Reality Report: global economy under stress (transcript)

MediaReality Report: global economy under stress (audio)

transcribed by Katherine Baldwin

Jason Bradford: Alright, we are back and Nate Hagens is on the line. How you doing Nate?

Nate Hagens: Good morning, Jason.

Jason Bradford: Good morning to you. Thanks for coming back on the Reality Report, and I'm going to start of by kind of giving people a summary of our show. It's a complex topic and I just want to go over what we're going to talk about, and then we'll talk about it. So the basic premise for our show is that the US and global economy will contract in the near future and we are discussing two main reasons for this. The first is a crisis of credit as a result of huge debt levels in the US, many of which are looking poor, including mortgage backed securities linked to declining real estate markets. Now, being bitten by defaults following cheap credit, banks will develop more stringent lending criteria and likely require higher interest rates on loans needed to attract investment capital. At the same time, the Federal Reserve will probably work very hard to ease credit by lowering the interest rates it controls such as the overnight lending rate of banks. However, lowering the cost of money by the fed will probably lead to higher inflation through weakening of the US dollar, which may also put a brake on the US economy since the US has such a large negative trade balance. Thus the Feds hands is somewhat tied compared to other historical crisis; furthermore, as banks fold, solvent banks will be reluctant to take on the risk of debts from banks needing capital, effectively forcing cutback in the number of loans being made. In summary, there is a real possibility of loss of market liquidity either by deflation or an expanding money supply with inflation rapidly eating away its purchasing power.

Ok, so that's the first part of this. Now the second reason for an economic slowdown has to do with higher energy costs. It looks as though oil has peaked and so the price isn't likely to decline significantly absent some economic contraction. So historically economic growth is highly correlated with energy consumption because energy is literally the motive force behind economic activity, such as mining, manufacturing, transportation, residential and commercial heating and cooling, and food production. Now while efficiency gains have cut down on the energy required per unit of economic activity, there is no precedent for an economy responding to energy contraction in any other way besides economic contraction. The rate at which prices increase or shortages develop is critically important. Slow and steady price increases that are foreseeable will be more manageable than rapid and unforeseen increases in shortages. In terms of the global economy, it looks as though current energy price increases have been unexpected by governments and businesses. Until recently, for example, the International Energy Agency and the Energy Information Administration of the US Department of Energy were anticipating ample supplies and low prices for oil and natural gas. Ok, now when the economy does contract, demand for oil may reduce. If demand reduction is greater than the depletion rate of oil supplies, prices will actually decline. Now this cheaper oil will signal to the market that alternatives to oil are not currently needed. On top of this, a contracting economy is a difficult environment in which to raise large sums of capital for sustainable alternatives. If you really don't understand what I just said folks, stay tuned. Nate Hagens is here to put this all in perspective for us, develop some possible scenarios, discuss the implications and consider what might be done about it. All in less than an hour. Amazing Nate, good luck.

Nate Hagens: Well, for a biologist you started it off pretty well.

Jason Bradford: Well thank you, thank you. For an economist, you know a lot about biology.

Nate Hagens: Well I'm not an economist; I studied finance and now I'm studying ecological economics.

Jason Bradford: Mm-hm

Nate Hagens: I think it's a broader view that humans, the economy is part of the natural system and not the other way around.

Jason Bradford: Yes.

Nate Hagens: Just starting off with this credit crisis which is happening right now; you're reading a lot about this in the papers. To understand this, we have to look at the role of credit in our economy. We need that to grow, and we need growth to pay off the debt. So a new business comes to the bank, and they borrow money. Then they pay it off next year and eventually the loan with interest and principle. The lynch pin of all this is a fractional reserve banking system. So as the economy grows, there are profits. When a new deposit is made into a bank, say 1,000 dollars, depending on the reserve requirements, ten or more times this amount leaves the bank via loans. So money and credit can be created out of thin air.

Jason Bradford: Yeah, the Fed sets what that fractional reserve requirement is.

Nate Hagens: Right. And this doesn't matter, it's not a problem, as long as loans are paid back in the future and the cycle repeats. So the last 30-40 years, especially the last 5-7, we've been on a generally huge expansionary credit cycle. We've had a few recessions, but nothing deep or lasting like the 30s. So after the dot-com bust in 2002, the Federal Reserve lowered the Fed Funds rate to 1%, but there was still several percent inflation at the time, meaning that the real rate, which is the Fed Funds rate minus the inflation rate, was negative. So people were actually borrowing money at a negative rate, meaning, essentially, there was free debt. So this made people feel richer than they were, and caused all kinds of long-term bad behaviors, both by the consumer and by the government and banking policy and the Wall Street crowd. What's happened recently is that lenders in search of making more loans, which were desired by Wall Street who was making money off them, offered loans at incredibly favorable terms to people who didn't really deserve credit, and many of which didn't understand the complex financial terminology of these mortgages.

