Understanding Our Oil-Related Fiscal Cliff

The United States’ fiscal cliff is very much related to several changes we have been going through recently, and will likely continue to experience:

  1. High oil prices (more than triple their level ten years ago). High oil prices cause people to cut back on discretionary spending, leading to layoffs in discretionary industries and debt defaults. Governments get less revenue in taxes at the same time they need to increase spending for unemployment benefits, bailing out banks, and stimulus funds. Result: financial problems for governments of oil importing countries, including many Eurozone countries and the United States.
  2. More free trade with Asian countries starting about 2001, when China joined the World Trade Organization. This change sent many jobs to Asia, and also holds down wages in US industries that compete with companies using overseas labor.
  3. Lots of baby boomers becoming eligible for Medicare and Social Security, starting about 2011. This is a problem because taxes, in practice, need to cover the cost of  benefits on a cash flow basis, which is the way US handles its financial accounting. As a practical matter, this is the way the world economy works as well–the goods and services used today are created by today’s workers, with resources pulled out of the ground today. Carryovers in terms of goods are very limited–mostly a little grain.
  4. A health care industry that is able to charge fees that are increasingly out of line with the wages of common workers.

None of these issues looks likely to improve in the near future, suggesting that we are encountering a long-term problem that is only likely to get worse.

In this post, I provide charts showing that if the US funding problem is fixed through higher taxes on individuals (including proprietors), the needed fix would require additional taxes averaging approximately 15% of each person’s wages. If oil production remains relatively flat, as it has since 2005, additional tax increases even above this level will likely be needed later, as higher oil prices lead to more layoffs, and more need for government spending.

I also discuss three approaches other than higher taxes on individuals that might be used to try to fix the problem:

  1. Send programs back to the states
  2. Fix health care costs by emulating the Japanese using severe caps on medical charges
  3. Rethink taxes on imports

The first approach is being considered by others. I see drawbacks to it that others may have overlooked. The second two approaches are admittedly nonstandard, but need to be at least considered.

I am not very optimistic that a way can be found around the fiscal cliff. The problems are too much “baked into the cake”. But if we don’t understand what the magnitude of the problem is, and what is causing it, it is hard to make good decisions.

The Magnitude of the Problem

The “standard” way of looking at government income and expense is as a percentage of GDP. As a practical matter, though, about 80% of federal taxes relate to individuals, so it makes more sense to me to use a wage base for comparison, especially if there is concern that wages aren’t keeping up with GDP.

Also, while the issue at hand is federal taxes, from a taxpayer point of view the real issue is total taxes–Federal, State, and Local, including Social Security and miscellaneous taxes. If we compare total government expenditures to estimated taxpayer wages1, we see that in calendar years 2009 through 2011, expenditures exceeded 65% of wages (Figure 1). Total government receipts have averaged around 50% of wages, currently slightly less than this benchmark.

Figure 1. Government expenditure and expenses for all levels of US government combined (including federal, state, and local and Social Security), based on Table 3.1 of the Bureau of Economic Analysis. See Note 1 for definition of wage base used.

Based on Figure 1, we either need to raise taxes by a little more than 15% of wages, and keep raising taxes in the future to keep up with an escalating problem, or we need to cut back on government benefits, such as unemployment insurance, Social Security and Medicare.

Either of these actions can be expected to have a very adverse impact on the economy. If citizens need to pay much higher taxes, they will cut back on discretionary spending. Such a cutback is likely to lead to more layoffs in discretionary sectors, and more recession. If benefits are reduced, those directly affected will be very unhappy. There may even be civil disorder. In addition, those with reduced benefits are likely to cut back on their spending, leading to recession. They may also default on loans, leading to bank problems.

Of course, the Fiscal Cliff discussions are about fixing only a little bit of the problem now, and making plans to fix small amounts in the future. The real issue, if we understand the four problems listed at the beginning of this post, is that we are facing an escalating problem. This is especially the case if world oil supply remains relatively flat, as it has been since 2005.

Breakdown of the Deficit

Figure 1, shown above, showed a combination of Federal, State, and Local government income and outgo (including Social Security, Medicare, etc.) as compiled by the US Bureau of Economic Analysis. Figure 2, below, shows the corresponding figures for State and Local Governments.

Figure 2. State and Local Government Revenue and Expenditures based on Table 3.3 of the Bureau of Economic Analysis, expressed as a percentage of the same wage base as described in Note 1.

A person can see from Figure 2 that Income and Outgo are fairly well in balance for State and Local Governments, but there is a problem with both taxes and benefits rising over the long term. This contributes to the long-term unhappiness citizens feel about taxes in general, even if the problem is not federal taxes.

While it may seem surprising, the Federal deficit discussions relate to all government spending other than State and Local government.2 Thus, besides regular budgeted spending, the Fiscal Cliff discussions consider Social Security, Medicare, the Federal Government’s portion of Unemployment Insurance, and un-budgeted military expense. If the Federal Government should become obligated in the future to bail out government organizations, such as the Pension Benefit Guaranty Corporation or the Federal Deposit Insurance Corporation, these costs would presumably need to be considered as well in determining whether there is a balance of income and outgo.

Probably of the biggest areas of funding shortfall is Medicare (Figure 3, below).

Figure 3. Medicare Revenue and Expenditures by Fiscal Year, based on Tables 2.4 and 11.2 of the Historical Data of the White House Office of Management and Budget.

Medicare, besides providing health care for those ages 65 and over, also provides coverage for some disabled workers. The program has always needed supplemental funding, but the amount of the deficit has become greater in recent years, and is forecast to get even worse in the future. (On all of the charts, the forecasts I show are those provided in the White House Office of Management and Budget reports.)

Social Security is better funded, or was, until a decision was made to cut employee contributions by 2% of wages, for calendar years 2011 and 2012. This was done as an off-budget stimulus to the economy.

Figure 4. Social Security receipts and outlays, based on Tables 2.4 and 4.1 of the Historical Tables of the White House Office of Management and Budget.

The current plan seems to be to return to the original tax rate effective January 1, 2013. This return to the original tax rate does not seem to be reflected in the White House Office of Management and Budget (OMB) figures I am showing in Figure 4. Even if this change is made, it is my understanding that there is still some need to raise Social Security taxes.

Another grouping on budget reports which has some revenue associated with it is Income Security, shown as a functional category on OMB report 11.2. This grouping seems to include the federal portion of unemployment compensation. It probably also includes Food Stamps. It too shows a shortfall.

Figure 5. Federal Income Security receipts and outlays from Tables 2.4 and 11.2 of the Historical Data of the White House Office of Management and the Budget.

If it were somehow possible to erase the problems with these three programs (Medicare, Social Security, and Income Security), there would still be a federal revenue shortfall, but a manageable one. In several periods, there has been a surplus on this basis (Figure 6).

Figure 6. Comparison of Receipts and DIsbursements for Federal Programs excluding Medicare, Social Security, and Income Security, based on Historical Data of the White House Office of Management and Budget.

We can break down the remaining federal spending (as shown in Figure 6) into some major groupings.

Figure 7. Allocation of Federal Spending, other than that for Medicare, Social Security, and Income Security, based Historical Data of the White House Office of Management and Budget.

Health, at the bottom of Figure 7, would seem to include federal funding related to state Medicaid programs. The bulge for future years reflects the new federal healthcare program. Defense, shown in red, is very large in recent years, but is forecast to shrink in the budget forecasts of the OMB.

Net interest is reflects a netting out of interest paid and received. This is a different accounting treatment that a person sometimes sees, with Social Security being credited with some portion of interest payments. Here, all interest is in one location. Recent interest payments have been very low, thanks to the artificially low interest rates now in effect. Interest payments are forecast to more than double by 2016.

Figure 7 shows that the “All Other” category is quite small, compared to the $1 billion+ in deficit that we are facing on an ongoing basis, if funding stays as in the recent past. This would correspond roughly to federal government programs where the expenses are mostly salaries of government employees, rather than transfer payments to citizens. I calculated this amount by subtraction of the selected pieces from the total.

Federal Revenues and Outlays Compared to the Selected Wage Base

If we use the same wage base as with Figures 1 and 2, the ratios of income and disbursements to wages are as shown on Figure 8 below.

Figure 8. Federal Government Revenue and Expense (including Medicare, Social Security, etc.) as percentage of Wage Base described in Note 1.

The current high outgo doesn’t look as high relative to prior years, as it does in Figure 1, but looks can be deceiving. Figure 2 near the beginning of the post shows that state and local taxes have been increasing–from roughly 20% of wages in the late 1970s to 25% (or more) now. So total taxes “feel higher,” even if the federal part doesn’t rise by much. The federal government has paid for some of this rise in state programs, through federal funding of local programs. The temptation now will be to cut back on federal funding.

If there is a goal to keep total state and local taxes to less than 50% of the wage base, then it would make sense to get federal spending down to 30% of wages, or below 30%, if there is a cutback in federal funding of state programs. If federal payments look to be headed for 45% of wages, this would mean that federal spending for all programs combined would need to be cut back by one-third (=(45%-30%)/ 45%).  Alternatively, of course, taxes can be raised–but with the caveat that taxpayers get very unhappy about taxes over a certain level.

If we look at individual programs “stacked up” as a percentage of wages, this is what we see:

Figure 9. Federal spending as a percentage of wages, broken out by category, in stacked chart. Spending based on White House OMB data; wages as described in Note 1.

The biggest run-away program is Medicare. It will be difficult to fix it without making a lot of people unhappy. Defense can be cut back even more than it has been, but that leaves a lot of unemployed military people as well as unemployed people who work in defense industries.

Other Ways to Fixing Funding  Besides Higher Taxes

Send programs back to states. Perhaps the easiest way for the Federal Government to reduce spending is to turn programs over to the states, offering some sort of small “block grant” to fund them. Then, if the program is unsatisfactory, it is the problem of the state, not the federal government. Richer states will be able to provide better programs than poorer states. The federal government’s role will gradually be reduced.

The downside of this approach is that programs are likely to be greatly reduced in scope. The federal government will become less and less important in the whole scheme of things.

I have written about the tendency of countries with financial problems to break into smaller pieces, as with the possibility of Catalonia seceding from Spain. The problem with reducing the government’s role is that it tends to push a country more in this direction. The view may become, “If the individual states are doing everything, who needs the expensive federal government, with all of its debt?”

Fix Health Care Costs. US healthcare has been on its own track for a long time. It is far more expensive than the systems of other developed countries, and the quality of results is not very good, according to studies such as this one by Commonwealth Fund.

Figure 10. International Comparison of Healthcare Spending, from Explaining High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices, and Quality, by David A. Squires, The Commonwealth Fund, May 2012.

The high cost of the Medicare program and the high anticipated cost of the new healthcare program for the uninsured are both related to this issue. David Squires, author of the study linked above, points out that Japan has a health care system that shares similar features to the US system: it is a fee for service system with unrestricted access to specialists and hospitals. Yet its cost is near the bottom of the chart, and Japanese have the longest life expectancy in the world. The major difference in the Japanese health care model is that the Japanese government aggressively regulates health care prices. The report indicates that if the US were to spend the same share of GDP on healthcare as Japan, the saving would amount to $1.25 trillion. This would be enough to pay for our annual spending deficit, if it could be channeled in that direction. (Of course, it can’t, but it would help.)

Perhaps a change closer to the Japanese system of regulation could be coupled with more emphasis on healthy eating and exercise. The major losers in such a change would be surgeons and other specialists earning very high salaries, investors in very high-priced devices, pharmaceutical companies who charge US customers more than elsewhere, and hospitals that need to scale back services to be more in line with what other developed countries provide.

Rethink Foreign Imports. Economists have told us globalization is the only solution. Yet, we cannot compete on a level footing with countries with very low labor costs, especially if their primary fuel is (cheap) coal. We find that we have more and more laid-off workers, at the same time their economies are growing rapidly. (I describe this more in  this post.)

It seems likely that over the long-term, globalization is going to shrink, as the cost of importing goods increases, and as financial problems of countries increasingly get in the way of signing longer-term contracts. (Who wants to sign a contract to make products for a country whose currency may radically drop in value before the goods are produced?)

A partial solution might be to penalize companies that outsource jobs to parts of the world with lower wages (but this would be hard to enforce, and likely run afoul of free trade agreements). It would theoretically be possible to re-impose tariffs on selected categories of imported goods and services, to try to encourage more local hiring, even if it means higher production costs. Again, this has free trade agreement issues.

A  related issue is the idea of businesses being able to incorporate offshore, and escape US taxation. I know my work as an insurance actuary involved a lot of work for “offshore captives“. Somehow, we should be rethinking whether allowing US companies to take the benefit of these offshore services, without tax, inside the United States, is in the United States’ best interests. Shouldn’t we be taxing goods and services produced elsewhere, to avoid US taxation?

Other Issues

There are many other issues that deserve a more complete treatment, including further discussion of the four causes of the increasing deficit at the beginning of this post. I have treated some parts of these issues in other posts, such as High Price Fuel Syndrome.

Notes:

[1] Wages used as a base consists of “Wages and Salary Disbursements” for both employees in government and in private industry, plus “Employer Contributions for Government Social Insurance” plus “Proprietors Income” relating to both “farm” and “non-farm”. All of these amounts are from Table 2.1, Personal Income and Its Disposition. For most people, this will be the nominal wages a person receives (before deductions of any kind), plus the amount paid by the employer on behalf of the employee for Social Security and Medicare contributions. I have not included “Transfer Payments” such as Social Security, Medicare, Medicaid, and Unemployment Insurance, since these are likely not to be heavily taxed. For projecting future years wages, I have assumed 3% annual growth (1% increase in labor force and 2% inflation). If there is recession or if the number of jobs fails to rise, this assumption may prove to be too high.

[2] There is a small overlap between federal and state programs. For example, the Federal Government gives State and Local Governments to spend on unemployment benefits, and on Medicaid, and on stimulus projects. The data sources I am using should remove these overlaps correctly.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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157 Responses to Understanding Our Oil-Related Fiscal Cliff

  1. donsailorman says:

    I think the main fiscal problem the U.S. has is that we are greatly undertaxed. All the European countries are much more heavily taxed than the U.S. Some of those high-taxed countries such as Germany, Norway, the Netherlands, and Sweden have significantly higher standards of living than does the U.S., and their citizens live several years longer than do U.S. citizens.

    The idea that high taxes stifle prosperity is pure undiluted B.S. There is not a shred of evidence to support this position. Minnesota, where I live, is one of the most highly taxed of all the fifty states. It also has one of the very best-educated citizens of all the fifty states. Real disposable per capita income is much higher than in Minnesota than in North Dakota, where the oil is and which has highly productive wheat farms and cattle ranches and is a low tax/low services state. Because of the oil boom, N.D. has a lower unemployment rate than does Minnesota, but in all other respects standards of living are very significantly higher in Minnesota than in North Dakota. One of my friends, who works for Wal-Mart, was recently offered $110,000 per year to take over as trouble shooter for all North Dakota Wal-Mart stores, which is pretty good for a guy in his mid thirties who never finished college. He turned down the offer and applied for a Wal-Mart job in the Twin Cities at lower pay, but he hated the idea of being based in the oil boom town of Willitson, where the price of houses is more than double the price of a comparable house in the Twin Cities areas.

