Navigating the Unsteady Waters of Today's Economy
Hello everyone,
Let's talk about something serious: the state of our western economies. It's looking pretty shaky, and a deep recession could be knocking on our door. Despite what the big shots say about GDP growth and the power of the G7, the real story is quite different. In terms of real goods and services? We haven't seen real growth in the West for 18 years. Now the stage is set for a rapid downturn. So it's time for a no-nonsense look at our economy - and I'm in the middle of it with you. Let me explain.
You've probably heard it before, but it bears repeating: money is not the real thing in the economy; energy and materials are. Everything - mining, growing, making and consuming - requires energy. No energy means no production and no services. And as much as rich countries seem to be growing without increasing their energy consumption, that's not really true. They've just shipped their energy-intensive work elsewhere, making them more dependent than ever on foreign trade.
The bigwigs have been dazzling us with GDP figures, but now it's time for a reality check. Gross domestic product, or GDP, is a rather misleading figure. It doesn't measure real economic activity, just financial transactions. It's like confusing a busy road with a productive one. Add in the finance, insurance and property sectors, inflated by rising debt, and you've got a lot of money changing hands. But guess what? They don't really add value to the economy. In fact, they do the opposite.
Here's the kicker: even penalties for late credit card payments count as GDP. It's crazy, isn't it? Then there's the increase in the rental value of your house - even if you live in it and don't earn a penny. Or what about the way inflation is under-reported? If you spend more on the same things as before, that counts as GDP growth. We're living in a world where we have to create money again and again just to keep up with rising costs and a debt-based system. Banks don't just lend money from deposits, they create it out of thin air. And when a loan is repaid, poof! The money is gone. The catch is that we constantly need new loans to pay back old ones, plus interest. It's a never-ending cycle.
This whole situation isn't new. Debt and economic growth have been at odds for thousands of years. Energy, from food calories to fossil fuels, is what's really driving our world. And like ancient civilisations that crumbled when they couldn't 'fuel' their growth, our complex economy faces a similar fate if we can't increase our energy consumption.
Remember: no growth in energy means no growth in the economy. If the economy can't grow any more and starts to shrink, we'll be stuck with a mountain of financial obligations that can't be met. Imagine a growing pile of money chasing fewer goods. We're on the brink, and what comes next could be like nothing we've seen before. Think 1929 levels of panic.
Raising interest rates now would be like shooting ourselves in the foot. Energy projects, from fossil fuels to renewables and nuclear, require large upfront investments. In today's economy, only the most profitable projects will go ahead. If we don't keep adding new energy projects, we will end up with declining energy production. And we all know what that leads to.
Recently, some light has been shed on this unhealthy relationship between finance and energy. The gist is that if the cost of extracting a new barrel of oil goes up every year, the returns on investment should go up too. But here's the rub: the returns on the oil companies' savings are lagging behind their investment costs. It's getting to the point where it doesn't make sense to park profits in bonds. Instead, oil companies are paying out dividends or buying each other up, living off their existing resources until they're gone.
"So let's invest in renewables," you might say. But there are two big problems. First, we can't make renewable energy without fossil fuels. And second, electricity grids need a lot of physical and energy investment to handle more wind and solar power. It's a negative feedback loop: the more renewables we add, the more dependent we become on fossil fuels.
In the US, for example, the North American Electric Reliability Corporation is warning of potential blackouts because of this problem. We're facing a real challenge in keeping our energy systems running smoothly and interconnected. Throw in material cost inflation and rising interest rates, and we're looking at a perfect storm for the renewables sector. It's a repeat of the shale oil situation, only worse.
Interest rate hikes to combat inflation driven by high energy costs could end up doing more harm than good. And with energy production growth hitting a wall, the only option left may be more government bailouts, leading to even higher electricity prices and inflation.
So here we are, with a financial system that's piling debt on debt while the real economy, which needs steady energy growth, withers on the vine. Western nations are already on an unsustainable path, not just because of the recent crises, but because of decades of problems. And as Europe faces deindustrialisation and loses its demand for gas due to high import costs, we're seeing a corresponding decline in real economic output.
It's a tricky situation. GDP figures may look good, but the reality is that jobs are precarious and real wages are falling. Globally, less production means less shipping, and the US isn't immune to these trends. Even electricity generation, a key indicator of economic health, is stagnating across the G7.
In short, the West is losing its economic edge, and the signs have been there for some time. The financial system's focus on GDP, an unsustainable and precarious model, can only mask this decline for so long.
As we navigate these challenging waters, it's important to stay informed and prepared for the changes ahead. The next financial crisis may not just be a temporary setback, but a fundamental shift in our global economy. And as always, I'll be here to keep you informed of every twist and turn.
Until next time, take care and stay sharp.
Malte
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