Peak energy has combined with the diminishing returns of over-investments in complexity to pull the “kill switch” on our vaunted “way of life” — the set of arrangements that we won’t apologize for or negotiate. So, the big question before the nation is: do we try to re-start the whole smoking, creaking hopeless, futureless machine? Or do we start behaving differently?

The attempted re-start of revolving debt consumerism is an exercise in futility. We’ve reached the limit of being able to create additional debt at any level without causing further damage, additional distortions, and new perversities of economy (and of society, too). We can’t raise credit card ceilings for people with no ability make monthly payments. We can’t promote more mortgages for people with no income. We can’t crank up a home-building industry with our massive inventory of unsold, and over-priced houses built in the wrong places. We can’t ramp back up the blue light special shopping fiesta. We can’t return to the heyday of Happy Motoring, no matter how many bridges we fix or how many additional ring highways we build around our already-overblown and over-sprawled metroplexes. Mostly, we can’t return to the now-complete “growth” cycle of “economic expansion.” We’re done with all that. History is done with our doing that, for now.

So far — after two weeks in office — the Obama team seems bent on a campaign to sustain the unsustainable at all costs, to attempt to do all the impossible things listed above. Mr. Obama is not the only one, of course, who is invoking the quest for renewed “growth.” This is a tragic error in collective thinking. What we really face is a comprehensive contraction in our activities, especially the scale of our activities, and the pressing need to readjust the systems of everyday life to a level of decreased complexity.

For instance, the myth that we can become “energy independent” and yet remain car-dependent is absurd. In terms of liquid fuels, we’re simply trapped. We import two-thirds of the oil we use and there is absolutely no chance that drill-drill-drilling (or any other scheme) will change that. The public and our leaders cannot face the reality of this. The great wish for “alternative” liquid fuels (bio fuels, algae excreta) will never be anything more than a wish at the scales required, and the parallel wish to keep all our cars running by other means — hydrogen fuel cells, electric motors — is equally idle and foolish. We cannot face the mandate of reality, which is to do everything possible to make our living places walkable, and connect them with public transit. The stimulus bills in congress clearly illustrate our failure to understand the situation.

The attempt to restart “consumerism” will be equally disappointing. It was a manifestation of the short peak energy decades of history, and now that we’re past peak energy, it’s over. That seventy percent of the economy is over, especially the part that allowed people to buy stuff with no money. From now on people will have to buy stuff with money they earn and save, and they will be buying a lot less stuff. For a while, a lot of stuff will circulate through the yard sales and Craigslist, and some resourceful people will get busy fixing broken stuff that still has value. But the other infrastructure of shopping is toast, especially the malls, the strip malls, the real estate investment trusts that own it all, many of the banks that lent money to the REITs, the chain-stores and chain eateries, of course, and, alas, the non-chain mom-and-pop boutiques in these highway-oriented venues.

Washington is evidently seized by panic right now. I don’t know anyone who works in the White House, but I must suppose that they have learned in two weeks that these systems are absolutely tanking, that the previous way of life that everybody was so set on not apologizing for has reached the end of the line. We seem to be learning a new and interesting lesson: that even a team that promises change is actually petrified of too much change, especially change that they can’t really control.

The argument about “change” during the election was sufficiently vague that no one was really challenged to articulate a future that wasn’t, materially, more-of-the-same. I suppose the Obama team may have thought they would only administer it differently than the Bush team — but basically life in the USA would continue being about all those trips to the mall, and the cubicle jobs to support that, and the family safaris to visit Grandma in Lansing, and the vacations at Sea World, and Skipper’s $20,000 college loan, and Dad’s yearly junket to Las Vegas, and refinancing the house, and rolling over this loan and that loan… and that has all led to a very dead end in a dark place.

