US Federal Reserve Chairman Ben Bernanke, the world’s most powerful figure in monetary policy, said the other day that the economic recovery remains ‘unusually uncertain‘ and that it’s more likely things will turn out worse than the already rather bleak forecasts he presented to Congress than that things will turn out better.
Why are things ‘unusually uncertain’? The reaction of the large governments (not ours) to the economic crisis was textbook. They moved quickly to give confidence to markets where it had failed, thereby preventing a tail-spin of falling confidence, lower asset values, institutional collapses, even lower confidence, etc. And they spent up big in the real economy, building roads and schools, to replace the failing private sector. Their stimulus packages were meant to act as starter motors to get the private economies turning over again under their own steam. This is literally all out of the textbook and has worked every time until now.
The engine has been primed but it hasn’t started ticking over on its own. The private sector is still missing in action. Confidence is still weak.
Watching the financial media it’s clear that the players don’t understand what’s wrong. They know that there ought to be a recovery as strong as the recession under way but it isn’t happening.
Step back a little, though, and it becomes clearer. All the players can’t see that the field they’re playing on is changing. They’re like beasts expecting that their waterholes will be refilled by the rains after the dry season, unaware that the climate has changed.
The reason the recovery isn’t happening, the reason that prospects for growth are ‘unusually uncertain’ is that we hit the limits to growth in 2007-08. When we hit it, we bounced off but we cannot grow much again before once again slamming into that brick wall.
If you look at all the major commodities that our world runs on – wheat, rice, coal, metals, and, of course, oil – the prices are starting to spike up again just as they did before the last crash. Why? Because a price spike is the economy’s way of saying that supply is about to fall short of demand. We have reached the point where growing supply of many of the key things we rely on for growth, most especially oil (which is about to peak), cannot continue. This is a finite world and we are hitting its limits. Already, the rising prices are constraining companies’ abilities to grow during what would usually be a strong recovery.
So, yeah the prospects for growth are ‘unusually uncertain’ because we have run out of room to grow in an economic paradigm based on burning more hydrocarbons and producing more cereal crops.
The problem (one of the problems) is that we can’t see the forest for the trees. People still think that the great recession was a problem with the finance system, triggered by a housing crash. But that’s just a proximate cause. The underlying cause was the oil crunch and the next great recession will occur within a matter of years as a result of another crunch, as the IEA, US military, and others have predicted. But the likelihood is that recession will be blamed on another proximate cause and everyone will try to carry on as if infinite growth is possible, as if the rules haven’t changed. Bernanke didn’t mention oil once in his testimony to Congress.
We are at the limits to growth within this energy economy. The sooner we realise that, the better.