How Resource Limits Lead to Financial Collapse

Resource limits are invisible, so most people don’t realize that we could possibility be approaching them. In fact, my analysis indicates resource limits are really financial limits, and in fact, we seem to be approaching those limits right now.

Many analysts discussing resource limits are talking about a very different concern than I am talking about. Many from the “peak oil” community say that what we should worry about is a decline in world oil supply. In my view, the danger is quite different: The real danger is financial collapse, coming much earlier than a decline in oil supply. This collapse is related to high oil price, and also to higher costs for other resources as we approach limits (for example, desalination of water where water supply is a problem, and higher natural gas prices in much of the world).

The financial collapse is related to Energy Return on Energy Invested (EROEI) that is already too low. I don’t see any particular EROEI target as being a threshold–the calculations for individual energy sources are not on a system-wide basis, so are not always helpful. The issue is not precisely low EROEI. Instead, the issue is the loss of  cheap fossil fuel energy to subsidize the rest of society.

If an energy source, such as oil back when the cost was $20 or $30 barrel, can produce a large amount of energy in the form it is needed with low inputs, it is likely to be a very profitable endeavor. Governments can tax it heavily (with severance taxes, royalties, rental for drilling rights, and other fees that are not necessarily called taxes). In many oil exporting countries, these oil-based revenues provide a large share of government revenues. The availability of cheap energy also allows inexpensive roads, bridges, pipelines, and schools to be built.

As we move to energy that requires more expensive inputs for extraction (such as the current $90+ barrel oil), these benefits are lost. The cost of roads, bridges, and pipelines escalates. It is this loss of a subsidy from cheap fossil fuels that is significant part of what moves us toward financial collapse.

Renewable energy generally does not solve this problem. In fact, it can exacerbate the problem, because the cost of its inputs tend to be high and very “front-ended,” leading to a need for subsidies. What is really needed is a way to replace lost tax revenue, and a way to bring down the high cost of new bridges and roads–that is a way to get back to the cost structure we had when oil (and other fossil fuels) could be extracted cheaply.

The Way Resource Extraction Reaches Financial Limits

Figure 1. Illustration of why resource limits are very hard to see

Figure 1. Illustration of why resource limits are very hard to see

When a company decides to extract a resource such as oil, gold, or fresh water, it looks for the least expensive source available. After many years of extraction, the least expensive sources become depleted, and the company must move on to more expensive resources. It always looks like there are plenty of resources left; they are just increasingly expensive to extract. Eventually an extraction limit is reached; this limit is a price limit.

As easy to extract resources become more depleted, it becomes necessary to invest more resources of every type in extraction (for example, manpower, oil, natural gas, fresh water), in order to extract a similar amount of the resource. I have called this the Investment Sinkhole problem.

The need to use greater resources in the process of resource extraction leaves fewer resources available for other purposes. Prices adjust to reflect this out of balance. If there is no substitute available for the resource that is reaching limits, the economy adjusts by contracting to match the amount of resource that is available at an affordable price. Some economists might call the situation “reduced demand at high price”. What the situation looks like, in terms most of us are used to using, is recession or depression.

Part of the confusion is that many people completely miss the fact that there is a close connection between cheap energy supply of the exact type needed (for example, gasoline for cars, diesel for trucks, electricity for many factory applications) and the ability of the world economy to make goods and services.

If the price of energy of the type a particular manufacturer or service provider uses increases (say gasoline or diesel or natural gas or electricity), that manufacturer or service provider in the short term has no choice but to pay the increased price, because there is no substitute for energy of the right type. If the manufacturer or service provider tries to pass these higher costs on to its customers, there is likely to be a cutback in demand, leading to a need for layoffs. Alternatively, with longer lead time,  the company may be able to find a way around the problem of increased costs, by using more  automation, or by outsourcing production to a country where costs are cheaper. Any of these responses leads to reduced US employment and recessionary impacts.

What History Says about Prior Collapses

Until fossil fuels came into widespread use, civilizations regularly grew until they reached limits of some sort, and then collapsed. There are many books looking at this issue. David Montgomery, in Dirt: The Erosion of Civilizations talks about the role soil erosion and soil degradation play in bringing civilizations down. Sing Chew, in The Recurring Dark Ages, talks about how ecological stress, deforestation, and climate change have led to long periods of collapse and low economic activity. Joseph Tainter, in The Collapse of Complex Societies, talks about how increasingly complex solutions to the problems of the day lead to ever-higher administrative costs that eventually become too expensive to afford.