Jason Bradford: Yeah.

Nate Hagens: And with rates so low, borrowers were a lot more concerned with their monthly payment levels than with the total balance outstanding. So to exploit this, banks offered a range of loans called "Neg-Am arms" which stands for: an arm is an adjustable rate mortgage, with negative amorization. So borrowers were offered low teaser rates for the first few years, paying less than the interest they even owed on their loan during that time, while the unpaid interest was added to the principal to pay some time in the future. This was the only way that someone could buy a $1.2 million house in some expensive California suburb, was to do it in this way; otherwise they couldn't afford to qualify for the loan. Often they signed these loan documents without understanding that in a couple of years these things were going to bump up, at the end of the teaser rate period. The full interest payment would be due on the larger principle at whatever the then market interest rate would be.

Jason Bradford: Right.

Nate Hagens: As interest rates have increased recently, monthly payments on these re-setting arms are going to, like, double in many times.

Jason Bradford: Right.

Nate Hagens: So what's happened is that over 50 billion of these loans will reset at higher rates, each month now, for at least the next year.

Jason Bradford: Wow.

Nate Hagens: So you have these mortgage loans. These loans were then repackaged in securities called CDOs.

Jason Bradford: What's that stand for?

Nate Hagens: Collateralized Debt Obligation and they were rerated by rating agencies in giant pools, pretty much as AAA, which is the highest rating you can get. Because 1,000 are much less likely to default than just one loan.

Jason Bradford: So it's spreading the risk of mortgage default, but it's also then making it easier for people to take on risk, in a sense.

Nate Hagens: Exactly, and what the Wall Street derivative crowd, I think has made a critical error; they've confused the spreading of risk with the elimination of risk, and the underlying assets were hundreds and thousands of mortgages on houses that had poor credit and a lot of leverage.

Jason Bradford: What's leverage?

Nate Hagens: Well, if you've ever owned a house, you know what leverage is. If you buy a $300,000 house and you put down $50,000 of your saved money, and you get a loan for $250,000, you're basically buying that house on leverage. We don't think of it that way, but if the value of the house goes below $250,000, your $50,000 investment not only is gone, but you actually owe more. Leverage has exploded on Wall Street in the last decade.

Jason Bradford: So it's using a small amount of capital in order to take on a large amount of debt. Nate Hagens: Not necessarily debt, but a large amount of exposure to something. For example, on our last show we talked about oil and oil futures. Right now, the oil futures are $96 a barrel, and one oil future's contract is 1,000 barrels of oil. So that's $96,000, is what the contract is worth, but you can buy that for about 4%. You can buy a contract for $4,000 and control $96,000 worth of oil.

Jason Bradford: OK

Nate Hagens: So leverage on Wall Street is just enormous right now, and anything that I say today is just a guess at how big it is. I mean, the Bank of International Settlements recently said that the world derivative market is over $500 trillion.

Jason Bradford: So it's like being able to, essentially, become a buyer for a scarce resource. Let's say, maybe it's oil or a limited commodity, or housing stock, without a lot of capital, but that pushes the prices up.

Nate Hagens: Right, capital's the thing that's going to be key here. That's what's been happening on Wall Street is the capital on some of these large banks, their asset accounts have been shrinking because they have so many loans out there that have been deteriorating in value. Like Citi Bank has gone, the stock, has gone from like 70 to 30 and they have a trillion dollar assets and liabilities, but if you break out everything they've got like $170 billion dollars in capital, of which a large portion of that is in what these CDOs and sub-prime and some of these collateralized debts obligations. Sub-prime, by the way, doesn't mean the prime rate, it means it's sub-prime -- a prime person would be someone with a good credit rating; sub-prime would be someone that doesn't have such a good credit rating.

Jason Bradford: So people with sub-prime credit ratings were given mortgages which were repackaged as AAA or credit, is that the problem?

