Potential futures

The world is in a very uncertain place right now. On the one hand, we have a very advanced society with all the necessary technology and communication channels needed to build a future of true sustainable prosperity, but on the other hand, we have stumbled on to a dangerously unsustainable path in terms of our environment, our economy and our society. Depending on the choices we make from this point forward, our future could realistically lie anywhere between true sustainable prosperity and total economic/societal collapse.

There are many factors that will influence the future of our society, but the two primary influences are likely to be our energy supplies (in the medium and long term) and climate change (in the long term). Climate change definitely merits lots of attention, but, since this post will only be concerned with our medium term future, we will focus primarily on energy.

As outlined on another page, our global civilization is completely and utterly dependent on cheap and abundant fossil fuel energy. And yes, despite all the good that fossil fuels have done for our civilization, they are also responsible for our gravest problems. Regarding the environment, the burning of fossil fuels is the primary cause of climate change and abundant fossil fuel energy is the one and only reason why we have been able to push so many other ecological systems to the brink. And as far as the economy goes, cheap and abundant fossil fuels is the one and only reason why our economy developed to the absurd point where the fundamental impossibility of perpetual exponential economic growth has become mandatory.

Now that we are running out of cheap fossil fuels, especially cheap conventional oil, life is becoming increasingly challenging. We are completely dependent on cheap fossil fuels to extract the wide range of resources from our environment that we require in daily life and therefore, as energy prices increase, so will the price of everything else. This can cause real problems in our massively unequal society where almost half the planet lives on less than $2 per day.

Rising energy costs also lie at the root of the sheer madness that is our current economic system (1, 2, 3) where rich nations conjure vast quantities of fiat money into existence in order to buy cheap products often produced under conditions that can be described as modern-day slavery in poor nations. This really is a crazy situation, but its evolution is completely understandable. Since our economy must grow exponentially each and every year and cheap conventional oil has been steadily running out in recent decades, the world had to find ways to produce goods in a more energy-efficient manner. And what better way to increase energy efficiency than to move production from America (where the average worker consumes energy at an enormous rate of 11 kW) to China where the average worker consumes energy at a ten times lower rate (in the year 2000).

But this was always going to be nothing more than a temporary fix. While the average Chinese consumed energy at a rate ten times lower than that of the average American in the year 2000, they have increased their energy consumption so rapidly that they now consume only 3 times less energy than Americans. And yes, the rather obvious result was a 500% increase in the oil price up to the crash in 2008. The oil price is currently hovering just under the point at which the economy crashed five years ago and it should therefore come as no surprise that the West has stagnated and China is slowing down.

So, the point is simply that our medium and long term economic futures are wholly dependent on the way in which we manage the great energy transition that lies before us. The options available to us are well summarized in the following graph and will be analyzed in more detail below:

Techno-fantasy (0%)

The techno-fantasy scenario is one where we discover some miraculous new energy technology that allows us to continue increasing our energy usage exponentially for the foreseeable future. As shown below, we are wholly incapable of achieving economic growth without an increase in our rate of energy usage and the techno-fantasy scenario therefore is nothing other than a continuation of the perpetual economic growth paradigm we have become used to over the past century or so.

In order to carry out some meaningful projections for this scenario, we can look at historical economic growth rates and simply extrapolate the long-term trend. As shown below, world GDP growth is unmistakably slowing down as various environmental limits (primarily energy) become more significant and population growth declines.

Historical and projected year on year real GDP growth under the techno-fantasy scenario.

In terms of real GDP shown in the graph below, our GDP would increase by 19% by 2020 and by 44% by 2030 from today’s level. These projections are purely academic, however, because it simply is physically impossible for the world to achieve this growth trajectory as energy prices keep rising and one debt crisis follows another. Indeed, this trend can only continue if we discover a technology that can lower the oil price back to $20 per barrel and, since the chance of this happening is practically zero, I honestly think that this scenario has a 0% chance of materializing.

Green tech stability (20%)

This is the scenario that we should all be striving for. In this scenario, we make a congruent effort towards greening and localizing the global economy, gradually transforming our economy from one driven by miscellaneous consumption to one that is driven by green investment. Massive growth takes place in the green industry, initially primarily driven by crucial transition energy technologies like carbon capture & storage and nuclear energy. Steady increases in energy prices and honest politics about the fundamental inevitability of these price increases will then provide individual consumers with a very healthy incentive to curb their consumerism, greatly increase their energy efficiency and to invest in micro electricity generation to become energy independent.

As discussed in two other pages, the second law of thermodynamics together with three other key factors will make the gradual transition to renewable energy extremely challenging, but, quite frankly, we have no other choice. As a result of the large energy price hikes brought by renewable energy, we will have to watch our modern consumer economies slow down substantially and probably cancel out any gains made by the massive growth in the green economy.

For this reason, the green tech stability scenario will likely see an economic contraction towards 2020 and it may very well bring substantial economic turmoil in certain regions such as many Western nations with unpayable debt and totally unsustainable social welfare systems. However, if this uncomfortable transition period is managed well, the world may just be able to revamp its economic system away from the impossible target of perpetual consumption-driven economic growth and achieve some slow green investment-driven growth towards 2030.

Historical and projected year on year world GDP growth rates under the green tech stability scenario.