Peter Turchin and Surgey Nefedov in the book Secular Cycles take more of an analytical approach. They look at how cycles actually played out, based on financial and other detailed records of the day. Their analysis considered eight economies, the earliest of which began in 350 B. C. E.. The pattern they found looks disturbingly like the pattern that the world has been going through since the widespread use of fossil fuels began about 1800: A civilization starts its existence when a new resource becomes available, for example by deforesting land to be used for agriculture (or in our case, finding ways fossil  fuels could be used). A civilization experiences Growth for 100+ years as the population is able to grow with the new resource available to it.

Eventually the civilization reaches a Stagflation period. This happens when the civilization starts reaching limits. Population is much higher, the size of the governing class is much larger, and feedbacks like erosion and soil depletion start to play a role. In my view, Stagflation period began for the United States around 1970, when US oil production began to fall.

Turchin and Nefedov found that during the Stagflation period, population growth slows and wages stop rising. Wage disparity increases, and debt grows. The cost of food and other resources becomes more variable, and begins to spike. The level of required taxes grows, as the number of government administrators grows and as armies increase in size. (Joseph Tainter refers to this growth in government services as a product of increased complexity.)

Eventually, after 50 or 60 years, a Crisis Phase begins, when it is no longer possible to raise taxes enough to cover all of the governmental costs. In this period, wages of commoners drop to such a low level that nutrition declines, leading to epidemics and a higher death rate. Commoners often revolt, leading to government collapses. Wars for resources are sometimes fought. The Crisis Phase lasts a variable length of time, typically 20 to 50 years, with the length of time seeming to be shorter in the more recent cycles analyzed. There is considerable die-off from illness and warfare in the Crisis Phase.

It seems to me that the United States, most of Europe, and Japan are now very close to the point where they will enter the Crisis Phase of a similar cycle.

The Nature of the Financial Predicament We Are Reaching

At the beginning of this post, I mentioned that rising investment costs lead to what I call an investment sinkhole problem, as we extract fuels and ores that require increasingly expensive inputs near the bottom of Figure 1. An examples might be tight oil, that is extracted using “fracking”. While we hear much about the hoped-for higher supply, we don’t hear that the newer types of oil are available only because oil prices are high. They can’t be expected to bring oil prices down. An investment sinkhole means that our dollar of investment doesn’t go as far; it is precisely the opposite of increased productivity.

When we were still far from reaching resource limits, efficiency improvements could more than make up for the loss of efficiency that comes from the Investment Sinkhole effect. But as we get closer to limits, the situation is reversed. Efficiency improvements are outweighed by the ratcheting up of extraction costs, because of the Investment Sinkhole effect. This means that instead of increased wealth being added to the system by efficiency improvements over time, we find the Sinkhole effect predominates. The common worker needs to spend an increasing proportion of his paycheck on necessities, leaving less for discretionary items. The result is recession, or very slow economic growth.

When the Investment Sinkhole problem starts to predominate, financial models suddenly don’t work very. Central banks react by cutting interest rates, in an attempt to stimulate economic growth. They also try to stimulate the economy by Quantitative Easing. This adds more money to the economy, and attempts to reduce longer-term interest rates. Of course, if the problem is really structural, there is no bounce-back to economic growth. The temporary fix becomes a bridge to nowhere.

A Long-Term View of our Financial Problems

In the previous section, we talked about our immediate problems. But what about our longer-term problems?

Figure 2. Author's view of how various limits might work together to produce different symptoms.

Figure 2. Author’s view of how various limits might work together to produce different symptoms, of the type seen by Turchin and Nefedov.

Today’s financial system is based on the assumption that individuals and businesses can make and keep financial promises. This system worked well, when resource prices were flat or declining, as was the case prior to 2000. It was possible for businesses and governments to take out loans under the expectation of continued prosperity, and for individuals to buy houses and cars under the expectation that they would continue to have jobs, so that they could continue to make auto loan or mortgage payments.

The situation changes dramatically, if the long-term expectation is for oil prices and other commodity prices to keep ratcheting upward. We don’t really have substitutes for oil and other commodities, so if we want to keep obtaining them, we need to pay the ever-higher cost. Even devices such as more efficient cars are affected by higher prices, because they too, use fossil fuels in their construction, and depend on ever more expensive technology.

In a period when commodity prices are ratcheting upward, businesses find it increasingly difficult to forecast whether new facilities will continue to be economic 10, 20 or 40 years. Businesses find that customers gradually have less discretionary income, instead of more, so it becomes increasingly difficult for these customers to afford the products which are being sold. This makes business planning much more difficult.

