https://consciousnessofsheep.co.uk/2024/12/04/it-was-always-about-the-oil/

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We didn’t really need to see Britain’s Labour government being given its instructions from those higher-up to understand that they are just a continuation of the past 14 years of Tory misrule. The unravelling budget last month was clearly a continuation of the neoliberal extremism which has dogged the UK for the past half-century… more borrowing, more taxation, more corporate welfare for the multinationals, and more impoverishment for those at the bottom. Indeed, the only oddity is the publicity given to Fink’s meeting with Starmer, since until now our real rulers have preferred to stay behind the curtain.

One reason for the more overt signalling is that things are getting desperate – not just in the UK (although we are leading the charge) but across the western states generally. Geopolitically, the growing challenge from the BRICS bloc, along with Trump’s threat of tariffs as sanctions, risks the unravelling of global supply chains and serious (possibly fatal) damage to the Eurodollar monetary system. At a national level, the discrediting of the hyper-liberal self-identifying “left” has opened the way for nationalist populist movements to enter government and, again, undermine the neoliberal system of international trade. These though, are superficial when compared to the one thing that Karl Marx (almost) got right.

Understanding that Marx was a creature of his time, what he witnessed in the course of Britain’s second (coal-powered) industrial revolution, was a vast increase in the production of capital goods. And it was through this lens that he developed the idea of a “crisis of overproduction.” Put simply, in order for capitalists to make a profit, they had to pay the workers less than the value that the workers provided (this was wrong, but bear with me). But ultimately, it was the workers, collectively, who had to purchase the manufactured goods (and the products made with them). But since the workers had less income than the value of all of the products, the capitalists would be unable to sell all of their products. This would lead some to go out of business, laying off their workers and forcing their suppliers out of business. Others would try to avoid bankruptcy by lowering their costs… the largest of which was the wage bill. But the collective impact of these measures was that the workers would have even less income to spend. And so, even more capitalists would be unable to sell their goods. And so, the crisis tightens.

What Marx got wrong is that it wasn’t (primarily) the workers which added value, but the vast energy unlocked from burning coal to generate the power for industrial machinery. In an economy – like mid-nineteenth century Britain’s – where energy (coal) was cheap and abundant, both wages and profits could increase without impacting purchasing power across the economy. The same was true on a gargantuan scale during the oil boom in post-war America. Nevertheless, Marx was (sort of) correct in pointing out that ultimately the workers had to have sufficient income to purchase the goods (and services) being created if the economy was to avoid a crash. And since, in the modern world, this manifests as a decline in consumption, it is better to regard it as a “crisis of under-consumption” than of over-production – particularly in the services sector where a single product (a video, TV programme, computer game, etc.) is sold over and over with no additional production.

Steve Keen’s modelling, which allowed him to correctly predict the 2008 crash, adds to our understanding by introducing the modern system of debt-based fiat currency. That is, in the post-war years, and certainly by 1971, the western economies shifted from gold-backed currencies issued by governments to fiat currencies mostly issued by banks. This shift meant that collateral replaced gold on the other side of the ledger… and for a large part of the total loan book, collateral amounted to little more than the ability of an entity (household, company, or government) to repay the loan with interest. What Keen was able to demonstrate was that even a slowing of the rate of borrowing in our debt-based system is sufficient to produce a crisis of under-consumption. Moreover, the system did not have to wait for bankruptcies to materialise to enter a downward spiral… all that was required was for banks to tighten lending standards even further to send spending plummeting.

Insofar as people think they know anything about the 2008 crash, they will likely talk about “sub-prime mortgages,” since this was the most visible element of the crisis as it affected ordinary people. Mis-selling, shadow banking and insurance, and lax rating agencies were also involved. As was the voracious appetite for easy money among the world’s banking and financial corporations. But all of this misses an essential point – that the people who couldn’t afford their mortgages had recently been people who could afford their mortgages. The game was rigged, of course. It depended upon people being able to service the debt (i.e., pay the interest) while they waited for the housing market to rise sufficiently to sell their houses at a profit. And those who entered the game early enough managed to end up owning mortgage-free properties. Those who came late to the party fared much worse though… but why?

In two words, interest rates. Something happened to the global economy around 2005, which caused “inflation” to increase above the arbitrary two percent desired by governments and central banks. Central banks responded by jacking up interest rates in the mistaken belief that this – rather than the global recession of the early-1980s – was what had ended the inflation of the 1970s. In one – particularly egregious – manner, this was true, insofar as the rise in interest rates caused the banking crash which resulted in the depression we have been living through ever since. Indeed, in the UK, rising housing costs – caused by the rate rises of the past two years – are the main component of the unexpectedly high rate of CPIH inflation today.

