The Market Has Spoken – Go Plan C!
Filed Under Economy | 2 Comments
November 25, 2008
By Pat Murphy
Executive Director, Community Solutions
Our book Plan C – Community Survival Strategies for Peak Oil and Climate Change hit the book stores in July of 2008. In that month the Dow Jones Industrial Average (DJIA), the barometer of what is most meaningful in modern U.S. culture, was around 11,000, down about 3,000 points from its high of slightly above 14,000 in October, 2007. Since July of 2008 the DJIA has dropped another 3,000 points to around 8,000. Comparisons with the pattern of the DJIA in the late 1920s abound. Arguments suggesting we cannot be in a depression for various reasons are constantly being proposed – and countered by new negative events. We are told that in the Great Depression government failed to provide bailout loans, something which world governments are now doing with abandonment. But these are no more effective in stopping the decline than the opposite actions of governments of the 1920s.
At the core of Plan C is the action of curtailment – a word I selected to make a distinction from mere conservation. The definition of curtailment includes both the act of curtailing, which implies voluntary actions, as well as the state of being curtailed, which can be construed to be involuntary. To curtail means to cut back, to shorten, to abbreviate, to retrench, to reduce. These words now need little detailed definition because people are experiencing them daily (albeit some more than others). Some are having their work hours shortened. Many are retrenching in every way possible. In our office we are cutting back on our use of natural gas for heating, wearing heavier clothing, and sometimes putting on gloves with the fingers cut off to keep our hands warm while typing. Home thermostat levels are being lowered, and extra blankets laid out in the living room to be used when the sun goes down. Trips to speak at conferences are now being reconsidered and driving has been reduced. Curtailment is upon us and it is uncomfortable to everyone and painful to many – particularly those that are being laid off.
We may have been physically more comfortable a year ago. But at that time a deep fear was growing in our souls that the human race might not make it. James Hansen recently called for us all to cut back our CO2 emissions to 350 parts per million (ppm), down from the current 387 ppm – and way down from the official estimates that we could (probably!) survive at 450 ppm. The International Energy Agency (IEA) in its November 2008 report expressed the seriousness of the situation in newly bleak terms, noting that “Preventing catastrophic and irreversible damage to the global climate ultimately requires a major decarbonization of the world energy sources.” There are many other sobering statements in this report, including projections of existing oil fields depletion rates in the range of 4-6 percent annually. In support of this, recent reports from intelligence and defense agencies darkly acknowledge the high probability of future resource wars.
In terms of CO2 generation we have a significant new source of hope. Curtailment is happening! And at a rate that may meet the reductions recommended by the climate scientists, namely about four percent per year. That’s not a lot–at least for the first year. But with overall vehicle miles being reduced this year, and our domestic car companies heading for bankruptcy because they have no really good fuel efficient vehicles, we are seeing a turnaround in driving habits. With layoffs and shorter working hours we can guess that many thermostats are being set back by at least four percent as well. Utility companies report drops in electricity consumption at rates that are more than four percent annually. Maybe some people are even beginning to cut back their food intake–a positive step since we consume 30 to 40 percent more calories than is healthy, and most of us are overweight.
Did all of America read Plan C in the last few months? Book sales numbers suggest not. And we have had no invitation from Oprah to appear on her TV show. So did Americans somehow intuit for themselves the curtailment recommendations of Plan C? Or did the finance gods simply decide to punish us for buying derivatives and credit swaps–violating some obscure commandment dealing with fiscal responsibility? Has something happened in the culture that woke up old ancient survival memories buried in our DNA? Are we experiencing a disquieting common dream in which the muses whisper “Hard times are coming?” I have my view–which is simply that Americans are beginning to wake up to evidence and their own experience. They are starting to see that greed is not good. They are beginning to question the cultural story that material consumption is our reason to live and what makes us great (meaning superior). They are losing confidence in the American view of the good life. They are starting to recall spiritual roots that warn against the pursuit of Mammon (the ancient Christian false god of riches and avarice). They are remembering Matthew 19:24–“And again I say to you, it is easier for a camel to pass through the eye of a needle, than for a rich man to enter into the kingdom of God” and Matthew 6:26–“Look at the birds of the air; they neither sow nor reap nor gather into barns, and yet your heavenly Father feeds them. Are you not of more value than they?”
