Reaching Debt Limits

If an economy is growing, it is easy to add debt. The additional growth in future years provides money both to pay back the debt and to cover the additional interest. Promotions are common and layoffs are few, so a debt such as a mortgage can easily be repaid.

Figure 1. Author's image of an expanding economy.

Figure 1. Author’s image of an expanding economy.

The situation is fairly different if the economy is contracting. It is hard to find sufficient money for repaying the debt itself, not to mention the additional interest. Layoffs and business closings make repaying loans much more difficult.

Figure 2. Author's image of declining economy.

Figure 2. Author’s image of declining economy.

If an economy is in a steady state, with no growth, debt still causes a problem. While there is theoretically enough money to repay the debt, interest costs are a drag on the economy. Interest payments tend to move money from debtors (who tend to be less wealthy) to creditors (who tend to be more wealthy). If the economy is growing, growth provides at least some additional funds offset to this loss of funds to debtors. Without growth, interest payments (or fees instead of interest) are a drain on debtors. Changing from interest payments to fees does not materially affect the outcome.

Recently, the growth of most types of US debt has stalled (Figure 3, below). The major exception is governmental debt, which is still growing rapidly. The purpose of sequestration is to slightly slow this growth in US debt.

Figure 3. US debt, based on Federal Reserve Z1 data,

Figure 3. US debt, based on Federal Reserve Z1 data,

The growth in government debt occurs because of a mismatch between income and expenditures. There is a cutback in government revenue because high oil prices make some goods using oil unaffordable, causing a cutback in production, and hence employment. The government is affected because unemployed workers don’t pay much in taxes.  Government expenditures are still high because many unemployed workers are still collecting benefits.

What can we expect going forward? Will the debt situation get even worse?

I think we can expect that from here, the debt situation will deteriorate. One issue is rising oil prices. While there seems to be a large supply of oil available, it is at ever-higher cost of extraction, because of diminishing returns. (This is even true of tight oil, such as from the Bakken.) Furthermore, I recently showed that not only do high oil prices adversely affect government finances, they also adversely affect wages.1

Figure 4. US per capita non-governmental wages, in 2012 dollars. Non-governmental wages and population from Bureau of Economic Analysis; Adjusted to 2012 cost level using CPI-Urban from Bureau of Labor Statistics

Figure 4. US per capita non-governmental wages, in 2012 dollars. Non-governmental wages and population from Bureau of Economic Analysis; Adjusted to 2012 cost level using CPI-Urban from Bureau of Labor Statistics

If wages are low, the temptation is for governments to try to create more “spendable income” by increasing debt. This can’t really fix the situation, however. The real issue is increasingly high oil prices, which adversely affect both government finances and wages. Adding debt adds yet more interest payments, adding a further burden to wage earners, and creating a need for payback in the future, when wages are even lower.

Ultimately (which may not be very long from now), the debt system appears likely to collapse. The Quantitative Easing (QE) which a number of governments are now using to hold down interest rates and make more funds available to lend cannot continue forever. While there are claims that QE is a bridge to “when growth returns,” it is seriously doubtful that economic growth will ever return. Inexpensive oil is simply too essential to today’s economy. As oil prices rise, wages fall, and demand for oil is further constrained. Falling wages also reduce demand for debt, as payback becomes more difficult.

How Household Debt Adds to Spendable Income

One thing readers may have not thought about is that it is the increase in debt that adds to a person’s (or company’s) spendable income. For example, taking out a car loan allows a person to buy a car. Paying back the loan over a period of years tends to reduce spendable income. If, in the aggregate, the amount of debt outstanding starts decreasing each year, spendable income is actually reduced below the level of wages, because in total, the balance is being reduced.

If we add the increase in household debt (mortgages, credit cards, student loans, car loans, etc.) to wages, this is the pattern we see historically. (The increase has been adjusted for inflation using CPI-Urban):

Figure 5. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report.

Figure 5. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report. *2012 estimated based on partial year data.

The pattern is very much what we would expect, given what we know about recent debt patterns. The amount of debt rose rapidly in the early 2000s,  when interest rates were lowered and lending standards relaxed. Some people bought new homes. Home prices escalated, with the higher demand. Many homeowners were able to refinance at lower interest rates. In the process, homeowners were able to “pull out” funds that they could use for any purpose they liked–fixing up the house, buying a new car, or going on a vacation.

By 2008, the party was over. In fact, the amount that was added through debt started decreasing in 2006 and 2007, after the Fed Reserve raised interest rates, in an attempt to choke back inflation caused by high oil prices. I talk about this in Oil Supply Limits and the Continuing Financial Crisis, available here or here.

Increased Government Debt Can Also Add to Spendable Income

In Figure 5, we added the increase in household debt to wages, to get an estimate of spendable income, adjusted for debt. Theoretically, at least part of the increase in government debt might also be added to spendable income, since it is often used (in leu of increased taxes) for programs that benefit citizens. (Some of the increased debt is used for things like bailing out banks, which is of questionable value in raising the spendable income of individuals, so perhaps not all of the increase in government debt should be added in estimating spendable income. Also, increased interest costs related to higher debt amounts would tend to have a dampening effect on spending, if interest rates are not continually dropping, as they have been under QE.)

If we add the increase in government debt (all kinds, including state and local) to the amounts shown in Figure 5, this is what we get:

Figure 6. Amounts shown in Figure 5, plus change in government debt added to the sum of (wages plus increase in household debt). Non-Government debt from Federal Reserve Z1 report, adjusted to 2012 cost levels using CPI Urban. *2012 amounts estimated based on partial year values.

Figure 6. Amounts shown in Figure 5, plus change in government debt added to the sum of (wages plus increase in household debt). Non-Government debt from Federal Reserve Z1 report, with changes adjusted to 2012 cost levels using CPI Urban. *2012 amounts estimated based on partial year values.

How much did citizens really spend? The Bureau of Economic Analysis tells us that as well, as an item called Personal Consumption Expenditures. We sometimes hear that in the United States, personal consumption of goods and services makes up more than 70% of GDP. In fact, this percentage has been growing since about 1950.

Wages (excluding government wages) as a percentage of GDP and personal consumption as a percentage of GDP, both based on data of the US Bureau of Economic Analysis.

Figure 7. Wages (excluding government wages) as a percentage of GDP and personal consumption as a percentage of GDP, both based on data of the US Bureau of Economic Analysis. *2012 estimated based on partial year data.

Strangely enough, wages excluding governmental wages have been falling as a percentage of GDP during the same period. How can wages be falling at the same time personal consumption is rising? I think that a large part of the  answer may very well be “increasing debt.”

If we compare wages to personal consumption expenditures, we find that wages were about 2/3 of personal consumption expenditures at the beginning of the period graphed, but gradually fell to a lower and lower share of Personal Consumption Expenditures.3 If we add a line to Figure 6 showing 2/3 of personal consumption expenditures, the line comes out very close to where we might guess it would, if all of household debt increases, and part of government debt increases were acting to increase personal spending (Figure 8).

Figure 8. Same data shown on Figure 6, plus a line equal to to 2/3 of Personal Consumption as shown on BEA Report 2.4.5. also adjusted to a per capita and 2012 cost basis using CPI-Urban.

Figure 8. Same data shown on Figure 6, plus a line equal to 2/3 of Personal Consumption as shown on BEA Report 2.4.5. also adjusted to a per capita and 2012 cost basis using CPI-Urban.

While there are too many variables to make this comparison exact, it does indicate that the increases in debt levels are of the right order of magnitude to explain what would otherwise be a very strange anomaly.

I might mention, too, that part of the reason that Personal Consumption Expenditures can be rising as a percentage of GDP is the fact that investment has been falling, as businesses move their manufacturing offshore, and as other changes take place. According to the American Society of Civil Engineers, we are allowing bridges, roads, and dams to deteriorate, and not adequately maintaining electrical transmission infrastructure. We are reaching limits on how far we can allow investment to drop, however. In fact, the time is coming when we will need to increase investment, or face loss of some of the infrastructure we take for granted.

Figure 9. United States domestic investment compared to consumption of assets, as percentage of National Income. Based on US Bureau of Economic Analysis data.

Figure 9. United States domestic investment compared to consumption of assets, as percentage of National Income. Based on US Bureau of Economic Analysis Table 5.1.

Where Do Debt Limits Put Us

Even if all debt limits were to do is erase the beneficial impact of debt increases, based on Figure 8, it appears that spendable income (or Personal Consumption Expenditures) would decrease by about 23%, to bring it back to might be expected based on wages.

