julho 15, 2019

Diminishing Returns

[...] the human bias to keep doing more of what worked so well in the past leads to doing more of what failed even as results turn negative. The dynamic in play is diminishing returns: the yield on the policy that worked so splendidly at first diminishes with time.

Credit offers a cogent real-world example. When credit becomes available in a credit-starved economy, it generates a rapid, sustained expansion as credit-worthy borrowers borrow and spend on new productive capacity, consumer goods, housing, etc., all of which further drives expansion. But once credit has saturated the entire economy, the only pool of borrowers left are uncreditworthy (i.e. at risk of default), and the only projects left unfunded by credit are laden with risk. Either way, credit expansion stops: either lenders prudently refuse to issue credit to risky borrowers and ventures, and credit expansion grinds to a halt, or they foolishly lend money to borrowers and ventures which predictably default, triggering a credit crisis that brings imprudent lenders to their knees and triggers cascading defaults as declining asset prices push marginal borrowers into bankruptcy. Doing more of what was successful [...] -- expanding credit -- is now doing more of what's failed. Expanding credit in a credit-saturated economy only sets up cascading defaults.

The human response to the failure of what worked so well is disbelief: the problem, we reckon, is we didn't do enough the first time. So the answer to the failure of extending more credit is to extend even more credit and lower lending standards so anyone who can fog a mirror can get a loan. At this point, diminishing returns become negative returns: doing more of what's failed is now not just unhelpful--it's actively destructive. Cramming more credit down the throats of risky borrowers and ventures guarantees a full-blown credit crisis when the defaults start taking down lenders and crushing asset prices that were dependent on credit expanding into eternity. -- Charles Hugh Smith

julho 07, 2019

The Long Descent

Where nearly all of the carbon goes, in turn, is the earth’s atmosphere, where it messes with the delicate balance of the global climate. [...] The Earth’s climate, reduced to simplest terms, is a heat engine that runs off the difference in temperature between the Sun and deep space. Back in 1772, James Watt launched the industrial revolution by figuring out that he could boost the efficiency of the crude steam engines then in use, and so get more work out of them, by reducing the rate at which heat was lost from the engine to the environment. Adding greenhouse gases to the atmosphere does exactly that, and the work that the Earth’s climate does is called “weather.” Thus the result of greenhouse gas pollution isn’t a steady increase in temperature—it’s an increase in all kinds of extreme weather events, coupled just now with a shift in climate bands that’s warming the poles.

Does that mean that sometime very soon industrial civilization is going to crash to ruin because of some climate-related catastrophe? No, though you’ll hear that claim made at high volume in the years ahead. Does it mean that solar and wind power or some new energy technology will save the day? No, though you’ll also hear those claims being made at equally high volume. Here again, those same claims got made during the previous energy price spikes of the 1970s and the 2000, with equally dubious results.

No, what will happen is that the annual cost of weather-related disasters will move raggedly upward with each passing year, as it’s been doing for decades, loading another increasingly heavy burden on economic activity and putting more of what used to count as a normal lifestyle out of reach for more people. With each new round of disasters, less and less will get rebuilt, as insurance companies wriggle out of payouts they can’t afford to make and government funding for disaster recovery becomes less and less adequate to meet the demand. [...] That’s the shape of our future.  It bears remembering, too, that fossil fuels aren’t the only nonrenewable resources that are being extracted at a breakneck pace just now with no thought for tomorrow. For that matter, the global climate isn’t the only natural system on which we depend that’s being disrupted by human pollution in ways that are already circling around behind us and kicking us in the backside. As Kenneth Boulding pointed out a long time ago, the only people who think that you can have limitless economic expansion on a finite planet are madmen and economists. In the real world—the world the rest of us, willy-nilly, are constrained to inhabit—actions have equal and opposite reactions, and trying to push the pedal of economic growth all the way to the metal all the time simply means that you run out of gas sooner. That’s the logic of the Long Descent: the slow, ragged, unevenly paced, but inexorable process by which a civilization that’s overshot its resource base winds up in history’s compost bin. -- John Michael Greer