Nate Hagens: Yeah, and now banks that have securitized these mortgages are finding that AAA isn't really AAA and they're kind of playing the game of hot-potato trying to sell these securities at lower and lower prices. The US real estate market is $13 trillion give or take, and $1 trillion of that is "sub-prime". That market has already been trading down from 100 cents of the dollar to all across the board, depending on the region: 50 cents of the dollar, 70 cents of the dollar. No one really knows the value of some of these complex securities; so much of the financial world has been following what's called Mark's Model, as opposed to Mark to Market. So they have these complex models that say, well this is what the security's supposed to be worth, but we really don't know till it trades. All of a sudden, nothing trades for two weeks, then all of a sudden, there's a trade at 30 cents.

Jason Bradford: That's the new price level.

Nate Hagens: Yeah and there's a positive feedback level on all that. Same thing in a real estate community. If none of the houses in your neighborhood sell and the recent comp was $300K, everything's kind of valued at $300K. Then all of a sudden Joe next door says I need money, I sell mine for $220, then everything else is valued at $220. So this is the kind of positive feedback mechanism, in a negative way that we may be facing. So far already we've had upwards of $50 billion of write downs among Wall Street firms. But there's a growing concern that it could spread well beyond what's already happened, and all this is happening, as you mentioned, at a very precarious time in the energy world as well. So it's pretty bad timing and I think we're headed for a recession or worse quite soon.

Jason Bradford: What's the difference between a recession and the D-word, the depression?

Nate Hagens: Well, those are often much confused concepts. A recession is negative growth for five consecutive quarters. A depression is when people are really bummed out about it. No, um, a depression, if you ask a hundred different economists you'll get a hundred different answers probably, but the general sense is depression is longer, and it's deeper and the reality is that we haven't had a depression - at least in the United States, in over 70 years. The Great Depression of the 30s was really two separate events. There was an incredibly severe depression from August of 1929 to 1933 where GDP declined 33%.

Jason Bradford: Wow.

Nate Hagens: And remember, over 30% of the banks in the United States closed their doors in those four years, meaning people went there, couldn't get their money out. That did happen. Then there was a small period of recovery and then there was a less severe depression in '37 and '38; but, we haven't had anything close to a depression in the last 70 years. The worst recession we had was from November '73 to sometime in '75 when GDP fell by 5%. So I think we're standing, in my opinion, near the top of a giant bubble, and I'm quite concerned about it.

Jason Bradford: Yeah. Now, you said something about $13 trillion total real estate market. Only $1 trillion of that is in sub-prime; it's hard to understand, then, what the significance of that is. I mean, how does that compare to the stock and bond market? How are they related? Does the risk have to do with the fact that things are leveraged? Help me figure this out.

Nate Hagens: Well, yeah. The total market cap of all the companies in the world is about $50 trillion. We've got residential real estate, which is $48 trillion; commercial real estate $14 trillion; government buys $20, corporate buys $13. There's like a total of $115 trillion of, roughly - that number's actually a year or two old, of assets, as it were. So if you look at it that way, real estate assets make up over half of all the financial assets; stocks, bonds make up the other half. So in the US, the GDP is around $13 trillion, which is about the same size as the real estate market, and corporate profits are only about 10% of that, or $1.5 trillion. So if you take a sub-prime - and remember that this isn't just confined to the sub-prime market, I mean the other mortgages are having trouble as well because the real estate market has already dropped. New home sales have dropped in price over 10% already in the last 3 months.

Jason Bradford: Oh wow.

Nate Hagens: The existing homes are down a little bit less than that, but, again, all this has happened to the financial companies on Wall Street. It hasn't happened in real life yet, in the United States neighborhoods because things haven't -- it takes a while for that to play out. The scary thing is that we don't know where the leverage is. I mean, all those numbers I just showed you pale in comparison to the $500 trillion of derivatives.

Jason Bradford: Oh my gosh.

Nate Hagens: Yeah.

Jason Bradford: So it's like three times, three and a half times.

Nate Hagens: No. It's five times the total world wealth is denominated in Goldman Sachs owes Citi Bank some credit default swap. "I have ten-to-one on this mortgage" I don't think people can really get a good grasp on that, but I will tell you this, when people are seeking dollars and they want out, things could go pretty fast as far as everyone -- This game of hot-potato. In the past the Fed has been able to do something about it, right? But here, I'm concerned that their ability to intervene may be limited. The thing that's logical is if some of these large banks go under, that the Fed will step in and bail them out. But how do they do that? They do that by injecting more money into the system, by printing money, by lowering interest rates, and you know the savings and loan debacle in the 90s was like $150 billion total.

