Wednesday, January 21, 2009

Deepening The River of Our Economy

Right now, everyone is focusing on the crisis in banking as the cause of our economic problems, but I wonder if this is an effect and not a cause.

The financial sector certainly made some really stupid mistakes, but they actually were doing fairly well until something set them off.

When that happened, they realized they had, over the years, removed a lot of the safeguards we installed to protect them. That was the stupid part.

For thirty years, maybe more, maybe twice as long, our economy has been a shallow river. The water moved very fast, but it wasn't very deep.

Two years ago, we found ourselves in a situation where growth in the the world's economy was outstripping the resources we built to fuel it. The problem was fuel itself. We were too reliant on fossil fuels and when demand outpaced supply, we saw fuel prices more than double.

Energy costs are a fundamental building block of any economy, and you can't double the cost of energy without having serious repercussions throughout the rest of the system. Fuel prices doubled and the economy stalled. When the economy stalled, it created a major back flow in the banking system so the banking system broke.

As painful as this recession is, it may have come not a moment too soon. Without a slow down in the world's economy we were facing the serious problem of literally running out of energy. This recession may give us just enough time to correct the problem before it's too late.

The river of our economy overflowed its banks and threatened the villages in the valley below.

Alternative forms of energy have been a part of our economy for more than seventy years, but they were only a small part. Instead we supplied our demand for energy with fossil fuels as a commodity. It was more profitable in the short-run, but lead to two major problems: global warming and dwindling supply.

Renewable forms of energy are part of the infrastructure, not a commodity. Wind, solar, tidal, thermal, hydroelectric, even nuclear energies cost more to build on the front end, but then they are free from the fluctuations of the commodity market as they are self-supplying to a large extent.

Our energy has always come from a mix of infrastructure sources like hydroelectric and commodity sources like natural gas and oil, but in the past the ratio of that mix was something like 10% infrastructure and 90% commodity, leaving us incredibly vulnerable to the fluctuations of commodity markets.

Suppose we change that ratio, to say 60% renewable infrastructure sources and 40% non-renewable commodity sources. We need to retain that 40% from commodity sources because they're more flexible and can respond to fluctuations in demand, but it's unlikely demand will ever fall below the 60% provided by infrastructure sources.

To do this will require a genuine increase in both leadership and responsibility in the public and corporate sector. Some will say we can never expect that kind of performance in people, people are too greedy and too stupid, but I say we can. We can accomplish anything we want to.

Hell, we went to the moon strapped to the tip of an over-glorified bottle rocket. We can do anything.

By changing the mix of where we get our energy, by investing in our energy infrastructure, we deepen the river of our economy. The water won't move as fast, but more will flow past us and our future will be more secure.

Image: Hoover Dam from the air; Source Wikipedia http://en.wikipedia.org/wiki/Hoover_Dam

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