NOW SERVING Psychedelic Culture

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This article originally appeared on The Archdruid Report

One of the least constructive
habits of contemporary thought is its insistence on the uniqueness of the modern
experience. It's true, of course, that fossil fuels have allowed the world's
industrial societies to pursue their follies on a more grandiose scale than any
past empire has managed, but the follies themselves closely parallel those of
previous societies, and tracking the trajectories of these past examples is one
of our few useful sources of guidance if we want to know where the current
versions are headed.

The metastasis of money through
every aspect of life in the modern industrial world is a good example. While no
past society, as far as we know, took this process as far as we have, the
replacement of wealth with its own abstract representations is no new thing. As
Giambattista Vico pointed out back in the 18th century, complex societies move
from the concrete to the abstract over their life cycles, and this influences
economic life as much as anything else. Just as political power begins with raw
violence and evolves toward progressively more subtle means of suasion,
economic activity begins with the direct exchange of real wealth and evolves
through a similar process of abstraction: first, one prized commodity becomes
the standard measure for all other kinds of wealth; then, receipts that can be
exchanged for some fixed sum of that commodity become a unit of exchange;
finally, promises to pay some amount of these receipts on demand, or at a fixed
point in the future, enter into circulation, and these may end up largely
replacing the receipts themselves.

This movement toward abstraction
has important advantages for complex societies, because abstractions can be
deployed with a much smaller investment of resources than it takes to mobilize
the concrete realities that back them up. We could have resolved last year's
debate about who should rule the United States the old-fashioned way, by having
McCain and Obama call their supporters to arms, march to war, and settle the
matter in battle amid a hail of bullets and cannon shot on a fine September day
on some Iowa prairie. Still, the cost in lives, money, and collateral damage
would have been far in excess of those involved in an election. In much the
same way, the complexities involved in paying office workers in kind, or even
in cash, make an economy of abstractions much less cumbersome for all concerned.

At the same time, there's a trap
hidden in the convenience of abstractions: the further you get from the
concrete realities, the larger the chance becomes that the concrete realities
may not actually be there when needed. History is littered with the corpses of
regimes that let their power become so abstract that they could no longer
counter a challenge on the fundamental level of raw violence; it's been said of
Chinese history, and could be said of any other civilization, that its basic
rhythm is the tramp of hobnailed boots going up stairs, followed by the whisper
of silk slippers going back down. In the same way, economic abstractions keep
functioning only so long as actual goods and services exist to be bought and
sold, and it's only in the pipe dreams of economists that the abstractions
guarantee the presence of the goods and services. Vico argued that this trap is
a central driving force behind the decline and fall of civilizations; the
movement toward abstraction goes so far that the concrete realities are
neglected. In the end the realities trickle away unnoticed, until a shock of
some kind strikes the tower of abstractions built atop the void the realities
once filled, and the whole structure tumbles to the ground.

We are uncomfortably close to such
a possibility just now, especially in our economic affairs. Over the last
century, with the assistance of the economic hypercomplexity made possible by
fossil fuels, the world's industrial nations have taken the process of economic
abstraction further than any previous civilization. On top of the usual levels
of abstraction — a commodity used to measure value (gold), receipts that could
be exchanged for that commodity (paper money), and promises to pay the receipts
(checks and other financial paper) — contemporary societies have built an
extraordinary pyramid of additional abstractions. Unlike the pyramids of Egypt,
furthermore, this one has its narrow end on the ground, in the realm of actual
goods and services, and widens as it goes up.

The consequence of all this
pyramid building is that there are not enough goods and services on Earth to
equal, at current prices, more than a small percentage of the face value of
stocks, bonds, derivatives, and other fiscal exotica now in circulation. The
vast majority of economic activity in today's world consists purely of
exchanges among these representations of representations of representations of
wealth. This is why the real economy of goods and services can go into a
freefall like the one now under way, without having more than a modest impact
so far on an increasingly hallucinatory economy of fiscal abstractions.

Yet an impact it will have, if the
freefall proceeds far enough. This is Vico's point, and it's a possibility that
has been taken far too lightly both by the political classes of today's
industrial societies and by their critics on either end of the political
spectrum. An economy of hallucinated wealth depends utterly on the willingness
of all participants to pretend that the hallucinations have real value. When
that willingness slackens, the pretense can evaporate in record time. This is
how financial bubbles turn into financial panics: the collective fantasy of
value that surrounds tulip bulbs, or stocks, or suburban tract housing, or any
other speculative vehicle, dissolves into a mad rush for the exits. That rush
has been peaceful to date; but it need not always be.

I've argued in previous articles
that the industrial age is in some sense the ultimate speculative bubble, a
three-century-long binge driven by the fantasy of infinite economic growth on a
finite planet with even more finite supplies of cheap abundant energy. Still, I
am coming to think that this megabubble has spawned a second bubble on nearly
the same scale. The vehicle for this secondary megabubble is money — meaning
here the entire contents of what I've called the tertiary economy, the
profusion of abstract representations of wealth that dominate our economic life
and have all but smothered the real economy of goods and services, to say nothing
of the primary economy of natural systems that keeps all of us alive.