Jason Bradford: Wow.

Nate Hagens: So the magnitude of this problem is greater.

Jason Bradford: So one of the big problems then is there's so much uncertainty of the magnitude of it and who really is at risk here and what the level of the risk is, and it's that uncertainty itself which then causes nervousness, which then causes positive feedback. Is that true?

Nate Hagens: Right. I mean, I think even now, you're seeing on Wall Street it's not so much the facts that I just laid out, although those are scary, it's a crisis of confidence. My friends are mortgage brokers; they sell and trade these products, and everyone is just very scared. They don't know; they're losing confidence in the system. I think the average stockbroker doesn't have a clue about these things yet because they're looking at Bath and Body Works, and Michelin Tire, and stocks like that that haven't yet been affected by how this is going to impact the consumer down below.

Jason Bradford: So who stands to lose if this continues to unfold then?

Nate Hagens: Well, the whole economy is going to go down, which means there's going to be less. See what happens in a credit crunch is you can't borrow money that you used to be able to. A lot of this exuberance was led by people borrowing and using their homes as ATM machines. That's pretty stretched out. I mean, the amount of debt in America, by household alone, is at record levels. So who stands to lose is -- We need confidence in the system, we need economic growth and we need the ability to borrow money. So its people at the margin that need to borrow money to buy a house or that work at a company that's economically linked, and 70% of our economy is consumer goods related. So everyone stands to lose. But people that are in the lower half of the economic strata are probably going to be worse off. Incidentally, I heard an amazing statistic the other day that 1% of Americans -- the top 1% of Americans have over 51% of the wealth; meaning that 99%, the other 99% have the other 50%. This ratio has never been this high, except it got to 49%-ish in 1929 and that's kind of a scary parallel.

Jason Bradford: Yeah.

Nate Hagens: But I think this trend's going to continue to happen. The median household wealth in America is about $62,000. That's not insignificant, but the top 1% average wealth is $12.5 million.

Jason Bradford: So they can take quite a drop in their wealth and still have the basics.

Nate Hagens: Exactly. So if we go into a steep recession or a depression, almost half of American households spend more than they earn each year and 60% don't have (it's around 60%) don't have enough savings to last them 3 months if they were suddenly out of a job.

Jason Bradford: Right.

Nate Hagens: So, you know those pictures that we saw of people standing in bread-lines and stuff in the 30s, yeah, I hope that doesn't happen, but I can see that happening.

Jason Bradford: Now what about people who have -- their house is paid off or they're able to maintain their mortgage payments during this crisis. Are they buffered to some extent, or how might they still be affected?

Nate Hagens: Yeah, they're buffered to some extent, but remember there's a positive feed-back that happens here. Banks are going to have to put on the break big time. I got a call last week because I bought a computer and I spent a lot of money at Gander Mountain on my American Express card. I pay on time, I have good credit, but I spent like $6,000 in like three days and they called me and they said I can't use my Amex card anymore, until I pay off that. I was like, but it's not even due yet; they're like, yeah, well there's new rules now and we're not going to let people run up balances without having them pay it off immediately. Starting in January they're going to really -- I don't know all the details, but I mean, think about how vital just being able to have credit is. If banks, like I said earlier on, if they create money 10-to-1 out of thin air when they're expanding loans, what if they're retracting loans. It works in reverse and we're reducing credit and money 10-to-1 when they call them in.

Jason Bradford: Right. Well that brings up the issues of, are we going into an inflationary period or a deflationary period? Why don't you explain what those are and what the risks are of each of those?

Nate Hagens: Well, for the longest time we've been in this lightly, moderately inflationary period. Since the early 80s we've been like 2% or 3% inflation, which is good for everyone because you make money and you can still buy things and there's still profits. I think we're at a fork in the road and I don't know which way we're going yet, but I believe we're going massive inflation or deflation and both have risks. Basically inflation means you make more money, but the things that you have to buy cost more and you can't keep up. I mean, that would be a lot of inflation.

Jason Bradford: That'd be uncontrolled inflation

Nate Hagens: Right, well, as opposed to hyperinflation like Weimar, Germany where within months you needed a wheelbarrow full of money just to buy a loaf of bread. The government just kept bringing money and it was basically worthless. Now deflation is where you make less money, and goods are cheaper, but the amount of money you're making is less and less. I actually am in the camp that we've had so much credit expansion that the reversal of that is going to first lead to deflation and there's going to be a recession/depression. Money is going to be king for a while - cash that is.