In fact, reaching debt limits is likely be a messy affair, with some type of change (such as increasing rising interest rates as QE fails, or the US dollar losing its reserve currency status, or huge changes in the Eurozone) leading to changes that affect governments and currencies around the world. It seems likely that trade might be disrupted. Some governments might be replaced, and the debt of prior governments repudiated by the new governments. It is not clear what would happen to personal and corporate debt. In many countries, reform governments have redistributed land and other property. In such a circumstance, neither prior land ownership nor prior debt would have much meaning.

In our current circumstances, we are reaching debt limits because of a specific resource limit — lack of inexpensive oil. Oil is used almost exclusively as a transportation fuel and  in many other applications as well (such as construction, farming, pharmaceutical manufacturing, and synthetic fabrics). Expensive oil is not really a substitute, and neither is intermittent electricity. We are reaching other limits as well. Perhaps the most pressing of these is availability of fresh water. Fresh water can be obtained by desalination, but expensive water is not really a substitute for cheap water, for the same reason that expensive oil is not really a substitute for cheap oil. See my post, Our Investment Sinkhole Problem.

The situation of reaching debt limits because of resource limits is a worrisome one, because it is hard to see a way to fix the situation. People often say that our debt problem arises because we have a financial system in which money is loaned into existence, and as a result, requires growth to pay back debt with interest.  I am not sure that this is really the problem.

We have been used to a financial system that “works” in a growing economy. In such a system, it makes sense to take out loans on new business ventures. In such a system,  money is also a store of value. In a shrinking economy, relationships change. Some loans will still “make sense,” but such loans will be a shrinking proportion of current loans, with long-term loans being especially vulnerable. Money will either need to “expire,” or a high rate of inflation will need to be expected, making interest rates on loans very high. In a shrinking economy, businesses will fail much more often, and workers will more often lose their (fossil fuel supported) jobs.

Some have suggested that new local currencies will fix our problems. I am doubtful this will be the case. The problem may well be that all currencies start being more local in nature. What we may lose is interchangeability based on trust.


[1] As background for those who have not read my post The Connection of Depressed Wages to High Oil Prices and Limits to Growth, wages recently have been depressed, in part because fewer people are working. Figure 4 above, showing “Per Capita Non-Government Wages,” provides a measure of how wages have changed. This is calculated by taking wages for all US residents, subtracting wages of government workers, and dividing by the total US population (not just the number working). The average wage calculated in this manner is than adjusted to the 2012 price level based on the CPI-Urban price index. Government workers have been omitted because I am trying to get at the base from which other funding comes. Government wages are ultimately paid by taxes on workers in private companies.

The thing that is striking about Figure 4 is that a similar pattern occurs in the 1973 to 1983 period as the 2002 to 2012 period. Oil prices were high in both periods. (Figure 10, below). In fact, the vast majority of wage growth has occurred when oil prices were $30 or less in 2012$.

Figure 3. Per capita non-government wages, calculated by dividing non-government wages from the Bureau of Economic Analysis by the US population, and then bringing to 2012$ using CPI-Urban price index, together with historical oil prices in 2012$, based on BP 2012 Statistical Review of World Energy data, updated with 2012 IEA Brent oil price data.

Figure 10. Per capita non-government wages, calculated by dividing non-government wages from the Bureau of Economic Analysis by the US population, and then bringing to 2012$ using CPI-Urban price index, together with historical oil prices in 2012$, based on BP 2012 Statistical Review of World Energy data, updated with 2012 EIA Brent oil price data.

There are several reasons why rising oil prices can be expected to reduce the number of people working, or the hours they work:

(a) Discretionary sector layoffs. Consumers find that the price of food (which uses oil in its production and transport) and of commuting is rising. Prices of other goods are also rising. This forces consumers to cut back on discretionary spending. Employees in discretionary sectors get laid off, because of these impacts.

(b) General layoffs. Even outside discretionary sectors, employees may be laid off, if the cost of goods rises indirectly because of a rise in oil price. Often this will be because of higher transport cost, but it could because of another use of oil, such as by construction equipment, or as a raw material. With higher costs of delivered products, companies find that demand falls, if they raise prices sufficiently to maintain profit margins. (This falling demand occurs because some consumers can no longer afford their products.) Businesses  find it necessary to scale back the size of their operations–lay off workers and close stores or other facilities. Alternatively, businesses can move operations to China or another low cost site of operation, to reduce costs, but this also leads to layoffs of US employees.

(c) Government layoffs. Eventually the government tax base is reduced, because of a smaller proportion of the population paying taxes. Governments also find a need to pay our more in direct costs–such as more for unemployment insurance, and more for asphalt (an oil product) for paving roads. Governments also find themselves laying off workers.

The effects outlined above can be mitigated to some extent by changes such as moving closer to work and more fuel efficient cars. But experience seems to suggest that even more what happens is that the effects shift from sector to sector over time, as businesses “fix” their problems, leaving them to with wage-earners and governments.

The high price oil situation was mostly resolved in the early 1980s, because other relatively inexpensive oil was available to drill, bringing the price down again. (The new price, at $30 barrel, was still 50% higher than the $20 barrel price prior to the crisis, though.) The availability of new low-priced supplies seems much less likely now, because we extracted the inexpensive-to-extract oil first. We are now reaching diminishing returns. While there seems to be plenty of oil available, it is high-priced oil.  This is even true of the new “tight oil” supplies in the Bakken and several other areas.

[2] Government debt in this post refers to all types of government debt combined, including state and local debt. Within this debt, only debt classified as “Marketable” is included. As such, it does not include debt owed to the Social Security system (because contributions that were collected by the Social Security system were spent on something else, and are not available to pay Social Security recipients) or to other pre-funded government agencies. Such debt is a future liability, not affecting today’s spending, so I didn’t add it in. (The Federal Reserve Z1 report also does not include it.) There are, in fact, a huge number of government obligations that are not reflected, such as promises to bail out pension programs and FDIC coverage of bank accounts, because they are contingent in nature.  Such programs can be expected to add to the problems we would have, if our debt system should fail.

[3] We would not expect non-government wages to equal Personal Consumption Expenditures, since for one thing, wages of non-government employees leave out expenditures by government employees. They also leave out various derivative amounts, such as expenditures by entrepreneurs, and expenditures of amounts that would be classified as rents and dividends. Changes in savings rates would also play a role.

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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69 Responses to Reaching Debt Limits

  1. SlowRider says:

    After reading about debt problems for years, it has become difficult for me to find new meaningful stuff anywhere, but your work does it. Thanks for your research!

    • Glad you liked it. It is a difficult subject to write about, because people either haven’t thought about the subject, in which case a lot of it is over their heads, or they have read about it, and it takes some “gear shifting” to think in a new way about the issue.

  2. Paolo says:

    good evening Gail, I love your post. since I’m Italian I would like to ask you what you think of the current German growth in the European context of general decline, although Germany has a debt that more than 2 trillion euro but was able to keep the trade balance. what can ‘last for this huge imbalance? it seems that Germany will be able in some way to drain resources from European countries in trouble ‘. thank you so much for sharing your thoughts, you are strong!

    • I don’t know that I know all of the answers on this one. I would need to study the situation more. Several observations:

      1. If a country is able to issue a lot of debt, it makes the country look better from a GDP basis, than it would otherwise. This is because GDP is strange measure. If a government buys something with credit–say subsidies for lots of solar panels built in Germany, or new highways, the effect on GDP is pretty much the same whether the purchase is paid for with taxes or with increased debt. (Actually GDP is better using debt. If taxes are raised, it reduces funds that citizens might spend on other things, so if a country has the option, more debt is the way to go, to raise GDP.) In general, the more debt, the more GDP, especially if a country can keep raising debt. Looking at the debt of some of the larger OECD countries, all seem to follow the same pattern, with high debt levels. Germany’s is at about 80% of GDP. The US debt level would be a little over 100% of GDP if non-marketable debt were included. I think what happens is that as long as other peer countries agree that a certain level of debt is OK, there is peer pressure to push debt to as high a level as everyone else has it, to push spending along, and thus reported GDP.

      2. This article points out that 60 years ago, half of Germany’s debt was cancelled, as part of a war reparations program. The remaining debt could only be paid if Germany sold enough exports to pay off the debt. This gave motivation to the creditor countries to buy the goods Germany was making, and helped Germany along in the direction of being an exporter of manufactured goods.

      3. If a country has a low average cost of energy that it consumes, it helps its competitive situation. Germany does fairly well in this regard. Oil is high-priced, so it is helpful not to use very much of it. Germany is about the same as the US in its oil share of its total energy mix. In 2011, Germany got 36.4% of its energy from oil, and the US got 36.7% of its energy from oil. Mostly, Germany uses cheaper products–including coal and nuclear. The countries that are most in financial trouble get a very large share of their energy from oil. Greece got 56% of its energy from oil in 2011, Spain got 47.6 from oil, Portugal got 47.6 from oil.

