubic metres of gas will be lost, vented or flared to the atmosphere. This amount should be compared to how much actually gets down a pipeline or is shipped in LNG tankers then placed in a pipeline to final users, to produce goods, services and fossil energy-based wealth. After this reality check, the interested reader can check CH4 levels in the world's atmosphere and the climate change impact of methane versus CO2, unit for unit.

We can very easily argue that fossil energy resource depletion plus climate change due to fossil fuels are two of the biggest drivers of economic obsolescence. Less and less dimly perceived, less and less denied, we are learning that what comes after will not be the same as what came before. Oil and gas depletion could or might be OK if remaining reserves were unlimited and there were no environmental or geopolitical problems and difficulties, including oil war and endgame change of the world's climate. In the 1925-32 period annual oil discoveries were up to 40-50 Bn barrels in a few lucky years - while annual world production and consumption was well below 4 Bn barrels. Times have changed quite a lot, since those days. Through 1980-2008 the world extracted and used about 745 Bn barrels, and we use about 6 times more than we find each year.

The fossil fuel limit on global economic growth is easy to demonstrate, but is not instantly evident. New oil can come from the Arctic Zone, tarsand oil can be ramped up, the biofuels including second generation non-food biofuels can be developed, even oil-from-gas and from coal could be increased a little – if oil prices are high enough and interest rates stay low. If the demand isn't there, due to slow, zero or subzero economic growth, oil prices will be low. The energy alternatives will not be developed, or developed slower. Natural gas and coal supply can be ramped up, a lot for coal, maybe only a little for gas. But this again needs relatively strong economic growth and high oil prices, to justify the investment spending.

Fighting climate change sets really radical and different frameworks, starting with the need for Low Carbon Energy simply to limit climate change, not to "stretch the oil age" as Saudi rulers say they want. But here again, low carbon energy is mostly expensive and/or slow to develop, needing high oil prices to be economically justified and to grow without subsidies or regulatory aid. Therefore low carbon energy development ideally needs strong economic growth and high oil prices – but this context generates high or extreme rates of greenhouse gas emissions, environment damage, accelerate depletion of remaining fossil resources, and geopolitical stress.

DIFFICULT TIMES

Difficulties for G-20 leaderships are evident. The time-hallowed art of Do Nothing will however not be productive or sustainable. Policy decisions will be forced by what will happen in the very near-term future. Any trace of global economic growth returning in late 2009 or in 2010 will send oil prices flying through the glass ceiling, sparking inflation, and sooner or later triggering defensive interest rate rises. This conditioned reflex - interest rate hikes - will be needed quicker than in the recent past, for many convergent reasons including hangover public finance deficits that increase with each day that global economic growth fails to return.

This is not taking place in a time-free vacuum. Another and more menacing driver of long recession trends is economic obsolescence. This all the more menacing because it is either unknown or little discussed. Probably even less evident, but a fact, the longer we delay in facing the challenge of obsolescence, the worse the problem will get.

Facing up to obsolescence, notably in the car industry, and oil & gas industry, will need simply fantastic write-downs of assets, yet another carefully avoided real world fact. As mentioned in this article, a tilt from recession into what can become long-term depression will almost certainly raise geopolitical stress and rivalry. Failure of the global economy growth model, already under threat inside many countries, can result in conflict between nations. Already a key slogan for G-20 leaders, sustainable and ecologically-based development will become the new No Alternative, as the menace of economic obsolescence becomes impossible to ignore.

© 2009 Andrew McKillop
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