If this nation wants to survive without an intense political convulsion, there’s a lot we can do, but none of it is being voiced in any corner of Washington at this time. We have to get off of petro-agriculture and grow our food locally, at a smaller scale, with more people working on it and fewer machines. This is an enormous project, which implies change in everything from property allocation to farming methods to new social relations. But if we don’t focus on it right away, a lot of Americans will end up starving, and rather soon. We have to rebuild the railroad system in the US, and electrify it, and make it every bit as good as the system we once had that was the envy of the world. If we don’t get started on this right away, we’re screwed. We will have tremendous trouble moving people and goods around this continent-sized nation. We have to reactivate our small towns and cities because the metroplexes are going to fail at their current scale of operation. We have to prepare for manufacturing at a much smaller (and local) scale than the scale represented by General Motors.

The political theater of the moment in Washington is not focused on any of this, but on the illusion that we can find new ways of keeping the old ways going. Many observers have noted lately how passive the American public is in the face of their dreadful accelerating losses. It’s a tragic mistake to tell them that they can have it all back again. We’ll see a striking illustration of “phase change” as the public mood goes from cow-like incomprehension to grizzly bear-like rage. Not only will they discover the impossibility of getting back to where they were, but they will see the panicked actions of Washington drive what remains of our capital resources down a rat hole.

A consensus is firming up on each side of the “stimulus” question, largely along party lines — simply those who are for it and those who are against it, mostly by degrees. Nobody in either party — including supposed independents such as Bernie Sanders or John McCain, not to mention President Obama — has a position for directing public resources and effort at any of the things I mentioned above: future food security, future travel-and-transport security, or the future security of livable, walkable dwelling places based on local networks of economic interdependency. This striking poverty of imagination may lead to change that will tear the nation to pieces.

Regards,
James Howard Kunstler

February 12, 2009

Debt Drought Kills Consumerism was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Consumerism: The Problem With Saturated Markets in Western Societies

CONCERNING THE PHENOMENON of saturated markets, Richard Tomkins published recently a very interesting column in the Financial Times entitled, “Shop until you stop: The problem of consumer satiety” (April 12, 2005).

According to Tomkins, for most of human history the majority of people “suffered poverty, malnutrition and disease, had almost no possessions and were dead by the age of 40. Living standards went up and down over the centuries but showed no progressive improvement. Want was the natural human condition and the need to overcome it was a deeply ingrained instinct.”

Then came the Industrial Revolution and, with it, undreamed material progress, which brought even ordinary people comfortable homes, plenty of food and clean water, shopping and entertainment, transport, healthcare and education, and longer lives. According to Tomkins,

“…it also, of course, brought satiety. But this could never be admitted. Think of the implications! Without demand for ever more stuff, there would be no economic growth, company profits would stagnate and progress as we know it would cease.

“So we invented the consumer society to generate new desires for things we never knew we needed. Jimmy Choo shoes, rainforest adventure holidays and pyjamas for our dogs. Deep down, though, I think all but the poorest of us know we have enough. Indeed, many [of] western society’s problems – obesity, traffic congestion and the agony of choice – now arise from surfeit rather than want.

“My proposition is that it is one of the most powerful undercurrents influencing business and society today. For business, the notion of satiety is downright scary. During the industrial age, all you had to do to make shedloads of money was invent something useful – the lightbulb, the motor car or washing machine – and sell it at an acceptable price.

“But by the late 20th century, markets for most such products were nearing saturation and it was becoming difficult to find any further unmet needs. True, new technology is producing new toys – the iPod, the BlackBerry and the Sony PlayStation Portable – but for many manufacturers of consumer products, satiety is an alarming reality. Their response has been to present consumers with ceaseless novelty. Perpetually reformulating and repackaging their products, extending the range with new variants, flavours, and colours or extending the brand into other product areas.”

Saturated Markets: Taking Competitors’ Customers

Tomkins then explains that “satiety” must surely make competition much fiercer, because when markets are saturated, companies can no longer go after new customers but must start to take their competitors’ instead. A good example in this respect is the US beer market where volumes are basically flat.