      4. Germany is known for keeping its labor costs low by allowing low-wage immigrants. This has helped its competitive position.

      5. The Euro represents a blend of countries. Where the Euro floats relative to other currencies is pulled down by the countries with the most financial problems. Germany’s exports have been helped by having the Euro float lower than what would be the case, if Germany had its own currency.

  3. ” Money will either need to “expire,” or a high rate of inflation will need to be expected, making interest rates on loans very high. In a shrinking economy, businesses will fail much more often, and workers will more often lose their (fossil fuel supported) jobs.”-Gail

    Demurrage on money or high inflation rates destroys the function of money as a vehicle for savings. In this scenario, people flee the currency to try and “preserve wealth” in other forms, notably for Gold Bugs by buying PMs/ Issue here is this takes more money out of circulation in Keynes’ Paradox of Thrift and you end up with a deflationary spiral anyhow.

    Essentially money has been issued as debt claims against earth resources since the beginning, but more so in the industrial era as a claim against Oil. As Steve likes to point out, industrial tycoons like J.D Rockefeller and Andrew Carnegie simply borrowed their fortunes into existence. He who controls the issuance of credit controls the State, as Meyer Rothschild well knew.

    Anyhow, it is unlikely any form of money can work on the International level in a shrinking economic system, though some forms may work on more local levels. Mass barter might work, but only if Nation-States hold together, and it looks increasingly less likely they will, as evidenced by what is occurring in Greece, Spain and Italy right now.


    • Since the beginning, we have always been in a situation where the future as at least as good as we had in the past. (The only exception occurred with groups that underwent collapse, as a result of overusing local resources.) So using money as a store of value made sense.

      Now we are moving to a whole new world. I think you are right–it really doesn’t work to have an international monetary system that doesn’t hold value, but that is sort of what we are up against, if we are hitting limits. Lack of a way to put together a new international financial system is one of the big problems in trying to fix our current financial problems.

      • “Lack of a way to put together a new international financial system is one of the big problems in trying to fix our current financial problems.”-Gail

        Actually, the current International Financial System is one of the fundamental causes of the problem, it rewards the waste of resources. We will be a good deal better off without such a system running, which causes vast inequities in wealth distribution.

        Failure of this model will finally bring to an end the hegemony of the International Banking Cartel and the dissolution of large Nation-States, both inherently Evil systems of control.

        Of course it will be no Picnic remodelling society in the absence of money, and we are bound to end up with a lot of Dead People, but then, You Can’t Make an Omellette Without Breaking a Few Eggs. :)


        • I wonder if part of the problem isn’t in the genes of humans (and in fact all species), wanting to use all energy supplies to the maximum extent we can. Our goofy system of looking at GDP, where GDP has no subtraction for the amount of debt added, encourages adding debt, at least up to what peers are doing. Of course, if growth starts slowing down, because the system hits limits, then it becomes harder and harder to service the debt. Lowering interest rates helps for a while, but doesn’t fix the problem. We end up with a big financial mess.

          We will still need to have some system to facilitate transfer of goods, if our current system breaks down. The new system may work best locally. David Graeber, in Debt: The First 5,000 Years, talks about temples acting as central clearing houses. People would bring goods to be sold, and receive a credit (on a tablet of clay, or something like that, with goods converted to a common measure). When they bought something, there would be a debit to their account. As long as they system was fairly short term, such a system would work again now. The catch, though, is we cannot make anywhere nearly enough goods locally to provide for the needs of 7 billion people, and this is likely to present a population problem. It is the efficiencies of international trade that helps give us all the goods and services we have today, and it seems like we may lose much of this. There still may be some international trade, but it most likely it will need to be more constrained–I’ll send you a two boatloads of wheat for your boatload of oil, or some such thing.

        • “David Graeber, in Debt: The First 5,000 Years, talks about temples acting as central clearing houses. People would bring goods to be sold, and receive a credit (on a tablet of clay, or something like that, with goods converted to a common measure). When they bought something, there would be a debit to their account. “-Gail

          What you are talking about is the Origin of Money and Banking, and that’s the LAST thing we want to Repeat here. WHAT A MISTAKE! Talk about hitting an important Crossroads and taking the WRONG turn!

          The better choice would be to turn to Potlatch or Gift Economy. As Einstein said, “The Definition of Insanity is doing the same thing over and over again and expecting different results.” Money is Fundamental Evil. Once it is gone, we must never make the same mistake again if we are to survive as a species. It has nearly destroyed us this time. It must be Repudiated Forever More.


          • It seems like we have too many people now for Potlatch or a Gift Economy to work by itself. It would be very difficult to make anything very high tech in solely a gift economy. We would probably lose all ability to make metals, for example. (The “easy gold” and “easy silver” is probably gone–even bronze would be a stretch today.)

            It might be possible to use them along with other approaches, with a fairly large population, though.

          • “It seems like we have too many people now for Potlatch or a Gift Economy to work by itself. It would be very difficult to make anything very high tech in solely a gift economy.”

            We aren’t going to have energy to run high tech systems anyhow. We also are unlikely to maintain such a high population level without the energy input of fossil fuels. So neither presents an argument against Potlatch for the world of the future.


  4. p01 says:

    I would not count on prior debt not having much meaning. Someone WILL be blamed.
    Now, whether the emerging government has an extreme left or extreme right flavour, debtors are a perfect scapegoat for both types of fascism in general.

    • You may be right about prior debt having some meaning, when it comes to blame. Or I suppose people could become bonded servants, and be allowed to work off their debt serving some local big-wig, working in fields.

      People always ask about how essential it is to pay off debt, and I have tended to say, “Not very, everyone else will be in the same boat.” But I personally have tended to avoid debt. We have tended to live in inexpensive houses and drive modest cars. With two wage-earners, debt never became much of an issue.

      • Xabier says:

        Paying off debt can be important in an immediate Crisis situation: I seem to recall that in the Argentine Crisis the banks moved ruthlessly to repossess apartments and houses, throwing people right onto the street, even though this created a huge socail problem due to the extent of the collapse. Shanty towns became, and are, a big issue there – and you don’ really want to end up in one of those if it can be helped, at greater risk of crime and disease. If a crisis gets too deep, then maybe it will be a case of ‘all bets off’…..

        In Spain, banks have been going quite easy on debtors – because of the scale of the problem – but now the EU in Brussels is pushing them to clean up their accounts and move to repossess and deal with bad debts.

        On the whole, it’s not good to be a debtor in such times as these.

        • It is not just house loans that can be a problem. During the 1973-1974 oil price run-up, the insurance company I worked for got into financial difficulty, and laid off quite a number of workers. The Credit Union associated with the company, which financed a lot of cars for the employees of the insurance company, went bankrupt. I wasn’t involved, but I understand that the receivers for the company were trying to repossess the cars of the laid-off workers.

          There were a lot of other problems at that time as well. Many of us had bought company stock, and its value dropped nearly to $0, before the company was bought out by a conglomerate.

          I worked for a smaller insurance company for a couple of years just before all of these problems, and it eventually went bankrupt. I reported to the president of the company, so I was close enough to what was going on that I heard a fair amount of the details before it went under.

          When I heard about that oil seemed to be approaching limits in 2005, I remembered what happened in 1973-1974. That was a big reason that I was convinced that oil problems could cause problems for financial institutions, and thought looking into the problem further was worthwhile.

  5. mikestasse says:

    Reblogged this on Damn the Matrix and commented:
    For anyone who doesn’t understand the debt dilemma, this is essentail reading.

  6. Ed Pell says:

    In the 70s I read “The Limits to Growth” and thought the beginning of the next century is going to be bad. Here we are and I find it very scarey reading a dispassionate explanation of our situation.

    Gale, great article as always.


  7. Phil Harris says:

    I will add my thanks for bringing to our attention your observations and charts, and for continuing to develop in very interesting ways your thoughts based on these trends.
    I have a bit of a problem, however, with your reason for only looking at non-government wages, even if your results remain most interesting. You suggest that the ‘government sector’ must entirely depend on value obtained in the non-government sector. Well yes, but …
    Our ‘work’ is a ‘consumer’ of physical processes and stuff as well as producing goods and services. I regard perhaps the majority of ‘work’ in our modernised world as a costly but in many ways essential ‘superstructure’ or ‘overhead’. It would be a mistake for example to consider building and maintaining ‘infrastructure’ as other than an essential part, even when it is a monetary cost. Most infrastructures, like the fossil energy input, are the necessary context for all of the complex businesses that weave the total economy. Nobody supposes that education for example (for sure mostly a ‘cost’ of resources) could be dispensed with. Yes, it could be considered a form of expensive consumption rather than production, and difficult in the main to turn directly into private ‘profit centres’, but try not paying for it!

