Editor”s Note: Last month we presented an interview with Nicole Foss that arose from our having met her at the ASPO conference. Contributor Helen Loughrey took that assignment and presented a very readable short interview with Foss, aka Stoneleigh, the co-editor at . This month we present the full but unedited version of that interview. Go get a cuppa Joe, and settle in. It takes a while to read. But we think Foss fans will find it worth it.
Loughrey: Of the three storms threatening our modern way of life – Peak Oil, Climate Change and the Economic Crisis – you focus your attention at The Automatic Earth on the third, less widely understood economic storm, specifically deflation. Your career background is in energy and Peak Oil, so why make the economic storm your main focus?
Foss: We were starting to write about finance at the Oil Drum Canada because the time scale is so much shorter than any kind of changes in energy supply or demand. We decided to put the primary focus on finance at The Automatic Earth because of the time scale issue. It doesn’t have to happen tomorrow but the thing about deflation is you often get a certain amount of notice but you never know when it can suddenly go into high speed and it can take you almost by surprise. In September 2008 we came within hours of the global banking system seizing up and so that’s how quickly it can unfold. That’s why we warn people that you can afford to be early preparing for deflation but you simply cannot be late. We want people to prepare soon enough so they don’t lose what they have in the systemic banking crisis. If they are prepared, then they will have the resources to fight the next challenge that comes up, peak oil and climate change. They have to get through the deflationary period if they are going to retain the freedom of action to deal with those crises. Because money is choices: if you have no money, you have no freedom of action, no choice in the world. You are completely at the mercy of what life throws at you.
In the short term the repercussions of the economic storm come faster. In the longer term, the energy storm repercussions will be massive. Actually the finance storm will buy us time in energy terms because demand and price will fall a long way. We will be swimming in energy for a couple years while demand is low. But this also means there will be no additional investment no exploration no maintenance which means the when the energy crisis hits, it will hit with a vengeance. So finance is rewriting the way the energy debate plays out.
Loughrey: Your message is that a severe depression – much worse, and lasting longer, than the 1930’s – is arriving soon due to the ongoing collapse of the credit markets. The government claims to have averted that scenario with the bank bailouts. Wall Street has rebounded with a DOW back up over 11,000. How do you respond to their official pronouncements of a recovery?
Foss: The recovery is an illusion. The measures appear to have worked because there was a stock market rally to support them. Rallies are kind to governments and central banks. They allow their interventions to appear successful because there is a public suspension of disbelief that supports their actions. But this rally is topping and is now very close to a sharp move in the other direction and that is going to undercut support for government policies. If you remember, none of what Hank Paulson did in 2008 worked at all because we were in a declining phase at the time. Declines make central authorities look completely inept. Nothing they do gets any traction. Once we turn the corner into another decline, then nothing they do is going to appear to work. People are going to get angrier and angrier with government.
Loughrey: Many in the peak oil community believe that our current economic woes are the result of an energy price hike a few years ago. You point to other economic causes instead. Why was the energy price hike not a major cause of the recent economic downturn?
Foss: If you look at what happened back then, stocks topped in late 2007 but oil topped in mid 2008. The speculative bubble in oil prices was hot money trying to get out of stocks to find some other place to make money. The spike in mid 2008 to $147 per barrel was a massive speculative bubble. We said at the time that it would be followed by an enormous price crash and it was. This smaller speculative bubble will end the same way. Prices could go down quite sharply as low as $20 a barrel. There will be people who say that this oil price bubble will have caused our looming economic problems but that is not the case. Finance changes happen first. Peaks in energy typically follow peaks in stocks.
Because financial bubbles are Ponzi schemes, and are therefore inherently self limiting, they reach a top and they crash. What happens in the energy sector to oil prices tends to be a consequence of a financial crash, not the cause. Look at what happened in the thirties: the U.S. was the global swing producer for oil; they had a continents worth of the stuff. The only thing they did not have was money because they had a credit crash. You had a massive depression that lasted for ten years because you didn’t have enough money in the system and that is exactly what is coming again. The mechanisms are very much the same. You don’t need to postulate a shortage of energy to precede a financial crisis. Going forward shortages of energy will put a hard lid on any recovery and it will set up very serious political ramifications for resources grabs around the world.
Loughrey: You recently gave a speech at the annual Association for the Study of Peak Oil [ASPO] conference in Washington DC. As a former editor of The Oil Drum Canada, much of what you had forewarned about the banking system has since come to pass. How well is the peak oil community receiving your economic message these days?
Foss: They asked me to come back and speak next year so I think the reception at the conference was quite good. Those who disagreed with me didn’t attempt to argue points with me. One example was Jeff Rubin. To paraphrase, he called my presentation a version of monetarism devised by a non-economist. Which didn’t make sense to me because monetarists don’t recognize the role of credit, and as I say credit is the absolute key to why we are going into a deflation. If anything, the fact that I am not a formally taught economist carried more weight with many who were there at the ASPO conference. I taught myself informally everything I know about economics; it is a fascinating topic. My quest to understand how the world works means studying power relationships and hierarchies and you have to understand the role of money and thus credit to do that.