    • Thanks for your views. Do you have figures on what percentage of income in Europe goes to taxes (including all of the taxes people pay)?

      I think part of the difference here is that for most people, healthcare in the US is outside the tax system. Our healthcare costs are so high that the combined burden of healthcare and taxes may very well be higher than the corresponding amount in Europe–but that is a guess on my part. I haven’t seen the real figures.

      • Leo Smith says:

        In the UK just over 50% of the GDP circulates through the government.

        It hasn’t solved our problems either.

      • Schuyler says:

        Gail,

        If one looked at Federal spending per capita or adjusted for wages would it appear any less gloomy? I was just wondering what effects population growth might be having on debt, or if they are even significant from the broader perspective. :-P

        • Sorry, I haven’t had a chance to look at this. But in general wages per capita are not doing well. The government has hidden the impacts of the high price of oil behind a high federal spending deficit since 2008. Now, it is becoming clear that this model of spending more that the country takes in can’t be continued indefinitely. It we had a good supply of $20 oil, I expect quite a bit of our problem would go away.

      • donsailorman says:

        Well, I have seen the figures. U.S. tax payers pay for a lot of medical care through taxes, including Medicare and Medicaid and also through property taxes at the county level to finance the care for emergency rooms at county hospitals. By law (I think through all the states but am not sure on this) emergency rooms in public county hospitals must accept all who apply for medical help, regardless of ability to pay. Much of Medicaid is paid for by the federal government–some through taxes and some through deficit spending.

        Medical spending in the U.S. is a financial catastrophe. Canadians spend less than half as much on medical care than does the U.S., and that is also true of Britain and European countries. U.S. medical care is not especially good. We have high infant mortality rates and lower life expectancies than do Canadians, the U.K. and most if not all of the European countries.

        Obama care is going to be one more catastrophe. A few days I overheard the manager at the local Dairy Queen mention that all employees had to be cut back to 28 hours per week or less because of Obama care. What Obama care is going to do is to vastly increase the cost of health insurance, because under the law medical insurance companies must accept all applicants regardless of pre-existing conditions. Also the premiums for old people must be no more than triple the cost of premiums to younger and much healthier people. What companies are going to do (and they are already doing this) is to fire their fulltime employees and then hire them back as independent contractors at lower wages and no medical benefits. IBM, for example, has already done this with much of its labor force.

        • I worry about health requirements making it harder for people to get full time employment. It seems like all of these programs are dominated by unintended consequences.

      • Some examples of tax in Norway where I live:

        VAT is 25% on most goods except food which is 15%.
        A normal income has around 30% income tax, but rises all the way to 50% if you earn a lot.
        A normal petrol car will double in price from taxes alone once it arrives our docks, one exception is electrical cars which are almost tax free.
        We have road tax as well and very high tax on gasoline and diesel.

        Naturally the government also have very high income on the oil – which counts a lot for the general good situation here. But yes, socialism has made an impact in Norway as a country with regards to taxation. Although we like to bitch about taxes like everywhere, I think in general people feel its required to have a fair and well run country. Although lately the right wing parties (Høyre and Frp) have gone up a lot in popularity and some predict they will win the next elections if they cooperate. Still our right wing politics is far to the left of the democrats with regard to taxation I think. :)

    • Julie Cosgrove says:

      You completely ignore that moral argument about how wasteful, inefficient and downright corrupt the Federal government and many State governments like mine in California are. How on earth can you morally ask people at any income level to pay more in taxes to a fiscally irresponsible government that delivers terrible results overall? That just makes no sense. Government is NOT a responsible steward of resources…which money represents.

      In addition, why is it that the people that rely on the majority of government services the most…the poor and middle class, pay the least amount? Why is that morally acceptable? Unless you can’t understand a federal balance sheet (which is full of lies and tricks so I would not fault you for it), it’s pretty clear that we have a SPENDING problem, not a revenue problem.

      Personally, and I know a lot of Conservatives, Liberals, Libertarians and Independents who feel that the idea that taxes are too low is a completely insane statement. How much is enough for this corrupt government? How much is enough for you? Why are you or any bureaucrats better determinants of how individual’s money should be used? That just seems like arrogant hubris to me.

      Finally, there are lots of studies that prove that higher taxes reduce investment. You just reject them because the violate you world view and love of Big Government and moral belief that people should be hosed by the government. PATHETIC. Just do a Google search for “study taxes affect investment” and you’ll find countless results. Why do you go around spreading falsehoods? Is it simply ignorance or a desire to mislead? We all hope it is the former.

      • donsailorman says:

        You are the one who is ignoring the facts. Germany, Norway, the Netherlands, and Sweden, all of them high tax countries, have higher rates of investment than does the U.S., which is a low-tax country. I think we should abolish the income tax because it is unfair, inefficient, and it invites corrpution of politicians and fraud by citizens and business people. We should, in my opinion, have a value-added tax only. Many, perhaps most, economists much prefer the value-added tax to the income tax.

        How to get politicians and leaders who will not be corrupted is the fundamental theme of Plato’s “Republic.” It is a thought experiment only and Plato did not think it could be implemented in the real world. For more Plato reading I suggest “The Laws” which is about how to have good government from a practical point of view. Aristotle, both in the “Ethics” and “The Politics” has many brilliant insights; He thought that ethics and politics were one ball of wax. In my opinion, political science has gone backward since the days of Plato and Aristotle.

        • Would you exempt businesses from income taxes as well? How about taxes on resources extracted?

          I take it that they would also pay VAT on goods they purchase in the course of doing business, so would pay some taxes too.

          • Schuyler says:

            Most will not likely agree to an economic balance sheet that includes externalities or long term deferred costs. I know very few people, even liberals, who are enthusiastic about paying actual long term costs, whether they approve of redistribution via taxes or not. We’re riding a wave of natural endowments. Probably for psychological – instinctive reasons, our economic policies will be determined by way of an ongoing series of crises rather than preemptive measures. Rational risk assessment and accordingly adjusted behaviors require rational participants. Perhaps there will be some tipping point that will allow for more far sighted economic policies? But will they be rational? Or just more ideologically based social experimentation? :-P

            • Politics is not a system that is given to rational thinking.

              I talked to one person in the government-related sector in the last couple of days who explained that he thought the way his organization behaved reflected employees acting in the way that they thought would best protect their own pensions.

            • donsailorman says:

              All economists that I know, and I know about 300 Ph.D. economists, favor an internalization of external costs. There is a big literature on this subject that goes back more than fifty years.

          • donsailorman says:

            The VAT is not a hard tax to understand; it is strictly a tax on consumption. Some object that it is regressive, but that can be easily fixed by exempting food and maybe rent from the VAT. The VAT operates very well in many European countries and seems to be the only way to finance a system of welfare captitalism in which a great deal of income is transferred from the rich and the middle class to the poor. Note that Sweden, the classic example of a welfare state, has completely abolished poverty. Some of the other Scandinavian countries have also done this.

          • donsailorman says:

            There are variations on the VAT. I think most countries tax only at the consumer level. In 2001 I bought a Brompton folding bicycle for 600 pounds, including VAT. When I left the UK 100 pounds of the VAT was refunded to me, working on the theory that I should not be taxed because I was only a tourist and would not be receiving any benefits of the VAT.

          • donsailorman says:

            Now that I think of it, I believe that that VAT is extracted at all stages of production. To make a loaf of bread, you need flour, so the miller pays some tax because he or she adds value. Then the baker has to pay some VAT because he adds value. Also the retailer adds value, so he or she also has to pay some VAT. But the consumer pays a lot through higher prices.

            • It seems to me that whenever businesses pay taxes, ultimately it is the consumer who pays, because without consumers, the businesses would have no reason for being.There might be some situations where the shareholder gets lower dividends because of taxes, but that would be the exception, rather than the rule.

            • donsailorman says:

              You are correct. The VAT is a pure consumption tax.

  2. robert wilson says:

    Is the true US debt $16+ trillion, or as Cox and Archer suggest, $100+ trillion?
    http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html

    • The $16 trillion in the debt of the US government where there are explicit bonds outstanding.

      The government has a lot more promises than that. It stands behind the Federal Deposit Insurance Corporation for banks, and the Pension Benefit Guaranty Corporation for Pensions, among other things. It also stands behind the promises it has made for future Medicare payments and future Social Security payments, and future payments to government employees. These would add a whole lot more.

      The linked article doesn’t mention the default risk on banks and pension. I am sure we could find other default risks as well. For example, the FHA behind US mortgages. So the total is amazingly high.

  3. Dave Cooper says:

    Something I’ve kept reading about, for years: the US has kept getting away with the Fed’s money-printing because of the US dollar’s status as the world’s main “reserve currency” — but, http://theeconomiccollapseblog.com/archives/the-giant-currency-superstorm-that-is-coming-to-the-shores-of-america-when-the-dollar-dies

    • I heard this issue mentioned twice today–once in a private conversation with someone else attending the ASPO-Conference, and later by a speaker, who was concerned that the effective price of gold could skyrocket if/when this happens. This is more of an issue that most people think. If we cannot reach agreement on the fiscal cliff, it could possibly push the world more in this direction.

  4. Pingback: Understanding Our Oil-Related Fiscal Cliff « Usman Sattar blog

  5. I think our greatest problem, in the fully collective sense, is the rejection of reality about what oil has become . We have bet our lives (literally) on the continued availability of oil, it’s far more than just this looming ‘fiscal cliff’ or whatever.
    more taxes won’t work, because taxes can only be paid out of increasing prosperity, and we can only have increasing prosperity if we can go on increasing our energy input into the commercial infrastructure, so more ‘stuff’ can be made for everyone to buy and keep the money whirlpool circulating.
    But making stuff needs cheap energy

    Seems like there’s a hole in my bucket

    • GermanStacker says:

      From the main article: “Such a cutback is likely to lead to more layoffs in discretionary sectors, and more recession.” Reading this always makes me think of the usual middle class fun spending on holiday parks, fancy restaurants, big cars and even property. Doesn’t seem so bad. But when the downward spiral accelarates, MOST things might become disretionary, and some of them seem to be viewed as essential by many people today. Health care isn’t essential, we can die at 60 without a problem for society.
      I admit that I’m reading this blog also to get sustainable long term investment ideas. And if I believe your story, it would seem to be “go short everything” in the medium term. Well the hedge funds got them a bloody nose on that, and then they may forbid shorting like during 2008 in socialist france, or my bank goes bust. Silver is nice, but too risky for all-in, have to sell some at the next little upspike. Thinking to run a bycicle repair shop with some other guys if I can preserve the capital until people have to stop driving cars, like 2025. Well better continue good ole’ prepping, nothing wrong with that. Urban people (like over 10.000) will never live off small scale farming, not going to happen. Seasonality and lack of space will forbid. Rather government confiscates land and provides staples soviet style. For prepping, recently discovered black molasses, i.e. byproduct of making sugar from sugarcane. Enormous nutri value (calcium, magnesium, iron and others in a complex natural way), long shelf life, not too bulky and cheap. Drink with hot water, put into yoghurt, everything.

      • its because we dont die at 60 that society has a problem

        • I think that the fact that we don’t die at 60 is connected to some other things. We have defeated “Survival of the Fittest” through farming and healthcare (among other things). If we had not done this, women would have more babies, but many would die earlier. Total population would not expand, so we could remain in our niche of the world ecological system. We probably cut this off about the time we learned to control fire, over 1,000,000 years ago.

          Now, it is the fact that health care can cure ailments as they come along, so we don’t die off before 60 that leaves us with a big elderly dependent population. The fact that we are financially well enough off to take care of the elderly allows us the luxury of taking care of them in nursing homes and assisted living centers (even though these don’t necessarily help the quality of life of individuals). In the hunter gatherer era, those who couldn’t keep up with the group almost certainly got left behind to die, or chose to walk away from the group, to die. We have changed this.

          • I keep banging on that everything changed for humankind—we actually became ‘humankind’– once we could control fire, after that it was only a matter of exponential progression until we controlled everything else, because fire-energy gave us access to every other form of energy. we thought we controlled the world but we forgot about bacteria , who are the real dominant species on this planet. We declared war on them, so they regrouped and are now fighting back to take back control of the planet that has always belonged to them
            as energy availability slips away from us, we will be literally in a fight for survival
            this article makes interesting reading on that subject
            http://healthafteroil.wordpress.com/2012/11/10/guest-post-survive/

            • Thanks! Your point about bacteria is a very good one. Thanks for the link.

              I think insects and other crop predators are in some ways parallel. We are genetically modifying seeds and developing all kinds of pesticides and herbicides, but mutation goes on so quickly that we can’t win. This is especially the case if we have to cut back our efforts in this direction.

  6. Schalk says:

    Thank you for another very interesting post, Gail. I would like to run some thoughts by you to see what you think:

    As I see it, the fundamental cause of all the western problems is that we cannot come to grips with the fact that we will have to start consuming less due to peak conventional oil and our changing demographics. This is manifested in all sorts of ways – increasing budget deficits, growing shortfalls in welfare programs, jobs going oversees etc.

    In the end, Americans and Europeans will have to reduce their consumption/production ratio (aka swallow some austerity) and the best way to do this is by adjusting salaries. A Chinese worker probably earns half the PPP adjusted salary of an American worker for doing the same job (and still manages to save 40%). Until western salaries are reduced or Chinese salaries are increased to a more balanced level, these trends will continue.

    Both these changes will have the same effect: Less consumption in the west. One can try to mask this fundamental truth through things like import tariffs, inflationary monetary policy, more debt and other miscellaneous policy tinkering, but this is just kicking the can down the road.

    Really the only solution I can see is if western governments own up to reality and launch honest programs to educate people about the implications of peak conventional oil and shifting demographics. People must understand that these factors fundamentally enforce reduced consumption in the west and that the best way to do this is to actually start looking after personal health and finances and improving personal energy efficiency. In this way reduced consumption translates directly to increased life satisfaction and everyone’s a winner.

    Such a government program will be truly unprecedented, but can you really see any other way in which these fundamental imbalances can be corrected without something like a dollar collapse?

    • I think a dollar collapse is probably part of the readjustment.

      The issue I see is that our economy has built in connections that make shrinking back difficult. For example, we have forgotten how to do things in a simpler way, using less energy. All we can think of is inventing some more advanced way, with more spending, that we solve each problem. So we invent a more energy efficient washing machine, rather than wash our clothes on a washing board or by a stream. Also, an electrical company that loses half of its business is likely to face bankruptcy. Thus, shrinking back is likely to be severely disruptive to developed economies.