    I can give some British further illustrations of my point. London simply would not work without mass-transit, (and I guess New York is the same). The transit systems do not ‘turn a profit’, and must be ‘subsidised’, like our roads, from taxes. The remuneration necessary to maintain the system must come from the wider economy via taxes – or the whole thing falls over!

    Not all government-funded work of course can be so easily economically justified, or at least it is very hard for us to see the rationale for some ‘costly’ expenditure, but unfortunately the same has proved true for much of our ‘private’ financial sector. We saw a massive increase in the British financial sector over recent two decades, including a large increase in employment in the sector. Of course these people were remunerated and were consumers and paid their taxes, or at least most of them did. This ‘industry’ was a ‘valuable’ part of the economy and fed the government revenues. Actually, we learned it had in fact mostly been a huge net loss, and the major part had then to be nationalised. Most of the previous financial services-led ‘investment’ it seems was misapplied, and was either ‘consumed’ or is now sitting in stranded or under-productive ‘assets’. Now we are required to maintain this legacy ‘superstructure’, otherwise we all fall over! (Nobody actually seems to know how to do this – the ‘real economy’ at least in many of our countries seems to be missing some vital ingredient! Hint! You point to some remarkable co-incidences!)

    I cannot separate out easily in my mind the private drivers of our economies from the public/government cycling of money and investment. Indeed one of your charts, Figure 3 seems to show private debt issuance (money ‘investment’ creation) stalling and falling and simply being covered by government in an attempt to keep the show on the road. You are right of course to point out that businesses must ‘turn a profit’ and those that rely entirely on short term profit, increasingly go out of business, while bigger corporations increasingly sit on their hands (cash piles?) and manoeuvre, (e.g. buying up assets at ‘fire-sales’) looking for profit where they can?

    Changed times – but no obvious ways of returning to BAU in most ‘advanced’ countries, I would very much agree.
    I prepared my comment yesterday, British time, but appreciate the comments that came in later: and the point about the issuance of money, in particular. The quantitative modelling work of Kumhof et al in the IMF Research Department (not to be confused with IMF political leadership) on the 1930s ‘Chicago Plan’ (not to be confused with the more recent ‘Chicago school of economics), is startling in this regard. Kumhof’s references led me to read Zarlenga’s ‘The Lost Science of Money’. This in turn gives us insight into both ‘growth’ and ‘non-growth’ economies going back to the beginnings.

    • I’ll have to look at the references you note. I missed Kumhof’s “Chicago Plan” paper.

      This issue I am concerned with is the public sector growing all out of proportion to the private sector. (Of course, it the public sector is selling goods and services, this may very well be OK. We know of state-run oil companies, and state run universities, both of which are selling a “product” of sorts. Under Communism, the state seems to run all kinds of enterprises.)

      In the insurance industry, the early start on a lot of companies seemed to be “Mutual insurance companies”. The intent was not particularly to provide a profit for participants. It was to provide a service. I wonder if somehow, we don’t need to go back to more of this model. There are also companies owned by their employees, like the consulting firm I was part of. I don’t know that the private sector is really ideal–it is just the way most things are set up in the United States.

  8. step back says:

    Too bad your post did not come out on April 1 instead.
    Money and debt are fool words.
    We all become fools when tossing them around.

    At the end of the day, “money/debt” are about making promises; about making promises about promises; and about not really concerning ourselves with how those promises are going to be fulfilled and who will fulfill them and at what true “costs”.

    • You are right. In fact, money, debt, insurance, and pensions are all about making promises. Actuaries are ones who have worked with the idea of promises, and in fact, with attempting to fulfill those promises. Economists have come at this from a whole different perspective.

      • step back says:

        Energy, and the lack of the same at cheap “price” is but one example among many of why the implicit promises made by “money”, by corporate “bond” issuances, by “social security” assurances, etc. may not come to fruition.

        Promised “technology” is another example. Too many among us stick to the unshakeable belief that “they” (the technologists who invisibly lurk among us) will surely come up with something new to save us from our growing sinkhole of public and private indebtedness. Just wait till the :singularity” arrives and we have … you name it … the next big thing: (1) cold fusion, (2) galaxy-net (like internet but allows us to communicate with aliens who come here to save us from our own follies) , (3) unobtanium, …., etc.

        Promised “sapience” (in the form of “educating” the next generation better than we slow-adapting grups can be educated –see Lord of Flies) is a further example. How often do we see the politicians yapping about improving “education” and through that magical process, curing society of ALL its ills?

        But in the end, “promises” are easy to make. The more often we make promises, the easier it gets to make the next one and the one after that.

        Why just a few years ago, the thought of making promises in the billion dollar range came with great trepidation. Now we glibly make promises in the trillions of dollars range.
        How will those promises be kept? Easy. <>: Fracking (technology) will save us. Early childhood education (trying to mold excessively plastic brains) will save us. Investment in stocks, bonds, … (promises about promises) will save us. Yes, Dumbo, the faster you flap your wing-like ears, the higher you go and worry about a possible fall becomes incomprehensible. (*Dumbo is a fictional Disney cartoon character in the form of an elephant with large ears who can fly –check out the crow’s song: =when an elephant flies)

  9. Claire Jones says:

    Thank you for another interesting post, Gail. I agree that increasing debt is a plausible explanation for the widening gap between per-capita non-government wages and consumer spending. However, there are other possible explanations and I wonder whether you’ve tried to investigate them. Firstly, wages are not the only part of GDP which reaches consumers’ pockets. For example, they also receive transfers from the government (welfare payments in excess of taxes), dividends on shares, and rental income (UK GDP includes an imputed rental value for home-owners which is a fairly significant and rising figure; is US GDP calculated in the same way?). Secondly, consumers can spend money earned in previous years (ie deplete savings) rather than anticipating earnings from future years (ie increasing debt). The ageing population may mean that we are now seeing greater draw-down of savings, eg in the form of increasing income from pension plans. If suitable data were available, analysis of these alternative explanations would provide a more complete picture and quite possibly strengthen your argument that increasing debt has played a key role.

  10. SlowRider says:

    “In our current circumstances, we are reaching debt limits because of a specific resource limit — lack of inexpensive oil.”
    Taken out of context, this statement would be easy to attack from many sides, because there are always other factors. And there is a small step then to doubt your whole story. But this is a blog, and it’s about discussing ideas and concepts, so one should read everything in context, and I take it like, oil is just at the core of the story because it (literally) fuels everything.

    One thing I’m just not sure, many analysts claim that oil is expensive BECAUSE of dollar inflation, and not because of supply and demand fundamentals. How can you really counter that argument? They think in a purely financial way and ask: how can you know how much of a high oil price isn’t speculation fuelled by money printing? How can you know that the Saudi and other exporters aren’t just demanding more inflated dollars for the same oil? Especially if the U.S. exports their inflation to the rest of the world by printing trillions of the global reserve currency?

    I’m also struggling a little to get to understand why debt (per se) should be a problem for a government that has a central bank to buy all the debt and keep interest rates at zero. They need no confidence of other investors, if the central bank buys everything. So we went from 8 trillion to 16 trillion of debt. Why not continue on this path for decades? Why not have 100 trillion? 200? In theory, if all our needs would be met by some machines, produced by other machines, and few people have to work anymore, why couldn’t everyone go on vacation sponsored by government spending? I know it’s not “good”, it’s as inefficient as it gets, but couln’t it work? If this were true, in the end, in a country with a central bank, you could have all the debt you want, until finite resources themselves become the problem once again? I’m confused…

    • I think part of the problem in writing this post is that I am trying to tell a “slice” of a very big, very long story. If I start at the beginning, and try to go to the end, the story gets so long that it will lose any reasonable reader–I really need a book to tell the story. (But I am not very good at figuring the entire book at once. I can figure approximations to slices of the story, and let readers help me fill in what I am missing.)

      The story is about humans who, whether we like it (or understand it) or not, need external energy. Humans discovered a way to control energy, and learned to use it in various ways–to cook part of our food supply, to provide warmth so we could live in colder areas of the planet, to better capture animals, and to make better tools (first by heating stone, so we could give it a better edge, and later by adding metals to our tool collection. Our body had now adapted to having external energy. Our digestive organs and teeth are smaller than they would be if we ate only raw food. Our brain is bigger than if we needed to use much of our time and energy on chewing and digesting food. Our population has grown from less than 100,000 to over 7 billion, thanks to the advantages that external energy of various types could supply.

