Most people have a preconceived notion that there will be obvious winners and losers in any conflict. In their view, the world economy will continue, as before, after the conflict is "won" by the active or passive parties. In my opinion, we are basically dealing with a situation where there are no winners. Whatever the outcome, the world economy will get worse when the conflict stops.
The problem facing the world economy as a result of conflict is the simultaneous consumption of multiple resources. Population growth has exacerbated this depletion, which means that available resources need to provide adequate livelihoods for more and more of the world's inhabitants. As a result of depletion, the world economy is reaching a point where it can no longer grow as it used to. Inflation, food shortages and rolling blackouts could become growing problems in many parts of the world, and eventually, populations could decline.
[1] In a world where resources are relatively underpopulated, conflict is likely to become more common.
The Ukrainian military is an example of a resource-related conflict. The allies behind NATO have chosen to escalate the Russian-Ukrainian conflict, in part because the existence of the conflict has helped mask the shortage of resources and the high prices that come with it. Regardless of how the conflict stops, potential resource shortages will continue. Therefore, conflicts cannot have a good ending.
If sanctions lead to a reduction in trade with Russia, the world economy will face a greater problem of under-resources after the end of the conflict. In fact, many components of the current economic system are in danger of failing, mainly because depletion leads to too little energy and other resources per capita. For example, the dollar could lose its reserve currency status, the world debt bubble could burst, and globalization could take a big step backwards.
[2] There is a huge problem of resource depletion, which has long been known to the authorities of many countries. The problem is so terrible that the authorities have chosen not to explain it to ordinary people.
The mainstream media almost never mentions the major problem of resource depletion. Instead, the mainstream media recounted a narrative of the "transition to a low-carbon economy" without mentioning that the shift was unnecessary: the world faced constraints on the exploitation of many kinds of resources. In addition to oil, coal, and natural gas, the restricted resources include many other minerals such as copper, lithium, and nickel. The mainstream doesn't tell us that there's no evidence that the transition to a low-carbon economy is actually possible.
[3] The biggest issue of consumption is the affordability of final products manufactured with high-priced resources.
The cost of extraction has risen, and the ability of the world's citizens to pay for the final products made using these high-cost resources has not risen. Rising commodity prices are not enough to compensate for rising extraction costs. When this affordability constraint is hit, resource-extracting countries such as Russia find themselves in a dire position in terms of the financial situation of their people.
The big problem that suffers from depletion is price conflicts. Companies that mine resources need high prices so they can reinvest in new mines where the cost is getting higher, but consumers can't afford those high prices.
In a sense, the higher the cost is due to "inefficiency". Due to depletion, more labor time, more machine time and more energy products are used to extract the same amount of a given resource that was previously extracted elsewhere. Increases in efficiency tend to help raise wages, but increases in efficiency tend to be the opposite: wages don't rise, and certainly not as fast as the price of the final product.
As a result, commodity exporters such as Russia are in trouble: they cannot raise prices enough to make new investment profitable. The problem is that consumers around the world can't afford the high prices of necessities like food, electricity and transportation. Russia's reported reserves are very high, especially for natural gas and coal. However, it is questionable whether these reserves can actually be withdrawn. In the long run, sales prices cannot be maintained at a high enough level to cover the huge costs of extracting, transporting, and refining these resources.
In a sense, the success of a country's economy can be measured by the country's GDP per capita. Russia's GDP per capita tends to lag far behind that of the United States.
After the collapse of the Soviet Union in 1991, Russia's inflation-adjusted per capita GDP declined. Once oil prices started to rise in the early 2000s, it was able to grow again. Since 2013, Russia's per capita GDP growth has once again lagged behind that of the United States, as rising prices for oil and other commodities have once again lagged behind rising production costs. Given the difficulties of these attritions, Russia is increasingly reluctant to ignore the bad treatment it receives from Ukraine.
There may be another factor, in particular, that leads to the escalation of the conflict. The United States appears to covet Russia's resources. Some of the great powers behind the throne seem to believe that Western powers that support Ukraine can win quickly in this conflict. If such an early victory were to occur, the aim would be to get Western powers to step in and increase Russia's resource extraction at low prices, providing the world with new sources of cheaply produced fossil fuels and other minerals.
Against this backdrop, the conflict between Russia and Ukraine broke out. Ukraine has been causing problems for Russia for years. One issue is the transit fee for natural gas through the country; Does Ukraine consume too much gas? Another problem area is the rise of the far-right Azov legions. Russia has also expressed concern that NATO has been training soldiers inside Ukraine, even though Ukraine is not a nato member. Russia does not want nato-trained troops to be within reach.
[4] World economic growth depends to a large extent on growing energy consumption.
There are two ways to measure world GDP. The standard is that each country's production is measured in inflation-adjusted dollars and takes into account the relative value that is constantly changing compared to the dollar. Another approach uses "purchasing power parity" GDP. The latter is considered to be unaffected by changes in the level of the US dollar relative to other currencies. Inflation-adjusted GDP in PPP is available only in 1990 and subsequent years. Figure 3 shows the high correlation between energy consumption and GDP at PPP for the period 1990 to 2020.