Unfortunately, the chances of this scenario playing out are not very high, primarily because of the unthinking culture of consumerism and entitlement that has taken over Western nations. A focused green tech transition implicitly implies that people will have to consume less and invest more, but our current cultural mindset dictates that we do the exact opposite. I remain hopeful, but cannot give this scenario a more than 20% chance of happening.

Historical and projected world GDP under the green tech stability scenario.

Disorderly descent (70%)

In the the reference figure, this is called “creative descent”, but there really is no way that the human race will willingly reduce their consumption in a pro-active and “creative” manner. Nope, if this is going to happen, it will be forced upon us by expensive fossil fuels and climate change. And yes, it will be pretty disorderly.

In essence, this is the business as usual scenario where we try our best to maintain the current status quo of consumption driven economic growth for as long as we possibly can. This implies that we keep on burning up our limited stocks of easily accessible fossil fuels and inflating our already over-blown credit markets to fuel further consumption. The motto remains one of getting consumers to borrow and spend more every single year.

This totally unsustainable paradigm is already being gradually dismantled by the markets through the European debt crisis and the threat of the US fiscal cliff. In essence, these developments are now forcing the US and the EU, which together account for almost half of world GDP, to finally start curbing their consumption and paying back their massive debts. The world’s third largest economy, Japan, is also burdened by enormous debt which it has been able to sustain through a (currently evaporating) trade surplus. As shown below, it is clear that the developed world is rapidly losing steam due to these obvious factors and I honestly cannot see any plausible way in which these trends can be turned around.

Historical year on year GDP growth for the USA, the EU and Japan.

It remains possible that the developing world can keep the world economy on a path of slow and unpredictable growth for some time, but most developed world economies will almost certainly be smaller by 2020 than they are today. By 2030, however, the business as usual scenario will almost certainly see the entire global economy on the path of disorderly descent as energy prices shoot up, the effects of climate change become increasingly severe (e.g. superstorm Sandy) and the resulting social unrest further hampers productive capacity.

Historical and projected year on year world GDP growth rates for the disorderly descent scenario.

Even though this scenario will not be very pleasant, the state of the world today suggests that this is our most likely future outcome. The previous green tech stability scenario would certainly be preferred, but this would require long-term thinking on a scale which unfortunately seems to be far beyond the capacity of our race. Our current debilitating culture of consumerism and entitlement is testament to the short-term outlook of the typical member of the democratic electorate and, unfortunately, this mindset (and therefore also the general direction of society) is unlikely to change any time soon.

The good news is that we can realistically upgrade from the disorderly descent to the green tech stability scenario through nothing more than one or two extraordinary leaders who have the guts and the integrity to tell the world that the era of debt-based fossil fuel-driven economic growth is over. Such honest leadership has the power to rapidly reshape our debilitating culture of consumerism and entitlement into one of contribution and personal responsibility, but, until I see such a leader step forward, I’m forced to give the disorderly descent scenario a 70% probability of materializing.

Historical and projected world GDP for the disorderly descent scenario.

Collapse (10%)

Finally, we have to acknowledge the possibility of a global economic collapse. Such a scenario can easily be imagined considering the inherent instability of our current financial system. There is such a massive amount of debt, welfare promises and other financial contracts (derivatives) in the system that a single adverse event could trigger a self-strengthening hyperinflationary or deflationary collapse.

Hyperinflation and deflation sound like two completely opposite scenarios, but the only real difference between them is the actions of government. In a deflationary spiral, the government does nothing and simply allows individuals and corporations to go bankrupt if they can no longer pay their debts. This causes job losses, falling consumer demand, falling prices and falling wages, and thereby leads to further bankruptcies which completes the self-strengthening spiral.

After this spiral has gone on for a while, the financial system disintegrates. And once this happens, you can no longer get any form of a loan, your insurance disappears and, in the end, you cannot even withdraw any money from the bank any longer. Rock bottom is reached soon after this point.

In the more likely hyperinfation scenario, the government or the central bank comes to the rescue of individuals and corporations who can no longer make ends meet with tons of fiat money conjured out of thin air. Rescue mechanisms include direct bailouts (simply handing over a bunch of money), lending further money when no private investor in his right mind would keep on lending, or by lowering interest rates (reducing the size of debt repayments).

This strategy can keep the system afloat temporarily, but it inevitably leads to more of the thing that caused the problem in the first place: unsustainable debt. This kind of government intervention (which has become the hallmark of developed world economics since the turn of the century) therefore only sets the system up for an even more painful collapse. As debt continues to mount and productive capacity remains stagnant due to rising energy prices and an aging population lost in an unthinking culture of consumerism and entitlement, the magnitude and frequency of these interventions become greater and greater until the point where new fiat money is created at such a rapid rate that Zimbabwe-style hyperinflation ensues.

Regardless of the route taken, the final outcome of hyperinflation and deflation is identical: droves of impoverished people often fighting for their very survival. This is certainly not a situation that any of us ever want to experience, but many people think that the world is en route to such a scenario. Personally, I think that such events could play themselves out in a number of countries, but that the chances of the world economy truly collapsing remains pretty slim. As stated before, the human race responds very strongly to short-term motivation and the threat of an impending economic collapse will get people to make remarkable sacrifices in order to prevent this pain. In essence, the only mechanism through which I can envision global economic collapse is through conflict on a massive scale (i.e. World War III).

We simply must avoid such a global catastrophe, but when looking at the world today, I have to give this scenario a 10% chance to come to pass before 2030. Let’s do our very best to push these odds down even further.

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