      With our current population of 7 billion, we have set up a very complex economic system that basically lets us use energy to transform resources into goods and services that we need today. (Unfortunately, economics has not figured out this basic principle.) These goods and services include food, clothing to allow us to live in inhospitable climates, medicine so that we can conquer the germs that would soon defeat our species if we had to life in close quarters without medicine. There are many intermediate goods as well. Coal enabled the making of today’s concrete, so we could have what we think of as “renewables” like hydro-electric. Coal also enabled the production of reasonable quantities of metals and glass. With these, it was possible to put together electrical transmission. Oil played a different role, basically enabling most forms of transportation. Oil also provides a feedstock for many important uses (such as asphalt for roads). Money is sort of an intermediary to this whole system. By itself, it does nothing.

      The various forms of energy are unfortunately not very interchangeable. We ran into deforestation problems 6,000 years ago (4,000 BCE) with a population of about 20 million, according to Sing Chew in The Recurring Dark Ages. One of the issues was trying to make metals with charcoal. Another was the need for land for farming. It is 100% certain that wood and other biomass will not provide adequate resources for 7 billion people.

      Oil is the most energy dense resource, and the most easily transported. It is used in many ways, including farming, building construction, road construction, transportation, and in many types of goods, such as pharmaceuticals, herbicides, pesticides, building materials, and synthetic cloth. In some cases, with a lot of investment and a long time-line, electricity can substitute for oil, but not generally.

      World oil supply has been constrained since 2005. Its supply has grown very little, and its cost has spiked. In fact, oil has tended to be the highest cost fuel since the 1970s. The US was the world’s largest producer of oil until 1970, until its production suddenly started heading downward, despite everything that everyone tried to do. So since the 1970s, there has been a push to try to get away from oil, because of its high cost. This push has been somewhat successful–we rarely make electricity with oil any more, for example, but we still have a huge number of uses that we have no alternatives for.

      About all our monetary system can do is facilitate a transfer of resources, and help different areas of the world to work together, by allowing “payment” in terms of promises of future resources. When debt is used, it is a long-term promise of future resources.

      The issue now is that world oil supply is growing hardly at all. I read a report today saying that oil supply in the first two months of 2013 is down by 600,000 barrels a day, relative to the first two months of 2012. World oil supply has grown very little since about 2005. What oil we are extracting is becoming increasingly expensive to extract. In other world, we need to exchange more resources of various sorts, to get the oil out. Money simply acts as an intermediary.

      The issue of high priced oil and limited supply oil work closely together, so to some extent almost become interchangeable, but not quite. When oil is high priced, the pricing system seems to move oil away from countries that use oil in the largest proportion to their fuel supply, and toward the countries that use the lowest proportion. This is really an issue of energy leveraging, or of business going to the country with the lowest average fuel cost. Europe, Japan, and the US tend to lose oil supply, at the same time that China and India (that use a lot of inexpensive coal in their mix) gain oil supply.

      There is also a connection with jobs. Oil goes to the countries where the jobs are, because workers with jobs can afford to buy cars and motorcycles and fuel for their cars and motorcycles. The countries that have the jobs are the ones that can produce goods and services at the lowest price. These tend to be the countries with the lowest cost energy supply, on average. They also tend to have low wages for their workers.

      With this combination of factors, the developed economies are losing out as a result of high oil prices, and a lack of jobs. Governments find themselves increasingly in the middle. They are getting less tax money (because their citizens don’t have jobs) and having to pay out more in benefits (again because their citizens don’t have jobs).

      Central banks try to cover up all of this mess, by printing more money. This money doesn’t really get back to the workers. It doesn’t fix the basic issue of not enough oil getting to the United States (or Europe or Japan), and too few citizens that pay a reasonable wage.

      The government can print and print and print, but it doesn’t fix the underlying resource problem. Energy resources are not sufficiently interchangeable that we can use one for another. Perhaps the printing adds a little to the price of oil, but this isn’t really the issue. Without adequate oil supply, the economy tends to grow very slowly, or shrink, regardless of what kinds of intermediation is done. Making interest rates very low, to encourage more debt, doesn’t help either. (Adding more coal, or natural gas or wind doesn’t fix the problem either, because of the interchangeability problem.)

      Our financial system is one of promises. If you lend me x amount of money, I will return it with interest. With that money, plus interest, you will be able to buy more goods and services in the future than you can buy now. If oil supply is becoming increasingly tight, and we are getting less of it because of we are losing the bidding war to countries that can leverage its use better, we discover that the goods and services that we can make in the future are likely to be smaller in quantity than what we can produce today. The promises we made in the past were made in the context of a growing economy. If our economy is really shrinking, we can’t cover those promises. More debt won’t solve the situation.

      At some point, something happens to break the system. Most likely, it is cash flow problems because of higher interest rates, related to increasing debt. It could also happen because of lack of trust. If Greece would like oil for its citizens, and doesn’t have the resources to exchange for it now, and likely won’t have resources later, why should I lend money to Greece? The same issue exists for almost all of the other developed countries, with shrinking economies. It is not really an issue of the debt level rising. It is really a realization that the future is likely to be less good than the past, so promising something a country doesn’t have now really doesn’t make any sense.

      All the money printing, or debt issuance, in the world doesn’t fix this problem. We are dealing with a resource problem.

      • SlowRider says:

        Your reasons are very convincing! And please write that book!
        All you say makes sense. Issuing more money and debt is the old story of only dealing with the symptoms of an illness. Probably even a debt jubilee wouldn’t change much. It even seems the dynamics of the OLD debt system is what keeps the economic story on the road (like fracking).

        One problem with debt is that it CAN be used successfully for a while. So in your example, if the EU governments think it is necessary to bail out Greece, it will be done, and the Greeks will like it. Just how long this can go on, is what many would like to know. Maybe the Germans vote for someone who says “no” to europe.

        One factor other than oil that gave us the extraordinary wealth and debt growth period of the 70′s, 80′s and 90′s in the western economies, was exploding productivity. Back then, the next economic upturn was always around the corner, and investment on leverage made sense.

        Time to become more “spiritual”? The last era in the Mayan Long Count was specifically called the “Transformation of Matter”, i.e. “producing things”. It started around 1630 and ended in 2012. Should the end of cheap oil be what brings that about, because we don’t seem to be doing it voluntarily? The conscious movement to “consume less” is very new and unique in history…

        • I might mention that the upturn in productivity had a lot to do with having more tools powered by fossil fuels to serve us. It hasn’t been that long since the days of manual typewriters and ruled ledger books. When I visited India, I discovered that when I signed into the guest residence hall of the university where I stayed, I needed to sign my name in a very large book, on a page on which the correct date had been written. So even now, the “new” technologies have not been adopted everywhere.

          We seem to be transforming to a new age now, but what that age will bring is not that clear.

  11. “Imagine a plot to undermine the government of the United States, to destroy much of its capacity to do the public’s business, and to sow distrust among the population. Imagine further that the plotters infiltrate Congress and state governments, reshape their districts to give them disproportionate influence in Washington, and use the media to spread big lies about the government. Finally, imagine they not only paralyze the government but are on the verge of dismantling pieces of it.

    Far-fetched? Perhaps. But take a look at what’s been happening in Washington and many state capitals since Tea Party fanatics gained effective control of the Republican Party, and you’d be forgiven if you see parallels.”
    Robert Reich

    Last year, the GOP in Florida thought they’d somehow win if they could make people stand in the heat and line up in front of their polling places for hours. They somehow figured that most would go home without voting, or blame it on Obama, and vote Romney. It did not work.
    Now the GOP thinks if they force the country into another recession by applying random spending cuts, people will somehow blame that on Obama, and vote GOP next year in November.
    Fortunately, the American voter isn’t that dull. Most people do know who passed the sequestration laws and why. Boehner will get the bill next year. We can only hope the country survives another year and a half of Republican ninja politics, without suffering permanent damage.

    America didn’t need a the Bush Republican war in Iraq, we even could have left Afghanistan sooner. American tax payers shouldn’t have to pay to protect a Carlyle Group ex employee elevated to a Afghan President to make sure that Caspian Sea pipeline is completed for profit for that group. The American people didn’t need a financial meltdown from Republican deregulation of to big to fail banks either, and we certainly didn’t need to bailout Wall Street. We really don’t need those Bush tax cuts for those billionaires. Because of the lack of equality, their isn’t anything in that Government measure for the middle class, and the American people certainly don’t need job loses and lay offs. Speaker Boehner promised he would help the country get back on it’s feet with a jobs promise in 2010. Now of course in 2013 Speaker Boehner’s comment to jobs is if lay offs are coming “so be it”. Americans don’t need a dysfunctional Government what we need is jobs, compromise, and a nation that we can be all proud of rebuilding after spending this nation into the mess we are in now. We need a congress and a senate that will work with a President like our forefathers imagined.