If a bank makes a long-term loan, it needs to include a much larger provision for the expected cost of loan write-offs. These higher loan write-off provisions causes interest rates to rise, making long-term loans unaffordable for many (or most) people and businesses. Governments are hugely affected as well.

Without access to cheap loans, and with resource prices (especially oil, but sometimes desalinated water instead of well water, and natural gas) ratcheting upward, business failures rise. This leads to more layoffs, and more defaults on mortgages and auto loans.  Interest rates on these can be expected to rise as well.

All of these effects mean that debt-financing becomes much less attractive. Debt defaults, such we have just seen in Cyprus and Greece, become more common. This is not a temporary passing phase; it is a permanent long-term situation, caused by the ratcheting up of oil and other commodity prices, as resource extraction becomes more expensive.

In such an environment, the amount of goods and services available tends to decline over time. Continued economic growth changes to continued economic contraction. If governments issue fiat money, it declines in value over time as well. (Money is sometimes defined as a “store of value,” but this becomes less possible.) One way this decline could occur is if those holding money have an expectation for continued inflation. Alternatively, money can be subject to an automatic downward adjustment that reduces its value on a monthly or annual basis.

With such a system, individuals discover that if they have money, the best strategy is to spend it immediately, rather than to try to save for retirement or some distant goal. Investments in stock markets, or in stocks of new companies, are likely to decline.

Without the availability of debt at a reasonable cost, businesses find it much more difficult to expand or to begin from scratch. New businesses tend to be small ones, that can finance their own operations by bootstrapping–that is, self-financing by using the profits on early sales to pay for materials needed for later sales, and hopefully for a little expansion as well.

All of these issues mean that if there is a financial collapse, picking ourselves up afterward will be quite difficult. Our current financial system would need substantial modification to work in such a system. The size of the current financial sector would likely shrink dramatically.

If the various countries of the world set up different financial systems to deal with the new realities, connecting them into a world system is likely to be difficult. Political stability is likely to be lower in a system such as this. How does one arrange long-term contracts, when there is a very real possibility that the government of the country that is party to an agreement may have collapsed, prior to the end of the contract?

What Brings the Whole System Down?

It is easy to think of a long list of things that might bring the system down. In fact, there are so many contenders that if any one of them starts the collapse, it seems likely others will push it on its way.

Clearly one of the issues is the wide gap between US Federal Government revenue and government expenditures.

Figure 3. US Federal Government Receipts and Expenditures (including Social Security, etc.) based on Table 3.2 of the US Bureau of Economic Analysis.

Figure 3. US Federal Government Receipts and Expenditures (including Social Security, etc.) based on Table 3.2 of the US Bureau of Economic Analysis.

If the US government (or the government of any of the many countries who are having difficulty balancing their budgets) tries to raise taxes or cut benefits, to get revenue and expense back in line, the outcome is likely to be more recession and more layoffs. Debt defaults are likely to rise, putting banks into financial difficulty. There will then be a need for more bank bailouts, and a rerun of the problems we saw in 2008, but with governments in poorer financial condition to solve these problems.

Another possible way the system could be brought down is by rising interest rates for governments, perhaps because of all of the failures elsewhere around the globe. Rising interest rates will mean that a government’s budget is even more unbalanced than it was before, because the higher interest rates translate to higher government expenses.

These higher government interest rates would quickly be reflected in other interest rates, such as mortgage interest rates and interest on corporate loans. Sale of homes would drop dramatically, as interest rates rise. Prices of homes would likely drop as well. Business investment would drop dramatically. Much of the “stimulus” that the government has put in place would disappear. We likely would be headed back into major recession.

A third possibility relates to the Quantitative Easing that has been done recently, and the artificially low interest rates that have resulted, even for longer-term loans. Investors who have to contend with these low interest rates will try to find ways around them, and in the process, create bubbles in asset prices. These bubbles invariably burst, with bad outcomes. For example, the WSJ recently published an article titled, “Investors pile into housing, this time as landlords.” Of course, when something goes wrong (like mis-estimating returns, or oil prices rising higher, leading to more pressure on renters’ ability to pay), the same investors are likely to pile right back out, puncturing the new bubble. Commercial investors rushing out will pull down property values, leading to yet more mortgage defaults as homeowners again find their loans “underwater”.