Jason Bradford: Because if you have it in hand it's useful, whereas no one's going to trust the electronic stuff?

Nate Hagens: Well that gets into the question of whether banks fail and whether people get their money out. Last month there was a Northern Rock Financial in Scotland and there were lines and lines to get money out and the government bailed them out. So you ask if we're going to have inflation or deflation; I think it depends on what our government does. To me, I think the best -- I think we ought to take our pain now. Now would mean allowing banks, and hedge funds especially to fail. Clean out the system, let it start up again. But I don't think they're going to do that, I think they'll bail them out. They'll print money and then we get the other-- See all this is happening at the worst possible time. Given a normal environment without peak oil and everything else, this would just be another boom or bust in the economy, but what's happening now is if they do print money in order to inflate our way out of this problem, then the trend that's started recently of lack of confidence in the US dollar will accelerate.

Jason Bradford: Right. That makes me think about people looking into hard assets like gold or commodities. Would these be the direction that the market or people might flock to in this situation?

Nate Hagens: Well, in a deflationary environment all commodities go down because the demand is crushed because the economy is so low.

Jason Bradford: Because no one can buy, so the value has to drop in order for somebody to be able to buy.

Nate Hagens: Well, I mean, whose going to be making tons of jewelry if the economy is down 10% or 15%?

Jason Bradford: Right.

Nate Hagens: So, again, I don't know which way we're going to go. Gold has historically been a store value in times of crisis until people figure out what the next store value is going to be. I know -- this might be getting too far afield but -- remember, right now this whole system, not only the United States, but the whole OECD nations is based on fiat currencies, fiat money.

Jason Bradford: What is that?

Nate Hagens: I'm sorry?

Jason Bradford: Explain what that is for people.

Nate Hagens: Until the 1970s, we had a currency that was backed by something real and the Bretton Woods arrangement in the 30s, we had $35 and eventually $40 worth of gold backing every dollar*. In the 70s they went off of that. So a fiat currency is basically something that exists and has value only because people agree that it has value. Right now we're in a precarious situation because the United States used to be the largest exporter and producer of natural resources like oil, and now we're bar far the largest importer. So we're importing things and consuming them while other countries that have a lot of resources, specifically oil, are exporting them to us in exchange for dollars. But if the dollar has a crisis of confidence that we're going to continue to bail out companies just by printing more and more dollars, these people are going to not want to denominate their things in dollars anymore. You're already seeing this happen in the Middle Eastern countries and Venezuela. They don't want to denominate oil in dollars anymore.

*Note from Nate Hagens: When seeing it written out that way "$35 of gold backing each dollar" is obviously ridiculous. I meant to quote the number of grains of gold backing each dollar which equated to around $35 per ounce of gold, but in a radio interview, when the microwave is dinging and the dog is barking and a chickadee runs into the window, sometime ones thoughts get garbled en route to the mouth. Plus my subconscious mind knew I didnt know the number of grains... The essential point was we used to have something tangible backing our currency and now we don't.

Jason Bradford: Sure. They talking about Oil Borse or basket of currencies, our Euros.

Nate Hagens: Right. You know, one way to look at it is that there's four people on an island, three foreigners and an American. One of the foreigners has to find the food, one has to procure the food, one has to cook the food and the American has to eat the food.

Jason Bradford: Right. On credit.

Nate Hagens: On credit. So they may at some point, you know everyone's happy, until the three recognize that the American isn't really doing anything that they couldn't do themselves and then they start to re-think their business plan. Except for the one caveat is the American is the only one that has a gun.

Jason Bradford: [laughs] Alright, well you're listening to KZYX Philo KZYZ Willits and Ukiah, this is the Reality Report. I'm your host Jason Bradford and our guest today is Nate Hagens. We're discussing the stresses on the US and Global financial systems and possible implications for responses to peak oil. Nate is a former Wall Street investments manager and has an NBA from the University of Chicago. He's completing his doctoral studies at University of Vermont's Gund Institute for Ecological Economics. Nate is also an editor for the Oil Drum, an online source for news analysis and discussions about energy and our future. That's theoildrum.com. Well Nate, we started tying this to energy via OPEC and the dollar. Let's do this more deeply. How do you think this is all linked to oil and energy?

Nate Hagens: Well, given how cheap oil's been historically relative to its real value to society, a recession or a depression right now would make alternatives and future oil production less financially viable. So if we do actually have what some people fear in the next few years, I actually think that will cement peak oil as a historical event. In other words: oil's priced at the marginal barrel, it's not priced at the long-term scarcity, in my opinion, and we've been writing about this for a while.