      Also, I still think that climate is more on the side of most people in China, India, and the rest of Asia, than it is the US, Europe, and Russia. Warm countries can get along with less external energy use, since they can get away with bicycles much of the year and flimsier houses. Admittedly there are some cold areas in Asia, but the big areas competing with the US tend to be fairly warm. The people can get along with lower salaries, and still have a reasonable lifestyle.

      I am not even sure a government program to educate people would work. There are too many unknowns and too many difficult transitions. It would be helpful if someone thought through some basic issues like what land transitions might need to happen, if more human labor is needed on farms. How does one go about buying up land and redistributing it, or is there a better way (for example, surfs on existing big farms?) It would be hard for any group of us to think through what all of the problems might be. We almost have to face them, and work through them as they happen.

      • donsailorman says:

        Aristotle was very concerned with constucting a good society–or polity as he called it. One of the things he insisted on was that extreme concentration of wealth lead to plutocracy, which both Plato and Aristotle agreed was one of the very worst forms of government. To deal with poverty, he suggested that the government of Athens should buy up plots of land that were sufficent to support a family, and that these plots should be given to the poor, those who were on the Athenian version of welfare. The problem with Aristotle’s solution to poverty is that the land around Athens (and most of Greece) is poor land, not suitible for agriculture.

        One of the best federal U.S. laws ever was the Homestead Act, which allowed 160 free acres to anyone who would build a house on it and cultivate it for five years. I am not sure, but I think the Homestead Act is still in effect, and you may still be able to get 160 of free farmland. Of course it is much harder to find vacant or publically owned land in the U.S. today than it was, say in 1910 close to the time of the great Oklahoma land rush. In any case, I think redistribution of land is prerequisite for a decent economic future for the U.S.

        • Schalk says:

          Yes, such a division of land might very well become necessary in the future, but it will have to be accompanied by a massive campaign to give people the necessary skills to actually use this land productively.

          I’m originally from South Africa and, after Apartheid ended, the government began its land distribution program, buying productive farms from white farmers and giving it to previously disadvantaged blacks. In short, this has been a disaster leading to large productive farms going to waste and ever-increasing racial tensions to fester. The result has been a long range of brutal farm-murders (which has been noticed by genocidewatch.org) and many young people such as myself emigrating.

          • I am not even convinced that individual plots make sense, given the massive amount of training that will be needed. There may also be limitations in the amount of hand tools available. It may make more sense to have someone in charge who does understand what needs to be done. This kind of arrangement seems especially sensible, if farms are already fairly large, and under single ownership. Also, under such an arrangement, animals owned by the group might be used to help provide fertility to different parts of the total area over time, for example.

            The ownership model may look like surfs working on farms. Or there may be some form of common ownership. It probably would be worthwhile analyzing what has worked in the past.

        • They tried redistribution of land in Zimbabwe, where land was seen as wealth. They were too stupid to realise that it’s the produce of the land that constitutes wealth
          Zimbabwe went from a food exporter to basket case economy in a very short time (as Schalke says)
          Most of us wouldnt know what to do with 160 sq ft let alone 160 acres, and would starve to death between harvests. Farming is probably the top skill, few of us have it now. Then there’s the problem of those able to produce food having to defend it against those with nothing

          • donsailorman says:

            One of my friends in Grand Rapids, Minnesota owns a fine 160 acre farm a few miles from town with a big woodlot and also lots of pasture. He plows roughly 100 acres with two big horses and a horse-drawn plow, heats with wood and can easily live off the grid for an entire winter. For his day job he is a full-time English instructor at a nearby community college. His farm is bountiful in the production potatoes, O.K. for corn, and quite good for rutabegas and similar tubers. He also has some acres in beans and serval acres of berry bushes plus some fruit trees.

            I never asked him how he learned to farm, and his father was not a farmer. He was one of the “back to the land” movement of the 1960s and 1970s.

            I agree with you that farming is very hard to learn unless you have grown up in a farming family, but it can be done. A number of my students grew up on and still lived on farms.
            From an astonishing early age they would learn such skills as how to milk a dairly cow in a sanitary way. Not one of my students who grew up on farms wanted to be a farmer or a rancher. Also, not one of my students who came from three generations of loggers wanted to be a logger. Very few young people–especially young women–want to live on a farm. The median age of farmers is quite high and getting higher. As the old farmers retire or die it is going to be harder and harder to replace these very hard-working and highly skilled people.

            • One thing that bothers me today is the fact that kids spend their time filling their minds with video games and television. Thought and reading books are low on their list. This is even true for a lot of adults.

              The kids of farmers were learning a lot. I know someone sent me links earlier showing the brain size of hunter-gatherers was larger than today. I expect they kept track of an awfully lot of information about where foods of a particular type could be found at what time of year, without a map or a written summary of what they figured out. Also, how to get away from predators of various types.

            • donsailorman says:

              Several of my very best students were the sons and daughters of farmers–mainly because they understood the necessity of working long hours and working very hard to achieve success. Typically they would get up at 4 or 4:30 a.m. to do the morning milking, then study for a couple of hours before coming to eight o’clock classes. After school they would do several hours of farm chores until dark, and then during the hours of darkness they would study hour after hour until they had mastered the material.

              In my opinion, one of the main reasons students do poorly in school is that they are just plain lazy. By way of contrast, all of my four children had jobs by the age of fifteen and a half and saved up considerable sums for their college expenses. All my children worked in college for twenty hours a week of work study plus another job on weekends. They graduated with very little debt. I always emphasized to them the importance of proper work and study habits and set a good example for them.

            • I expect parents who are successful in general tend to do more of the things you mention than those who are “barely making it”. If nothing else, a person is working who is working several part-tme jobs to try to make ends meet may lack the time and energy to properly supervise his children and see that they get good nutrition and enough sleep.

          • That is a good point. It is not the land itself that is wealth. It is really the produce that gives us wealth.

            I think that we can lose sight of the fact that the ability to yield produce involves quite a combination of other conditions. Nature has its own way, and that will yield actually the highest yield, but spread over a huge area (if I understood Tad Patzek correctly. I think he was talking about primary productivity, not the highest yield of edible food.) We can in our own humble way attempt to produce a different ecosystem that will produce more edible food on a given area. I would argue that it takes a lot more than knowledge. About all we can do without fossil based tools is dig with a stick, and perhaps in some places stick a seed in the ground. Water is a huge issue as is not degrading the soil. There is also a question of how much of the yield we as humans are able to keep, as opposed to giving it to other competitors (insects, animals, crop diseases). Without fossil fuels, our share becomes much less.

          • I agree that many people wouldn’t know what to do on a farm, so its really a bit pointless to give farmland to individual families. Its really better that a community of families try to cultivate a farm together, with the help of someone experienced. The land and its produce could be owned and shared among that community – any surplus used for trade naturally. Also some people are better skilled at repairing stuff than the actual farming, so its only natural that skill would be distributed as needed. But I think the important lesson to learn for the people in such a “world” is how important the common sharing and community is – that “owning” and “riches” does not work in this world. Whether it is really possible to form this kinds of communities without someone “claiming ownership” is another matter altogether. History teaches us that at one point the dictator shows up and takes ownership. It almost seems inevitable that some sort of hierarchy will form even under an energy limited world, and especially if education also falls apart.

            I always found it interesting that human beings are always able to imagine “a better world” or “a fair and just world” – but is completely utterly unable to implement it. Some people just have a built in gene that they should conquer and rule, even in a small silly way by having the biggest McMansion and 4WD monstertruck parked outside (who would think that the more debt you have, the more status you have).

            • Don Stewart says:

              Dear John
              In my immediate area we have perhaps a thousand young people who could make a living on 5 acres and prosper with 10 acres. They have worked on farms and many have attended the community college sustainable agriculture program. What is the barrier? It is, quite simply, the cost of getting started–mostly the land. My county doesn’t make it difficult for them to build a small dwelling–but some neighboring counties make it impossible (keeping out the riff-raff, I suppose).

              So here we sit with Bernanke printing bales of money and giving it either to politicians or to bankers and driving up the cost of farmland so that young people who are woefully underemployed can’t afford it. It doesn’t make sense to blame this sorry situation on the young people’s alleged ‘lack of knowledge or work ethic’. Bernanke could use the money he is printing to buy and distribute land in small parcels to young people who demonstrate the ability to sequester carbon in the soil and prevent soil erosion.

              What we are suffering from is a lack of political will and imagination. I hope it isn’t just suicidal tendencies in the governing class.

              Don Stewart

            • I think that the hierarchical behavior you describe is common because there are so many people on the earth now. I have mentioned Craig Dilworth and his book, “Too Smart for our Own Good.” He talks about most mammals (including humans) being K-selected species. In K-selected species, hierarchical behavior is a way of dealing with overpopulation by squeezing out those at the bottom. I expect that in remote areas, or in a hunter-gatherer society, there wouldn’t be too much trouble with sharing and working together. It is when we get to today’s modern crowded society that fighting over who is “top dog” gets to be a problem.

              You may be right about a hierarchy forming in an energy-limited world. With enough oil, there has been closer to “enough” in the recent past. Wars have killed off fewer people recently, for example. If we are back to an era of shortages, the natural tendency to fight over what is available will begin again. Hierarchies will form in this effort.

      • Schalk says:

        I just wish that we could do this without the potential large scale tragedies that might accompany something like a dollar collapse. That could really be very bad…

        Have you ever written a post explicitly discussing how economies like the US of the EU could best manage the way down? I’d be very interested in such an article by a well-informed writer such a yourself.

        The irony is just that it really is very easy for individuals to live much more sustainably within our modern industrialized societies. I currently have a carbon footprint of under 2 tons/year and doing this has enhanced my life tremendously. My diet is primarily plant-based, I cycle everywhere I need to go, I have completely broken the erroneous psychological link between consumption and happiness and I get most of my fun from creation/learning. The result is that I have not been sick for 4 years, am in perfect shape, am financially secure, have a range of valuable skills and a scientific output 500% that of the norm.

        Yes, it is true that our debt-based system of perpetual economic expansion will break down when people start shifting down in large numbers, but even this has to be manageable through honest, intelligent and pro-active action. I just cannot help thinking that there has to be a way in which we can make the transition to true sustainable prosperity without any major catastrophes along the way…

        • donsailorman says:

          I suggest that you read two books by Lester Thurow, “The Zero-Sum Society” and “The Zero-Sum Solution.” Each book is available, used, on amazon.com for one cent plus shipping and handling. If you want to self-learn economics there is no better way than to read all the books of Robert Heilbronor and Lester Thurow. For a few editions, Thurow co-authored “The Economic Problem” which is a book for the basic microeconomic and macroeconomic two semester class. Both the late Robert Heilbronner and Lester Thurow were and are socialists, and both were among the best writers of economic prose ever.

        • I am not sure that I have the answer to what can prevent potential large scale tragedies. The picture a lot of people have in their minds is that of oil prices gradually rising, and the customer being able to buy less gasoline or diesel because of the high oil price. While this may happen in some cases, I am afraid that the issue will be more complicated–for example, there won’t be oil available at any price for significant periods, in some places, or there will be major interruption in imports in general, or there will be some states will secede, because they don’t feel that they are getting adequate benefit for the taxes they are paying, and think that they are better off “going-it-alone”.

          My concern is that today, everything seems to have a long supply line leading up to it. Even replacing the bicycle tire on your bicycle is not something a local person can do with local materials easily. The concern I have is that supply lines will start breaking, and this will bring about a breakdown of systems that don’t appear to be related to where the initial shortage took place. For example, a car may be taken off-line for lack of a replacement water pump, or electricity my be interrupted because of interruption in coal transport to the power plant, or because workers lack transportation to get to work, or because the bank is closed, and it is not possible to pay workers so they will continue to work.

          When I was in India recently, I saw people getting along with much simpler systems. But even these would be subject to supply line breaks, because they too have adopted at least some modern methods.

          Most people today have lost touch with how things used to be done, when most goods and services did not depend on fossil fuels and long distance transport. For example, my father (who is no longer alive) was a medical doctor–originally a general practitioner. He was trained in the 1940s to evaluate patients by how they looked. He had a good idea of how high a person’s fever was just by looking at him and feeling of him. He knew the difference in size between a 5 pound baby, a 6 pound baby, and and 8 pound baby, just by looking at the size of the baby, because he had delivered so many of them. He set lots of bones with the simplest of X-ray equipment, and I expect could almost do without, in a real pinch. My father often used hypnosis so as to avoid needing anesthetic in situations where this seemed better (childbirth; some accident situations). My father had a hard time understanding why today’s doctors have to do a number of tests to figure out things that appeared obvious to him, based on the way he was trained. While today’s doctors could probably do some percentage (80%??) of what they do today, using much simpler approaches than they use now, I expect most of them would need retraining to think like an old-fashioned doctor.

        • I can’t see how downsizing is ‘manageable’
          management implies control, and any form of control demands some form of dictatorship.
          any form of dictatorship will only suit half the population–at best–the rest will rise up against it, violently.
          we are all tribal, the dictator will be accused of favouring his own clan—look at Egypt right now, or Syria
          that is the future we all face I fear

        • I sincerely envy your freedom, its really the kind of life you promote that more people need to see and learn from today. That you can be happy without all the stuff. I am seriously working on forming a lower carbon footprint life and figuring out how I can limit debt and remove some of the “artificial chains”, but I am constantly torn between bad options – and I really don’t want to completely change everything overnight also as it would be too worrying for my family and myself. I have started analyzing what kind of budget I could really live on, as you are completely right that its quite simple for individuals to live more sustainable once you get rid of the “consumerism habits”. I have come to enjoy that I can e.g. buy books for the kids at a used book store, many are practically mint and cost 1/5th of new price. I am a long time computer gamer so I enjoy that I can download more content instead of buying new and expensive packaging, although I have a hobby in preservation of old used 8bit computer games that is hard to shake off (that Commodore 64 will still work on the power of a treadmill :) ) – Basically there are so many parts of life where we can change habits. We hardly eat out at junk food places (perhaps a couple times a year as a happening for the kids) – We mostly buy ecological food and have increased our vegetable percentage considerably (our kids love simple pasta+veggie meals without any meat or sauce). We hardly ever buy soda drinks – if anything I buy some beer now and then, and i plan to learn how to brew some beer myself (John Greer informs in his blogs that this is a good thing to know). We plan on starting our own little composting unless we can get the local housing community to pitch in on some together for the whole area. One small step for mankind… :)

          • Schalk says:

            That sounds great, John :-) Indeed, stepping back from the consumerist rat-race can be highly rewarding (not to mention very good for the planet).

            This is actually the central topic of my blog (http://oneinabillionblog.com/). I have only been writing for about 6 months, so it is far from being the finished product, but I think the central concept of the approach advocated – constructing intelligent micro environments within which happy, healthy, wealthy and sustainable living happens automatically – is worth spreading. Feel free to come by and take a look.