The reason for the strong link between GDP growth and energy consumption growth is a physics-based cause. Producing and providing services requires "dissipation" of energy products, because the laws of physics tell us that it takes energy to move any object from one place to another, or to heat any object. In the latter case, individual molecules in the substance move faster and faster as the temperature rises. Economics is a "dissipative structure" in physics terms because energy dissipation is required to provide the work needed to make the system work.
Humans are also dissipative structures. The energy that humans get comes from the dissipation of energy in various foods. Food energy is usually measured in calories.
[5] World economic growth also appears to depend on factors other than energy consumption.
GDP is growing much faster than energy consumption, almost twice as fast as energy consumption. Over the entire 30-year period, the real growth rate of energy consumption averaged about 1.8 per cent per annum. If energy consumption growth is really 1.8% per year, then the fitted equation means that GDP growth will accelerate significantly during this period. In fact, the growth rate of energy consumption has declined over a 30-year period, but the rate of GDP growth is close to a constant level.
Figure 4.Based on the fitted equation shown in Figure 3, calculate the expected GDP growth rate of energy consumption at a constant rate of 1.8% per year.
How can GDP grow so faster than energy dissipation? There seem to be several ways in which this higher growth rate can occur temporarily:
[a] The trend towards the use of more services in the global economy. Production in service industries tends to require less energy consumption than the production of necessities such as food, water, housing and local transport. As the world economy becomes richer, it can afford to add more services, such as education, health care, and child care.
[b] The trend towards widening wage and wealth disparities worldwide. This trend tends to occur with more specialization and more globalization. Curiously, the trend toward widening wage differentials due to different spending patterns between low-income and high-wage workers has enabled the world economy to continue to grow without increasing correspondingly increased energy consumption.
Analyzing the situation, the world is mostly full of low-wage workers. If the wages of these low-wage workers can be compressed, it could discourage these workers from buying goods such as cars, motorcycles and modern homes that tend to use relatively high amounts of energy products. At the same time, the widening wage gap has allowed high-wage workers to be paid higher. These high-paying workers tend to spend a disproportionate share of their earnings on services such as education and health care, which tend to use less energy consumption.
As a result, larger wage gaps tend to shift spending from goods to services. The main beneficiaries are the top 1% of workers, not the remaining 99%.
[c] Technical improvements. Technological improvements help to increase GDP because technological improvements tend to make manufactured goods and services more affordable. As affordability increases, more people are able to afford goods and services. This effect helps allow economic growth as measured by GDP to be faster than energy consumption.
Using improved technology to make goods and services more affordable is a trap. Improved technology tends to increase the wage gap because it almost always results in owners and some highly educated workers getting paid more, while workers who do more routine parts of the process are paid less. As a result, it tends to lead to the problem discussed above: [b] the trend of the wage and wealth gap.
In addition, as technology improves, available resources tend to dry up faster than technologies without improvements. This happens because the finished product is cheaper, so more people can afford it. Once resources begin to dry up, improved technologies cannot solve the situation, because resource extraction costs may rise faster than the impact of new technologies.
[d] A global trend towards increasing debt at lower and lower interest rates.
We all know that if the interest rate on debt used to finance the purchase is low, the monthly payment required to buy a car or home is lower. Therefore, falling interest rates can make salaries go further. Both businesses and citizens have the ability to use credit to buy more goods and services, so overall debt levels tend to rise as interest rates fall.
If we only consider the period from 1990 to the present, the trend is clearly to lower interest rates. These lower interest rates are partly responsible for keeping GDP growth higher than expected when interest rates and debt levels remain unchanged.
[6] The world economy now seems to be reaching the limits of many variables that allow world economic growth to continue as it has in the past.
Inflation-adjusted gdp per capita PPP has fallen twice. The first occurred during the period 2008-2009; The second time happened in 2020. Figure 7 shows a sharp drop in energy consumption over the same time period.
In 2021, when the world economy tries to reopen, energy prices begin to rise rapidly. The rapid rise in prices strongly suggests that energy extraction limits are being reached.
Another clue to energy production restrictions comes from the fact that oil exporter OPEC+ is finding that they can't actually ramp up oil production as quickly as promised. Once oil production is reduced by insufficient prices, even if prices rise temporarily, it is difficult to get production to rise again, because many parts of the chain that support such exploitation are broken. For example, trained workers leave and look for work elsewhere, and contractors go out of business due to insufficient profits.
If we think about it, projects [5a], [5b], [5c] and [5d] have also reached their limits. Item [5d] is probably the clearest: interest rates can no longer be lowered. In fact, almost everyone says that it is time to raise interest rates because of the high rate of inflation. If interest rates are raised, commodity prices, including fossil fuel prices, will fall.
As fossil fuel prices fall, oil, gas and coal producers will be under pressure to cut production, even at today's lower levels. Due to the strong link between energy and GDP, lower energy production tends to push the economy further towards contraction. Of course, this will make the situation worse for resource-exporting countries such as Russia.
