Decline of Federal Reserve Has Begun

by: Gregor Macdonald

The Federal Reserve is an artifact of the Abundance Economics that have governed Western economies over the past 250 years. For 250 years exactly we have climbed the ladder of ever increasing energy density, and ever increasing energy supply. That era has now come to an end. You can see that view, the end of the abundance era, expressed by a number of different writers, whether it’s today’s longish piece from Matterhorn Management, last year’s piece by Richard Heinberg on the End of Growth, or some of the shorter articles I have written in the past.

To keep things simple, oil is no longer available to fund world growth. Oil is certainly available to fund existing systems as they are currently set up, but not new growth. You can only fund new growth with an energy supply that is growing. That’s why the developing world has turned to coal, not oil, to fund its growth. Based on the most recent data, let’s update the chart of global crude oil production:

The credibility of the United States Federal Reserve is closely aligned with its ability to induce economic activity, by the provision of money and credit. But you can see the problem: if there is not an expanding supply of energy, credit is less useful as credit cannot be paid back very easily in a future of either flat, or declining growth. Now that the return on the Fed’s credit provision has gone into decline, then its incumbent on the Federal Reserve to rethink its approach. But the Fed, governed by post-war economists, is apparently unable to learn from new information.

There is another limit to the Fed’s provision of money and credit: and that is the quantity of debt already being carried in the economy. As debt levels rose in the US economy over past decades, the Federal Reserve simply kept repeating itself in a kind of argumentum ad infinitum, providing ever more money and credit as though completely unaware of the levels to which debt was rising. Now, presently, the Fed has declared a war on debt-deflation. But, the Fed indicates no understanding of the core thrust of debt-deflation. I’ll help out: there can be no kick-starting of economic activity, until debt levels are reduced significantly. What the Fed is looking for is not the effects of more credit provision, but instead, debt jubilee.

The Federal Reserve is now in a permanent, irreversible decline because it has no tools to fight both the limits placed on the economy by oil, and, current debt levels. Were the Fed to conduct debt jubilee on a scale sufficient to restart demand, that would vaporize the currency. But even if it were possible to manage a workable debt jubilee, then the economy would come more squarely back into confrontation with the energy limit. And there too, the Fed would discover that its role as provider of money and credit was reduced, as credit itself relies on future growth.

The Federal Reserve came into existence during the fattest part of the abundance curve, made possible by the extraction of energy-dense fossil fuels. The early part of the last century was the moment when the world started to transition from Coal to Oil, with the fullness of oil’s resource spread out before the industrial economy like a broad forest. As an artifact, not a creator, of this abundance, the Fed was merely a mediator of wealth and performed (at best) a smoothing operation as the economy traded credits on future labor and future growth. Like most institutions in decline, the Fed can either reform itself now and embark on a substantially new mission, or, it can decay into irrelevance as it attracts lower quality intellects, and is dismembered of its power. Indeed, if you look around the edges, that process of decay in the Federal Reserve has already begun.

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