A fourth possibility is that oil prices will ratchet upward again. Alternatively, natural gas may rise from its current artificially low price level in the US, to more like European or Japanese levels. Either of these would lead to more financial pressures on citizens, and more debt defaults. Banks would likely again be in difficulty, needing bail outs.

A fifth possibility is that the Euro ceases to be a currency. Alternatively, some of the debtor nations could drop out of the Euro, allowing the Euro to rise for remaining nations, thus putting the remaining nations in a worse position for selling their exports. In either of these scenarios, the European crisis could be exported to the US, partly as reduced demand for our goods, and partly through exposure of banks to European defaults.

A sixth possibility is the effects of ObamaCare will destabilize an already weak economy, as businesses attempt to circumvent its effects by substituting more part-time workers for full-time workers.

A seventh possibility is that pensions start running into real financial difficulty, because of artificially low interest rates. The US government may be called in to bail out pension funds, or the Pension Benefit Guaranty Corporation, at high cost.

An eighth possibility is that states start leaving the United States, because they feel that they would be better off on their own, as taxes and mandatory programs (such as ObamaCare) become increasingly difficult to deal with.

What does the shape of the decline look like?

Many people who base their views on geological depletion of oil expect that the decline will be somewhat slow, matching geological decline. I don’t think geological decline rates will have much to do with the shape of the decline, except for perhaps setting an upper bound as to how well things might, in theory, work out.

The big question in my mind is how well the international financial system will hold together. There is a close corollary question: How successful will be at replacing it on a timely basis if it does fall apart? My concern is that if banks are suddenly closed, businesses of all types will fail. This could include companies extracting oil as well as companies selling electric power and companies providing fresh water.

If there are long-term problems with the financial system, international trade is likely to be greatly reduced. Businesses making trades are likely to want greater assurances that they will actually be paid than is the case today. This could take the form of bilateral trade with trusted partners, or “I’ll ship you Product A if you will ship me Product B,” as a form of barter.

A slowdown in world trade could have dramatic repercussions quickly with respect to our ability to keep basic services in good repair, because we are now  dependent on international trade for replacement parts of products we use every day (such as cars and trucks). Nearly everything that is manufactured today incorporates raw materials from around the world, and uses machines that depend on parts from around the world.

Another question is whether there will be huge political disruptions. If banks are closed, someone usually is blamed. We have seen many ways these political disruptions can take place. Some examples might include Syria, Egypt, the Former Soviet Union, and Greece.

One scenario I can imagine is that some parts of a country are subject to more disruption than others. In one part of the country, banks may be closed, while in another part, states may be able to reopen closed banks. Or electricity outages may occur following a storm, and never be repaired, while other locations nearby are doing fairly well. There may be political riots, but these are often located in areas where politicians are located, not in other areas.

Perhaps it is just as well that we don’t know exactly what the decline will look like. Not knowing gives us some chance for optimism.

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.
This entry was posted in Financial Implications, Planning for the Future and tagged , , , , , . Bookmark the permalink.

186 Responses to How Resource Limits Lead to Financial Collapse

  1. timl2k11 says:

    Thanks for the excellent write up. The current stalemate in congress, where no seems to be willing to do anything, or is even aware of where our problems really lie, leads me to believe things are much worse than they look. Politicians aren’t taking action because there is no action to take.

    • Timothy says:

      “Politicians aren’t taking action because there is no action to take.” – A very revealing observation.

    • jphsd says:

      There’s another reason politicians aren’t taking action. Their time horizon is very short – the next election. Any pol that stands up and admits the party is over is not going to get re-elected. Admitting to our reality would amount to career suicide, hence none of them are doing so.

      • If the situation were fixable, it would be easier to talk about it. I know some “peak oilers” are convinced that the reason climate change got all of the attention and not peak oil, is because climate change was conveniently off in the future. (If the fixes were the same for each, why tell folks about peal oil?) Of course, if the situation is really worse than the standard “peak oil” story, that makes it more of a problem, and harder to talk about.

        • Xabier says:

          Thank you for another fine post.

          The sound of so many nails being hammered so firmly on the head, makes it almost a symphony!

          I’m inclined to feel that the hollowing out of our economies, with the destruction of middle -class and skilled working-class employment leading to a steady and remorseless decline in discretionary spending, and even impacting spending on essentials, is something that the politicians and central bankers can’t even begin to comprehend and address.

          Apart from whole categories of jobs simply disappearing, which has clearly accelerated over the last decade, the very high and increasing cost of home heating, fuel for commuting and of well-made goods (many are spared the true effects on the latter by buying cheap rubbish in bulk from Asia) is steadily eroding the viability of many businesses and communities.

