The Telegraph has reported that the Bank of International Settlements (BIS) has warned of the risk that the credit bubble being experienced poses the potential to push the world into another Great Depression.
I have thought about the potential of the combination of financial malfeasance coupled with the constraints of resource availability that we face. It is such a tremendous issue that I don't think it to be feasible to discuss coherently in a lone diary, books will be written about this over the next decades once all the pieces are put together. In the mean time, I think of some advice my Ninjutsu instructor told me- "How does a wolf eat a moose? One bite at a time." So here goes nothing.
This isn't my area of expertise, although I did start out in college as an Economics major but washed out (I didn't see the field as being scientific enough, all conclusions are driven by initial political assumptions, but that's a matter for another diary). I still keep up on economic matters as a hobby. While in college, I did a fair bit of research in the U.S. economy during the 70s. What I gathered is that the economic pain we felt as a country back then was very analogous to what is happening today. The U.S. abandoned the Breton Woods system in 1971, two years before domestic oil production peaked. From that point onward, the value of our currency in relation to other currencies was determined in trading pits, and Congress transferred its Constitutional authority to coin money to the Fed.
At the time, Keynsian economics was the rage of the age, and the theory dictated that the way to stimulate the economy was to devalue the currency. This would punish those who saved, and reward those who spent all of their wages. This was the policy pursued by Arthur Burns(who may or may not have been the inspiration for Montgomery Burns). The logic behind this policy was that the absolute necessity for any economic policy was to avoid a repeat case of the Great Depression. The prescription for avoiding the deflationary conditions, in a Keynsian approach, was simply to pump liquidity into the system.
The problem with this approach was that after '73, we were no longer exporters of energy, we were dependent on the Rest of the World. So, put yourself in the shoes of a Saudi prince in charge of a big oil field. The American masters of their currency have announced for all to hear that they are going to print dollars day and night until the lazy workers get out and spend. If you knew next year that you would be very likely to get more dollars for the oil you control than you would this year, why would you sell that oil today, rather than a year from now? Before getting all tangled up in theories about international trade and exchange rates, just think about that question. It's very important to understand what's going on right now. The owners of foreign oil fields do not control our currency, the only lever they control is the rate of production from their fields. So a rational prince, in the absence of any coercion or personal favors owed, would only pump enough to not cause a ruckus and keep as much as he could in the ground. This, I think, was the driving motivation behind the oil embargo of '73.
So why did the Saudis flood the markets with cheap oil after the Iranian revolution in '79? This is a hard question for me to answer. A possible explanation is that they weren't acting out of self interest and sought to reward Reagan/punish Carter, or perhaps it was to stamp out any possibility of develpement in alternative fuels, it's hard to say.
The upshot of all this is that the pain we are experiencing now in our economic system isn't new. What is frustrating is that we learned the wrong lesson from the Great Depression. You cannot print your way out of economic despair. Any economic growth predicated on a credit bubble is not sustainable, and when the underlying energy inputs are pulled out, the bill comes due. It is important to understand that it doesn't matter if this is nominally more or less significant than the Great Depression or the stagflation of the 70s, what matters is that this is what we are experiencing now. If we don't understand our past, we are doomed to repeat it.