  12. Andy says:

    Thanks for the article Gail. Debt limits are a big part of the greater convergence under way. I agree with Chris Martenson that things will happen at an accelerating rate, because humans and what we do, is all done at an exponential rate. Everything from resource consumption, to debts, pollution, population etc.

    I question why you say that debt is theoretically repayable? If I borrow $10 at 10% then a year later I need to repay $11, and since money can only come from debt (excepting the 3% that is notes/coins) I have to say that there is $1 unpayable. This scenario applies to stable and shrinking economies. Growing economies grow their debts at equal or greater rates then the average interest cost. A stable economy must still have increasing debts, because the portion used to pay interest will be a drain on the economy.
    GDP = Money x velocity, if you reduce money by paying interest, to have a stable economy velocity must increase, which can’t happen indefinatly. Govt borrowing (in the absence of private sector borrowing) is vital to the health of the economy, without an ever increasing money supply, velocity must increase to compensate. Governments can talk all they like about reducing deficits, but unless the private sector takes on the additional debt, govts will have to.
    A couple of years ago I did an approximate count of Global MZM/M3 and global debts, and I think that global debts were about 3x more then the monetary aggregates. Which is not suprising to me, though I could have missed something.

    I often hear that QE cannot go on forever, but I have yet to hear the convincing theory as to why not. It is inflationary no doubt. Citizens can still get poorer if the National production is not increasing in line with population growth, and money secures less and less goods. Yet I don’t see the mechanisim by which QE must end. Interest rates can go infinitly lower, ie 0.01% is an order of magnitude lower then 0.1%. Since money is imaginary, and infinite, I think QE failing somehow is the last thing to happen.

    The real limits to private sector debt is ‘money good collateral’, in developed countries nearly every asset is encumbered. Africa still has a lot of unencumbered assets and this is IMO one of the few things keeping the financial system afloat, that and a few other places, Russia is one I think. I’m not sure how to apply this to govt debt, as the collatoral is taxes, but when the main purchaser of govt debts is the Central Bank, then collatoral ceases to become an issue.

    Since all money is created as debt, and creating money leads to inflation, it is impossible to inflate away debts. However if you divide the economy in half between public and private, then it is possible for the private sector to inflate away the debts of the public or vice versa. Govt’s cannot inflate away their own debts.

    Sorry for the long comment I prefer them shorter, I’m unable to condense it much more then that.

    • There are going to be some situations when debt is repayable. If debt is used for an investment, and that investment is fruitful, it will be possible to earn enough to repay the debt. In general there will be more fruitful investments when an economy is growing than when an economy is shrinking. I am looking at the debt from a goods and services point of view. The investment will provide enough goods or services to repay the debt, in terms of what equivalent goods and services were borrowed, plus an equivalent amount of goods and services to cover interest. Exactly how that is handled in the financial system is not of as great as a concern. Admittedly, if the system requires more debt for buyers to purchase the goods that are made by the process, and this debt is not available, this is a problem. But if the amount of goods produced is growing more rapidly than the interest rate, then the growing debt is not a problem. The time when growing debt is a problem in a shrinking economy, when fewer goods and services in total are available, or even in a steady-state economy or very slowly growing economy–growing more slowly than the interest rate.

      Regarding the government needing to keep borrowing, if the private sector does not, isn’t that the requirement necessary only if the economy is not to shrink? Not shrinking is a nice thought, but in the real world, isn’t there really a need for the economy to shrink sometimes, as when our share of world resources is shrinking, as it is now? In that case, debt should decline, in line with the smaller resources. It admittedly will make the downslope worse, but that is the flip side of increasing debt on the way up accelerating the upslope. I suppose I should have talked about this issue, specifically. GDP is a gross measure, where rising debt helps it, and declining debt badly hurts it.

      Regarding QE limits, I don’t see .01% interest as being an order of magnitude better than .10% interest rate. The interest rate has relevance from the point of view a borrower, say, agreeing to purchase a house based on a mortgage that is 3.5% for a 30-year loan. A 0.09% decrease is not going to make much difference in the borrower’s decision-making.

      It seems like there are a couple of limits on QE. One is asset bubbles that develop, in stock markets, bond markets, and land. The asset bubble in land can interfere with agriculture. I suppose there is the possibility of some of the bubble going over to commodities, and affecting the general public. Once the bubble bursts, there is a new set of dislocations.

      Another limit is what the other players in the international financial system will put up with. At some point other players will discover that the countries doing the QE really aren’t producing as much goods and services in the past, because of the declining resources they are obtaining on the world markets. The trust that underpins the current system will start eroding. Printing money doesn’t really fix this. If trade slows down, there could be hyperinflation with respect to the cost of goods that are imported.

      Of course, if the interest rate ever does go up, despite quantitative easing, both the government and private parties will need to start paying higher interest rates immediately, causing cash flow problems. Asset bubbles will deflate at the same time, causing a big problem.

      I am not sure unencumbered assets for collateral is a limit. The financial system seems to have debt layered upon debt layered upon debt. People without jobs are encouraged to go back to school and get student loans to do so. If wages, which are in some sense at the bottom of the triangle I showed in this post, are shrinking, shouldn’t private sector debt shrink as well? Wage-earners can’t be expected to by as many goods in the future, so businesses don’t need to be growing much to service their needs. The limit involved is really the loss of wages, not the lack of unencumbered assets.

      • Andy says:

        Thanks for the reply Gail. I’ll think on it. I have realised I had a false premise that interest was a drain on the money supply, only principal repayments deplete the money supply.

      • BC says:

        Gail and all, the cumulative imputed compounding interest on US total credit market debt owed today to (effectively infinite) term is now an equivalent of reported private GDP. All wages, profits, production, and gov’t receipts are now claimed by, and pledged (promised) to, the owners, i.e., the top 0.1-1% of US households, of the debt in perpetuity, either directly or via collateralized equity proxies of various kinds.

        The top 0.1-1% own the private banks that own the Fed; therefore, the top 0.1-1% own virtually all claims from the issuance of private debt-money.

        The next 9% below the top 1% own subordinated financial claims on the claims of the top 0.1-1% on the wages of the bottom 90-99%, profits, and gov’t receipts.

        The bottom 90% effectively own nothing (and cannot own in net wealth terms) but rather borrow private debt-money to circulate for subsistence after debt service (“rentier tax”) and taxes. The circulation of the private debt-money has collapsed since ’00 and ’08, owing to the EXTREME wealth and income hoarding and concentration to the top 1-10%, HUGE debt-money overhang, and slow or no growth of bank lending, employment, wages, and production per capita.

        The hoarding of $40 trillion in financial wealth (debt-money claims and equity proxies) by the top 0.1-1% (own 40% of financial wealth and receive 20% of US income) to top 10% (85% of wealth and 45% of income) at plunging velocity, along with the associated compounding debt-money interest claims on wages, profits, and gov’t receipts, means that the bottom 90% of society is starved for private investment, production, and wage income. The top 1-10% demand returns to their hoarded capital of 7-10% in perpetuity while labor returns at best are 2% (labor force growth plus capital replacement), and sustainable resource services throughput from existing labor and capital stock probably negative per capita given Peak Oil and overshoot.

        It is an incredibly bizarre irony that there is so much “debt-money” per capita and per GDP but so heavily concentrated to the top 1-10% via digital debt-money credits and equity proxies at hopelessly slow velocity among the bottom 90%.

        It is a simple mathematical reality that real economic activity per capita cannot grow hereafter, which implies gov’t receipts and spending will decline per capita. The only way out is deflation of debt-money claims (and associated equity values) of the top 0.1-1% to 10% on the labor, profits, and gov’t receipts of the bottom 90%.

        But even then it will likely mean the end of the system as we know it, including a systemic collapse, the end of the rule by the rentier-financier oligarchs and their Power Elite benefactors, and a mass-social loss of confidence in major economic, financial, and political institutions, social unrest, economic privation, and the risk of gov’t reaction and violence. The Fourth Turning r-evolution is due this decade.

        • It seems like you very well may be right about this. Certainly the interest amounts associated with all of the debt are amazing, even if the interest rate is very low.

          Where do you get more information on this, including the concentration of who owns the wealth? I think the one place there may be overstatement has to do with pension plans. They are very big, but the recipients of these pensions only receive a relatively small amount each. Banks may also suggest an over-concentration for the same reason. All the bank itself gets is the wages and other expenses paid out of the interest, and the profits they earn from the interest. Quite a bit of it is passed on to account-holders, who in many cases are small.

