In Memoriam: The Age of Complacency

Today, a Memorial Day special.


When supply and demand become unbalanced in a free market, prices act to bring them back into line. But if physical supply is constrained for some reason (e.g. depletion, war or embargo) prices have to rise a lot further before balance is restored. That's because in the absence of additional supply, the only alternative is to lower demand via higher prices, i.e. prices have to do double duty. This is more so for goods that exhibit relatively inelastic demand, like crude oil.

Today, the relentless drive of crude oil to over $130 per barrel spells the end of The Age of Complacency, a quarter century during which we were lulled into smugness about the price and availability of necessities like food, energy and clean water.

Data: FRB St. Louis

For 25 years we literally sleepwalked. And finally smacked head-on to the most virulent supply-demand imbalance this world has ever seen. The sevenfold increase in prices serves as a rude wake-up call: we once again have to worry about the things we need, as opposed to the things we want.

We need food. So to keep the Green Revolution going we apply massive amounts of fertilizer, pesticides and mechanization to the production of grains and meat. Fertilizer consumption in the US, particularly nitrogen in the form of ammonia produced from natural gas, has increased sixfold.

Chart: USDA

And just like oil, fertilizer prices have now spiked sixfold. Yes, we really do eat oil and natural gas.

Data: YARA

During the Age of Complacency we thought good times would last forever, so we borrowed up to our eyeballs and kept satisfying our hankering for all things consumer. Household debt doubled as a percentage of disposable income, accelerating sharply in the last seven years. Instant gratification became the norm, instead of the exception. Well, goodbye to all that.

Data: FRB

At the end of the Age of Complacency, we find ourselves at a crossroads.

We can choose to live in denial for a short while longer. But soon thereafter we will have to pay dearly. Socio-economic triage will become a necessity, involving famine, pestilence, riot and war. The other five billion souls inhabiting this planet are simply no longer content to subsist on two bowls of rice per day, so that we can drive to the mall and fly to Monte Carlo for the races. The information revolution has seen to that, blogs included.

There is another choice: Change, starting right now. Reduce our consumption of everything, establish an alternative economic model based on sustainability, view growth as an opportunity instead of a purpose. Radical? Of course not: it's simply necessary.

How can we accomplish change? Necessity being the mother of all invention, there are many suggestions running the gamut from disguised denialism (corn ethanol), to hopeless futurism (power stations in space). Some are even downright macabre (dieoff). My own is the Greenback, a straightforward suggestion that involves familiar instruments and institutions in a novel application. There are no perfect solutions, of course; but doing nothing is much worse.

How are we currently doing at the crossroads, then? Not very well, I'm afraid. Denial is still the order of the day: we are told that the American way of life is non-negotiable, that tax cuts and shopping will boost the economy, that more drilling in the most hostile environments will (briefly) quench our thirst for fuel. In finance, we opt for bailouts instead of practical workouts, hoping the rest of the debt won't come crashing down from its rickety pile. Our political and economic leadership is, sadly, behind the times.

So, it is really up to the rest of us to quit being complacent and change our ways. There is no need to list what each of us could and should do - we already know. There are no excuses. Let's get involved in our future.