            It’s great that your kids actually like veggies and even better that they like books. Sounds like you’re setting them up for a great life.

            Oh, and my computer game phase started a little after the 8-bit era, but I am proud to have finished every version of Commander Keen :-)

      • Offering individuals a plot of land to farm is not a workable solution.
        Individual small plots generally do not have access to water other than through well digging, and this is causing serious aquifer depleting, as I discussed in the recent Water article on the Diner.
        What IS a demonstrably workable solution however is independent and distributed Hydroponics systems. This is not Theoretical, Peter on the Doomstead Diner practices this form of food production and raises most of what he eats inside his own house in Ocean Falls, BC.  You can read about it and see the evidence in the photos from his indoor system by following the link provided here.  This food BTW is “soft” enough for the “small” human jaw to munch through uncooked.  LOL.
        Hydroponics conserves water and uses far less in terms of fertilizer, and it can be done inside Cities as well as Suburbs.  Combined with Aquaculture and Mealworm production, a balanced diet with animal protein, fats and carbohydrates all can be raised up in far smaller spaces than conventional techniques.
        As a society we can move to this form of food production, but if the society won’t move that way, the individual can.  It is not theoretical, just a matter of the Will to do so.
        RE
        Doomstead Diner

        • Lack of access to water is an important point for individual small plots. It seems to me that it could be an issue for hydroponics as well, unless the person has a good supply from roof rum-off. Fertilizer for hydroponics seems to be a current fossil fuel product, but not something we can produce long term. Even containers are a current fossil fuel product. I expect hydroponics may be a temporary solution for some people–and maybe that is what you are looking for, not something we can use 100 years from now.

        • Hydroponics uses far less water than conventional farming since it is in a closed loop system and doesn’t runoff. It uses far less fertilizer for the same reason. Fertilizer can be made from various forms of animal waste, in the next year we should be experimenting with duck guano and worm juice possibly. Did you go have a look at Peter’s setup? William is starting on his in the next month or so.

          Far as whether the systems will operate in 100 years, probably. Its mostly made from Sewer Pipe, and lots of pipe in NYC is well over 100 years old now. That stuff lasts a long time. There will be plenty of parts to scavenge from old cars and decaying McMansions also.

          In the far, far future, you could build similar systems using Bamboo for tubing, tightly woven and waxed baskets, wooden casks etc. Mainly though I see this as a means for the individual to get off the current Industrial Food apparatus, and if undertaken on a larger scale could help to spread out population reduction over a couple of generations, rather than all coming at once like the Deer on St. Matthews Island.

          RE

  7. michael dittmar says:

    Dear Gail,

    excellent as usual. Many thanks for the insights.
    Actually I have a related question to all of this.

    Inflation and hyperinflation seems to be the only way out.
    (like pest and cholera as a choice or
    thanks to peak oil and shortages the entire system starts to fail and oil extraction
    even if wanted will not grow as much as expected .. so we avoid the climate cliff
    by bringing things to a stillstand)

    but anyway, here is my question:
    When trying to find actual about what really happened back in Germany after WW I
    the hyperinflation .. very very little is easily available..
    perhaps you or anybody here has some good links for further reading
    I would be very grateful

    regards
    Michael

    • donsailorman says:

      I have closely studied more than 2000 pages on the German inflation of 1923. The best book for the noneconomist is titled “The German Inflation of 1923,” which should be available, used and cheap, from amazon.com. If you are sophisticated in economics or economic history or in statistics, I recommend that you search the journals of economic history. Some of the best articles were published in German and have never been translated into English.

      Using Google you should be able to find a lot. I am almost sure there is a Wikipedia article on the German inflation of 1923. Try using different word combinations when you search with Google or another search engine.

      • donsailorman says:

        The author of “The German Inflation of 1923 is Fritz Ringer, and used on amazon.com the price is $2.91 plus shipping. Another excellent book is “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany” by Adam Ferguson. You can order it from amazon.com for $8.86 used plus shipping.

    • GermanStacker says:

      My grandparents lived it here in Germany, they showed me the worthless 50.000.000.000 bills. The mistake by the government back then making runaway and eventually hyperinflation possible was to put the newly printed money directly into the economy. That’s why today they go via the bond markets, where they always can continue to manipulate the game among themselves.
      At the moment of course, they are forestalling natural deflation. When that flips and inflation kicks in because people wake up, central banks can start selling the bonds back into the market along with financial repression, like forcing institutions to buy, maybe fixing low interest rates by law (Spain already demanded so). Then they destroy the money they recieve, or keep it who knows. Screw pensioners and savers on both the way up and down. Advice is the same as in Weimar: stay safe and sane, exit all paper, rely on yourself, prepare, default on your obligations when everybody does, and don’t buy property or equities until after the dust settled and everything is dirt cheap.

      • donsailorman says:

        The Federal Reserve System is an engine of inflation; it was created in 1913. Prior to 1913 there was no long-term inflation inflation in the U.S. The silver dollar of 1913 had exactly the same value of the original U.S. silver dollars of the late 18th century when it was first defined to be equal to the famous Spanish silver dollar known also as a “piece of eight.” By the way, the Mexican peso for centuries had exactly the same silver content as the U.S. dollar and was worth exactly as much as a U.S. dollar up to the late 1930s.

        What a dollar will buy today is what roughly what four cents would buy in 1913.

        I wrote my M.B.A. thesis on “Common Stocks as an inflation health. Using very simple numbers (not even any algebra, just graphs and tables of numbers) I proved that, contrary to conventional wisdom, stocks were not a good hedge against inflation. My prof was very impressed, gave me an A+ and said that I should try to get it published and now I regret that I did not follow his advice. Both my son (who majored in economics) and I agree that inflation is the big threat, and now all his 401k money is in I bonds, which are indexed to inflation. I prefer the Vanguard mutual fund that invests soley in TIPs, Treasury Inflation Protected Securities.

        I do not think that precious metals are a good hedge against inflation at this time because they are vastly overpriced, especially gold. In 1972, when it was legalized to buy gold, I bought large quantities of gold coins to finance the college educations of all my children. I paid about 37 dollars per ounce and bought Austrian gold philharmonic coins, in part because they are one of the most beautiful coins ever made.

        • gold is ultimately a loser, if only for the simple reason that you can’t eat it
          on the other hand, gold can be compared to its value down the ages, but how many ounces of gold would buy a decent horse or a parcel of land of a certain size
          I think comparisons would show that it hasn’t changed much, though I admit to be no authority on the subject

      • Julie Cosgrove says:

        Completely agree except I did buy a plot of land because I am not sure what happens in the future. Given that it is near impossible to determine the value of property today since it’s been manipulated by government and Federal Reserve printing for decades if not a century now, I just wanted to make sure I had something for a homestead outside of the SF Bay Area because I am not sure if you’ve ever been here but…there are a lot of crazy and violent people who won’t take kindly to being poor or getting their government checks cutoff. I don’t want to be around for that madness. I got a good deal anyhow.

        I am stacking gold and silver every month. Large and small denominations. Thank God we have a way to escape the lies, corruption and outright theft of the current system so lauded by the elites of both parties (land, gold and silver and other hard assets). This country has become a disgusting place in so many ways and I see so much support for it of it coming from the faux intellectuals in academic, media and the crony capitalist CEOs.

        It all happened in Rome very similar to this but this time around we have resource limits to worry about which will make it even worse. Buy a gun or twenty.

    • I haven’t tried to study this issue. Perhaps readers have links.

  8. Dana Visalli says:

    Thanks Gail, all very interesting. I’m curious why cutting funding to the Department of Defense isn’t considered. I think there is widespread agreement that most of our wars are ‘discretionary,’ so if we were serious about economy we could choose not to have them. Also if we want to face reality, then our discretionary wars suggest that we have a Department of Offense, not defense. A last relevant point is that non-governmental assessments of military spending render a total of about $1 trillion dollars, rather than the $500-600 billion shown in Figure 2. I’ve often said I would be willing to pay taxes to our so-called federal government if there was an actual Department of Defense and it was funded at about $1 billion a year to defend our borders from the Canucks. It really comes down to how serious we are about moving towards ecological and psychological health. So far I would say–not very serious.

    • I didn’t happen to mention cutting funding to the Department of Defense, because (1) the forecasts already were showing cuts (2) I wasn’t trying to outline all options, just some that others might not think about.

      I tried to take my spending amounts from the summary that was most exhaustive. Thus, it is my understanding that what I show already includes subcontractor costs and costs that might not be budgeted, since it adds up to everything the government spends. If I am missing anything, it would end up in the “All other” category in Figure 7, which is not very large.

      • Defence spending is 60% of the US Federal Budget. Cut the military, stop the killing.

        • donsailorman says:

          Sorry, but your numbers are flat-out wrong. Check a reliable source for your numbers; Gail has posted many of these numbers over the past several months. She is an actuary and is very good at judging the validity and accuracy of numbers. Or you can go to Wikipedia. I get most of my numbers from “The Economic Report of the President,” which is an annual publication and also from “The Wall Street Journal,” which is published six days a week.

          Entitlement spending is most of government spending, and it is increasing rapidly both in real absolute terms and also as a percentage of real GDP. For a good introduction to GDP and related numbers, I recommend the textbook I wrote: ECONOMICS: MAKING GOOD CHOICES, or any macroeconomics book. I especially like the paperback version of the Heilbroner and Thurow text, THE ECONOMIC PROBLEM. The textbook by Paul Samuelson is also excellent, and as always, old editions of textbooks are very cheap to purchase–often for one cent plus shipping and handling from amazon.com

        • Defense spending is a lot less than 60% of total federal spending, including Medicare, Social Security, and all the rest. Eliminating defense spending would stop the killing, but leave quite a number of people (especially young people) unemployed.

          Look at my graphs. Even eliminating it doesn’t do the trick, but it would be a fairly big step.

  9. Don Stewart says:

    IMHO, the real issue with the Fiscal Cliff isn’t ‘reality’, it’s ‘delusional thinking and emotional childishness’.

    What most people seem to want and so the politicians and the corporations promise them is a free lunch. And, for a little while, increased leverage seems to deliver a free lunch. And for several decades now increasing supplies of energy have fueled a global economy that delivered more stuff and fooled most people into thinking that debts would never have to be repaid–or at least we would all be so rich that repaying them would be a trivial exercise. We are like drunks–last night was fun but now we have a hangover.

    Can we behave like clear thinking, emotionally mature adults? And if we did so, what would life look like? The absolutely best description I have seen is in Charles Hugh Smith’s book Why Things Are Falling Apart and What We Can Do About It. I particularly recommend that you begin by reading these sentences on page 194:

    ‘We have seen that neither the marketplace nor the Central State can sustainably supply ‘the good life’ to the majority of citizens, for a number of systemic reasons. Both the market and the State have gained power by replacing the non-market economy–what I call the community–with high-cost ‘solutions’ that require ever-increasing amounts of credit, income, and tax revenues. Now that incomes are declining and credit has ballooned to destabilizing levels, those ‘solutions’ are untenable’.

    And on page 195:

    ‘the secret of a long, prosperous life is well-established: a vibrant social life of friends, family, and voluntary associations, a purposeful life (positive reasons to get out of bed in the morning), a diet of whole grains, legumes, fresh fruits and vegetables (lightly processed foods low on the food chain), occasional meat and seafood and sufficient sleep….None of these requirements require a fortune in cash…’

    If we believed these things, we would not be printing enough money to drive the cost of a parking spot in Hong Kong into the hundreds of thousands of dollars range, and the price of Kansas farmland to 15,000 dollars per acre. We WOULD be looking at what the government needs to do in the way of demolishing those regulations and practices which prevent people of modest means from living a good life with little money.

    So what can we do? We have discussed to death the notion of making our own families more resilient. As for politics, I have no magic oil lamp which, when rubbed, will make our government get religion. I guess all we can do is oppose it and try to throw sand in the gears. In terms of community, I can tell you what I am going to attempt.

    Dr. Joel Fuhrman’s book The End of Diabetes will be published in late December. A number of other people have demonstrated reversal of type 2 diabetes. I think Dr. Fuhrman may take this fact into the mainstream with his book. The Amazon publicity states: ‘The End of Diabetes proves that diabetes, heart disease, and high blood pressure are not inevitable consequences of aging. They are reversible and preventable. This simple and effective plan offers great food, starts working right away, and puts you on a direct path to a longer, better, fuller, disease-free life.’ I know how to do this. My goal is to leverage what I know to as many people in my community as possible. I’ll work on the details.

    Don Stewart

    • I agree with pretty much all of what you write and you have quoted.

      I figured out many years ago that my heredity puts me at risk for Type 2 diabetes, so I have to stay away from eating patterns that would lead to it. So far it has worked.

    • I totally agree with you Don, but its really tricky to convince enough people around us about the realities of life (the search for the good life). Many are just blinded by the media and consumerism around us, its expected that to be part of this society you take up a huge loan to get a house for your family and then toil away at some place for the rest of you life to pay down the debt. Its really a terrible deal (selling your soul to the banks). Some are more motivated by others and are able to pay down debt way faster so they become “free” earlier in their life (who wouldn’t want to be debt free by their 40s).

      I have also lately pondered a lot about what me and my family really need in life and could probably live on a very small budget if we wanted too. I sometimes think about stuff like, moving the whole family into my parents house (which is after all too big for them), work where I am now still but save a lot of money for buying a house a bit outside town that has a big enough area for some small scale food growing. The plan would then to reduce the amount of paid work in order to spend more time at this new home and making that life work. But at the same time I am no farmer, and basically I have no idea how to plant anything so all that would be new skills to acquire. Also I have this feeling that not everyone has to be a farmer, although noone really needs a computer programmer either if things turn badly (after all consultants are the first to be booted in recessions). So perhaps some other skill which I like but is useful in a low energy future (perhaps a bartering one). But in all of this we still have to live among other people, and we have kids with their own expectations. We can try to teach them better ways but i cant hold them back from their friends and certainly not education. Even the notion of moving them to a new place is one I cant do, as I know how important growing up in one place was for me as a kid.

      I am looking around though, there are some communities and places like this website where I can at least get some feeling for how a future could be. Very few around me regards energy and running out of resources a real problem we have to worry about – that we will invent ourselves out of it. Sometimes I listen to them, and even people like Richard Alley are optimistic about finding an alternative that is sustainable. Naturally just listening to that man alone just makes you more happy, and I sometimes feel the hope that we will be forced to adapt our energy use and technology as we go along the curve down. Question is if we are able to at least stretch that way down as long as possible so we hardly feel the decline – or if there will be serious conflicts and resource wars breaking out all of the world. The latter scares me as it doesnt really matter if you are debt free and have your own crops growing if the society around you breaks apart. But I am not really a believe in mad max scenarios so I guess we should at least try to prepare a bit and learn new skills as we go along.