Molson (TAP), which had recently acquired Adolph Coors, just reported that, in the first quarter of 2005, its volume in the US had declined by 4%. Subsequent to its disappointing announcement, the stock sold off by 18% in one day (see Figure 3).

I suppose most technology companies suffer from this trend: Hewlett Packard (HPQ) from competition with Dell (DELL) and Lexmark (LXK), Research in Motion (RIMM) from numerous new competitors (see Figure 5), and Eastman Kodak (EK) from an obsolete product and literally hundreds of competitors in digital photography, which all offer very similar products (see Figure 6).

Saturated Markets: Trading Up

Tomkins, however, admits that for companies that do recognise the nature of satiety it is also an opportunity. Tired of familiar products, large numbers of people are ready to trade up to premium-priced versions of goods ranging from coffee and food to cars, and are willing to pay several hundred dollars for a pair of jeans, several thousand dollars for a pair of skis and millions for cars.

“So mass luxury is one market opportunity. Another, with the need for material comforts largely satisfied, is to address people’s emotional needs. Many marketers are already doing this through advertising and branding: often, instead of talking about the product’s attributes (“It floats!” – Ivory soap), the advertising message is about you and your needs (“Because you’re worth it” – L’Oreal).

“But products themselves and services too, have a better chance of success if they deliver some sort of emotional satisfaction. I am thinking, for example, of things that pamper or enhance people’s self-image, such as spa breaks or cosmetic surgery; things that appeal to spiritual needs, such as designer rosary beads, Kabbalah Energy Drink or the junk you find in those new age shops; or things that have any relation to the self-indulgence, egomania and sheer, preposterous vanity of so-called therapy culture. [In 2004, Americans spent US$46 billion to lose weight - ed. note.]

“As for society, it goes almost without saying that the biggest threat presented by satiety is that of ennui (somehow, boredom sounds so much more interesting in French). In theory, we should be staving off the tedium by reading Proust and going to the opera. In practice, the need never arises since we are so exhausted by the distractions and demands of consumerism that it is as much as we can do to manage Hello! And Big Brother.”

I don’t wish to imply that there is no consumerism in Asia, but surely there is far less satiety than in Western societies and, in my opinion, far less “boredom” arising from satiety as well. Each new visit I make to China, Vietnam, or India is an eye-opener about the dynamism of these emerging societies and their huge pent-up demand for products that the common man has never had before, such as cars, motorcycles, appliances, homes, and all sorts of entertainment, including travelling.

Moreover, the desire to acquire these products and services has the effect of “forcing” people in these emerging economies to work far harder than we have become accustomed to in the Western world. I concede that, in general, Americans not only tend to work far longer hours, but are also far more entrepreneurial than Europeans.

Still, what puzzles me is that despite this entrepreneurial spirit, Americans seem to have failed to produce in a large number of industries high-quality products, or products and services that appeal to consumers.

This is not only evident in the airline industry and for automobiles, where Japanese manufacturers (with similar wages costs) are doing well while US car makers are struggling, but also for consumer electronics and appliances – not to mention the physical infrastructure of the country. (Take a train ride in the US and in Europe – you’ll see the difference.)

Saturated Markets: Maytag

A good example of an American company that is failing to address consumers’ needs – aside from the entire US car industry – is Maytag (MYG). In a housing boom, one would expect an appliance maker such as Maytag to do particularly well.

However, because front-loading washing machines, which use less water and energy, have gained market share in the US at the expense of the traditional American machines that load clothing from the top and wash by agitating the clothes rather than spinning them, Maytag has just reported very disappointing earnings and the very existence of the company is threatened (see Figure 7).