Loughrey: Many peak oil aware folks are preparing for hyper-inflation. What would a person expecting deflation do in preparation that might not occur to someone expecting inflation?
Foss: Hold cash and get out of debt. Those are the big two. If you are expecting inflation, then you wouldn’t worry about debt. In the 1970’s it made sense to buy the biggest house you possibly could afford. You knew under that in a few years time it would be worth more and your debt would be a smaller proportion of the house value. Similarly you didn’t hold cash when cash wouldn’t hold its value.
I would argue now that cash is what will hold its value while property and other assets will not.
I do have something in common with the inflationists. Both of us would agree that significant economic upheaval is coming. Whether you expect inflation or deflation, it is wise to have supplies stored: things to eat, to use as spare parts, or to trade for things you will need. But in purely financial terms, the deflationary preparation would be the opposite.
Loughrey: What’s your response to the economists’ prescriptions for the United States? You’ve got the Keynesians on one side saying “let’s spend our way out of our troubles” and you’ve got the more austere Chicago boy economics on the other side saying “lets’ drown the baby in the bathwater.”
Foss: And I think a plague on both their houses.
Freidmanites, or the Chicago school, have two big problems. First they do not understand the role of credit in the money supply. They define money too narrowly so they don’t understand why deflation is coming. Secondly they assume away the people. To them, economics is a machine explained by physics without having to understand people. Their economics model cannot describe the real world ever because economies are based in collective human behavior. In a way it is far more important to study human psychology to be able to explain the how the economy works.
To Keynesians I would say when you are in a hole, stop digging. When you are already drowning in debt, why on earth would you decide that more debt is the only thing that you can do to get out of your situation? It isn’t going to work. Keynesianism debt spending is just throwing more money down a giant black whole of credit destruction. Furthermore, it is putting additional excess claims to underlying real wealth in the hands of the very people who are best positioned to know that you’d have to cash those out at the beginning if you are going to get anything for them. So it is tilting the deck in favor of the big boys yet again.
I am in favor of tilting the deck in the other direction, toward the average person. There is very little money coming out of the system, so there is nothing I can suggest to get more wealth out of the system. All I can try to do is to help direct what does come out of the system into the hands of ordinary people because they will do something useful with it for the sake of their friends, families and communities. Ordinary people will apply those resources to real world solutions that genuinely matter. To me that is the single most important thing that I can possibly do. It fits very well with the goals of the Transition movement.
Loughrey: How will the economic and peak oil crises play out for different economic classes?
Foss: Yes it will depend on how much money people have. They may bring in rationing programs but it could be delayed. During the period of deleveraging, there may not be any recognition that low prices are so unaffordable for people. You don’t get pressure for rationing right away. A price spike would be more likely to induce rationing programs later. The more money you have the more access you have to the important things. Many will have to do without.
When you are talking about falling out of a window, how much it hurts depends on what floor you fell out of. Some are only going to fall out of the ground floor window. If you are a small scale farmer with no debt and you didn’t get sucked into buying expensive equipment, you may not notice. Whereas upper middle clas,s who seem to be wealthy but are up to their eyeballs in debt as any subprime borrower, and they have no skills: to them it will feel like falling out of the 100th floor window. So it’s how much money they have going forward that will matter, not how much they’ve had in the past. We will see a big shakeup of who has what. The people who do well are not necessarily going to be the people who are wealthy now. Some of them are going to be so devastated, so incapable of living without pots of money that they may drink themselves to death, like people did in Russia. There’s a whole generation of middle-aged men who had the rug pulled out from under their feet. They were no longer useful and they couldn’t adapt. The women were a lot more flexible i.e. that was then this is now and they got on with it.
Loughrey: Foreclosures have skyrocketed. Do you think foreclosures will accelerate and spread into previously unaffected areas or will the states attorneys general put a stop to it?
Foss: One of the things that will blow up in their faces is the foreclosure problem. There are no good answers no matter what they do to the foreclosure problem. There will be tremendous repercussions for the United States. The entire mortgage industry has been thoroughly grounded in fraud for years. An enormous amount of mortgages written were fraudulent; most of the securitization process was fraudulent; and now the foreclosures are fraudulent too.
Government has a choice: do you support the banks and allow then to foreclose even though they cannot legally prove title? You will piss off ordinary people tremendously. They are going to say you are enforcing fraudulent contracts only against us the little guy. Yet if you do not allow fraudulent foreclosures to proceed, then there will still be enormous anger. Other people who had been paying will be upset that others will get a house for free. They’ll realize that their mortgage notes are fraudulent too and stop paying too. So few people will pay in the end that the banks will fail anyway.
No real good answer. Nothing is going to work.
Loughrey: How bad will it get in terms of turfing people out of their homes?