      At least my mind is set to that change is necessary and that I dont mind it either. Stuff like public transport which made me previously think “how stupid, who want to take the bus?” – now really makes sense and I would support any good new public transport system. Same so with a lot of socialistic ideas (although I have been partly drawn to that before) about community, sharing and “having enough”.

  10. C Breeze says:

    Regarding health care:

    Although the Japanese system looks good in some ways, it is not sustainable:
    http://www.washingtonpost.com/wp-dyn/content/article/2009/09/06/AR2009090601630.html?sid=ST2009102805439
    Any time some valued thing is given for free (or at very an artificially low cost), people begin to overuse and waste it. When an insurer pays the doctor rather than the patient, prices can be raised to heights that no patient would willingly pay. When free emergency care for the poor is mandated but free home care is not, everyone chooses emergency care, even though it is only “free” to them: it costs society a very large amount.

    Imagine if food, which is also essential to health, were treated like health care. The elderly and poor would get a card that would allow them to eat for free in any restaurant they please, but it would not pay for making their own meals at home. If you were REALLY hungry and had no food insurance, you could go to the finest restaurant in town and they would have to give you a free meal. Imagine what would happen to the waiting time for tables at the finer restaurants. How much you would have to pay for your meal to subsidize all those freebies for the hungry? What would happen if the government cracked down on costs by lowering wages for chefs and waiters? Would this improve our food system? Would restaurants become more affordable?

    At least for food, there would be a limit: people eventually get full. Unfortunately there is no clear limit to how much health care a person would use. In the Japanese system in the article link above, one mother took her child every week to the doctor during cold and flu season, just to make sure everything was fine. It is not uncommon for Medicare patients to have several weekly doctor visits. Some of these are quite wealthy people who demand the finest in care for free even though they could afford to pay for it.

    Society would be better served by a very basic universal health care system to ensure everyone has preventive care and standardized treatments for common diseases and for the most complex/expensive diseases, with everything beyond these basics being paid for directly by the people receiving the care.

    • I think that in the United States, Medicare has gotten to be very much like the system described in the newspaper article you linked, especially when the “supplemental plans” that most seniors buy are included. There are too many people who are bored or lonely, and look forward to an outing to the doctor’s office as a somewhat pleasant excursion for the morning or afternoon. With the coverage available, trips for issues that are a bit out of the ordinary often end up at the emergency room, since the cost is $0. (My husband and I have made a lot of trips to doctors offices and emergency rooms with elderly relatives.)

      One of the big issues in Japan is the demographic change. If the US were to get its elderly population up to 40%, its costs would truly be horrendous as well.

      I agree with obesity being an issue. That was my reason for my comment at the end about more emphasis on diet and exercise.

  11. Les says:

    It seems that health care costs are the biggest problem.

    The two biggest factors here seem to be heroic attempts to extend lives which cannot be extended, and chronic diseases related to obesity.

    I have had personal experience with both. About two years ago a family member had a heart attack after he checked himself into hospital feeling unwell. He never recovered consciousness, but was kept alive for nearly a month in intensive care. Fortunately for the rest of us, his bills were paid by his brother (who is one of the “0.1%”).

    I also have in my immediate family four people with type 2 diabetes, and two who have had, or will soon have to have, joint replacements.

    All of these people are or have been obese, and more than half of them are or have been smokers. Their ages range from thirty to early sixties.

    The solution to the health cost crisis is not cutting money to health care providers, nor rationing health care. It is convincing people to eat more healthily, developing a realistic approach to dying, and getting rid of tobacco completely.

  12. RobM says:

    Your ideas are constructive and well thought out but do not address the core causes of our predicament. For starters we need:

    1) One child policy.
    2) Ban on refined carbohydrates.
    3) Phase out of fractional reserve banking.
    4) Severe luxury goods tax.
    5) Revenue neutral carbon tax.
    6) 40 mph speed limit.
    7) Cessation of military presence on foreign soil.
    8) Campaign funding limits.

  13. Greg C says:

    I see at least three underlying problems; One, our debt and interest based (capitalist) economic system requires continual growth to survive. Two, we live on a finite planet.

    We have been in recession in spite of the fact that we are still growing; we’re just not growing as fast as we need to grow. If the growth stops all together we are headed into a depression. If that continues long enough the system collapses.

    Once our economic system becomes large enough relative to the resource base of the planet, the quantity, quality and accessibility of the remaining resources become a limiting factor. Physical resources have limits and they decline over time; however, financial assets are not similarly constrained.

    We have reached the point where the total value of our financial assets; which is just a claim on physical assets, dwarfs the dwindling physical asset base. We are playing a zero sum game with growth.

    Three, we have more population than the resource base of the planet can support given our high per capita consumption of natural resources. Also, the combination of our population size and our societal complexity are now overwhelming the capacity of the planet to absorb and neutralize the increasing quantity of increasing toxic waste products. This becomes another limit to growth.

    Technology will be of little use because it requires cheap energy to be commercially viable and it suffers from diminishing returns. In order to have technology, we must first have a surplus to fund the increasing specialization that technology requires. Lacking growth our technology will slowly disappear. At least we can hope it will be slow.

    If I understand Gail correctly, our problems are systemic. She used the expression “baked in” to describe it.

    People have suggested many things we can do to slow down our rate of decline, but like it or not, none of them will stop it. As good as many of the suggestions are none of them seem to address the underlying systemic problems which are show-stoppers.

    It’s no wonder people are in denial. But that’s another story; perhaps our genetic predispositions are the real underlying factors, not geology, physics or economics.

    • You are right–our problems are systemic. Perhaps it is possible to get past their manifestation this time, through some slight of hand trick, but over the long term, the situation looks impossible to solve. Some type of collapse appears likely.

      The oil problem is really the very tough one to solve, especially combined with the fact that we live in a system that is so utterly dependent on oil as a transportation fuel. It is very difficult to go to a system that doesn’t use oil as a transportation fuel–even if a little piece can be transferred out (local transportation by electric, say) it still leaves a big piece that is oil based.

      It is also very difficult to go from a system that offers benefits to seniors and disabled persons, to one that offers much less (or no) benefits to them. We don’t have the customs built-in (say, women don’t work outside the home, and instead stay at home and grow vegetables and tend elders) that would accommodate this change.

  14. The only real solution is to get OFF the Money Economy. The systems which have developed around it since Ag came on the scene are all unsustainable and consume resources faster than they get replenished.

    Leaving the Money Economy is difficult but not impossible. A few of the Diners have come close to the goal of independence from it, though nobody is completely removed from it while still chatting on the Internet of course.

    If you are not yet destitute, you do have some control over how you can remove yourself from the money economy, if not in totality at least enough to not suffer the worst of the outcomes. Information on HOW to do this is out there, and it just takes willingness to make the changes in your lifestyle to enhance your survival probabilities, and those of your loved ones.

    This system is currently in CASCADE COLLAPSE. The “Fiscal Cliff” is just one manifestation of that collapse. The ONLY alternative is to remove yourself as much as possible from the Money Economy. Piles of Gold in the Basement Safe will not do jack squat for you as the Conduits fail. Perhaps suh piles of Gold buy you a bit of time, but not much more than that. You must work together to build local communities that can develop snergetically sustaiable systems. It CAN be done, there are Diners who are DOING it now. There is still TIME left to make the changes necessary here, but it is running OUT. Goobermint will NOT make the changes, not in its current form anyhow. So it is up to you as an individual to make the necessary changes to if not isure your survival, at least up the probabilities for it.

    RE
    http://doomsteaddiner.org

    • In my view, the major alternative to the money economy is the gift economy, in which people freely share whatever resources they obtain. People gain status by giving away more, rather than by saving more. Typically, there are strong sanctions built in when someone hoards, and does not play be the rules. This kind of system works best when groups are small enough that everyone knows everyone else. From what I have read, this kind of system has worked around the world, in many places. Family finances are usually operated on this basis.

      An economist explained to me that one function of debt (not the only function) is to distribute wealth from the less wealthy to the wealthy of society, and I can easily believe this, based on how the system really works. Thus, in a way, it is a way of creating a system with higher “Gini Coefficient“. I have talked previously about hierarchical behavior in other mammals being a way of marginalizing those at the bottom of hierarchy, in times of ecological stress, because of overpopulation, trying to push them out. So one function of debt seems to be to contribute to this marginalization. (Arguably, this is too negative view.)

      Research seems to indicate that people are happier and healthier in societies with lower Gini Coefficents. This would seem to be an argument for moving away from debt-based money. But any major change like this would be extremely disruptive. I would not expect such a change to happen until it is forced on us.

      • Don Stewart says:

        Gail
        I do not think that an entirely gift based economy will work. Nor do I think that an entirely financialized economy will work. Both are inconsistent with human nature and the ways of the natural world. In my experience, aiming for a rough split is about right. Half our needs are supplied by a home economy, and the other half are supplied by cash facilitated trading.

        A hundred and fifty years ago the farmers around here were probably about 80 percent home and 20 percent cash. The family was the basic unit of production, but they also traded work with neighbors and bought supplies in town and paid taxes in cash. Those who live on that land today have at least reversed the percentages, and many are probably 90 percent cash and only 10 percent home. If they have animals, there is still some work trading as people provide the daily care that animals need. We can see that work trading now is a last resort and fossil fuels have permitted us to pretend to be islands. I see that attitude reversing among the young people who work at the farm.

        In thinking about a potential ‘way down’ we have to solve three problems: we don’t know exactly what is going to happen nor exactly when it is going to happen so we can’t optimize with mathematical precision; we have to be economically competitive in today’s marketplace; and we have to have enough self-reliance to be able to survive an abrupt transition.

        There is also the issue of mental resilience. Those who have lived through collapses say that the death of dreams is more devastating than the physical hardship.

        I have previously named my chosen strategies, so I won’t belabor them: emergency water, gardening, joining in a local food web, getting out of debt, working on the mental angle.

        Don Stewart

        • Don Stewart says:

          One other thing people might want to think about is a simple solar PV system. See, for example:
          http://www.suburbsolar.com/products/

          For about 2000 dollars you can protect yourself against some of the consequences of garden variety power outages, the more severe power outages suffered in ice storms and hurricanes, and, in the event of a grid collapse, you will be able to continue to power some of your electrical tools.

          I haven’t bought one of these as yet…so am not an expert. I do know (mostly rural) people who own them.

          Don Stewart

        • Thanks for your insights. Working toward a better balance might very well be the direction to go. But that will mean a reduction in what goes into what economists report as GDP.

    • The Gift economy, better known around these parts as Potlatch is the far superior means of internal distribution of resources than the money economy. The Money economy supplanted it because of its relationship to centralized Ag and the concommitant connection to Militarism.

      Potlatch doesn’t scale up all that well, though at its peak in the Pacific Northwest there were probably around 200,000 people in affiliated tribes all practicing it and trading with each other.

      For such a system to work again on such a scale, we likely have to wait until the collapse of the Nation-States, already well underway now with Secessionary Movements sprouting like mushrooms in Spain and the UK, and here as well. However, while large scale Potlatch is probably at least a generation away, small scale Potlatch can be practiced by any small to medium sized community. Again, this is mainly a matter of will to operate against the cultural conditioning we have been subjected to through the courde of our lives, but this can be overcome. It is only the narrow thinking that all Growth is Positive and that Money is a necessary ingredient to the society of Homo Sapiens that is an obstacle here, and this can be overcome through a variety of means, a source of endless discussion on the Diner as to which ones would be most effective. LOL.

      RE

  15. arcos says:

    According to Adam Smith, the economy consists of 3 input factors (Produktionsfaktoren). This is very basic economics.
    1. Labour (quantity and price)
    2. Resources (quantity and price)
    3. Capital (quantity and price)

    Now, for an economy to grow, the quantity of each of these input factors needs to grow as well. If not, the price of the input factor will increase and therefore the equation 1+2+3 will be in inbalance. In that case, the economy cannot grow anymore or, depending on the inbalances will even contract.
    So, what concrete situation are we facing today?
    We have a resource problem. The quantity of the most important resource, conventional cheap and high quality crude oil has been flat or even decreased since 2006. The result is higher prices (roughly 4 times higher as in 2003).
    Therefore the simple economic equation is out of balance. What was or still is the reaction of the policy makers?
    They increased the quantity of capital and consequently its price (interest rates) declined. Interest rates are near zero today. No more can be done to decrease those capital costs. In the meantime, amid peak oil, the price of this ressource will keep rising resulting in a ever increasing inbalance of the economic equation until we reach the point of zero return, which means the inevitable crash or collapse.

    • donsailorman says:

      I agree with all of your comment, but I think you left out the key factor, which is human capital. Human capital is more important than physical capital (buildtings, trucks, machinery, tools, etc.) and more important than financial capital as a constraint on economic growth. Let me give you a specific example. About twenty years ago I had three generations of the same family in my Introduction to Sociology class. The grandmother, who was about sixty five,got the highest grade in the class, and I gave her an A+, which I do very rarely. She had excellent reading and writing skills.
      The mother was in her early or mid forties and got a straight B. The eighteen year old daughter got a charity C-.

      Here is another example, again from about fifteen or twenty years ago. An FBI man came to my office for an interview about a student who was applying to the FBI to work as a secretary. Immediately he wanted to shut the door, but it was my strict policy to always have an open door to my office at all times. Reluctantly, he agreed to the open door and insisted that we talk quietly enough so that nobody could overhear us. He started out with a silly question: Had I ever seen her carrying around “The Communist Manifesto.” Of course not. Then we went on with a series of basically silly questions, until I finally told the FBI agent than under no circumstances should the FBI hire this girl, and I pulled out her final exam from one of the courses she had taken from me and showed it to the agent. He was positively appalled. The writing was at about the fourth grade level–ungrammatical, riddled with punctuation and spelling errors. About half of the students who enter Itasca Community College could not take college-level classes, so they had to take about a year of remedial education. We would start with a freshman class of about 600, and two years later about our graduating class of sophomores was down to about 220. In other words, both primary schools, middle schools, and high schools were totally falling down in their obligation to give good educations to their students. When I was a kid, it was common for a student to fail a class and not be promoted but rather would have to repeat the class. Now the norm is social promotion, because the current dogma of the educationists is that students must stay with their age-mates.

      My second oldest daughter is an elementary education teach–she is tip-top at her job. But now the policy is “fulll inclusion,” which means that students of all intellectual levels must be included along with students with serious EBD (Emtionally Behavior Disorder) problems. Among many other duties, she has to make sure that the EBD students take their medications at the right times. In my opinion, the current educationist dogma is entirely wrong.

      • edward boyle says:

        this dogma is in the west pretty universtal but in USA it seems extreme according to what you are writing here. Being in Germany Id on’t find it so bad but the dogmatic left certainly weakened standards. Only high parental standards at home keep our kids way above theri peers with their smart-phones and computer plus TV in their rooms. Reading is a novel idea for them mostly.

