Paper vs Real: Exit From Normal, Ecological Economics, and Probabilistic Regimes in One Chart


A 20 year chart of the US 30 Year Treasury Bond vs. a broad commodity index is the occassion to make several macroeconomic observations. The comparison reveals how the purchasing power of the long-dated US Treasury Bond has fared against a basket of commodities over the period. Tracking the ability of the US Treasury bond, denominated in US Dollars, to maintain its viability as a capital storage unit is not arcane. Rather, it is central. All institutions and individuals eventually use financial assets to purchase energy, natural resources, and labor.

1. Prior to the years 2000-2002 the Western economic system is still in expansion, funded by cheap fossil fuels. During such a regime, paper assets are priced to reflect the belief in their future purchasing power against natural resources, energy, and labor. This is no mistake. The balance of global population, resource availability, and technological innovation guides savings towards the stability of paper assets. It’s a benevolent, virtuous cycle.

2. The end of cheap energy after 2002 marks the end of economic growth in real terms. The balance of global population, resource availability, and innovation enters transition. Paper assets lose stability and begin their decline against natural resources as technological innovation runs into the harder limit of energy availability. (Liebig).

3. Having built up a surplus of paper assets (both liabilities and claims) over a 25 year period, the economic system succumbs to its own lack of industrial growth. (Soddy). Paper assets become highly unstable as they are now deprived of cheap energy. In probabilistic terms the economic systems exits Normal. (Gauss). A new era of volatility in prices ensues as competing units of account come into play. The relative predictability of the future, also made possible by cheap energy, declines. A new probabilistic regime unfolds. (Pareto).

It’s highly unlikely that long-dated paper assets will ever regain their purchasing power against natural resources, because—while human innovation and technology will surely continue—the energy limit is only surmountable in small, incremental terms. Indeed, most of the revolutionary technology of the past 250 years has neither operated outside of cheap energy nor created cheap energy. Instead, our technological era leveraged cheap energy. The proper stance for resource depletionists therefore is not to dismiss the human capacity for innovation. It is undeniable that technological advances will continue apace. However, the advances made possible once humans started extracting fossil fuels, while likely to be repeated in humanistic terms, will not be repeated in industrial terms. Fossil fuels are not creatable. Their unique density make possible a whole range of laborious, constructive activities at a speed and scale that is not replicable.

The recognition that paper assets derive(d) their worth from future industrial growth will unfold very slowly. Human society, intellectually, continues to operate in the Normal probabilistic regime. Accordingly, the economic system is trying to move forward on the belief that cheap energy, in real terms without losses from externalities, will return. Indeed, modern economic theory, the operation of governments, and risk models are all predicated on the restoration of available cheap energy.

My suggestion: increase your optimism that human ingenuity will help to reorganize society around a new, scarce energy era. But, decrease your optimism significantly that a return to Normal, in energy terms or probabilistic terms, is in the offing.