Maytag’s Hoover vacuum cleaners have also lost the leading market position to Dyson. What is interesting is that front-loaders are also made in the US by Maytag and Whirlpool, but they are not a high priority. By contrast, front-loaders are the most popular type of washing machine in Germany, where appliance makers such as Miele and Siemens are leading exporters of such machines. In order to satisfy American demand, shipments from Germany have risen seven-fold since 1999, to US$499 million in 2004, including a 122% increase last year!

Admittedly, on a trade deficit of around US$600 billion, imports of German washing machines of US$499 million are meaningless, but the point is that given Germany’s higher wages compared with the US, the US trade deficit cannot only be explained by “cheap” overseas labour, something Miss Rice doesn’t seem to understand when she told the Chinese recently to address “structural imbalances” in trade with the US, citing responsibilities that came with the growing global clout of the Chinese economy. (In 2004 the US trade deficit with China was US$162 billion, the largest ever recorded with a single country.)

Regards,

Marc Faber
Whiskey & Gunpowder
May 19, 2005

Lord Rees Mogg
London, England

The world has got to be polite to Mr. Putin.  Russia may not be the superpower that the Soviet Union undoubtedly was.  Russian industry may be second world in efficiency. Even nuclear weapons may not carry the political influence they used to.  But Russia has something everybody needs, massive supply of oil and gas.  Russia is the world’s largest exporter of gas, and the second largest oil exporter.  And Russia has the largest reserves of hydrocarbons.

Russia is a quite different power when oil is $50 a barrel from Russia at $20 a barrel.   The higher oil price gives Russia a very healthy balance of payments, and has made Russia rich.  The rest of the world, apart from the major oil producing countries, depends on Russia to maintain oil supplies.

Exxon Mobil has produced a really scary little graph.  This estimates that world demand for oil or oil equivalents, with 2003 as a base date, will continue to rise by 2 per cent a year, while existing fields will decline by 4-6 per cent.   This is creating a widening gap between demand and supply.  By 2010, which is tomorrow morning in terms of major energy projects, the gap will amount to 60 million barrels a day of oil equivalent.  By 2015 the gap will be 100 million barrels.  This compares with current output of 120 million barrels a day.

Almost certainly this is too scary, and Exxon are probably using the little graph as a shot across the world’s bows.  There is potentially a lot of oil and gas which could be pumped, but low prices in the 1990s have led to under investment by the oil companies, and most of the oil lies under the heavy hand of governments.  There has also been a serious underestimate of the rise in Asian and particularly Chinese demand.  The result is the $50 a barrel oil price, which is itself a warning.  In monetary terms the shortfall of oil and oil equivalents by 2010 will come to $300 million a day, or over $2 billion a week, or $100 billion a year.  But that, of course, would lead to a scramble for supplies and a much higher oil price.

The margin is already far too tight.  Spare capacity is down to something of the order of one to two per cent.  The oil experts believe that this may be sufficient to get the world through to the time when supply of oil and gas has responded to the higher price.  But the world is far too close to an oil crisis, like those of the 1970s and early 1980s.   There is no margin to cover an unforeseen event.

Russia is, in all probability, the most reliable supplier.  Indeed the Russian record of supplying gas to Europe has been impressively stable, even in periods of economic difficulty.  The political dangers do not arise in Russia, so much as in the Middle East, in Iran, Iraq and, above all, in Saudi Arabia.  Any political event which caused a significant interruption in oil supply from any of those three countries would wholly unbalance the oil price.  Then one would be talking of an oil price of $100 a barrel or even higher.

The physical shortage, however financed, would cause a general slow down in the world economy, even in China.  As in the 1970s, that would lead to governments being turned out in many countries.  There would be higher inflation.  There would be stock market crashes.  Exxon may be painting a gloomy picture.  The market is very resilient.  But the world has allowed the oil market to depend on dangerously narrow spare capacity.  The most likely cause of a world financial crisis is a further rise in the oil price.

Regards,

William Rees-Mogg

Saturated Markets: Consumerism: The Problem with Saturated Markets in Western Societies was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.