    • Bogwood says:

      Not sure about 1700s but it seems like what we call capital today is an allocating factor and not a true separate input. It determines who gets to use the resources and the labor. If you had the labor and the resources you would not need the “capital.”That’s why having capital distributed by the government and the financial barons is unsettling. But maybe it’s semantics.

      • donsailorman says:

        “Capital” an extremely confusing concept because the word “capital” in economics means something radically different that what accountants and financial analysts call “capital.” In finance and accounting a synonym for “capital” is owner equity. It is financial in its essence and is equal to assets minus liabilities.

        In economics, capital (without a qualification word) means what I said it means–real physical things that you can touch, such as machinery, buildings, computers, tool and other items that are produced in order to produce something else. Capital in economics is radically different from natural resources (also called “land” in classical economics. Oil in the ground is a natural natural resource, a pure gift of nature. Once it is refined into fuel it is capital, and when it is consumed by consumers it is classified as a consumer good.

        Both accounting and economics have excellent clearly defined and agreed upon definitions. But the definitions are quite different in the two disciplines. Economics has a very clear and unambiguous vocabulary. By way of contrast, sociology has a terribly vague, confusing, and ambiguous vocabulary. In sociology there can be five synonyms for the same concept. Also the same word, such as “status” can have two radically different meanings, which, it does. One of the surest ways to get a sociology paper published is to invent a new word or concept. So all the time sociologists keep inventing new terms and using old terms in new ways. Economists just do not do this.

    • Someone pointed out to me that with investors facing virtually 0% interest rates (certainly in inflation-adjusted terms), many people are commit funds to oil exploration and development projects than would otherwise be the case. This leads to more drilling in marginal production areas, and may be behind the bulge in drilling in Eagle Forde and Bakken.

      If this production is not profitable, this becomes clear at some point, and even this goes away. There is evidence that Bakken drilling is down recently. With the delay in getting new wells fracked and into operation, this isn’t yet reflected in production, but may be soon.

      So this may be the corresponding way of reaching a lower and lower return (and eventually zero return) in the investment sector as well as in the bond market.

  16. edward boyle says:

    I had the thought about trade that if you had universal social and environmental standards then cheap imports would be no problem as the whole thing would even out. Only high skilll levels would matter and transport costs of finished goods.

    If you make shoes in Europe or America with union wages and high pollution controls then why should the govt. allow the manufacturer to dump the jobs for workers in Bangladesh for a dollar a day who get burned to death in their factory and use coal and cause massive chemical pollution?

    The two main arguments for free trade have been the striving upwards of the 3rd worlders to riches and a middle class life which almost none of Chinese and other factory workers ever get and that the locals in the West get cheaper goods which is a benefit and that we can always move up the food chain to get better jobs through education and technological innovation. Of course all of these are just rationalizations for businesses wanting to make more profits by wage and regulation arbitrage. They do the same in the United States and Europe switching locales according to lax tax codes and regulation and where the weaker unions are. Bottom line is that business is bigger and more flexible than local and even national governments.

    The social welfare state in all countries is going broke due to demographics – a pyramid scheme based on a permanently young work force will only work in absence of progress in medicine so people die off on average around 65. Perhaps this would be a solution. You cannot invent a wonder drug or technology and then say nobody is allowed to use it. Esssentially we need a stasis in medical technology, a ban on research. We must go back to herbal medicine and “let your food be your medicine”. With proper health prevention (nutrition, sport) people can live “healthily” to very old ages without health care costs or medication. Hi-tech medication will disappear along with containerized refrigerated shipping and electronic gadgets anyway in the mid term future. So people who don’t take care of themselves will die off at around 50-60 from heart attacks and “consumption” or alcohol related dieases. We see the trend in the uneducatied whites in USA already of a lowering of life expectancy. Perhaps post peak oil a social welfare state will work as a state pension for a couple of years for the few long-lived and some traditional medical attention from Chinese style “bare foot doctors” from the Mao era would be sufficient. That and all local manufacture would provide full employment and a sustainable state. The left wing Keynesian social welfare concept is going broke due to the curse of progress in medical technology and the right wing liberal free trade state is going broke due to the job exports, i.e. reduciton in tax base, import deficit country. Together these two make for a fiscal and balance of payments deficit. Wtih a long-term balance of trade and demographics you would have long term stability. In old China they banned new technology and trade with abroad. This worked fine for keeping long-term stability. Then the military would be superflueous as well at least at the level the USA is used to having.

    • I don’t know what a person does to fix the current mess. I ran out of room in this post, or I would have shown a graph showing that in recent years, reported US corporate profits (as a percentage of my wage base) have been rising, at the same time that implied average corporate tax rates have been falling. This is hardly ideal. I expect this result at least in part occurs because of the ability of businesses to use cheap foreign labor.

      When I visited India, I saw some factories, and the situation was not good–light for working coming from a window or hole in the ceiling or a small fluorescent light bulb, and workers working without safety equipment. I heard about some workers sleeping on factory floors–it certainly saves commuting expense. Coal seemed to be the fuel of choice. Restroom facilities were close to lacking. It is hard to compete with this business model.

    • not exactly saying you’re wrong Edward, but what happens when you take one of your kids along to the docs with a serious injury, or a raging infection, and the doc says ”sorry, we only grow herbs now to treat that” Antibiotics are just so ‘yesterdays medicine”
      He tells you to go away and live a healthier lifestyle.
      would you demand to be the exception in your brave new world?
      Or would you accept the early death of loved ones, because there’s just no room for them anymore?
      That is the reality of what you advocate. Prior to antibiotics, and the other life saving research of the last 200 years, 1 child in 5 died before their 5th birthday
      I fear that a ban on research wouldnt include those doing the banning, just the banned

  17. dolph9 says:

    I read a comment by Mr. Sailorman and have to respond, if only because it has the potential to cause people alot of pain.

    Only a madman would invest in TIPS. Inflation numbers are manipulated lower than they actually are, even more so now as an attempt by the government to hide what’s actually going on. Incredibly, neither food nor energy is accounted for in the misleading and corrupted inflation numbers. TIPS have negative yields even as oil prices rebounded from their lows. To invest in any government bond, much less TIPS, is to “financially repress” yourself and guarantee a negative real rate of return. Moreover, you subject yourself to default risk.

    I cannot, for the life of me, think of a more dangerous asset to be in than TIPS.

    Gold, on the other hand, is in a solid, 12 year bull market without any signs of a blowoff top. Moreover, the case for gold, with negative real interest rates and governments printing money with no abandon, has never been stronger. Gold is under-owned, comprising less than 1% of financial assets worldwide. Supplies are tight, as ore grades have been on a secular decline.

    Gold at $1700 an ounce may not be cheap, but it’s far from expensive.

    It’s irresponsible and dangerous for individuals like Mr. Sailorman to pimp TIPS and call gold overpriced, and he needs to be called out on it.

    • donsailorman says:

      Check the numbers. TIPs have far outperformed the index of Standard and Poors 500 stocks over any ten year period you look at.

      I have been studying both gold and silver markets since 1961. Without exception, all my investments in gold and silver have been highly profitable. In 1962, a year in which the DJIA went down fifty percent I made a profit of 29% on Pato Consolidated Gold Dredging Limited. I also made a great deal of money on Sisco Mines, a silver mining company. Among my other successful investments are Campbell Redlake (gold) and also Giant Yellowknife (gold).

      I have always been successful in my precious metals investments. What I now recommend is $1,000 face value U.S. silver coins–especially dimes. Dimes are way better than the .99 fine one ounce coins that are widely promoted, because you can make relatively small transactions in dimes, and you just cannot do that with one ounce silver coins and certainly not with one-ounce gold coins. IMHO, gold is currently way way overvalued and is due for a crashdown. Silver, IMO, is much more reasonably priced.

      I think gold will crash down to about half its present price within two years. Gold tends to follow oil, and I think oil is due to decline greatly in price due to weak demand. For some reason, silver tends to follow soybean prices, and it has done this for at least thirty years.

      Before you invest in silver, the one essential book to read is “The Silver Bears” by Paul Erdman, Ph.D. Not only did he write a number of successful books about finance, Erdman served some years in a Swiss prison. Silver is a highly manipulated market, much more so than gold, which tends to be ruled by the forces of supply and demand.

      • GermanStacker says:

        To say the precious metals are overvalued today, means you don’t understand the function of the market: It’s very nature is to be a place where EXPECTATIONS are traded. I expect to be hungry tomorrow, so I buy food today. The buy signals for gold and other real assets are as strong today, or even stronger, than they were 10 years ago. Physical gold is for the long term. Inflation can take years to show up, but we are in the end game. I don’t think there will be another deflationary event in the financial world like 2008. Gold won’t crash for good before this is all over. The central banks did their homework, and keep the printing presses ready. Spain and Italy won’t exit the Euro, they will increase debts. People will take their pension funds out to buy real assets. Also with oil, you are hearing so often “the price of oil might crash to 40$ because of demand destruction”. Only that it never looked back to something similar like that, since it startet rising in 2002. There was a little overcorrection after the 150$ spike, that’s it. I will rethink my opinion when Brent goes back under 90$ for more than just a brief time. We have too much liquidity in the system. The economy may contract, but that means just more money printing, and a scramble for real thinks by investors.

        • donsailorman says:

          Gold bullion and gold coins are the worst of all possible investments. During the civil war in Lebanon is was common for gangs to break into the houses where it was suspected that gold would be hoarded. The gang leader would ask the father of the family where the gold was, and typically he would not tell. So the gangsters would take the youngest child and start cutting off fingers. Unless you confessed to where the gold was, they would mutilate to death all the children, then the wife and finally the father. Most of the hoarded gold in Lebanon (and there was a lot) was stolen in this manner.

          Or read about the famous Soviet gold purge of 1937 (am not sure that is exactly the right year) described by Alexander Solzenitsyn where communist cadres stole gold from families in much the same manner as the Lebanese gangsters did.

          In my strong opinion, those who favor holding gold coins or gold bullion just have not studied history. In other words, they literally do not know about risk and have little understanding of the risks involved in owning gold. When I bought about a hundred gold philharmonic one ounce gold coins in 1972 for $37 per ounce, I bought from a souce a hundred and sixty miles from where I lived, then hid them in a safe deposit for many years. I did not even tell my wife anything whatsoever about my gold investment.

          Oh, another good example of the risks of owning gold: In 1933 or thereabouts Franklin Roosevelt made it illegal to own gold and confiscated all gold that government agents could find, then forced the gold owner to accept the government set price of $21 per ounce. When his inquisitors and investigators had confiscated all the gold they could find, Roosevelt promptly raised the price of gold to $35 an ounce in an attempt to stop deflation. From 1933 to 1972 all gold (that could be found by the government) was set at the artificial price of $35 until the U.S. went off the gold exchange standard and allowed people to own gold again. Anybody who has studied the history of gold knows this. Governments have confiscated gold before, they can do it again. I have to conclude that you have studied little or nothing about the history of gold and instead read the news letters sent out by various companies who sell gold. These newsletters are almost always bullish on gold and many claim to be able to predict the future price of gold with “technical analysis” and certain charts. Technical analysis is 100% pure B.S.; it always has been and it always will be. Speculative markets have been chaotic (in the strict mathematical sense) forever and they necessarily must remain so forever.

          • GermanStacker says:

            “Gold bullion and gold coins are the worst of all possible investments.”
            As the gold price has outperformed most anything during the last decade, you can only mean a bad investment in the context of loss risks brought about by sovereign crisis, riots and war, like pictured in your anecdotal evidence. Following this argument, any tangible asset would be in the same bad position. Not mentioning “paper” claims which seem to be the most easy to confiscate or default upon. So where do you go?

            “I have to conclude that you have studied little or nothing about the history of gold and instead read the news letters sent out by various companies who sell gold. These newsletters are almost always bullish on gold and many claim to be able to predict the future price of gold with “technical analysis” and certain charts. Technical analysis is 100% pure B.S.”
            Although I’ve been reading quite a bit on the history of gold, that was more for entertainment, not so much in order to make investment decisions. If you entered the gold market at the low in 2008 with a good physical position, you are well in the green now. What more do you want? And following chart analysis works fine, just because everybody else does (especially the computers who run most of the volume). If you play their volatility games without becoming too greedy, you do well in the medium term. As for the long run, there will be signs when to exit and buy something else, keeping a physical position as you see fit. Do you consider yourself smarter than Central Banks and Billionaires piling into gold, right now as we speak?

            • donsailorman says:

              Yes, I am smarter than the billionaires who are buying gold bullion and gold coins today. When I was a student at U.C. Berkeley I took two intelligence tests and got perfect scores on each. One was the Terman Concept Mastery Test, typically used to test for genius, and the other was the Weschler Adult Intelligence Test. More to the point, however, I know way more about history and economic history than the billionaires do. Further, I know far more about weighing risks and uncertainties than they do because of my many years of studying finance and economics at U.C. Berkeley. I bought Berkshire Hathaway for $14 a share, shortly after the initial offering of those shares. Now look at the value of Berkshire Hathaway Class A shares. You do the math.

    • I like to hear diverse opinions from different people. I can understand your view. One issue that people should be aware of, though, is that having gold doesn’t necessarily do anything for your ability to buy a loaf of bread, or for that matter, many other things. Exactly what will happen in the future is not certain, and diversification is not a bad idea. If the US prints its way out of its problems, there is a distinct possibility that the inflation rate will soar. TIPS may not 100% protect the investor, but they theoretically will work better than a lot of other things. In this scenario, the inflation rate might be higher than the oil and food increase.

  18. robert wilson says:

    I too am nervous about TIPS. They may be overpriced?? I am retired, hoping not to outlive mandatory IRA distributions. After metals TIPS have been my largest holding. I regret selling about a third of my TIPS last year. They proceeded to go even higher. Will wait for December interest payments and then decide what to sell..

    • donsailorman says:

      I do not think think TIPs are overpriced. Check the performance of TIPs over the last ten ten or twelve years; use different ten-year periods and compare to the 500 Standard and Poors performance over the same ten year year periods. From the time the TIPs were invented until now, they have invariably had a higher rate of return than the S&P 500 has had. I expect this trend to continue, because at this time, in my well-informed opinion, the stock averages will fall to roughly half their current levels within two or possibly three years. I agree entirely with Gail about the likelihood of a financial collapse that is going to happen within a few years.

    • robert wilson says:

      I certainly agree that TIPS have performed exceedingly well. Some financial experts expect a future financial unraveling to result in an interest rate spike, possibly to high levels. Is this likely? How would TIPS perform in such a scenario?

      • donsailorman says:

        Anything that increases expectations of increasing rates of inflation will increase the real return of TIPs. You can prove this deductively with simple arithmetic. My only worry about TIPs is that the government may default on TIPs. The U.S. has never defaulted on any of its national debt, but that is no proof that it will not do so in the future.

