FIGURE 2. The state of a system responds to a change in conditions. The continuous line represents a stable equilibrium. In A a change in conditions drives an approximately linear response in the systems state, unlike B where a threshold is crossed and the relationship becomes very sensitive. The fold bifurcation (C, D) has three equilibria for the same condition, but the one represented by the dotted line is unstable. That means that there is a range of system states that are dynamically unstable to any condition. Source.24
The state of our civilization necessarily depends on the state of the global economy. I mentioned earlier that the global economy has been in a dynamic but stable state for 150 years or so, because it has had compound economic growth of about 3% per annum within a narrow band of fluctuation during that time. The state of the global economy is indicated by annual GWP growth of approximately 3%, and GWP is absolutely dependent upon rising energy flows.
To argue that civilization is on the cusp of a collapse, it is necessary to show that positive feedbacks exist which, once a tipping point has been passed, will drive the system rapidly toward another contrasting state. It is also necessary to demonstrate that the state of the global economy is driven through an unstable regime, where the strength of the feedback processes is greater than any stabilizing process. It acknowledges that there may be an early period of oscillating decline, but that once major structural components (international finance, techno-sphere) drop or “freeze” out, irreversible collapse must occur.
In the new post-collapse equilibrium state we would expect a collapse in material wealth and productivity, enforced localization/de-globalization, and collapse in the complexity as compared with before — an expression of the reduced energy flows.
Collapse Mechanisms
The Monetary and Financial System
As I write, fears are being expressed that a Greek sovereign default may be inevitable and that, as a result, the markets might refuse to lend to Ireland, Portugal and Spain, causing them to default as well. In Ireland, as in other countries, deflation is continuing as the money supply contracts, and people retrench their spending because of fears of future unemployment. As our debt burden becomes greater in relation to our national income, it adds to the instability in the eurozone. A contagious default would be a major blow to German and French banks, which have lent to all four countries. The economic historian Niall Ferguson argued that US fiscal deficits could lead at some point in time to a rapid collapse in the United States economy, noting “most imperial falls are associated with fiscal crisis”.25 Such a crisis would drag down every other economy, including those of China and Saudi Arabia.
These examples point to three things. One is that while money may not have any intrinsic value, it can nevertheless decide the fate of nations and empires. The second is that in an integrated globalized economy, a crisis in one region can become everybody’s crisis. Finally, it emphasizes that the risks arising from huge indebtedness (and implied trade imbalances) are still with us, irrespective of resource constraints. The latter signifies the necessary irony that never before have we been so indebted, which is essentially an expression of our faith in future economic growth, just as that growth becomes impossible due to resource constraints.
Earlier I explained that the monetary and financial system was a hub infrastructure of the global economy, with no operational alternative. It is based upon credit, interest and fiat currencies. Credit underpins our monetary system, investment financing, government deficit financing, trade deficits, letters of credit, the bond market and corporate and personal debt. Credit, and the promise of future economic growth, supports our stock market, production, employment and much else besides. It is a primary institutional infrastructure of the global economy.
Over the whole of an economy, in order for debt to be repaid with interest, the money supply must increase year on year to replace the money lost to the economy when interest payments are made.* Money is injected into the economy when additional loans are taken out. Accordingly, the payment of interest requires an increasing level of debt, and eventually, the level of debt will become unsupportable unless incomes grow as well, either because the economy has grown or because there has been an inflation. If loan repayments including interest exceed the value of the new loans being taken out, the money supply contracts. If it does so, less business can be done, so firms fail and there is less purchasing power in the economy and increasing difficulties with servicing debts. This causes people to spend less, and investment borrowing to fall. In other words, a deflationary spiral develops. On the other hand, if debt, and thus the money supply, increases without a corresponding increase in GDP, money’s purchasing power is reduced by inflation.
Increasing GDP requires increasing energy and material flows. With an energy contraction, the economy must contract. In a growing economy, debts can be paid off as they fall due, because borrowers are prepared to take out enough additional loans to cover the payment of the principal plus interest on old loans as they mature. In a permanently contracting economy, the shrinking income makes the payment of even the interest increasingly difficult as, with inadequate borrowing, the money supply declines. Another way of putting this is that reducing energy flows cannot maintain the economic production required to service debt. The value of the debt needs to be written down to a level appropriate to the new level of production. This write-down can be achieved by either mass defaults or by inflation. Consequently, if the economy is expected to shrink year after year, the number of people prepared to borrow or lend money in the conventional way will dry up, as no one will be confident that the borrowers will have enough income to make the interest payments.
A bank’s main assets are the loans on its books. If even a tenth of those loans cannot be repaid, that bank is wiped out because making good the losses would take more than its shareholders’ capital and retained profits. Its depositors could not be repaid in full and its government or central bank would have to step in to make good the loss and allow the bank to continue to trade. If the bank’s losses continued as incomes and asset values fell further, the government is likely to reach the end of its borrowing capacity. It would be open to the central bank to create money out of nothing to fill the hole in the bank’s books, but it is likely to be reluctant to do so for fear that the new money would cause inflation.
Unlike previous monetary crises, one caused by declining incomes and asset values would be systemic and global. There would be no “outside” lender to provide rescue, or external hard currency to provide reserves for important imports. Nor could the system be “re-set” in the expectation of future growth, because those expectations would have little foundation.
As the deflationary pressures would continue as the crisis developed, the prices of oil, food, and debt servicing would rise in relation to people’s falling incomes. There would be an increasing frequency of sovereign defaults, banking collapses and runs, declining production, panic buying and shattered public finances. In such a context, printing money (not necessarily by conventional quantitative easing) and currency reissues are likely to become necessary. Unless the money issue was tightly controlled, this could open the door to hyper-inflation. However, forecasting and control of money supply may be very difficult due to the intrinsic uncertainty of the monetary and economic environment. An additional inflation risk is that, if people began to have doubts over their bank deposits and future monetary stability, they may start spending on necessities and resilient assets, driving up the velocity of money and further increasing inflation.
Trust is the central principle underpinning the global monetary system and thus the trade networks upon which we rely. Governments can in theory print endless money, at almost no cost, to their hearts’ content. That we trade it for our limited assets, or our finite labors, is a measure of the remarkable trust bequeathed to us through our experience of globalizing growth. The economist Paul Seabright argues that trust between unrelated humans outside our own tribal networks cannot be taken for granted.26 Because trade is, in general, to all our benefit, we have developed institutions of trust and deterrence (‘good standing’, legal systems, the IMF, banking regulations, insurance against fraud, and the World Trade Organization, etc.) to reinforce cooperation and deter freeloaders. Trust builds compliance, which confers benefits, which in turn builds trust. But the reverse is also true. A breakdown in trust can cause defections from compliance, further reducing trust.
Because