What is the stock market collapse essentially? I see it as a loss of confidence in the American system. Americans are now realizing that oil companies like Exxon have been funding anti-climate change lobbyists for decades. They are seeing that American car companies continued to make gas guzzlers in the US while making efficient cars abroad. And they have experienced a most awful shock upon discovering that the venal and manipulative management that prevailed in those kinds of industries was also in control of the finance industry, which meant that their life savings have been subjected to foolish risks. Americans are now beginning to understand that supposedly staid Wall Street bankers in fact more closely resembled Las Vegas casinos. The big-money players knew that the house would take its percentage and support them in casting the dice again and again. Citizens of Las Vegas know that there may be criminal elements behind the casinos; they assume their interests are being watched over by law officials subject to manageable levels of graft and bribery. But citizens of America did not have that protection.
To have discovered that the quasi- criminal elements behind the banks had as little regard for honest citizens as do Mafia dons, and that government officials and Congresspersons were part of the financial manipulation, has been a blow. Oil companies and car companies were only too easy to hate. But banks and financial institutions were supposedly to be pillars of trustworthiness. And now we are observing those very same officials who invented the financial instruments which defrauded us (Henry Paulson, for example) demanding that Congress pass bank bailouts of a magnitude beyond belief. We have watched CEOs take excessive pay for years, backed up with golden parachutes. Now we’ve learned from David Korten (in his essay in the winter issue of Yes magazine) that in 2007, the 50 highest-paid private investment fund managers averaged $588 million each in compensation, 19,000 times as much as the average worker’s pay.
Let’s consider some basic questions, questions that as citizens we should be prepared to answer. Why, for example, do stock markets seem to go up and down constantly? Certainly fundamental business conditions don’t change that rapidly. Review the stock markets of 40 years ago and you will find their daily swings were much less than today’s. This has a lot to do with confidence and the view of the market’s possibilities. One barometer that measures the confidence is the Price to Earnings (P/E) ratio of stocks. Over a long period of time, this ratio increases and decreases depending a lot on the mood of the country. Figure 1 illustrates this ratio, and the “irrational exuberance” that has existed in the first decade of the 21st century is apparent in it. When people buy into the story that they can “get something for nothing,” the P/E ratio rises. And when that bubble pops, P/E ratios decline regardless of the popular delusion (pushed until recently by securities sales people) that sophisticated financial schemes have taken the risk out of the market.
http://www.generationaldynamics.com/ww2010/g070818c.gif
But the “investment party” (for which a more accurate term might be the “speculation binge”) is now over – whether it be in internet stocks, rapidly increasing housing prices, gold, or oil stocks. A lot of paper profits for companies, for stock holders, and for home owners have disappeared. Friends with 401 K programs from respectable corporations and educational institutions tell me they now plan to add years to their work life because their retirement funds (based on the stock market) have lost so much value. No one I know believes that things will return to the way they were. But sadness at this loss of the “good life” is tempered a bit because we know that if things do return to the way they were, oil consumption and CO2 generation will once more threaten the lives of all beings on the planet.
It’s easy to blame the CEOs and board members of our institutions, for as leaders they have indeed failed the people. But we were all complicit. Automobile unions supported the building of SUVs since it increased their wages and retirement benefits. The huge population of workers who entered financial services was smart enough to recognize a financial bubble. But like most people, they hoped to get their stake and get out before collapse occurred. We continued to elect politicians who promoted growth prosperity as the end all and be all. We were not forced to take out home equity loans and remodel our kitchens and take vacations with money borrowed from an uncertain future. To quote the famous Pogo Possum, a character in a political satire comic strip by Walt Kelly popular during the first energy crisis, “We have met the enemy and he is us.” We selected a path that our grandparents knew would lead to perdition.
So we are now “in the state of being curtailed” and we must accept that and begin “the actions of curtailing.” Books and tip sheets abound to tell us how to live more frugally. Most of us now understand better that energy is at the heart of our challenges and that we must move beyond simple and easy efforts like recycling paper and plastic to big steps in reducing our personal energy consumption. Chevron, a major oil company, is running ads in which individual Americans announce “I will leave the car at home more,” “I will carpool to work,” “I will use less energy,” “I will replace three light bulbs with CFLs”, and “I will finally get a programmable thermostat.” When oil companies run curtailment advertising campaigns, can the people be far behind?