        Perhaps the best investment is a productive farm of 160 acres of arable land on it and a house that was built around 1980. I specify that date because in White Bear Lake I lived in a house built in or close to 1980, and it could be heated without central heating. We had a humungous kitchen stove for both cooking and heating and also hot water. It could be fueled with either wood or coal. During World War II coal was strictly rationed, but we never worried, because we had a huge woodpile, adequate for heating through at least two winters. Sometimes, when the supply of anthracite (My dad always bought anthracite rather than the cheaper bitumenous coal.) ran low we would fire up the woodstove and all hang around in the huge kitchen. We also had a huge pantry/lardor and also small rooms for two servants. In 1880 almost all upper middle class families had two or three servants. Besides, we had a hand pump in the back yard that still worked, and you could clearly see where an outhouse had been. When the water stops flowing, an an old-fashioned outhouse is a great thing to have. Also the house originally had no indoor plumbing and of course no electricity. It also had no insulation. The first thing my dad did when we bought the house in the spring of 1943 was to blow in a lot of insulation. He bought it for $4,500 in 1943 and sold it in 1949 for $5,800. Three years ago I was walking with a real estate agent past my old house, and I asked her what it was worth. Answer: one million three hundred thousand dollars–it had changed hands at that price in 2007. Now, that is inflation!

        You can still buy humongous kitchen stoves that will both cook and also provide hot water and that can be fired with either coal or wood. If memory serves, they cost about $12,000 plus shipping, but I have not looked at prices for such stoves for a few years.

        • hate to mention this, but isn’t coal mining one of the fossil fuel burning problems that got us into this fine mess in the first place?
          And just who is going to get your anthracite? One of the servants?
          Coming from several generations of coalminers, I can assure you that anthracite is the deadliest to human health. You might want to check out lung diseases in the old coalmines, Nasty.
          another teensy detail—if I may? if we all have 160 acres, and we all start cutting down trees, pretty soon we’re going to have 160 farmers swinging at the same last tree with axes.
          there’s also the minor problem of hauling wood. if you do find and unchopped tree, say, a mile away, you might haul it back to your woodshed. But the next unchopped tree is 5 miles away. You might at a push get that one. After that, we’re into EROEI territory.

        • Do you mean a house built in 1980 or 1880?

          • donsailorman says:

            I mean a house built in 1880 or thereabouts. These houses were built before electricity and before indoor plumbing became the norm.

            My friend, Matt Miltich, the one who plows his land with horses has a fully sustainable woodlot–roughly fifteen or twenty acres of hardwood, mostly oak or maple. He also makes his own maple syrup. In the winter he moves his timber on a traditional skidder with his two horses, though oxen actually work better than horses do for this purpose.

            Rather than horses, if I were to buy a farm today I would grow a lot of corn or potatoes or sugar beets to make ethanol to fuel very old tractors. Another good option would be to put about twenty acres of soybeans and modify a newer tractor to run on straight vegetable oil. The very old tractors were all designed to be fixed by the village blacksmith; you can keep them going indefinitely if you have access to a skilled blacksmith.

            My second youngest nephew is a skilled blacksmith with his forge in Berkeley, California, where he grew up. He is extremely successful, makes an income in the six figures every year. Mostly he caters to the wealthy who want the best wrought iron for their balconies or step railings. He can make just about any iron or steel tool from a bar of iron.

            In my opinion, one of the best occupations for the future will be blacksmithing using approximately the technology of 1900. Like it or not, we are going to have to go back to fixing things rather than throwing them away.

  19. Bicycle Dave says:

    Hi RobM,

    Be careful or long-time readers will think you are in cahoots with me :-) So, to save your reputation, I’ll quibble with a couple of your points:

    1) One child policy: why one child per couple? I’m not sure what is the right number, but perhaps we should look at this in terms of, as you say, “core causes of our predicament” – or as I would say “root causes”. If the root cause is an imbalance of global human population versus the natural resources needed for a sustainable population level, then this suggests we should try our best to determine what is a sustainable number of humans (considering variations by regions of the planet) and then set some goals. For example, a guesstimate (without proper analysis) might suggest 4B by 2100. Then using actual population growth factors http://en.wikipedia.org/wiki/Population_growth construct a “Planned Parenthood” policy that gets us there. This approach will probably show that the policy should be one child per X couples – and X is probably a double digit number. Such a policy would drive other policies such as totally free birth control, sterilization, and abortion. Along with tax policy to discourage child bearing, encourage homosexuality, and a massive education program – among other measures.

    6) 40 mph speed limit: a 35 mph limit would be better (maybe even a little less). I think the goal is more than lowering fuel consumption – it is also to stop wasteful consumption of natural resources for trivial transportation needs. At some lowered speed limit, we could envision several benefits – no crash protection being needed which then paves the way for Neighborhood Electric Vehicles and Human Powered Vehicles (NEV-HPV) as one no longer has to worry about getting clobbered by a 70 mph, 2-ton SUV piloted by driver who feels almost immune to harm; significant reduction in road maintenance especially if 3/4 of the roads are closed to heavier service vehicles (busses and delivery vehicles); a much greater demand for higher speed public transportation; health improvements as walking and cycling become more practical and less dangerous.

    However, our suggestions are just idle conversation as very few people believe there is any real problem that would justify these drastic measures. And this is the catch 22 – in order for people to be able to grasp the gravity of our predicament, they would have to be free of the political, economic and religious ideologies that prevent them from understanding the simple physics and math of “Limits to Growth” and the limited power of technology once the FF energy supply diminishes. My addition to your list of “solutions” is to make it a criminal offense for anyone (parents included) to indoctrinate children with the equivalent of Dennett’s Lancet Fluke analogy http://www.ted.com/talks/dan_dennett_on_dangerous_memes.html These topics should only be explored in a science based educational setting when the child is older. So, fat chance of this becoming law!

    Hi Don Sailorman,

    As always, I enjoy your thoughtful comments and appreciate the time you put into them. It is equally disappointing to see your rational thoughts pounced upon by people offering more flame than substance. BTW, (off topic) did do the WI MS 150 in August – probably my last one – got my 10 yr jacket, but getting too strenuous for the old body.

    • donsailorman says:

      Hi Bicycle Dave,

      Today in St. Paul the weather was just fine for biking. I love my three speed Brompton folding bicycle and will keep it so long as I can keep my balance on two wheels. Eventually I will change to a recumbant or semirecumbant adult three wheeler, but I am fighting hard against old age and am greatly reluctant to give up activities that have given me great pleasure since the age of six. In the nineteen forties we used to race our bicycles on ice for hours at a time. That is great fun. Nobody wore a helmet and and not once did anybody get hurt enough to go home to mama. Did you ever race bicycles on ice? Once you learn how to do it, it is relatively easy.

      • David Harney says:

        Hi Don,

        I don’t want to hijack Gail’s thread with a personal conversation, so I’ll just briefly comment that it’s also abnormally warm here a bit north of Milwaukee; no, not many kids biked on the ice in Duluth (think really big hills!); and please consider a recumbent (2 or 3 wheel – we have both) as the body-friendly position can prevent lots of aliments related to aging – I’ve been a bent rider for 10 years and should have switched 10 years before that. If you feel the urge to talk more about recumbents, just ask Gail to send me your email address.

  20. Don Stewart says:

    This will try to respond to some claims made about land redistribution, the points made about the Locavore food movement, and the principles of Permaculture…based to a considerable extent on my own experiences.
    http://www.lavidalocavore.org/diary/5233/carrots-are-not-enough-the-limits-of-the-local-food-movement
    http://www.patternliteracy.com/668-what-permaculture-isnt-and-is

    Troutman has three main points: (1) You can’t recreate what never existed (food has usually been traded over long distances by water) (2) Access isn’t the only issue (people will eat chocolate sundaes and corn chips rather than the healthiest spread of local food prepared by a celebrity chef) (3) Localism, as a style, has never succeeded anywhere, on anything. (people go for the cheapest, which is likely traded).

    I agree with the first point…which is why I think Permaculture and Intensive Grazing and perhaps Will Allen’s efforts are part of our solution. All three of these rely on pretty recent discoveries in science. They are not the way your great-grandfather farmed. I agree with the second point. As a society, I think we have a choice…we can restrict the Big Food companies by law or else most people will eat themselves sick. It is very clear to me that we cannot afford, as a society, to keep those who eat themselves sick alive. So…we are probably going to have a Black Death experience. I also agree with the third point partially.

    Now the nuances. The great distances over which non-perishable food was shipped by the Greeks and the Romans was in a much smaller world. Most of the people and most of the farms were close to navigation. It will be a lot harder to manage transportation in a Peak Oil world where vastly more of the agricultural land is far from navigable water and the people near the oceans are in peril from rising sea levels. Which tells me that those of us who live inland, but have access to land for growing food, are probably going to become a lot more Local than the Greeks and Romans. If the railroads and the barge lines continue to work in the US, then the grains which supply a lot of our calories can still be distributed reasonably cheaply.

    What about the localism of the human spirit? Humans are famously capable of conflicted behavior. We can exhibit hatred and love almost simultaneously. It is quite possible to go to the store and buy the cheapest wheat, while dealing with a farmer you know to get tomatoes, while teaching your children how to grow climbing beans in the garden. In short, there is a continuous gradient between the purely economic and behavior motivated by love. I have no faith that the behavior of humans can be ‘designed’ by bureaucracies to fit comfortably along that gradient. Everyone is going to have to find what works for them. The best governments can do is get out of the way–today they strongly support the financialization of everything…which is killing us. (I am not alone in this belief. Many Permaculture practitioners and Charles Hugh Smith say something similar.)

    So is Permaculture the solution to all ills (defined to include intensive grazing a la Alan Savory and perhaps Will Allen’s Growing Power efforts)? If you read Toby Hemenway’s essay, you will begin to understand that Permaculture is an attempt to solve problems in the most efficient ways which also serve both humans and the rest of the ecosystem. Humans are seen as part of the ecosystem, and intelligent participation in that ecosystem is our best hope. Permaculture is thus a contrast to the early exponents of science who talked about ‘dominating nature’. Permaculture is definitely not synonymous with ‘legally organic’.

    Toby does not talk in his essay about the gorilla in the room…how many people would a Permaculture Earth feed in a world of Peak Oil? If you look at the How To Save Humanity But Not Civilization talk he gave at Duke, you will get a clue. In the Q and A, which is not in the video, he said that his guess is somewhere between 500 million and 2 billion. If Big Food succeeds in creating a Black Death experience, it might help us achieve those levels (that is supposed to be said with a wry expression on the face).

    In short:
    1. We really need to keep ocean and river and canal transportation alive. We also need to keep the (probably electrified) railroads running and very probably rebuild branch lines.
    2. We need to implement all the tricks we can borrow from Permaculture in terms of carbon farming, water use, etc.
    3. Each of us needs to find the right combination for us on the gradient from economics to love.
    4. There really is a difference between dry commodity crops and perishables. Understand the difference.
    5. We need to face the power and intentions of Big Food without illusions. If a Black Death experience is the only reasonable outcome, get ready for it.
    6. Against all odds, we need to try to make government helpful rather than destructive.

    Don Stewart

  21. Don Stewart says:

    Seeing no ‘reply’ line, I will quote from one of Gail’s responses and then give my response:

    ‘We can in our own humble way attempt to produce a different ecosystem that will produce more edible food on a given area. I would argue that it takes a lot more than knowledge. About all we can do without fossil based tools is dig with a stick, and perhaps in some places stick a seed in the ground. Water is a huge issue as is not degrading the soil. There is also a question of how much of the yield we as humans are able to keep, as opposed to giving it to other competitors (insects, animals, crop diseases). Without fossil fuels, our share becomes much less.’

    Fortunately, there is research and development about all these issues. For example, in the current issue of Permaculture Activist you can find Peter Bane’s review of Martin Crawford’s book How To Grow Perennial Vegetables. A few quotes:

    ‘Martin Crawford has gone farther down the path toward a permanent agriculture than virtually anyone working in the temperate zone of the world. That he has done so systematically, both trialing plants and reporting his findings to the world, is a boon for all permaculture designers.

    The advantages of perennials are many, the disadvantages real enough but few. Tillage is a tremendous contributor to the oxidation of humus and the buildup of carbon dioxide in the atmosphere, a major driver of catastrophic climate change. Whatever we can do to reduce this is worth considering. Soil fertility is more easily built in non-tillage systems but weed management, while not more onerous overall, requires different approaches. Placement and the relationship of neighboring plants over time must also be more carefully considered than in settings where everything is wiped away with the onset of cold weather. Crawford addresses all these issues.’

    In short, industrial agriculture (both plants and animals) has been enormously destructive. But there are people in the world who know how to do it all better. While it is OK to examine the destructive methods, it is more productive to consider ‘best practices’. Tad Patzek might consider a trip to England and a meeting with Martin Crawford.

    Perennials require us to dig with a stick just once. And they are far more resilient to both drought and flood. We’d still be smart to use our remaining fossil fuels to do water landscaping, but such landscaping lasts centuries. And societies have landscaped with human and animal labor. The informed placement of plants in relationship to each other can maximize the yield that humans get as opposed to the random scatter which may occur in Nature.

    Again, I hasten to add that a partnership between Mother Nature and humanity isn’t guaranteed to feed an unlimited number of mouths. But, as I observed earlier, Big Food is doing its best to take care of the number of mouths problem.

    Don Stewart

    • If climate would “stand still” for a while longer, it would help in knowing what crops to plant. I agree, though, that perennials have huge advantages. The big disadvantage with perennial grains is lower yield. I would expect that this would be the case for perennial vegetables as well, because these plants have less need to reproduce themselves.

  22. Don Stewart says:

    Gail
    I highly recommend that you spend 14 minutes with Martin Crawford in his food forest in England:

    Notice a few things in particular:
    1. Feed 4 or 5 people per acre
    2. Low maintenance
    3. Drought resistant
    4. Mobile nutrients thanks to fungi
    5. Hundreds of edible plant species (are we as smart as orangutangs?)
    6. Carbon sequestration
    7. Mostly, but not entirely, perennials
    8. Stacking leads to efficient harvesting of solar energy

    Don Stewart

    • Thanks! I agree that what the movie shows is probably the “way to go”. It seems like an individual solution is probably needed for every piece of land, depending on soil and water conditions. Learning to do this will not be easy, and there is a time lag in getting the new forest garden “up and running”. All of these things make it hard to put these in in many areas. I haven’t run into a forest gardener living around here, for example.