  13. Andy says:

    Not sure If you have read this, but you reminded me when you mentioned bubbles and QE.

    • Yes, I did see that. I think that Wall Street probably would have come out well with a shale bubble, regardless of whether the result was a fairly long term event or quickly led to a collapse in prices. So Wall Street had reason to pump up prices, regardless of the outcome. Perhaps they would come out even better in the case of price collapse, which is of course what happened. I am not sure there was necessarily an intent of harm. Perhaps Wall Streeter’s didn’t realize how easily over-production could occur.

  14. dolph says:

    The central banks are running the economy as if it’s a perpetual motion machine, but it’s not.

    The world is overpopulated, birth rates have declined, and death rates are set to rise (by aging alone, let alone bankruptcy of the industrial healthcare system). Moreover, the fuel for the economy is becoming harder to find and more expensive.

    This is why QE cannot continue forever and will fail. QE simply drives up the price of fuel and other speculative assets. No work is actually being done by creating digital money.

    Once the debt is defaulted upon, further digital money creation would simply create runaway hyperinflation.

    Remember…humans long ago outsourced our work to the fossil fuels. In the modern world, humans do far less work than they did in the past, but the illusion is that they are doing more work, because we have the fossil fuel slaves working for us.

    There’s not much we can do but make individual decisions that serve us best. Personally speaking, I have decided to in fact work less, reduce consumption, and let the remaining fossil fuel slaves do their thing.

    You can prepare, and yes I suppose I do prepare in my own way, but generally speaking preparation is futile because if you survive the zombie apocalypse, you will live to old age when another zombie apocalypse hits, and by then you will be demented and will be discarded. Not exactly a victory.

    • You are right about QE, and also about humans outsourcing our work to fossil fuels. I have called fossil fuels energy employees, rather than slaves. The union for the oil energy employees has recently demanded an increase in wages. A business can try to pass through the increase in costs, but the increase in costs is likely to result in falling demand. So businesses have various options to try to keep their profits up:
      1. Save costs by automating
      2. Save costs by outsourcing labor and energy costs to China, India, etc.
      3. Scale back the size of the operation, because of lower demand at higher prices

      Any of these options ends up with fewer jobs for people.

      People will have to make their own decision regarding how much preparation is appropriate. I don’t think the situation is as simple as, “Use more electricity instead of oil,” or “Buy a car that gets better mileage.” (Although such a car might be a good choice, if you can afford it.) Some people find comfort in religion. Others draw near to friends and family.

      Historically, life expectancies have been very short. According to this article, the average life expectancy was 24 years in 1796 (just before coal use scaled up). By 1900, it was 48 years. Many of us have already lived past these ages, and have had the benefit of pretty good lives–warm homes, enough to eat, clothes to wear. Perhaps we should spend a little more time being thankful for what we have.

      • Xabier says:


        You are right to point out how fortunate we are and have been.

        If we allow worries about a future (this century) -or imminent – ‘collapse’ to overshadow that, we might as well call it a day now.

        I’m struck by how our ancestors, working slowly by hand in far more difficult conditions, individually did so much, and over quite long time-frames – like the great cathedrals and so on.

        In the time we have, we should try to emulate them.

  15. ProfK says:

    You are right about this being a slice of a very big and very long story. I don’t necessarily agree with quite a bit of what you wrote about debt limits. Nevertheless, why don’t you break these long dense lengthly complex discussions down into more manageable bite chunks to enable them to be explored and discussed more easily and help your readers to understand more clearly and easily.The time and effort to reply and engage in a discourse in detail on some of these complex essays is simply too great, which of course is a loss for everyone.

    • I struggle with knowing how much to put together into one post.

      I have some readers who have been following my writings for a long time, and can understand a fair amount of new material. I have other readers who are completely new. At the same time, I am learning as I go along. Even if I have discussed a subject before, I seem to discover new nuances and new connections as I do research for a new article. I always put together far too many graphs to use in a single article. I end up saving some for another article.

      One of my goals is to get the major areas covered, if for no other reason than that I understand the story from start to end. It is also hard to write a book, if there are “chunks” of the story I don’t quite understand.

  16. there is a very clear cut and simple reason why our current debt-economy will collapse
    when we started deep mining of coal with the use of steam engines (to pump the water out) it was found that the colossal amount of energy extracted supplied enough ‘excess’ to finance the next coalmine. (or any other enterprise linked to mining and engineering)
    Therefore money could always be borrowed (invested) on the certainty of even more energy being produced from every new mine (and of course oilwells later on)
    so energy became the collateral for our debts.
    while numerous securities may be offered for ‘investment’ ultimateky that security has its basis in the production and conversion of energy to manufacture to goods necessary to sustain our commercial infrastructure.
    as long as energy was cheap, this worked fine. Unfortunately energy isnt cheap any more, and the ponzi scheme we created around it is collapsing

    • That is a good way of putting it.

      I think one of the points too is that the extra energy came with relatively small upfront investment. Now we are looking at oil and gas production with huge upfront costs. We are also talking about renewables with huge up-front costs. If we get a payback, it is after quite a few years. Ramping up takes huge investment, because of the lag between investment and return.

  17. Eamonn says:

    I often read your artcles and you are excellent at outlining the problems. Sometimes they can be rather depressing :-). For every myriad problem there must be a myriad solutions.

    “Expensive oil is not really a substitute, and neither is intermittent electricity” – Agreed.

    Many countries in Europe are experiencing 20+% (yearly average) in renewable source integration to their electricity grids, with many countries targeting 40% (yearly average) renewables integration to electrical grid by 2020. Heres a recent news story from Denmark about how the Danes have baned oil and gas heaters in new buildings and are planning on outright ban in existing buildings ( Here is a rewind to how the plan was first negotiated way back in March 2012 ( In line with every major European study “extending current (energy) policies implies greater electrification and efficiency measures”. Here is an example of a revolutionary new “smart” electric heater ( (I have no affiliation). Denmark aims to reduce the gross energy consumption by 12% in 2020 compared to 2006, to increase the renewable energy accounts to at least 35% in 2020, to increase wind power capacity so that 50% of electricity consumption is covered by wind in 2020.

    Just to take this as one isolated “solution”, surely we can all target specific solutions to the impending energy crisis, which is in part fueling the continueing financial crisis. The U.S. may become the world’s largest oil producer of EXPENSIVE oil ( by 2020. Is this a “solution” the U.S. should choose to apply. Perhaps its all part of a two-step dance around the table :-).

    As Jared Diamond says; “there are many often subtle environmental factors that make some societies more fragile than others and many of those factors are not well understood…. people often ask me ‘Jared what’s the most important thing we can do about the world’s environmental problems?’… And my answer is the most important thing we need to do is to forget about any single thing, that is the most important thing we need to do. Instead there are a dozen things, any of which could do us in and we’ve got to get them all right. Because if we solve 11 (of the problems) and fail to solve the 12th – we’re in trouble. For example if we solve our problems of water and soil and population, but don’t solve our problems of toxics – then we’re in trouble.”

    Perhaps your book could take on some of the big problems, or perhaps a series of volumes to avoid leaving out the 12th and most important solution :-).
    Best Regards,

    • Thanks for your comments.

      European countries are doing so poorly that I sometimes questions their solutions, unless they can truly show that they can compete in a world market with the resulting cost structure. I do agree, though, that the Quantum heating system sounds like a breakthrough, if it can use energy when it is generated and store the heat until it is needed. At certain times of the year, this could help cut back on the mismatch between supply and demand, and keep from having to ramp fossil fuel powered stations up and down so much. It seems like hot water heaters working on the same principle would be even more helpful, since they would work year-around. (Of course, in many places, solar thermal would be better yet for hot water.)

      Regarding the many issues we are facing, I am reminded of one of the earliest posts I wrote. Our World Is Finite: Is This a Problem? (It was also published on The Oil Drum as a Guest Post.) In it, I pointed out that managing to avoid one limit can exacerbate problems with hitting other limits.

      I think that the issue is related to “Liebig’s Law of the Minimum”. There are many needs of a plant for nutrients. If it is missing any one of them, it can severely impair the growth of the plant. Even if we get around the shortage issue, there is still the pollution issue.

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  20. another facet of our debt problem which doesn’t figure highly in our discussion of it, is the pensions debt.
    We pay into pension schemes whether national or private, on the assumption that we will have payouts for life.These payouts are in effect debts incurred on our future, invested in enterprises which themselves are dependent on uninterrupted supplies of cheap energy. As that goes into decline, so will our pensions

    • You are right. There is a huge amount of obligations (if not debt) related to pensions and to guarantees like FDIC insurance. Social Security in not funded, except by unmarketable government securities relating to money which was collected as contributions, but has already spent. There is a lot of money in pension plans, by government agencies and by private companies that depends on securities that they own actually having value. The same is true for 401(k) plans.