As the world economy enters recession, we can expect a turnaround in the shift from goods to services. Those barely enough to buy the essentials will reduce their use of services such as haircuts and music lessons. Globalization and the associated wage gap are already under pressure. Countries are finding that as supply chains break, more local production is needed. In the United States, recent wage increases tend to flow to the lowest-paid workers. Technology growth, due to supply chain disruptions and depletion, the resources needed around the world are becoming increasingly unavailable and therefore cannot be accelerated.
[7] Since we have reached our limits, we may be facing the collapse of the world economy. Increased sanctions against Russia would further push the world economy toward collapse.
Many sources report that Russian exports of wheat, aluminum, nickel and fertilizer will be "temporarily" interrupted. Some sources point out that Russia plays an important role in the processing of uranium fuel used in nuclear power plants. According to the conversation:
Most of the 32 countries that use nuclear energy rely on Russia as part of their nuclear fuel supply chain.
U.S. President Joe Biden has warned of food shortages likely in many parts of the world due to sanctions against Russia.
The price of sanctions is not just imposed on Russia. It has also been imposed on many countries, including European countries and our countries.
If the world economy performs well, if Russia is a small part of the world economy, perhaps sanctions can be tolerated by the world economy. In fact, Russia's conflict with Ukraine masks a potential shortage of resources. This is possible because in a conflict, in the context of the terrible things that the Russians are doing, the shortage of resources can be described as "temporary" and "necessary". The Western way of looking at this issue provides a scapegoat to divert anger, but it doesn't solve the problem.
Russia is starting to be at a very disadvantage because in recent years the rise in commodity prices has not been sufficient to ensure an adequate life for Russian citizens and a sufficiently high tax revenue for the Russian government. Increasing sanctions against Russia will only make Russia's problems worse.
[8] There is no reason to believe that Russia would "abandon" in response to sanctions imposed by the United States and other countries.
For many related reasons, Russian attacks on Ukrainian sites appear to be taking place. It can no longer tolerate the resources it extracts and sells to Ukraine and the rest of the world are not adequately compensated. It's tired of being "pushed around" by rich economies, especially the United States, as NATO adds more countries. It was also tired of NATO training Ukrainian soldiers. Russia does not appear to have plans to acquire the entire territory of Ukraine; It's more of a temporary police operation.
The fundamental problem with Russia is that it can no longer produce the goods the world wants, as cheaply as the world demands. Building all the infrastructure needed to extract and transport more fossil fuel resources will require more capital expenditure than Russia can afford. The selling price will never rise enough to justify these investments, including the cost of the Nord Stream 2 pipeline. At this point, Russia has nothing to lose. The current situation is not feasible. Going back in time is not the impetus to stop the current conflict.
Russia is in some ways like a heavily armed, suicidal old man who can no longer live enough. Russia's economic system is no longer functioning properly. Russia is well equipped. This situation is reminiscent of the story of Samson, who in his old age destroyed the temple of the Philistines and lost his own life at the same time. There is no reason for Russia to back down in response to sanctions.
[9] World leaders, including Biden, seem to be blind to the situation we face.
World leaders have created absurd narratives that ignore the critical role that commodities play. They seem to believe that cutting off purchases from Russia is possible, at most causing temporary damage to other parts of the world economy.
World history shows that the population of many civilizations has exceeded their resource base and has collapsed. Physics points out that such an outcome is almost inevitable due to the way the universe is structured. Everything is constantly evolving, even the economy. The climate is constantly changing, and so are the species that inhabit the planet.
Elected leaders need a story of eternal growth that they can tell their citizens. They can't even consider the physics-based way the world economy works, and the resulting overshoots and crash patterns of expectations. Modelers who intend to be durable structures also cannot accept this result.
The limitations of defining the affordability of the final product are very difficult to model, so creative narratives have been developed that suggest that humans can stay away from fossil fuels if they wish. No one would stop and think that with much lower energy, the economy can't go on, just as adults can get along with 500 calories a day. Both are dissipative structures; The ongoing energy demand is built-in. When electricity, diesel and other energy products are cut off, factories shut down.
[10] Sanctions and the Russian-Ukrainian conflict cannot end well.
The world economy is already on the brink of collapse because it is being resource constrained. Deliberately halting Russia's production of fertilizers and processed uranium would certainly make the situation worse, not better. Once Production in Russia stops, it is likely that it will not be possible to restart Russian production at the same level. On the one hand, trained workers who lose their jobs may find work elsewhere. Output shortages will affect countries around the world.
The dollar is now the world's reserve currency. Sanctions imposed indirectly encourage counties to use other currencies to circumvent them. The U.S. economy seems likely to lose its role as an international trade center. If such a change occurs, the United States will no longer be able to export far more than it imports year after year.
A major problem is that most countries in the world have huge debts. As the world economy slows down rapidly, it will become impossible to repay interest-bearing debt. Debt defaults would further wreak havoc on the world economic system.
We don't know exactly when this will develop, but the situation doesn't look good.