Inflation does not though, appear by magic. Indeed, in 2005 as in 2021, the rise in prices was less the result of an expansion of the currency supply than of an unexpected rise in costs across the supply chains. This was obvious enough in 2021 and 2022, where pandemic lockdowns and self-harming sanctions caused shortages of key resources and components which sent prices rising across the European economies. Outside Britain, the 2005 price increase was less clear – although the cause was the same.

In 2005, Britain became a net importer of oil and gas. To a UK economy which had become addicted to a mountain of debt which was only possible because of the collateral of oil and gas revenues and taxes, this was the equivalent of an addict going cold turkey. Less obviously though, world conventional oil production also peaked in 2005, causing oil prices to rise. And since oil products are ubiquitous – and often essential – in the economy, the rise in oil prices translated into the general increase in prices.

This is where the old saying that “the cure for high prices is high prices” comes into its own. Unless higher prices are accompanied by equivalent higher incomes, then consumption must fall. This is first experienced across the discretionary sectors of the economy, but ultimately affects essentials. In the modern world, the problem is exacerbated by the role of banks in the currency system, because higher prices devalue collateral. It is, for example, one thing to use a house as collateral against a mortgage when the housing market is booming and something different when the housing market is stagnating or even going backward. The same goes for all manner of debt… including government borrowing. If banks come to believe that governments will not be able to repay their debts (for example, because their oil and gas tax revenues have dried up) they will certainly insist on a higher interest rate and may even refuse to invest entirely. In any case, as prices rise in the economy, bank lending to governments, companies and households dries up, accelerating the crisis of under-consumption.

The Keynesian approach within a gold-backed economy in such circumstances was for government to become a consumer of last resort – using the state monopoly on currency creation to print more notes and coins to spend on new public works and public services. This doesn’t really work in a global debt-based system... particularly in an import-dependent country like the UK, where the state is unable to “print” the foreign currency needed to repay its and its corporations’ and households’ foreign denominated debts. What we witnessed in the wake of the 2008 crash was states becoming borrowers of last resort… using their ability to issue sovereign bonds to unlock some of the bank lending which had dried up.

This didn’t solve the problem but merely locked us into a deadly game of “extend and pretend” in which real economic growth was replaced by a fictional GDP growth which includes new debt as growth. This results in our having to spend several new (debt-based) pounds for each new pound of economic growth… which, to anyone paying attention must end in grief as the mountain of debt – private and state – has to inflate exponentially to keep the game going. Bear in mind that the only thing keeping this monstrous, multi-trillion dollar global debt bubble inflated is the “collateral” on the other side of the ledger. That collateral, in turn, boils down to the amount of income ordinary people have with which to consume and to pay taxes.

This more or less frames the crisis that is unfolding. It omits one crucial question… why did we switch from the gold-backed to the debt-based currency system in the first place? While gold-backed currency systems are better at curbing the inflationary excesses of politicians and bankers, they achieve this by being a serious drag on economic growth when the potential for growth is high. This was the situation the USA found itself in following the Second World War. During that war, the USA had provided six out of every seven barrels of oil consumed (Venezuela providing much of the rest). Having unlocked that oil resource during the war, the USA had the potential to put it to productive civilian use. This though, was theoretically restricted by the Bretton Woods currency system which insisted that the USA maintain the dollar at a rate of $35 per ounce of gold – only by obtaining more gold could the USA lawfully expand the currency. In practice, inevitably, successive US governments simply pretended that the gold standard remained even as they flooded the world with Marshall Aid dollars and flooded their own economy with Cold War, Vietnam War, and Great Society dollars. Not that the explosion of dollars ended there. From the 1950s, an unregulated offshore Eurodollar system emerged. In this system, international banks created debt-based dollars in much the same way as domestic banks create new currency when they issue loans.

In conventional economic theory, the explosion of dollars following the war should have been inflationary but it wasn’t… at least at the start. The reason for this is to be found in the exponential growth in oil consumption during those years. The productive use of all that oil – by far the cheapest energy humanity has ever enjoyed – resulted in the explosive economic boom of the post-war period, during which the world’s economies produced as many goods and services than had been produced in the 150 years that preceded it. As long as there was excess productive capacity to absorb them, the USA and the international banks could create as many dollars as they pleased.