      I have told people, “You really don’t want to put away the maximum amount your employer permits in a 401(k) plan. You may never get the money back.” I can sort of see putting away the amount that is employer-matched, especially if you expect to collect soon. But going much beyond that shows an awfully lot of faith that our current system will hold together. I would pay down debt with those funds if that is an option–then at least you can sleep well.

  21. SlowRider says:

    Another example of the limits of debt: The best documentary I ever saw about the chinese housing bubble (12 Minutes).

      • Thanks for the link! I remarked a little about the debt situation on my post Observations Based on my Trip to China. A few observations based on what I know about the situation:
        1. Pumping up an economy with debt to buy an unneeded product has worked for eons as a way to increase GDP. War is the most popular way of doing this. US military intervention overseas, and all of its bases, sort of fit this role as well. A country gets a whole chain of businesses supporting the endeavor, and lots of employment.
        2. China does not allow migrants to move to cities as full citizens. They very carefully control who gets a license to move to the city, and thus are allowed to do basic things such as send their child to a school in the city. People who are being displaced might get licensed (to go to a specific city, not a high-demand city like Beijing), but people in general are not allowed to come to the city, unless they accept extremely secondary status. This has kept China from having all of the shanty-towns that are typical in third-world countries. China’s cities look beautiful because of this.
        3. Historically, Chinese workers have not had to pay for housing. Instead, housing has been provided by employers, as part of the wage package. This housing is quite minimal–shared outhouse, perhaps no electricity. (My perception though, that this shared housing was still better than in India. The shared outhouses there seemed to serve much higher numbers of people.)
        4. The government has been doing a lot of relocating of people, when they undertake public works of various sorts. They build new walk-up high rise buildings with indoor pluming for them, in the areas where they live, and sell them as condos. The results is that local people have to a make a mortgage payment for the first time in their life. This cost is at least somewhat subsidized by the buyout the government gives workers for their prior company-provided apartment. The condo is sold in very un-upgraded state (concrete floors, missing basic things like doors, and no air conditioning). Buyers can buy finishing items for their condo, but this adds to their condo payments. This means these folks are very stretched financially as well, and part of the economic boom comes from creating the accessories to the condos.
        5. China doesn’t have much of a pension program. It also has a one-child policy. The combination means that folks need to try to fund their own retirement, because neither the state or their one child can be depended on to provide much support. This means that there is higher savings than normal. With all of this savings floating around, and all of the other investment outlets paying very poorly, buying condos seems like the investment solution.

        Anyhow, it looked to me as though a debt bubble was forming when I visited in 2011. The professor I visited there had told me earlier that he had helped his son (in his early 20s) buy a condo, because they were such a good investment. This was back about 2009. It all seemed strange to me. The professor did not own a car–rode a bicycle to work.

    • you frightened me to death slowrider—but thanks anyway
      a really informative link

      • SlowRider says:

        What impressed me most was
        a) the waste of resources this means, if it is really going on all over the continent
        b) how they are betting completely on growth by taking on debt and building economies of scale, but are left without much to fall back on, if it turns out bad
        c) the implications for the global economy: if this is what the asian growth story looks like, it’s not sustainable

  22. Stan says:

    Is the cumulative debt chart inflation adjusted? (Are we looking at debt in real or nominal terms) I think this is the most powerful chart in economics I have seen in a while.

    • What I did was calculate yearly increments in debt. I then adjusted those increments, as if the CPI-Urban adjustment were the right rate to bring the increment to the current cost level. The older years would have looked a little lower, relative to the recent years, if I had used the GDP deflator as the inflation adjustment.

  23. SlowRider says:

    One more thought on debt in a broader context. Today, the wealth of the world is held mostly inside the financial system in the form of paper/digital assets (claims on real things). Each of those “assets” is also someone else’s liability, i.e. debt. Typical counterparties are governments, corporations and banks.
    My point is, global debt became unsustainable already when the assets inside the financial system became bigger than their corresponding claims in the real world. I don’t have the numbers, but that could have happened maybe in the 70′s already. In other words, the finite character of our world became a problem for our debt money system long ago.
    Now they try to maintain that unsustainable system, but at great risk and it has started to crack. There will come a time when the holders of these financial assets will transfer their money over to the real world before it is gone. Actually it is already happening.

  24. Leo Smith says:

    In the end there was God, and God looked down at the Waters, and the failure of his prototype Reality and at the balance sheet in His Hand.

    “Apparently I owe about 237 trillion credits to myself” he sighed, and drew a red line through the balance sheet with his finger. “There, that covers that. Next time I wont write in conservation of energy. That was my Big Mistake”.

  25. Ultimately, the problem will boils down to the following question: will the government be able to extract more from its citizens? It must reduce the burden of its debt, either via taxes or spending cuts, or via inflation. What means will be actually used, that is will be political profitable, depends on the results of the cultural propaganda. If people begin to think that austerity is necessary, then cuts will be enacted. If they can live with price freezing, like in Venezuela, then inflation can go on.

  26. Hj Gail, very glad I came across your blog [although more global -Euro related articles would be very welcome] – Here in the UK politicians are in a state of denial- the economy is just about to bounce back, and growth is just around the corner. Is there any US politicians that want to listen?

    • I am not sure there are many US politicians who want to listen. They seem to be enamored of today’s economists, who don’t think energy is a problem and think growth can go on forever.

      • Such short-sightedness amongst our short term politicians is depressing. We can at least look to Germany that is investing in a post peak/ post carbon future but I have yet to observe a political debate whether left or right prepared to even acknowledge the issues at hand. 5 years into a unique recession and the left wants more spending and rights wants less but all expect that growth is just around the corner. But you know this.

        But if it comes to advisers [and please accept my lack of subtlety] -as an actuary [Actuaries!?!] you are not a millions miles away from being an economist [apologies if you are]- so what logic are the economists working on? Is there an up and coming school of thinking which will succeed the current optimists? or is it simply that if you want work with politicians or business you need to be an optimist?

        I look forward to reading your next post.

        • I am not sure I have an answer for how so many can be so deluded. Actuaries do work in the financial world, so they are not that far removed from economists. In some ways, they are more like the engineers of the financial world. They haven’t been steeped in the economic theory (and nonsense) that the economists spout, so seem to be more open to the issues at hand. Politicians couldn’t possibly admit that there is a problem they can’t solve, so they have an incentive not to believe anything that does not forecast business as usual.

  27. Greg Chadwick says:

    Gail, you mentioned that…”I am not sure I have an answer for how so many can be so deluded.” I suspect that most everyone who has some understanding of peak oil and the other predicaments we face are thinking much the same thing.

    However, I think you may have already touched on the answer in one of your replies. I believe it was you; or perhaps another blogger, who mentioned the possibility that the problem may be genetic in origin.

    Evolution equipped our species for one specific purpose, that is to live long enough to reproduce and raise offspring. As one clever writer succinctly described it, we’re very good at the three “F’s.” For better or worse, anything else was a side effect.

    To make a long and complicated story short, the cave man who was too busy thinking about the environmental impact of his tribe’s wood burning activities to notice the tiger in the nearby brush probably wasn’t one of our ancestors.

    Ironically, our species was smart enough modify and create a whole new man-made environment. But unfortunately, not being predisposed to consider anything past the end of our noses, we inadvertently created an environment where we were no longer so well adapted for long-term survival. That’s because now almost all of our existential problems are long-term.

    If you have a chance, check out Craig Dillworth’s book “Too Smart For Our Own Good.” He did a great job of tracing our use of technology over the ages, which goes a long way toward explaining our current predicament.

    The other issue is that the human brain doesn’t work anything like most people think it does. Another long story. The short and bitter version uncovered by research psychologists says that we are NOT primarily logical and rational creatures, we are frequently illogical and irrational and driven by hidden emotions.

    Worse, all human history is revisionist history as our memories are recreated every time we access them in ways that suit our immediate needs.

    And last, but not least; most of our decision-making is done subconsciously, and not just the walking and chewing gum variety. Like it or not, we’re all short-timers.

    We can argue all we want, there is a mountain of peer reviewed research hiding in plain sight for those who are masochistic enough to go looking for it. If anyone is interested in this depressing and demoralizing stuff, I can provide a list of interesting, but disconcerting books.

    BTW: Great blog Gail. The readers who add their comments are clearly well read and intelligent. Far more than I can say for what I see in the mainstream media.

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