Eventually, after 50 or 60 years, a Crisis Phase begins, when it is no longer possible to raise taxes enough to cover all of the governmental costs. In this period, wages of commoners drop to such a low level that nutrition declines, leading to epidemics and a higher death rate. Commoners often revolt, leading to government collapses. Wars for resources are sometimes fought. The Crisis Phase lasts a variable length of time, typically 20 to 50 years, with the length of time seeming to be shorter in the more recent cycles analyzed. There is considerable die-off from illness and warfare in the Crisis Phase.
The Nature of the Financial Predicament We Are Reaching
At the beginning of this post, I mentioned that rising investment costs lead to what I call an investment sinkhole problem, as we extract fuels and ores that require increasingly expensive inputs near the bottom of Figure 1. An examples might be tight oil, that is extracted using “fracking”. While we hear much about the hoped-for higher supply, we don’t hear that the newer types of oil are available only because oil prices are high. They can’t be expected to bring oil prices down. An investment sinkhole means that our dollar of investment doesn’t go as far; it is precisely the opposite of increased productivity.
When we were still far from reaching resource limits, efficiency improvements could more than make up for the loss of efficiency that comes from the Investment Sinkhole effect. But as we get closer to limits, the situation is reversed. Efficiency improvements are outweighed by the ratcheting up of extraction costs, because of the Investment Sinkhole effect. This means that instead of increased wealth being added to the system by efficiency improvements over time, we find the Sinkhole effect predominates. The common worker needs to spend an increasing proportion of his paycheck on necessities, leaving less for discretionary items. The result is recession, or very slow economic growth.