All good things come to an end. The end in this instance was brought forward by a combination of peak oil in the continental USA, growing inflation among the USA’s trade partners and a desire on the part of Middle Eastern oil producers to have a greater share of the oil revenues. As the period of exponential oil production reached its peak, prices began to rise. This had its main impact in European and Asian economies still obliged to trade in dollars at the $35-per-ounce of gold rate. The USA was exporting its inflation. The crisis came in 1969, as first West Germany and later France asked the USA to settle its trade account in gold rather than dollars. Briefly, warships transported American gold across the Atlantic, thereby forcing the USA to import the inflation. Nixon blamed “speculators,” but it was really the inflationary currency creation, together with the end of the potential for real exponential growth, of the post-war years which was coming home to roost. Either way, in August 1971 Nixon “temporarily” suspended the gold standard.

Sensing this western weakness and using the excuse of support for Israel in the 1973 war, in October 1973, the OPEC states imposed an oil embargo on the USA and its allies. This was the first time since the late-1920s that the western states faced energy shortages, and governments of the day were ill-equipped to respond. Throughout the post-war years, governments had maintained full employment by acting as consumers of last resort – printing and spending new currency into the economy via a large public sector. The mainstream economists of the day imagined they had discovered the secret sauce to bring an end to cycles of boom and bust. It was only the excess potential within the economy to absorb the additional currency which had prevented inflation. The end of cheap oil had marked the end of the potential to absorb the additional currency, so that attempts to spend their way out of recession simply left governments facing a self-inflating cycle of price and wage increases.

Because it was partially artificial, the oil shock receded by the mid-1970s. Had the OPEC embargo never happened, the end of cheap oil would have come by the end of the decade. In any case, most of the economic assumptions of the post-war period had been shattered. while establishment media and neoliberal politicians sought to blame trade unions and social democratic parties, the reality was that the energy which generates value in the economy had suddenly become a great deal more expensive and, in consequence, the productivity of oil-based economies was slumping.

The “solution” which emerged is what came to be called “neoliberalism.” Its core elements were the end of the focus on full employment, the lowering of wages via the creation of a reserve army of workers, the free movement of capital (and the accompanying offshoring of production), and financialisation following the 1986 “big bang” deregulation. Again, the UK provides the most obvious example of the shift, since prior to the mid-1980s very few British people had access to bank credit, while credit cards were a luxury afforded only to the very wealthy. Indeed, for most Brits, even current accounts were a relative novelty resulting from a major state and bank drive to cease paying wages in cash in the early-1980s.

The political irony was that Tories like Thatcher had assumed banks would continue behaving conservatively after deregulation had removed the incentives to do so. Within weeks of the big bang reforms, people across the UK were being offered cash and gifts in kind to open new accounts, to adopt credit cards and to take out more loans. At the same time, traditional building societies (which could not create new currency) bribed their members to allow them to become banks (which could). So that, by the 1990s, ordinary people struggled to open their front doors for the mountains of junk approved loans landing on their doorsteps.

It was Blair’s New Labour which reaped the political benefits of the boom. The Tories had been unlucky. The Piper Alpha disaster in 1988 had shut down much of the North Sea oil and gas revenues… and with them the tax receipts which underpinned the value of the pound on international markets. This fed directly into the European Exchange Rate Mechanism crisis just months after John Major had been re-elected in 1992. Even though the oil was flowing and the economy booming again by 1995, the Tories never recovered from their mishandling of “Black Wednesday,” and were easily defeated by Blair in 1997.

Blair’s moment in the economic sun was to be short-lived. North Sea oil and gas production peaked in 1999 and declined steeply thereafter. By 2005, Britain had become a net importer… losing the goose which had been laying golden eggs. The one saving grace being that the 1992 crisis had removed any possibility of Britain adopting the Euro (had it have done so, its sovereign debt crisis in 2011 would have been worse than Greece’s). Not that the UK escaped unscathed. Like the other western states, the UK was obliged to act as a borrower of last resort to keep the banking system on life support and to prevent the whole neoliberal order crashing. In 2005, UK government debt had been less than half a trillion pounds. It passed £1tn in 2011, and £1.5tn in 2016. Today it stands at £2.69tn. Following Labour’s budget last month, government debt is projected to rise to £4.62tn by 2029… all of this though, without the oil and gas revenues which had made it possible in the 1980s and 1990s.

This brings us back to that crisis of under-consumption and to the oddly public meeting with Satan’s representative on Earth. Britain is leading the way that the rest of the western economies will follow. The increased debt required to keep the system running has, one way or another, to be paid by a mass of ordinary people whose real incomes have been falling for years.