Jason Bradford: So explain about the marginal barrel, you kind of say that a lot. What does that mean?

Nate Hagens: Marginal barrel. Right now we've used about a trillion barrels of oil and there's about a trillion left, so that second trillion is much harder to find, refine, etc. But it doesn't matter how many are left five years from now, ten years from now, because next month is all we care about. There's plenty of oil next month, in fact, there's more than enough to supply and there's just stuff sitting around that has nowhere to be stored; the oil price could go down to $50 a barrel because we have no mechanism of really storing it. If demand destruction due to a depression or what-have-you causes the demand for driving, vacations, etc to go down more than the supply of oil is going down, the oil prices plummet -- even though they're scarce.

Jason Bradford: Right, even though there's less oil available in the long term.

Nate Hagens: Right. That's kind of the whole point here is that the market and human policy decision makers care about the present.

Jason Bradford: So the short-term thinking is embedded in essentially the financial system and in the markets.

Nate Hagens: There's two camps right now on peak oil. Some people think we've peaked or are about to peak, and others think it's not going to be 'til about 2030 or so because there's a lot of oil in the ground. I won't get into the specifics about how those two camps differ, but it's almost like a theoretical versus practical argument. In either case, if we have a depression now, oil goes down in price. All these new projects - the Mega projects in Kazakhstan and the Arctic and the Gulf of Mexico and some of these things that are very expensive to do are going to be moth balls. All these great initiatives in solar and wind, which are not liquid fuels but they're going to help, they're not going to be very profitable if energy prices collapse here due to demand.

Jason Bradford: Well you see that. They say that, you know, the reason this project is going forward is prices are high, we think they're going to stay high; therefore we can afford to invest this many billions of dollars over this many years.

Nate Hagens: Right, and all of a sudden if prices give the signal that they're going to be low for a while, they're going to say "ah, well we'll wait till they get high again and then we'll do this project. The problem with that is once our normal boom/bust cycle comes back in 2010/2011, we start to reload in the economy, then the world-wide depletion rate of existing wells that are on the tail end of their production life will then be that much greater. Instead of 2% or 3% net decline rate, we'll have 6-8-10% and then you can't build up alternative energy sources fast enough.

Jason Bradford: Right. Wow, it's sort of interesting because in some ways I thought about it as a credit crunch is good because people would have less demand for oil. We'd have a way of forcing conservation, in a sense. But you're saying it's deceptive.

Nate Hagens: I mean, we would have preferred that it happened voluntarily or through government policy rather than an over-extension of our credit purchases and, you know, shop-until-we drop.

Jason Bradford: Right," shopacalypse" as that new movie talks about.

Nate Hagens: Yeah, I've heard about that.

Jason Bradford: But if it's happening because of the markets failing and giving the wrong signals, and it's not a government policy or market players coming together and saying, you know, we need to price oil for the long-term and have a consistent pricing on this and be open and transparent on our reserve and production data going forward; that doesn't happen then we can have the scenario you're putting up.

Nate Hagens: Well just imagine two years from now that we've had negative GDP, the stock market's sold off, we're kind of in a steep recession and people say, "oh by the way, fossil fuels are becoming scarce, we're going to add a two dollar gasoline tax to everyone." No politician would ever consider doing such a thing. They're going to try and put out the fire that we're sitting in first before they deal with the volcano and that's why I'm very concerned about the macro picture, because of this. I don't know what the answers are; I mean, I know what the answers are; they're just not going to happen.

Jason Bradford: You're just worried, as you said, politically because we're so tied to short-term politics and short-term reward systems – on personal level even. I mean, the US doesn't have a savings rate, a significant - that entire culture, then, will have trouble responding to the long-term interest.

Nate Hagens: Exactly.

Jason Bradford: Why is it the average person seems to care so little about energy and so much about dollars? There's so much focus on money and not these energy issues which are the basis of our economy.

Nate Hagens: Our entire generation, and even my parents generation were taught that dollars were the scarce resource and you should make more dollars and dollars can buy you anything. That's, for the most part, been true, unfortunately. But as we talked about one of the prior times I was on your show, I believe that over time, hopefully later rather than sooner, there's going to be a - just because we need time to make this transition - There's going to be a diversification away from strict financial capital, which is how people measure their wealth now, to a portfolio of more holistic capitals like: some financial capital; built capital, which is like a windmill; social capital, which is what you're trying to do in will that's there; human capital, which is knowledge; and natural capital, which is including our ecosystems and fresh water and soil. And someone considers their worth as an aggregate of all of that stuff rather than how many digits they have in a bank.