Foss: It’s very hard to tell. They will try a variety of things which are likely to fail. Many will lose their homes, and banks will fail, so people will lose savings too. I don’t know how many will be thrown out on the streets, how many will walk away, how many will manage to get a free home out of it. I expect a combination of the above.
One thing they could do is force a revaluation of property. But because property has further to fall it would only have to be done again. You can’t do it over and over. You will still crash the banking system because of the extent of leverage; and you can’t keep up with the price of which houses are falling. So it won’t work either. This is the single biggest issue that is going to blow up in people’s faces. The housing crisis will be blamed for what will happen in the stock markets. It won’t be the cause of the market fall but people always look for a cause.
There really is nothing that has a chance of working. Once you have the creation of excess claims on real wealth, you end up living through a depression. The emphasis has been to get borrowing and lending going again which is impossible in phase 2 of a credit crunch. They won’t do the thing that helps, which is what the relocalization community is doing: building food production and self sufficiency.
Loughrey: Some experts have predicted ‘the end of suburbia’ as a result of peak oil. What’s the prognosis for suburban neighborhoods under your deflationary economic scenario?
Foss: I think suburbia is a trap. There are two things that can work: Totally rural or totally urban. If you’re totally urban, you can’t be self sufficient. However whatever centralized services are going to survive, they’re almost certainly going to survive where you are because they don’t have to spread very far. You are more likely to have services like power and heat and gas. You may be able to walk to work or shops, so no need for your own private transportation.
Totally rural can work because although the services aren’t going to go that far out, you still have the potential to be self sufficient. So you can have a well and septic and grow your own food and have solar panels. It is everything in between that doesn’t work. Suburbia will have all of the dependencies and none of the services. So you can’t be self sufficient AND you’re not going to have services. An awful lot of suburbia is going to be unlivable. Suburbia could easily become slums: you would only live there if you had no other choices. Older parts of suburbia may still be walkable or bikable and the soil is better. If people can increase their self sufficiency, it will help.
Loughrey: You recently spoke to some Transition Initiative groups in the UK. The Transition movement designs 15 to 20 -year ‘energy descent action plans’ for small towns and even large cities in an attempt to reduce climate change impact and to prepare for peak oil. How would a deflationary economic scenario affect those preparations and timelines?
Foss: The Transition Movement fits well with my attempts to put resources in the hands of ordinary people at the local level. I am very happy to work with them. I do think they need more of a sense of urgency than they have. And they have to face the financial crisis. When I spoke at the Transition Town conference in England, they didn’t understand finance. To say that I shook them up is a colossal understatement. Now, they do have more of a concept of it. But I think they are still uncomfortable talking about it because they are afraid that people will just become paralyzed with fear. They have to overcome this in order to help people. Otherwise they will not have enough of a sense of urgency and not enough wealth will end up in the hands of ordinary people. But I am hoping to move them along on this.
Secondly, they have to broaden their tent beyond those they already agree with in the environmental and liberal camps. At the , it was a homogenous group; there was almost no dissent there. They must reach out to political conservatives, to the unemployed, and to racial minorities. This will take them out of their comfort zone. I believe we must transcend politics. You have to be able to work with those with whom you do not always agree, such as the tea party types. Otherwise the demagogues will try to manipulate the anger and divide us from each other and we will all be worse off. We have to be able to find common ground. They have some good things on the right like their work ethic perspective and self reliance values. If you only focus on what you dislike you can’t build the bridge. Although my instincts are progressive, I think the left can be clueless when it comes to reaching out to others to find common ground. The left, if anything, are more likely to be able to bridge the divide because of their inclusiveness values. So the effort has to come from the left.
Loughrey: Your recent speech in Marquette Michigan focused on resilience and practicalities. What recommendations did you make for those wishing to prepare for the economic storm?
Foss: I am working on a 2nd level presentation that expands on The Century of Challenges. It will address what is resilience and how you assess your vulnerabilities and dependencies and what you need to be thinking about. There are important concepts such as liberty, movements of anger, and the trust horizon to consider. I wanted to emphasize the role of psychological inoculation. If you are expecting something, then it doesn’t come as much of a shock and you don’t feel as much as if the rug has been pulled out from under your feet. You’re less likely to run around like a headless chicken. By providing these psychological inoculations, by warning people what’s coming, I am hoping to keep people out of movements of anger like the tea party. Traumatized people are likely to join movements of anger. I tell people, do not join movements of anger. It sucks all the energy out of you. Then you will not be in a position to help your friends, neighbors and family. It is better to say to oneself this has happened; get over it; and move on. Join something positive and constructive instead. That will matter more. I focus on explaining the human herding side of things so people are more immune to it.
There are many groups such as Transition Movement who are doing this constructive work.
Loughrey: Is there anything else you’d like to say to Transition Voice readers?
Foss: Stay in a constructive positive head space. Make an effort to understand the financial situation to develop your sense of urgency so you can build a different world.