What the Economic Crisis Really Means

From Automatic Earth

What the Economic Crisis Really Means (animation)

We're proud to present a great little animation video by our friend Theo Kitchener from Australia. It's safe to say that Theo's vision and ideas have been substantially influenced by The Automatic Earth, not in the least when we spent quite a bit of quality time together in Melbourne earlier this year (with both Theo and many more new-found friends of TAE) and had a number of great discussions in between Nicole's lectures in the city.

There are certainly things we would see somewhat differently, like for instance we don't necessarily share all of Theo's optimism, however contagious it may be - as is evident in the animation -, for a better society built more or less seamlessly on the ruins of our present one. But frankly, those differences pale in comparison with the broad extent to which our respective views do meet, and certainly with the sheer quality and artistic skillset that oozes from this wonderful little jewel.

I'd go as far as to say that even if you disagree with every single point made here, you should still find plenty to enjoy and admire. Hats off to Theo!

Automatic Earth

We were told that the global financial crisis of 2008 happened because irresponsible borrowers couldn’t afford to pay back their loans. This is true, but it was also part of a much deeper problem. The issue is that our economic system is based on the need for continuous, perpetual growth. It's highly likely that we're already in the beginnings of something much worse than a depression, even if bankers and governments won't admit it yet.

Fortunately, we don't need to hear it from them. We can tell that something is going on, we have the internet and we can share information amongst ourselves. And thankfully, if we try hard enough, we could just end up with something much much better than what we have now. I'm no expert, however I am someone who's done several years of reading on these topics and I really want everyone else to know what's going on, and understand the risks and the opportunities. It’s only fair.

So let’s look at how our banking system really works. It’s commonly believed that banks lend out money that they already have from invested savings. That would’ve encouraged a fairly stable system of banking. Instead, we have what’s called a fractional reserve banking system. This means that banks can loan out almost all the money that gets deposited with them. For example, when you put $100 in one bank, they lend $90 of it to someone else, who then puts that $90 in their bank.

Now there’s $190 where there used to be $100. That $90 lent out will also be deposited and $81 lent again. In this way, money ends up being multiplied between ten and a hundred times. Sounds crazy right? Less than 1% of the money in the economy is actual notes and coins, the rest are just numbers on computers, created as debt. This system rapidly increases the amount of money in the economy, which fuels economic growth, allowing most of us the ability to pay back our debts with interest. But only so long as the economy keeps on growing.

One reason it won't is that ever since the Industrial Revolution, economic growth has been largely dependent on cheap fossil fuel supplies, which are now dwindling. When we first started drilling for oil, it was easy to find. It just spurted up out of the ground. We've only been drilling intensively for about 150 years, and oil is no longer easy to find. Now, we drill down crazy deep through earth and ocean using expensive and risky technology. It used to cost one barrel of oil to get about 100 barrels of oil out of the ground. These days one barrel only gets us 10 barrels back, and declining. And that means it's not cheap anymore.

The truth is, we're living on a planet that has finite resources. We’ve always opted to extract the easiest resources first, while using more and more each year. Eventually the use of these finite resources has to peak and then decline as their extraction gets harder and more expensive. And according to the Association for the Study of Peak Oil and Gas, the global peak happened in 2008. Now, this doesn’t mean we’re running out of oil, it just means we're running out of cheap oil.

When I first heard about this I thought, at least oil is mainly just used to drive around. But no, beyond personal transportation, there's transportation of the food supply and all our other consumer goods, we run all our farm machinery on oil and make our pesticides out of oil. Oil is also a critical ingredient in plastics, pharmaceuticals, asphalt, paints, tyres and even toothpaste. In fact, oil is involved in pretty much all of the goods that we use in our everyday life.

Plus it's not only oil that’s peaked. Natural gas, high grade uranium, many rare earth minerals, phosphorus and many other important resources have peaked as well. We're trying to grow beyond the planet's resource limits. So not only have we damaged the environment so much that we now get hit more frequently by more intense natural disasters, we've also used up most of the non-renewable resources that have been allowing us to live in this high-tech world. It's as if we're burning the walls of our house to keep ourselves warm. It can't continue forever.

Anyway, quite apart from peak oil, we seem to be due for a global depression just because of the debt buildup. If you add up all the debts in the world it's roughly a hundred and fifty trillion dollars. You'd think it has to balance out somehow, that surely some countries are lending to other countries. But no, it's money everyone owes to the banks and their investors. The problem is, this is the world, we're not about to get bailed out by aliens.

