Thursday, October 01, 2009


“Recession” Trigger

Here we have an account of a speech given by economist Jeff Rubin. Many people are now aware of his message that the world will undergo wrenching and momentous change in the near future due to the spiking of oil prices. Of particular interest was his assertion that “oil prices, and not sub-prime mortgages, caused the current global recession.” Although the accepted wisdom is that the subprime mortgage debacle triggered the world recession (here in Japan the term “Lehman shock” is used to name the event believed to have triggered the recession), I have to agree with Rubin that this explanation amounts to barking up the wrong tree. Clearly, the world economy as we know it cannot function long with oil in the triple digits.

The simplistic explanation that subprime debt was the trigger ignores the role of cheap energy in creating the global debt bubble. Specifically, cheap energy fueled economic growth, and the promise of continuing growth underwrote all the debt. If sizzling economic growth had continued, a high percentage (certainly not all) of the subprime borrowers could have been expected to pay off their debts. Of course there was a lot of greed, and much overreach, but that too was goosed by the expectation of continued expansion. When $147/bbl oil crashed the economy, the debt bubble had to collapse because it had been kept inflated by the expectation of continued growth.

Unfortunately, the belief in growth still dominates. Governments spill the red ink with abandon for “stimulus” programs in the expectation that the world economy will mend itself and get back to expanding, which (in theory) would make it possible to pay off all that debt, with interest. In reality, no person in his or her right mind would believe that this much debt could be paid off. Without a doubt, it is just a matter of time until massive worldwide defaults begin.

Finally, there is debate on whether to call this a recession or a depression, but that argument is misplaced. What we are seeing is the beginning of the end for industrial civilization — unless, of course, a cheap and highly dense form of energy can be found. Good luck.

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