The True Victim of the Depression

We read an article from the International Herald Tribune which we found laughably uninsightful. Mr. Stephen Schwarzman, CEO of Blackstone Group, remarks that the world has lost about 40% to 45% of its wealth. Our cynical side wonders if he is covertly commenting on his personal portfolio, but we assume he is being honest in his estimation of the drop of the world's 'wealth.'

Even if Mr. Schwarzman's number is accepted as reasonably accurate -- which we do -- his comment is purely nonsensical: the 'wealth' he refers to was never real. It was perceptual wealth; it existed only because at least two people at the peak of valuation said it did: the credulous buyer, and the less-credulous seller. This fast-evaporating 'wealth' was patently illusory, as it had all the substance and reality of a mirage.

Beyond this basic falsehood of Mr. Schwarzman's comment lies the big, black truth that no one likes to think about. Depressions are not necessarily about destroying wealth; rather, they destroy excess. Excess demand, excess consumption, excess space, excess production, excess capacity, excess valuation, excess credit. These are the things upon which a depression feasts; nothing so trite and pedestrian as perceptual wealth. The most destructive feat of a depression, though, is how effectively it can eliminate productive capacity of an economy.

Within this destruction, though, is a major problem. All depressions of the past have occurred when energy was not a limiting factor. The populace did not wonder where the energy to renew the economy was going to come from. It was tacitly assumed, and rightly so, the energy necessary to rebuild economic activity was abundant.

We opine such a comfortable assurance is not present in the 2007 Depression. Demand destruction in world-wide oil consumption is a given, and some have mentioned that it is an end to the Peak Oil debate. We beg to differ: this destruction has guaranteed Peak Oil is upon the world (whether from the limits of Nature or the limits of Humanity is immaterial). The oil industry -- from whence the lifeblood of industrial civilisation flows -- is in danger of irreparable harm, as Simmons & Company International reports.

With the severe downturn in oil use, many oil wells, rigs and refineries are being spooled down... permanently. Most of this equipment is utterly antique, and can never be restarted at any cost; it is too rusty and too run-down, and needs to be replaced. On top of that, vast swaths of the industry's ageing workforce are retiring, and there are not enough new workers adequately trained to replace this loss of hard-earned talent.

At some point in the not-too-near future, the hard and unyielding ceiling of oil production capacity will become painfully apparent. By Simmons & Co.'s estimation, it will take upwards of $100 trillion to rebuild the world's energy production facilities, and make them a viable entity for the future. We have the suspicion that the money, the interest, and the labour will never be found. Too many people seem to believe that the oil industry is a profit-squeezing monster - instead of the abused and starving industry in danger of utter collapse it is.

The Coming Energy Bubble

In the present period, it seems that many bubbles have been pricked, and are contracting. It brings to mind some beautiful high-speed filming we've seen recently on YouTube: a person holds a balloon filled with water, and then pricks it with a pin. The rubber almost instantly contracts, leaving the person holding a shimmering sphere of water for the briefest of moments. Then, inexorably, the water descends, leaving the person very wet...

The bubbles in various markets have indeed burst, but the 'water' has still not yet lost its bubble-like shape. However, we are uncomfortable saying that the era of bubbles is completely over. Indeed, we have the suspicion there are a few more, even bigger bubbles out there, awaiting the funds of the tragically credulous.

In our opinion, one big bubble of the future will be energy. There is less and less of it in the world every day... although this is nothing new. We feel that, sometime in the near future, the average person will become aware of this increasing scarcity -- Peak Oil, Peak Natural Gas, and Peak Coal. This will mark a vast change in the perception of the common person toward energy: no longer will energy be a vague thing that 'might' become scarce in a century or so; rather, it will be perceived as a very real thing indeed.

Inexorably, the credulous will invest in their perceptions, and so will the market value of energy and the companies which produce it go up. Perhaps it will be a proportioned rise in value, as compared to scarcity... but we doubt it. No, we expect a bubble to rival, and exceed, that of the California real estate bubble, the U.S. dollar bubble, and whatever other bubbles one would care to mention.

The reason people will likely throw so much money into energy is simple: human civilisation subsists on energy. It's a good 'story,' and the credulous like to invest in a good story; one only needs to look at the internet bubble -- remember that one? -- of a decade ago. Don't get us wrong: we strongly believe that energy requires some serious investment. However, we expect that the sheer volume of return-chasing one will see will be far out of proportion to the need.

Peasant Virtues

As our income has fallen, we have been trying to rediscover the skills our ancestors used to manage their financial affairs. We break the skills into three sets: Industry, Frugality, and Thrift.

Industry is not here referring to factories and mines, but the idea of doing things for one's self. Hungry? Don't run to McBurger Kong, but make a meal for yourself. Cost of fresh food got you down? Grow some. The basic principle here is what economists call import substitution. Instead of importing goods and services into your household and exporting money, you substitute the fruits of your own labour (sometimes literally) for what you would buy from others.

Industry is also about figuring out what you can do to make extra money, on the side - if you still have a job, or as self-employment. Lots of things always need doing. If you can't figure out what to do to make money, keep busy around the home - chances are there are many worthwhile projects. Also, you may teach yourself some marketable skills.

Frugality is all about enjoying what you have as long as possible before you replace it. And when you do replace it, do that as inexpensively as possible. Let's suppose you have an article of clothing, say a sweat-shirt, and it's getting a little ratty on the collar and cuffs. Does it still keep you warm? Then keep it! You might say, "But it's shabby." Listen: a new one costs money (even if you make it yourself), and this one is free. Any money you spend is infinitely more money than not spending money. A new thing is not infinitely better than an old, shabby but serviceable thing. When you spend money to replace something which still works, you are being irrational. It's OK to be irrational now and then, but don't try to pretend that you are being rational by coming up with reasons that the new thing is better.

When it comes time to replace something, go first to rummage sales and thrift stores. Often you can find very good quality things at minuscule prices. Frugality is also about finding which stores get you the best prices, finding the best deals, conserving energy, and repairing things as cost effectively as possible.

Thrift has two components. The first is to look at money coming in as something to be saved, not spent. This is, for inhabitants of the developed world, counter-cultural. One hears countless messages to spend from family, friends, coworkers, employers, salespeople, and marketing. If your financial situation is not so good, the more you save the faster it will improve.

The second component of thrift, which answers the question of where the best place for most people to put their savings, is: Never, ever borrow money. People have gotten very lax on this in recent decades, and the results have been catastrophic. If you are fortunate enough not to have burned by your debts so far in the Depression, don't take any more chances. When all your debts are paid, you may then delve into the joys of learning to invest your savings. On this last point we must insist that you learn to manage your own affairs, and not leave the decisions to 'experts'. The experts have done very badly lately.