Up until now the way banks have been lending more and more money has pushed up prices of assets like houses and stocks. This was possible because in a growing economy, debts could be paid back. But when debts finally build to an unmanageable point, as they did before the great depression, asset prices can and do go down. Because banks are overextended, they lend less, and because individuals, businesses and countries are also overextended, defaults become more frequent. Both defaults and reduced lending decrease the amount of money in the economy, which means less money chasing the same goods and assets. This leads to a fall in asset prices, called deflation and means that house prices will eventually go back down to what’s reasonable and affordable. So if you have a mortgage, beware that you could end up with more debt than your house is worth.

This deflationary spiral also means high unemployment, high prices for necessities and hard times. That's what happened during the great depression, and it's what's going on now. Only this time round the depression will be even more severe because we've never lived in such a globalised world before, and it will be a permanent decline because of peak oil. The global financial crisis was only the beginning. Since then much of the world’s middle class have been struggling just to keep up with their food, fuel, bills and mortgage or rent payments and things can only get worse.

So what can we do? In a deflationary scenario, the money from bailouts and money printing mostly goes straight into paying down debts, which is why our economies have only barely recovered since 2008. Mostly governments, big business and the media are avoiding these issues and trying to keep the status quo alive a little bit longer. Which will only end up making the crunch harder in the long run. As things get worse, governments are likely to prioritise saving themselves, for example by raising taxes and cutting spending rather than helping us out. There isn’t actually any positive strategy they could use to save us that’s also in keeping with their own interests and systems, otherwise they would have done it by now. This complex system has grown to its limit, and it’s now in decline, slowly dismantling itself, piece by piece, delayed only slightly along the way by government intervention.

Fortunately, I've learnt, it’s going to be somewhat ok that our systems just dismantle themselves, because there are millions of people around the world busy at work on much better systems we can replace them with. The modern industrial world hasn't really given us happiness. It hasn't even eliminated poverty. Most of us have been working way too hard, and for what? To finally exhaust the planet and suffer for it? Why not try having energy security through lower energy use, feeling proud of feeding ourselves and making the things we need, switching our priorities from independence to interdependence. These are changes we can make regardless of whether our governments want to help or not. A grassroots movement has already gotten started, and being a part of this has already made me way happier and better off than I ever was engaging with the system.

There are other alternatives beyond capitalism, and I'm not talking about communism either. Both presume an industrial system, which is no longer feasible or desirable. In a world with less resources and less money, year after year, if we do nothing we'll end up with terrible living conditions, constant conflict and potentially a new wave of fascism and no one wants that. The positive option is that we just learn to get along with each other and look after the earth again. We can work together to build new infrastructures that can support meaningful work and dignified lives. We can choose to work much shorter hours, eat much healthier food, growing most of it ourselves and spend a lot more of our time with our families and friends.

I’m not talking about going back to the stone age. People have been working on cool new ways to live without an industrial economy for well over 40 years now. For example, permaculture is a system of doing much more with much less energy, and in particular intensively and organically growing food. Appropriate technologies have been developed to meet human needs like heating and cooling in highly energy efficient ways. Local currencies that are more equitable and stable are being designed and tested around the world.

Transition Town groups are building community and leading preparatory efforts to relocalise. Distributed manufacturing is about producing what we need, close to home with nifty technologies like 3d printers. There are even groups working on peer to peer versions of the internet that we can get up quickly if the internet happens to go down. I just wanted to point out this small set of examples because every time I worry about some particular challenge, I look it up and there's a group of people who’ve set themselves to figuring out a positive and feasible way through it. Working together/ we can create a better world, here and now.

Really, my hope is that as the system continues to fall apart, those of us who find out what's going on, prepare ourselves and start whatever local projects and enterprises to prepare our communities that we can. So that as conditions worsen, we can build community and share ways of growing food and simple sustainable technologies and plenty more that people will be very interested in during a time of great financial hardship.

Major economic downturns throughout history have not been happy times, and this one is set to be bigger than ever before. There are real possibilities of austerity leading to exploitation, a rise of fascism, and world war three. The fact that this time round some of us are aware of what's going on and are preparing for the crash, as well as the degree of free communication the internet affords us are the main things we have going for us. Mostly I feel scared to death about it all. We all have basic human needs for security and safety, and if we're lucky for happiness and fulfillment as well.

This is happening to all of us, and we all have the ability to make choices as to how we handle the future. So I’m asking you, please, even if this seems outside the realm of possibility, at least do some research, check it out for yourself. You can decide what kind of future you want and start taking steps to make it happen. The more of us who start now, the more likely this transition is to be peaceful and just, and perhaps even exciting and promising. In the meantime, if you appreciate what you've seen and heard here, please send this animation on to your family and friends. The more people who know about this, the better off we will all be.

For more, see doingitourselves.org