          Just by talking to people and business owners, one can sense a tipping-point. The ‘old rules’ ( invented largely post-1945) just do not apply any more.

          • YOu are welcome. The current situation is frustrating, and government seems to be geared primarily to helping business profits (automate; outsource to China/India), rather than to helping produce good paying jobs.

          • The whole layer of ash and the legend doesn’t sound good. But if there is not enough space to go around, someone has to be left out.

            Quite a lot of the people who aren’t working here have gone to the university to get degrees (with government loans), with the idea that when they graduate, they can get a job. The problem is that a large share of those new university grads won’t be able to get jobs either, except minimum wage jobs that they could have gotten without the degree. They now will have the debt they can’t pay back as well. We now read Surging Student-Loan Debt is Crushing the System:

            Student-loan defaults surged in the first three months of 2013, while efforts to collect bad loans are faltering, according to credit analysts and government audits. It is the latest twist in a college debt crisis that is hanging over recent graduates and dragging on the broader economy.

          • Steven Newbury says:

            I spoke to a Netherlands Central Bank economist who happens to be an old of my fiancée last week. This: “central bankers can’t even begin to comprehend and address”; is both true and false.

            The issue is people (all people) operate within socio-emotional constructs and a follow a dialectic narrative, that’s to say they are invested in their belief systems and mythos, and in order to “begin to comprehend” something that invalidates their preconceptions there needs to be a chink in their mental armour to allow the Cognitive Dissonance to take hold. As it happens the conversation I had involved exactly this topic, in respect to resource limitations and Climate Change. He had recently attended a conference on the topic of Climate Change, and while he previously was not aware of the perilous status of the Arctic and the degree of global changes under way, he accepted the data, while many (perhaps most) of his colleagues did not.

            Like an expert in any field, and in particular as a member of a specialist organisation, Central Bank economists are focused on addressing financial problems within the scope of the core tenets and fundamental dogma of the in-group. That doesn’t mean they are (all) incapable of understanding our predicament, but it does restrict the ability for individuals to take action or even discuss certain matters since they are effectively taboo. High priests do not openly admit their religion is false.

            • It is hard for economists to even consider that their religion is false. Obviously, someone smart would have figured this out long ago. There is no way they learned in school and are now teaching their students could be false.

          • BC says:

            Speaking of rules: http://www.alternet.org/economy/fiduciary-duty-cheat-stock-market-super-star-jim-chanos-reveals-perverse-new-mindset?paging=off

            As population overshoot increases the effects of resource constraints, competition increases, gains concentrate to a few “winners” willing to resort to deceit, theft, oppression, and violence, and the “losers” are required to make do with less, which further increases individual and mass-social, psycho-emotional stressors. A winner-take-all, win-at-all-costs zeitgeist takes hold.

            Resentment, envy, fear of loss, anger, retribution, racial/ethnic/religious conflict, and violence become dominant.

            Elites begin to fear loss of their status, privilege, security, and power, and they become increasingly insensitive to, even disdainful of, the deteriorating conditions experienced by the masses, permitting the elites to rationalize further wealth and income concentration, deceit, theft, violence, and abuse of power.

        • Xabier says:

          Increasingly now, one sees on the internet comments like: ‘If you work just to pay high taxes, and fund the bureaucracy, you’re a mug: stop working, get it free from the State, or work in the black economy.’

          This calls to mind the small farmers of the late-Roman Empire, who were driven into slavery for the big landowners by high costs and taxes, or simply to took to the hills as bandits. This then led to repression by State forces and civil unrest.

          In our part of Spain, there’s a whole layer of ash coming from this period, indicating the burning of farms and villas, but not at a time of barbarian invasion – that came later.

          According to legend, all the men were executed and replaced by the soldiers who started farming the land again -an extreme form of what happens in a Collapse!

        • Edward Kerr says:

          Again, Gail, you bring what until recently has been speculation to stark reality. Climate Change is no longer conveniently off in the future and will only exacerbate the financial collapse that now appears unavoidable. If the climate issue doesn’t cause our extinction, as more and more scientists are now suggesting, people will certainly be living differently a decade from now. Perhaps the “preppers” aren’t so crazy after all. Time to start gardens (I did 30 years ago) and learn new skills.

    • In case anyone hasn’t read my post on why our debt problem is not fixable, this is a link to my posts called Understanding our Oil-Related Fiscal Cliff.

      • Frank student says:

        Hi Gail. You have probably heard of Lyndon LaRouche. He forcast the problems decades before most people. Cheers Franko.

