The modern financial system was developed to support the rapid economic
growth that took off about 200 years ago with the phenomenal amounts of
cheap energy made available through the exploitation of fossil fuels. As
a result, its viability is completely dependent upon the continuation of
that growth. Unfortunately, the more recent fossil fuel discoveries,
especially for oil, have tended to have lower production levels than
earlier ones. In addition, greater amounts of energy are required to
extract the fossil fuels leading to less net energy available for
society. The Energy Return On Investment (EROI) for oil has fallen from
30:1 in the 1970's to 10:1 today. Thus, newer energy finds produce lower
extraction rates and more of the energy provided is offset by the energy
used in the extraction processes. The result has been economic
stagnation or even contraction, with growth in China and India etc. only
possible due to the extensive use of local coal reserves, and
recession-induced drops in OECD country energy use. Renewable sources of
energy will not be able to expand fast enough to replace the 87% of
energy supplies provided by fossil fuels, and apart from hydro and wind,
tend to have very low EROI rates. They are also critically dependent
upon the cheap energy infrastructure provided by fossil fuels. The
phenomenal amounts of path-dependent energy infrastructure will also
greatly inhibit any move away from fossil fuels.
Without continued economic growth there will not be the extra output to
fund loan interest payments, nor the revenue and profit growth to
support share price/earnings multiples. The financial system acts as a
time machine, creating asset prices based upon perceptions of the
future. As an increasing percentage of investors come to accept the
future reality of at best, financial asset prices will fall to reflect a
realistic future. The resulting crash will remove the underpinnings of
the banking, brokerage, mutual fund, pension fund, and insurance
industries. The comfortable futures of many will be shown to have been
based upon a mirage of future growth that will not take place. With the
financial system acting as the critical coordination system of the
global economy, its crash will also intensify economic problems. Written
by a retired financial industry executive with over 25 years of
experience, this book describes how the crisis will affect different
regions and industries to help identify the career and investment
choices which may provide a relative safe harbour.