Speculative bubbles are defined in
various ways, but classic examples — the 1929 stock binge, say, or the late
housing bubble — have certain standard features in common. First, the value of
whatever item is at the center of the bubble shows a sustained rise in price
not justified by changes in the wider economy, or in any concrete value the
item might have. A speculative bubble in money functions a bit differently than
other bubbles, because the speculative vehicle is also the measure of value;
instead of one dollar increasing in value until it's worth two, one dollar
becomes two. Where stocks or tract houses go zooming up in price when a bubble
focuses on them, then, what climbs in a money bubble is the total amount of
paper wealth in circulation. That's certainly happened in recent decades.

A second standard feature of
speculative bubbles is that they absorb most of the fictive value they create,
rather than spilling it back into the rest of the economy. In a stock bubble,
for example, a majority of the money that comes from stock sales goes right
back into the market; without this feedback loop, a bubble can't sustain itself
for long. In a money bubble, this same rule holds good; most of the paper
earnings generated by the bubble end up being reinvested in some other form of
paper wealth. Here again, this has certainly happened; the only reason we
haven't see thousand-percent inflation as a result of the vast manufacture of
paper wealth in recent decades is that most of it has been used solely to buy
even more newly manufactured paper wealth.

A third standard feature of
speculative bubbles is that the number of people involved in them climbs
steadily as the bubble proceeds. In 1929, the stock market was deluged by
amateur investors who had never before bought a share of anything; in 2006,
hundreds of thousands, perhaps millions, of people who previously thought of
houses only as something to live in came to think of them as a ticket to
overnight wealth, and sank their net worth in real estate as a result. The
metastasis of the money economy discussed in previous posts here is another
example of the same process at work.

Finally, of course, bubbles always
pop. When that happens, the speculative vehicle du jour comes crashing back to
earth, losing the great majority of its assumed value, and the mass of amateur
investors, having lost anything they made and usually a great deal more,
trickle away from the market. This has not yet happened to the current money
bubble. It might be a good idea to start thinking about what might happen if it
does so.

The effects of a money panic would
be focused uncomfortably close to home, I suspect, because the bulk of the
hyperexpansion of money in recent decades has focused on a single currency, the
US dollar. That bomb might have been defused if last year's collapse of the
housing bubble had been allowed to run its course, because this would have
eliminated no small amount of the dollar-denominated abstractions generated by
the excesses of recent years. Unfortunately the US government chose instead to
try to reinflate the bubble economy by spending money it doesn't have through
an orgy of borrowing and some very dubious fiscal gimmickry. A great many foreign
governments are accordingly becoming reluctant to lend the US more money, and
at least one rising power — China — has been quietly cashing in its dollar
reserves for commodities and other forms of far less abstract wealth.

Up until now, it has been in the
best interests of other industrial nations to prop up the United States with a
steady stream of credit, so that it can bankrupt itself filling its
self-imposed role as global policeman. It's been a very comfortable
arrangement, since other nations haven't had to shoulder more than a tiny
fraction of the costs of dealing with rogue states, keeping the Middle East
divided against itself, or maintaining economic hegemony over an increasingly
restive Third World, while receiving the benefits of all these policies. The
end of the age of cheap fossil fuel, however, has thrown a wild card into the
game. As world petroleum production falters, it must have occurred to the
leaders of other nations that if the United States no longer consumed roughly a
quarter of the world's fossil fuel supply, there would be a great deal more for
everyone else to share out. The possibility that other nations might decide
that this potential gain outweighs the advantages of keeping the United States
solvent may make the next decade or so interesting, in the sense of the famous
Chinese curse.

Over the longer term, on the other
hand, it's safe to assume that the vast majority of paper assets now in
circulation, whatever the currency in which they're denominated, will lose
essentially all their value. This might happen quickly, or it might unfold over
decades, but the world's supply of abstract representations of wealth is so
much vaster than its supply of concrete wealth that something has to give
sooner or later. Future economic growth won't make up the difference; the end
of the age of cheap fossil fuel makes growth in the real economy of goods and
services a thing of the past, outside of rare and self-limiting situations. As
the limits to growth tighten, and become first barriers to growth and then
drivers of contraction, shrinkage in the real economy will become the rule,
heightening the mismatch between money and wealth and increasing the pressure
toward depreciation of the real value of paper assets.

Once again, though, all this has
happened before. Just as increasing economic abstraction is a common feature of
the history of complex societies, the unraveling of that abstraction is a
common feature of their decline and fall. The desperate expedients now being
pursued to expand the American money supply in a rapidly contracting economy
have exact equivalents in, say, the equally desperate measures taken by the
Roman Empire in its last years to expand its own money supply by debasing its
coinage. The Roman economy achieved very high levels of complexity and an
international reach; its moneylenders – we would call them financiers today –
were a major economic force, and credit played a sizeable role in everyday
economic life. In the decline and fall of the empire, all this went away. The
farmers who pastured their sheep in the ruins of Rome's forum during the Dark
Ages lived in an economy of barter and feudal custom, in which coins were rare
items more often used as jewelry than as a medium of exchange.

A similar trajectory almost certainly
waits in the future of our own economic system, though what use the shepherds
who pasture their flocks on the Mall in the ruins of a future Washington DC
will find for vast stacks of Treasury bills is not exactly clear. How the
trajectory will unfold is anyone's guess, but the possibility that we may soon
see sharp declines in the value of the dollar, and of dollar-denominated paper
assets, probably should not be ignored, and cashing in abstract representations
of wealth for things of more enduring value might well belong high on the list
of sensible preparations for the future.


Image by herval, courtesy of Creative Commons license. 

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