Economic Crisis

Economic Crisis

Over the past few months, the world economy has crashed. Global trade is falling, unemployment is rapidly rising, and consumption rates are plummeting. There is a very real possibility that the global financial system will collapse completely, which would throw the world into an unprecedented state of chaos and confusion.

Why is this happening? Why is it happening now? And what can be done?

In order to answer these questions it is important to understand a little economic history. Economies grow and contract, sometimes in cycles, and this has been going on since the beginning of civilization. But during the past century the world has seen growth on an unprecedented scale—and this steady, rapid growth has coincided with the increasing availability of cheap energy (principally oil).

Once it is understood that growth in economic activity (the production and distribution of more goods, more travel, and so on) depends on increasing supplies of energy, it becomes clear that a decline in the availability of cheap oil is likely to result in the end of economic growth as we have known it. True: improvements in efficiency, the introduction of new technologies, and the shifting of emphasis from basic production to provision of services can enable some economic growth to occur without an increase in energy consumption, but such trends have inherent bounds. Over the long run, static or falling energy supplies must be reflected in economic stasis or contraction.

However, with proper planning, there is no reason why, under such circumstances, an acceptable quality of life cannot be maintained—if communities willingly engage in a transition from fossil-fueled consumerism based on debt to a different kind of economic system.

As world oil prices spiked in 2005 through the first half of 2008, peaking at $147 a barrel, the auto and airline industries buckled. With gasoline prices so high, homeowners who had bought houses at inflated prices now found it difficult to make mortgage payments.

During the previous few years, the financial industry had built a house of cards using complex, obscure new leveraging schemes, based on the assumption that housing prices would continue to rise. The oil spike helped to puncture this bubble—perhaps the biggest in history—and it is still in the process of deflating. Government efforts to prop up the auto makers, banks, and other major financial institutions by borrowing and loaning enormous sums of money may or may not succeed over the short run, but over the long run those efforts will likely result in hyperinflation that will destroy savings and cause even more hardship.

While details are complicated, the basic outlines of what is happening were foreseeable and are easy to understand. Modern economic theory sees the environment as merely a subset of the economy (a source of useful resources), whereas in reality the economy is a subset of the environment—and so if the environment becomes depleted, the economy will wither. Economists believe that growth can go on indefinitely, while in fact growth in consumption cannot continue for long on a finite planet.

The economy grew until it couldn’t. We have reached the limits to growth, and no amount of borrowing or spending will return us to “business as usual.” A new economy must emerge—one that fits within Earth’s long-term ability to support the human enterprise. That means a steady-state economy in which “growth” is measured not in terms of dollars spent or the amount of goods purchased, but by the health, happiness, and intelligence of the people, the safety of communities, and the integrity of ecosystems.

Transition Initiatives are the foundation of new local economies where neighbors once again know and look after each other, where we know where our food was grown (and grow much of it ourselves), where we invest in our friends’ and neighbors’ businesses, and where we participate in the basic productive and administrative activities that make community possible.