In the 1980s and 1990s, declining real incomes were masked by a massive expansion of borrowing (public and private) which allowed the mass of western people to consume beyond their real means on the back of rising asset (mostly houses) prices – for house owners, remortgaging became a means of accessing cheap credit as mortgage rates are far lower than credit card, bank loan or store credit rates. For the economy, this continuous cycling of debt helped counteract the tendency for consumption to fall. There is, after all, only so much stuff that people want to buy… and it is the big ticket items like houses and cars that have the greatest impact on consumption in the economy. As consumers become indebted, their ability to borrow comes to an end. Either way, by the mid-2000s several researchers were sounding the alarm about “peak debt” and the likely impact on the economy if borrowing ceased growing.

The 2008 crash, the ensuing sovereign debt crises, and a period of prolonged depression was what followed and never really went away. In the early-2010s there was a perverse repeat of the oil boom of the post-war years. Perverse, because it was unprofitable and – less obviously – because the energy return was far lower. When the economy settled in the wake of the crash, interest rates had fallen far below the point where investors could make a worthwhile return. Indeed, share ownership plummeted as corporations were better off borrowing from (and paying low interest to) banks than paying dividends to investors. For many investors, the rate of return was lower than the rate of inflation. The result was a “search for yield” which led increasing numbers of investors into the murky waters of “junk bonds” – risky investments which offered a higher rate of return… so long as they paid off. And perhaps the junkiest of junk bonds in 2010 were the bonds offered by US companies engaged in hydraulically fracturing the oil locked up in shale deposits. A lot of people lost a lot of money in fracking. At least for a few years it was to flood a depressed global economy with more oil than it could consume. As a result, and even after OPEC and Russia had cut their production, the world oil price slipped back to just $35-per-barrel (having reached an economy-busting $140 in 2008).

Between 2015 and 2018, the western economies – aided by massive state borrowing to support quantitative easing and corporate bailouts – experienced if not quite a boom, at least a revival. But this had petered out by the beginning of 2018, as increased consumer demand coupled to OPEC+ production cuts caused the oil price to rise to recessionary levels once more. The situation was compounded by the oil production peak in November 2018, as US fracking wells (which notoriously deplete in a matter of months) could no longer expand fast enough to hold up production. The situation was compounded by the quality of the oil being produced, as it was too light to easily (and cheaply) produce the (heavy) diesel and kerosene which is the lifeblood of the economy.

By 2019, the signs of another downturn were increasing (although it can take months and years for a downturn to materialise). Had there not been a pandemic in early-2020 and had western states not locked-down their populations, closed their businesses, and borrowed trillions of new dollars, euros and pounds into existence, by 2021 we might well have been hit by a crash even bigger than in 2008. As it was, the new borrowing kept the music playing – albeit at the cost of a brief period of inflation partially caused by people exiting lockdown and spending the currency they had saved, but mostly by shattered supply chains and shortages across the economy.

The trouble is that each new round of new currency creation is backed by increasingly weak collateral. In the private sector, businesses can only borrow if they can demonstrate their ability to repay loans with interest. Since 2008, too many so-called “zombie businesses” have been unable to repay loans, surviving instead by paying interest and taking out new loans to repay the old. But even businesses which had been repaying their debts have come unstuck because of inflation and high interest rates – the cost of borrowing is increasing even as the customer base is shrinking. Government can, in theory, print its way out of debt. In practice, the need to maintain the value of the currency and especially to secure foreign currency reserves, requires borrowing via issuing bonds. This is most true of import-dependent economies such as the UK, where a fall in the value of the pound would result in something close to hyperinflation of imports (including the 50% of the food which the UK imports). This helps to explain why the UK government has committed to doubling its borrowing, and why it has raised a series of counter-productive taxes (especially the big increase in the tax on employment – aka Employer’s National Insurance) to give the appearance that it will be able to repay the debt.

Most households are in a far worse position, since their only means of repaying debt – or, indeed, paying for life’s essentials – is from their income… mostly wages which have mostly failed to keep up with inflation. Corporations’ need to service their borrowing require them to pass on their increased costs (inflation and new taxes) to consumers (householders) who were already facing a steep decline in prosperity (the income left over once the bills have been paid). Government’s need to service its borrowing requires it to levy additional taxes on taxpayers (households) who have already seen their prosperity plummet. In short, the whole house of cards is founded – in the face of material depletion – upon the incomes of a mass of western householders who are increasingly unable to consume at the rate required to maintain our overburdened debt-based economy… a crisis of under-consumption indeed!