What can we expect from the new Obama government? This is hard to predict but we do know that our chances are hugely better with the end of the George W. Bush era. Bush’s administration will continue to practice damage control for the economy, bailing out banks and maybe car companies, but without a coherent overall plan or convincing explanations of what they are doing. For now, the bailout is being extended to whoever has political clout. Some corporations are even buying small banks so they can list themselves as financial institutions in hopes of staking a position at the cash trough. But even proponents are already questioning the Troubled Assets Act. Preliminary loans of hundreds of billions to the financial institutions have not resulted in a resurgence of loans. Even if the banks regain a level of confidence that will allow interbank lending, will consumers jump again at the opportunity to speculate in consumer and housing goods? This is highly unlikely. The early years of the Great Depression were a time of experimentation, and this period will likely be no different. We can expect little reassurance from the government for at least some months. And any effort they make will be risky. A core strategy of simply printing more electronic dollars to send either to banks or underwater mortgage holders or car companies merely patches a system that has been torpedoed and is rapidly taking on water.
The necessary steps for any and all of us are to understand and deal with the reality of what is happening. Hard times are coming. We are beginning a grieving process for a way of life that is passing. Many are now still at the first stage – denial. Watching the Dow Jones Industrial Average and (for the better off) checking our 401 K programs will make believers of us all. The second stage – anger – is probably predominant now, with the targets being banks, appraisers and government home-lending agencies. The third phase – bargaining – is probably best illustrated by the huge number of bailout scenarios. “Give us a few paltry billions and we will create a corporate miracle!” The fourth stage – depression – is a loaded term, since it can describe either a difficult emotional state or the long-term pain of an extended economic disaster. Hardly anyone who is paying attention is fully free from emotional depression as they see an economic depression coming. Unfortunately either kind of depression can last for many years.
The fifth and final state is acceptance – facing our losses and moving on, focusing our efforts more positively again, and setting appropriate new goals. Many people working on Peak Oil and climate change, local organic farming, and home weatherization are in this stage. They are as yet small in numbers but strong in effect. They form the beginning of a larger grassroots movement which will be vital to a successful transition. We cannot afford to wait for a miracle from Washington. One of the most important reasons that Cuba survived their economic hell (caused by the cutoff of oil exports from Russia) was that the government informed the people that it did not know what to do. Instead, the government enlisted the people in solving the problem. And in many cases the government itself learned from innovative local efforts and helped most by disseminating those efforts around the island. Could things get so bad here that we might even listen to ideas from a socialist nation? Our very recent efforts of socialization of corporations and banks may make us more open to this possibility.
Curtailment has arrived – it did not wait for an invitation. Circumstances and our own greed for goods have brought it to us. Five years of talking about peak oil and climate change combined with the huge decline of housing and stock values over the last two years (possibly precipitated by crude oil prices, as some economists claim) have brought not only America but all nations to an understanding that massive change is in the offing. The continuing failure of techno-fixes to provide any really substantial help in these years has not been overlooked by the public. As a people, we will continue to drill (Plan A) and to build windmills and solar panels (Plan B). But in our hearts we know this will not be enough. The crises have been coming too fast and the scientists have been too Pollyannaish about new technology to have kept our trust. Plan C has won by default. Unpopular and painful though it may be, it is the only game in town for long term adaptation. The current system is rotten; its financial benefits have accrued to the few who are rich, and its huge negative externalities to the multitudes of the middle class and poor. Justice calls for a change.
In the meantime the market, which sums up the views of hundreds of millions of people, has spoken. It has told us (or maybe we are telling ourselves), “The party is over.” Today’s market reflects a reality that people are beginning to experience and understand. People are “hunkering down.” They no longer trust their financial leaders. The task is damage control, not expansion. Our job is no longer to determine rationales and schemes to avoid the difficulties but rather to develop strategies and tactics for managing them. This is what the changing market now demands.
Comments
2 Comments so far
It is promising to hear some from the Obama campaign actually using the word curtailment…
Hi Pat:
It appears that you are correct, and curtailment is now being forced on us. If that is the case, we are headed into the mother of all recessions. It seems that the world population needs to be reduced to about one-third what it is today.
The 800 pound gorilla in the room is the population explosion which almost no one talks about. Other things being stable the demographers have been projecting a 50% increase in world population over the next 40 years. The birth rate cannot be changed abrupty by persuasion alone. Disease and mass starvation appears to be on the horizon. I see no possibility of increasing our agricultural production by 50%, even in the absence of our financial collapse. I think grain productionn per capita has already peaked several years ago. It is certain that world grain reserves are rapidly vanishing.
Shouldn’t population curtailment be an important part of “Plan C”?