Jason Bradford: It's a lot easier to keep track of the digits.

Nate Hagens: It is; it's true. The other thing is, education and examples have not really helped much. I mean, we see advertising show us that our worth as a human being is somewhat correlated with the power that we have and the amount of stuff that we've been told will make us look cool. That's a problem.

Jason Bradford: We have such a society bent on economic growth, and the expectations are for that. You seem to be indicating that it's going to be very difficult for us to grow in this environment anymore. Do you think that with less energy available it's possible to grow?

Nate Hagens: No. I mean, I know it sounds a little radical, but I think one of these times, and it could be now, we could be seeing the end of economic growth. Maybe 10 years from now, because net energy, as we've discussed before, is energy left after you use the energy necessary to procure it and deliver it to society. We have peaked in net energy per capita 20 years ago, and what's happened during that time is the disparity between the have and the have-nots has gotten greater; therefore, we've still had economic growth because we've sort of borrowed from the environment and the third-world countries. At the latest ASPO conference in Houston, Robert Hirsh, who is a very respected economist and analyst who was commissioned by the Department of Energy, gave a talk saying that peak oil means peak economy, forever. Granted, we need energy to grow. We can't just have -

Jason Bradford: Efficiency.

Nate Hagens: Well, that's true. Technically if energy available declined, we still could have economic growth if we had efficiency improvements, conservation, and stealing more from the poor. But those things you can only take so far.

Jason Bradford: So that's the debate, is how much more is there to be gained from theft from the poor, efficiency gain and extraction, basically.

Nate Hagens: Well, the point is, we need to conserve and we need to improve efficiency, and we need alternative energy sources. We need it all; but ultimately we need to change what makes us happy and we need to recognize the difference between needs and wants.

Jason Bradford: Right, and not just be exploitative all the time and think, "oh that's great, we just grew, we just enhanced our progress here". But for the long term it was detrimental.

Nate Hagens: That's right. So I, I mean I think it's possible that we are nearing the end of economic growth and it's such a shattering concept to get your mind around, but if you look at energy as the driver of growth, we didn't grow hardly at all before 1700. Then they found coal and you just shot up, and then we found oil and shot up, and what are we going to go to next. Possibly wind and solar, but that's a big, big infrastructure change that we need to invest in local communities. We need to move our manufacturing base back to domestically and all this needs money and assets and energy and scarce resources which this credit crunch is going to take our mind away, take our eye off the ball of energy and focus on getting people jobs and feeding people and such. I mean, if it takes that course.

Jason Bradford: So it doesn't sound like we can do much to prevent this from happening. You think this is just going to roll out with the credit crunch right now, is that right?

Nate Hagens: Well, there are bad policies and there are somewhat less bad policies, I mean choices that the government can make right now. I think if we start to bail everything out, that pushes off the day of reckoning, but makes it worse. I think there are certain things that can be done on an international policy scale, but the US is a little bit hamstrung because of our deficit. The US has a $9 trillion dollar deficit; but if you count all the unfunded liabilities -- pension, social security, everything, our deficit is $59 trillion dollars which is $500,000 per household in the US. So that doesn't give us a lot of options to be printing money and taking on more debt.

Jason Bradford: Is that worse than other industrial countries?

Nate Hagens: As a percentage of GDP, it's not. We're ranked like the 35th as far as debt-to-GDP; but as an overall amount, it's by far the biggest in the world.

Jason Bradford: OK. So to prepare, as individuals, as communities, you have any suggestions?

Nate Hagens: I think you do your own research. You sit down, preferably away from the influence of radio, TV, friends, and talk to someone that you really trust, long-drawn out. Really making anyone happy? In the end, we talk about the credit crunch, we talk about peak oil, we talk about energy, we talk about global warming, resource depletion; the answer to all of it is changing what we want and changing what we're addicted to-- to something that's lower footprint, healthier for us and more enjoyable. But that's a huge task to do that.

Jason Bradford: So find healthy addictions, in a sense.

Nate Hagens: Yeah, find healthy addictions, of which I could name a few, but -

Jason Bradford: You're pruning garlic, I know. Is that you're new addiction, gardening a little bit?

