Should we spend or cut our way out of the financial crisis?

Such is the legend of the great recession. The greedy Bankiers had been using the Force of Credit to gain wealth and power, but in their hubris they played with forces too big for them to control, and a monster arose from the debts to wreck havoc. The world descended into despair.

We all know the reason for the current economic crisis? It was caused by banks and investors moving around money, tricking people; until we lost faith in the market. It was a bubble that burst. People lost money, and then they lost confidence. The solution for the crisis is to regain confidence, by increased government spending, or printing and dropping money out of helicopters.

But what if, this crisis was not caused by money magic gone wrong? What if the answer to this crisis is not through applying white money magic? Money is not real. It has certain usages. The paper version can be burned thus converting it to energy. Although not ideally suited, it can be used to wipe certain body parts. Money has no reality in it self, its importance steams just from a social contract allowing it to represent some value in the real economy. Money is the shades on the walls of Plato’s cave. You can certainly be scared of shades that you see on the walls. You can use the shades on the wall as a indication of a approaching crisis, say for instance a approaching bear…But the shades on the wall can never be a problem in it self. Can a crisis just origin from black money magic practises? Or is the current financial crisis an indication of problems, and instability in the real economy?

Already from kindergarten, our flower power generation teachers, has told us about the unfairness of the world, and the wastefulness of our western ways. To put it simply, if everybody where to consume as we, then that would require several times as much resources than available. The world’s current energy production level is around 15 terawatts (of which 85% are from fossil fuels), the average energy consumption pr. capita in Norway is around 8 kilowatts. If the energy consumption of China and India where to rise to the same level as in Norway, they would alone consume 134% of the worlds energy production. And yes I know it is cold in Norway, but air condition also consumes energy.

The good news is that many of the poorer parts of the world is developing fast, people within those countries becomes richer and increase consumtion. The bad news is that their raise in consumption, outstrips the worlds capacity to bring new resources to the marked. Demand for basic resources is increasing faster than supply, thus triggering price raises. We see this for energy, but also for mineral resources and food.

The energy sector is better off than the other sectors of basic resources. Yes, we will soon need to replace some of the fossil fuels because they are almost used up. But the Earth have vast untapped sources for energy, solar related or nuclear. We would need to scale stuff up a bit…The reactors of the old Swedish nuclear power plant Barsebäck had a energy production of 600 Megawatt. If we where to replace use of oil we would need to build around 10.000 reactors of that size. The world has currently has 435 reactors…We would basically need to be able to produce one new reactor each day for the next 30 years. It would require a drastic scale up of the industry, and probably also a rethinking of the value chains supporting it.

But energy is easy, food is hard. Food is under a double pressure. The demand for food is increasing, as people get richer they want meat. We produce meat through giving animals grain, lots of grain, grain that could have feed humans. Our capacity to produce food will also fall. Industrial food production requires good supply of water and fertilizers. In the largest food producers there have been an over consumption of fresh water, water tables are falling. The best scenario is that this over consumption (for example in the US) need be reduced, thus reducing food production; the worst case scenario is that some of our most efficient agricultural regions will be destroyed. Fertilizers mainly consist of Nitrogen, Potassium and Phosphorus. Nitrogen can be taken from the atmosphere and is basically unlimited as long as energy is cheap. Phosphorus is a highly limited resource that will only last us 2-3 more generations, prices are already rising.

In practical terms, for every new pork-chop eaten in China, it must be financed through a European eating one less. For people from Europe and the US, which have grown up with the idea of steady material growth, this will require a major and painful mental shift. What we have done so far is to postpone the pain through living on loans and credit, financed by the savings put aside by the developing countries. This can not continue, sooner or later the developing countries will start to use from their savings, sooner or later we will need to start paying our debt back. Let’s hope it will be sooner, because the longer we wait, the bigger will the pain be. For every loan financed pork-chop we eat today, we will need to pay back two in the future.

So should we spend our way out of the current financial crisis? Or should be focus on the austerity path taken by European countries? We must stop believing in the magic of money, and start thinking about economy as something simple. The current situation was neither caused by the bankiers, nor can we be saved from it by the bankiers. We must adapt our consumption to our capacity to produce; lending can never be a permanent solution for anything. The Earth as a whole do not have any lender to turn to. The sooner we accept this fact, the sooner we can get back to focusing on long term economic growth, extending our resource basis, as well as increasing the efficiency of how we use those resources.