  23. Pingback: Guest Post: Understanding Our Oil-Related Fiscal Cliff »

  24. Don Stewart says:

    A recurring theme is that agriculture is just visible oil and when the oil gets scarce or expensive we are all going to starve. If any of you are going to mindlessly repeat this mantra, you should at least take a look at this article, describing the new rice yield record holder in the world–a small farmer with a one acre plot in India–using very little in the way of oil in his production. These methods are not new, as you will find if you read the article. I have repeatedly stressed many of the same themes here–with uncertain success in communicating. Maybe this article written by a professional will make a difference. (The article came to me from a Professor at NCSU).

    I do want to note one thing. When they talk about controlling weeds with ‘mechanical methods’, I am pretty sure that is weeding with hand tools. So these methods are likely to be more labor intensive…which loops back to my many observations that governments need to stop persecuting people of modest means…since I don’t think farm labor is ever likely to pay as well as hedge fund management and coupon clipping.

    Don Stewart
    http://independentsciencenews.org/un-sustainable-farming/how-millions-of-farmers-are-advancing-agriculture-for-themselves/

    • Don Stewart says:

      One added thought. If you believe that no agricultural policy change can make it through a legislative process without passing through the needle eye of corporate profit, then you will dismiss the methods described in the article as ‘impractical in the real world’. Because corporations are not deeply involved in the production and have little opportunity to skim large profits. Therefore, we can expect derision and hostility and Hillary Clinton running around to conferences saying that everyone is going to starve unless we all get behind Monsanto and Cargill and Coca-Cola.

      But be sure you identify the root cause–and it isn’t the hostility of Mother Nature. A lack of oil creates problems, but not catastrophic problems.

      Don Stewart

      • Don Stewart says:

        As luck would have it, Gene Logsdon’s post today reviews a book which explains how to construct on only one tenth of an acre something akin to the food forest that Martin Crawford has grown in England. I will be back with a qualification which frames one of the things you need to think about if you are considering the question ‘can we feed ourselves’.

        http://www.resilience.org/stories/2012-12-05/what-is-space-anyway

        I just finished reading a pre-publication copy of Paradise Lot, by Eric Toensmeier and Jonathan Bates (out next year) that makes me wonder exceedingly about the meaning of what we refer to as “space.” On only one tenth of an acre, the authors tell how they squeeze in 150 to 200 different kinds of food plants, including some in a pond and more in a greenhouse, all for year round eating in the north. From this “space” they are harvesting 400 pounds of perennial fruits and vegetables every year (some of which I have never heard of, like Rebecca violets) plus lots of annual vegetables. The book includes a detailed layout map showing how they do it, but I’m still finding it hard to believe. The best way I can think to describe their method is that they’ve eliminated space in their garden except for the pathways, which they are trying to fill with useful low-growing plants too. From now on, when someone asks me how we can prevent food scarcity forever I have a ready answer. Simply eliminate our preconceived notions of space. With work and knowhow, we can always find room to grow more food. Using the forest food methods of Paradise Lot, I have a hunch we could right now be growing all the food we need simply by eliminating all the space taken up by America’s lawns and filling it with food producing plants. If we run out of that space, there’s thousands and thousands of miles along all our roads which could be growing food or fiber.

        Back to me. I don’t know whether the Paradise Lot is entirely self-sufficient in terms of nutrients and water. So you need to ask yourself where the water is coming from now, how long that supply will be reliable, and whether the supply might be impacted by either climate change or energy and financial crises which prompt the neighbors to start harvesting more of the water which originates on their property. (Organic matter and runoff water are currently a nuisance in suburbs, and freely available–but for how long?) Certainly, with their heavy reliance on perennials, the Paradise Lot is far more resilient than the average farm or garden.

        In terms of nutrients. These intensive gardening methods need a lot of compost. If you start with poor soil, you have to bring in compost and amend the soil heavily before you can get good yields, or spend several years growing soil building cover crops and perhaps grazing small animals on it. Once you have achieved good soil fertility, the trick is not to lose it. Good water management plus assiduous recycling of all organic matter (including your own waste) is the key IF you are growing for your own consumption. If you are growing to sell for cash, then you must replace the nutrients you have sold for cash by bringing in organic matter from somewhere else. Where the ‘somewhere else’ is makes a difference. If you have divided your property in two parts and grow a cash crop on half and grow compost on the other half, the problem of moving compost is small. If you are bringing in compost from 20 miles away, you are more reliant on fossil fueled transport. You could use horses or oxen to move the compost, but then you have to feed the horse or ox and you have to do that 365 days a year.

        So…when you read Paradise Lot when it is published (and I think you should), keep these sorts of questions in mind….Don Stewart

        • donsailorman says:

          My sister’s favorite book on small-scale farming was the famous classic “Five Acres and Independence” by Maurice Kains. It is still available, both new and used on amazon.com

          My late sister had five irrigated acres in Georgetown, California in the heart of gold country. She kept half a dozen milk goats, chickens and rabbits for meat and eggs, and she had a big corn patch, plus fruit trees, berry bushes and a big vegetable garden. She was very nearly self-sufficient, but she had to sell her dairy products to pay for things such as health insurance, gasoline, and repairs to her twenty year old car. She would often go to the local farmers’ market and trade her cheese and yogurt and eggs for other produce grown on other gardens or minifarms. Her farm was 100% organic.

          • Don Stewart says:

            And…if you don’t believe me about the necessity for assiduous recycling, see:

            http://www.motherjones.com/tom-philpott/2012/11/are-we-heading-toward-peak-fertilizer
            But the next time someone facilely insists that the “industrial farms are the future,” ask what the plan is regarding phosphorus. Developing an agriculture that’s ready for a phosphorus shortage means a massive focus on recycling the nutrients we take from the soil back into the soil—in other words, composting, not on a backyard level but rather on a society-wide scale. It also requires policies that give farmers incentives to build up organic matter in soil, so it holds in nutrients instead of letting them leach away (another massive problem stemming from our reliance on abundant NPK). Both of these solutions, of course, are specialties of organic agriculture.

            Back to me. While Philpott rejects the ‘backyard’ solution, I think it is vastly better than doing nothing if it happens to be your backyard and your are growing a substantial share of your own food in that backyard.

            • donsailorman says:

              Both my mother and my sister used fish guts to fertilizer their corn patches. Native Americans often planted a small fish with a corn seed, but you get results just as good by using only the guts. My mother had a large patch of Black Mexican corn in our Victory garden, and in my whole life I have never had corn on the cob that was as sweet or good as that Black Mexican corn that my mother grew in White Bear Lake, close to St. Paul, Minnesota.

              From about the age of four my sister was a great angler. We could legally catch 100 perch a day and the same number of sunfish from White Bear Lake. Both perch (which is essentially a smaller version of walleye pike) and the sunfish are excellent fish to eat for people, but we would freeze the fish and feed them to our cats usually. All our cats thrived on a diet of nothing but fish.

        • Thanks! The last part of your comment relates to the, “Where does the compost come from?” question I raised in response to another question.

    • Thanks! It is interesting that wider spacing, incorporating more organic material, and better water management can do so much.

      I remember hearing that higher US corn yields were the result of closer spacing–working in exactly the opposite direction.

      I wonder how much organic material is really available for mixing in. We obviously don’t farm every acre, so leaves from trees in unfarmed acres could be added, as well as available manure. Maybe there is plenty of organic material for the farm,s as well as for the original locations. It would seem like there is an upper limit to the amount of organic material that can be taken away from other areas, without doing harm to those areas, but maybe this isn’t an issue.

      • Don Stewart says:

        Gail
        First, you are at the limits of my understanding, so caveat emptor.

        Nobody takes organic material to an old growth forest. That should tell us that Mother Nature is a very effective recycler.

        It seems to me that there are a couple of monkey wrenches which have been thrown in by humans:
        1. We try to increase production beyond what Mother Nature can sustain by planting corn and soybeans ‘fencerow to fencerow’.
        2. We export the most nutrient dense parts of the crops (the corn kernels and the soybeans) off the farm where they eventually end up flushed into the sea. Thus, we are steadily subtracting nutrients. Our current strategy is to replace them with mining which depends on fossil fuels and depleting supplies.
        3. We plow which instigates a lot of bacterial activity which increases yields in the short terms but decreases them in the long term because the bacterial activity burns the humus out of the soil.

        Having begun those three misguided efforts, and in combination with other misguided efforts, we have reached a point where yields can now be increased by using soil and plant science to do things quite differently. But the ‘quite differently’ implies a level of human husbandry that we find distasteful. We want to master video games, not crop synergistics or the science of gardening with microbes. And so all our institutional pressure is to do more of the same disastrous practices.

        Don Stewart
        PS As for the lack of forest gardeners in Atlanta. Albert Bates recently organized, at The Farm in Tennessee, a 10 day forest gardening session–and I believe Eric Toensmeier was one of the instructors. I believe the session drew 35 people. From little acorns…

        However, it is true that Andrew Jackson did his best to exterminate the forest gardeners. A Cherokee woman knew (if I remember correctly) 7000 plants and their uses. I used to live near the spot which the Cherokee’s regarded as the Center of the Universe–near Hartwell.

        • donsailorman says:

          I suspect your memory played a trick on you: I doubt that Cherokee women knew the potential of 7,000 plants. For one thing, I do not think 7,000 plants exist in traditional Cherokee country. I’ve studied a lot of anthropology, and in contemprary hunter and gathering societies the number of plants the women gatherers knew about and used was roughly 700 (from about 400 to 1,000).

          Otherwise, I agree with you completely. I have found it very useful to study the techologies of Minnesota Native Americans. Over time I acquired a lot of Native American skills, such as flint knapping, wild-rice gathering, making fish traps with no metal and also making excellent pemmican, which lasts indefinitely and is an energy-dense food.

      • Don Stewart says:

        Gail
        Another thought prompted by the quotation someone gave you from Donnela Meadows about bad price signals.

        The price signals we get today are that financial speculation pays very well, while husbandry of plants, animals, land, water, and solar energy pays very poorly. Just suppose for a moment that those price signals are disastrously wrong in terms of long term human survival.

        It is a fact that thoughtful, skilled people have come up with a variety of systems which depend on the careful husbandry that we currently believe has ‘little value’. It is also very probable that the correct system to choose depends very much on where you are and your particular circumstances. For example, if you are in the eastern third of the US and have a decade, a forest garden where you live may make a lot of sense. Perhaps you supplement your food supply in the early years by working at a community garden or on a small farm.

        If you are in the semi-arid or arid parts of the country, an intensive grazing program will probably occupy most of your (larger) plot. Earthworks to sink water into the ground will need considerable work. You may garden seasonally with irrigation from ponds.

        If you need a whole lot of food right now, because things are collapsing around your ears, then perhaps the Bio-Intensive methods of John Jeavons will make more sense to you. Half your property is likely to be devoted to growing compost. Perhaps the work of Emilia Hazelip in France or the simple methods using lots of mulch will fill your needs. If, like Joel Salatin, you have inherited severely degraded land, you are likely to use intensive grazing to rebuild the soils.

        In any event, there are likely to be some commonalities. First, you will assiduously recycle nutrients. Second, you will rely on the soil food web to mineralize the nutrients which the plants need. Third, you will rely on the plants ability to attract the soil food web to their root zone (the rhizosphere) with exudates to promote the mineralization (as opposed to adding NPK fertilizers). Fourth, you will make sure you are growing lots of nitrogen fixers. Fifth, you will either rely on a forest to slow down and sink water into the ground or else you will construct earthworks to help do that. Sixth, you will use lots of clever methods for controlling solar energy (such as Joel Salatin’s veggie garden floating on a raft in his pond or using tall plants to provide shade for leafy greens that benefit from it).

        Seventh, while you may never equal the knowledge base of a Cherokee woman, you will know several hundred plants. Even those which you want to get rid of will probably have some use. And eighth, conservation of human energy will be a prime consideration–but you will still do a lot of physical work.

        Regardless of the particular method you choose, if you are actually successful, it is likely to be because you spend a lot of time thinking and working intelligently to create the conditions for the flourishing of plants. If you are grazing intensively, you will call yourself a ‘grass farmer’. You will increase the biological activity on your land by several multiples above that common today–and you will tilt the table in favor of human flourishing without destroying everything else.

        Don Stewart

  25. Greg Yurash says:

    Gail – Figure 7 shows that Interest on the national debt is becoming a major sink for government dollars. It is important to see that this interest today, let alone it’s future growth, is waisted money. Interest payments buy no services, no economic activity, no tanks or bridges or Medicare Doctor’s wages.

    The U.S. constitution allows for the government to print it’s own money. Yet we are instead held hostage to the Federal Reserve, where-in the government borrows money into existence from private banks and pays them interest on it. This is the world’s largest Ponzi scheme. Eliminating the Federal Reserve will not solve all budget issues, but it would be the quickest fix with the largest impact on the budget. The question would become if there is enough political will to fight the banksters. That will certainly isn’t showing itself in D.C. It would have to be a grass roots movement, but our fellow citizens are currently too hypnotized by reality TV and the sports channel to have a clue.

    • I am afraid I don’t understand the interlinkages well enough to comment on that idea. At some point, we will need to reduce debt. This seems likely to have a very negative impact on growth in GDP, since GDP is a measure of consumption, not how that consumption is financed.

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  28. Don Stewart says:

    To Don Sailorman
    Another good idea is to put a few tall T bars around your garden. Birds like to land and survey the scene (looking for cats and snakes and such) before they commit themselves to serious foraging. Very frequently, they leave you a mineral rich deposit. Move the T bars around to spread the wealth.

    Don Stewart

    • donsailorman says:

      Thanks. I think that horticulture (gardening) rather than agriculture (with a plow) may be the wave of our future. On her five acres my sister practiced nothing but horticulture with a hoe and refused even to use a Rototiller.

      It is possible to build a high level of civilization on gardening. See HUMAN SOCIETIES: An Introduction to Macrocociology,” by Nolan and Lenski, any edition. I happen to like the old eighth edition, because I worked on and gave my endorsement to that edition, but any edition will do, and the old ones on amazon.com are very cheap.

  29. ¿Based on Figure 1, we either need to raise taxes by a little more than 15% of wages, and keep raising taxes in the future to keep up with an escalating problem, or we need to cut back on government benefits, such as unemployment insurance, Social Security and Medicare.?

    Cut government benefits? NO–CUT MILITARY SPENDING. The US is spending billions every years on wars not only in Afghanistan, and formerly Iraq, but on military operations and proxy wars in 8 nations (currently), with more billions spent every year on military bases and operations around the world. This is an unsustainable military empire; it’s killing the US budget and the US taxpayer, and destroying people and economies around the world. And there’s no justification for it. morally or financially.

    • donsailorman says:

      Check the numbers. If we cut military spending to zero we would still have a large national deficit. The 800 pound gorilla is entitlement spending; by comparison all other spending by government is relatively small potatoes.

      Military spending, including Veterans’ benefits of health care and pensions is a smaller percentage of real GDP than was military spending during the Reagan administration, when there was a very large buildup in spending on the armed forces.

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