Nate Hagens: Well yeah. I mean, gardening is physical and I'm actually knowing that maybe there's a chance I won't be able to buy all this flavorful garlic somewhere next year and maybe I can give some to my neighbor. I put in 85 heads, so that's like 500 cloves of garlic.

Jason Bradford: Yeah, nice.

Nate Hagens: Yes, and that gave me pleasure when I could have been in here on the internet doing whatever. But that's the ultimate, and I know you know these things because of what you're trying to do there is build communities, don't take everything for granted that we hear in the media (of course this is the media that we're talking on, but) think for yourself because the history of the last 60 years is kind of a one-time event in my opinion, and things are about to change.

Jason Bradford: Yeah. I sort of think about trying to lower ecological footprint which is-- You know, lower consumption is the easiest way to do that. But also then, become productive, in a sense. Produce what's important and vital in life and get that sense of security of doing that, develop those skills, that human capital you're talking about and try then to encourage others to do that so you have a community that's more self reliant and more skilful, and build community cohesion while doing that. So all those things.

Nate Hagens: I think that's right, but, not to sound crass, but you're only going to do that, you're only going to convince people if they can see it for selfish reasons. They're not going to listen to Jason saying, "you need to lower your ecological footprint", because that's not going to do it. If they realize that that's going to make them happier and healthier, then they will do it. So I think what needs to happen, I mean, it may be we need a depression led by credit crunch or something, to slap us upside the head and say, "wait a minute, this way of life wasn't working". The other problem here is that we've basically - This whole cycle of expanding credit and substituting cheap Chinese imports for our manufacturing base, is all of our major manufacturing has gone over-seas. So if we decide to do this locally, we've got a lot of work to do.

Jason Bradford: Yeah, some places are better off than other regarding that.

Nate Hagens: Yeah, that's true. California, you guys grow a lot of the food, so at least - But then again a lot of that is mechanized agriculture, too, so I'm not sure.

Jason Bradford: Well, let's think big picture for just a second, as we end the show, we've only got a couple more minutes left. Why does this happen? Why do people get into these sorts of problems and anything we can do to avoid it in the future?

Nate Hagens: I think we get into them because it's the natural evolution of an incredibly successful species that found a giant energy subsidy. As we discussed before, every barrel of oil - I mean, the amount of energy that an American uses is like having 700 slaves behind them every year, so -

Jason Bradford: Without the social problems.

Nate Hagens: I'm sorry?

Jason Bradford: Without the social problems - of slavery.

Nate Hagens: Right, right. So we have 700 energy slaves, and then we've also got this gigantic shmorgage-board of novelty to choose from. I believe you discussed having me on in a future show to discuss addiction and novelty and how this all plays a role, but real quickly, we very quickly habituate to something that we have come to expect to experience. Therefore, we need something a little bit more to get our juices flowing and to feel alive and to feel happy and motivated, and this knob only goes in one direction. The volume knob turns up and up. So you go from driving a car to driving a Mercedes to renting a corporate jet to having a corporate jet, blah, blah, blah. If you've got unlimited energy to subsidize those activities, peoples desires are going to escalate as opposed to simplify.

Jason Bradford: Right.

Nate Hagens: That's at the heart of this all, and it's going to be a massive social experiment to get people to change the metric that makes them feel successful. Right now it's money; I have $6 million in the bank, next month I have $7 million. I feel like a great success. First of all, there's a very real chance, greater than zero, that you might never be able to see that money, meaning if the banks close, etc. Secondly, once you get to $7 million, then you want eight; once you have eight you want ten; where does that stop?

Jason Bradford: Right, well I was playing Bruce Springsteen at the top of the show and he has a line and it goes: "poor man want to be rich, rich man want to be king, and the king ain't satisfied till he rules everything".

Nate Hagen: There you go!

Jason Bradford: We're going to have to end it on that and have you back to go into that deeply next show. Thanks so much for spending the hour with us, Nate.

Nate Hagen: You're welcome.

Jason Bradford: And thanks for listening to KZYX in Philo and KZYZ in Willits and Ukiah. This has been the Reality Report and I'm your host Jason Bradford. Our guest today was Nate Hagens and we talked about the US and global financial system and possible implications for responses to peak oil. Check out more at www.theoildrum.com where Nate is an editor. Thanks to our underwriters today "Dirt Cheap Landscaping and Garden Supply" and "Real Goods", our members and Craig Norris for coming in to engineer.

MediaReality Report: global economy under stress (audio)