        • I wasn’t familiar with LaRouche, so looked him up on Wikipedia. Some of the things he said sound kind of nutty, though. For example,

          LaRouche interpreted the AIDS pandemic as fulfillment of his 1973 prediction that an epidemic would strike humanity in the 1980s. LaRouche said it had been created by the “Soviet war machine,” or by the International Monetary Fund to kill “excess eaters” in Africa.

    • OldStone50 says:

      ‘Politicians aren’t taking action because there is no action to take.’

      That certainly strikes a cord, but is it really the case? Is there literally nothing that can be done? Is any and every action as useless as flapping your arms when falling without a parachute? In other words, if you had absolute power to change policy, would you say ‘Nope, nothing to do; nothing can be done. I’ll just fold my arms and fall’?

      Of course, it also depends on expectations. If maintaining BAU is the criterion, then it is hopeless, because change truly is inevitable; BAU is always ephemeral. The question is always what change and with what intensity. Change is not only inevitable, it is desirable. And it can be guided. So what will you do?

      • It turns out that the benefits that were promised (Medicare, Social Security, unemployment, student loan guarantees, guarantees for banks and pension plans) are way to generous given the out of control state of our medical system, the number of people who are no longer working, and the high price of oil. People have already planned their lives around having them. They will be very unhappy when they are take away. Cutting back on benefits will cause other programs to fail, because for example, a person depending on one benefit may default on a loan, causing problems for the lender.

        It is hard to see a way taxes could be raised enough to pay for these benefits. The high taxes would reduce discretionary income, and cause defaults of other sorts. See my post, Understanding Our Oil Related Fiscal Cliff.

        The economy really must shrink back to a much smaller size–fewer jobs, more unemployed. The deficit spending has been covering up the problems brought on by high oil prices. Any change that legislators make to fix the deficit will push the economy toward shrinkage.

    • Seems to me like a collective fight/flight/freeze reaction.

  2. dogtrainer says:

    One way to answer the questions you pose near the end of the article is to use the level of honesty (or the level of corruption) that exist in the financial system as an indicator for when, how, and where the financial system will crack and break apart.

    The more corruption in any part of the system the greater the possibility for failure. The less corruption (more honesty) the stronger and more resilient that part of the system.

    A really important question that needs to be considered is what role should government play in fixing a failing (or broken) financial system?

    Without government playing a role in the solution individuals will become their own nation states.

    • I am not entirely sure that the level of honesty or corruption is a good indicator as to when, how, and where it will break apart. I understand that corruption is a huge problem in the developing world. It is probably also a problem here, but not quite so much so. There are problems in developed countries that make their financial systems likely to collapse, with or without corruption. Maybe with a little more corruption, someone could cook the books a little further. Of course, some would think QE is cooking the books, too.

      • Xabier says:

        In Spain, the books are so cooked you could get a Michelin star for them!

        One problem in times like these is the self-proclaimed ‘honest man, who’ll put a stop to corruption, who understands the people': in 1930’s Germany, that was Hitler…….recently it was Chavez, and Kirchner in Argentian pretends to be on the side of the ‘little people.’ Obama tris to play this card, too (or so it seems to a European looking in from the outside.)

        • dogtrainer says:

          I was in Barcelona, Spain last summer and I noticed that the structure of the economy was similar to the US economy; the lower paying menial jobs were filled by emigrant labor. The people and the city were quite calm considering they had just gone through a real estate bubble and wealth had been transferred to the bankers.

          You cannot have fairness without honesty as the measure. Most people know when they have been cheated because they can feel the dishonesty. Fewer people can see the way a dishonest system has been used to cheat them.

    • Schinzy says:

      I think corruption is and has been endemic to financial markets since forever. Warren Buffet has said “You never know whose swimming naked until the tide goes out.” I think the tide is going out and we are observing that many in finance have been swimming naked for years.

      The problem with financial markets, as Gail has elegantly pointed out in her article, is that returns simply are no longer there. Investments that yielded excellent returns 25 years ago return next to nothing today. When returns go negative, usually lending stops.

      • The issue of falling returns is something people don’t consider at all. Solar panels still are producing negative returns. Trying to substitute them for cheap oil and coal, such as we had in the early days, just doesn’t work.

  3. superb, It all sounds pretty logic to me

  4. schoff says:

    Excellant. Having started many many businesses I certainly liked your angle of the ability to reasonably predict by the banks, owners, etc., what the cost of doing business is going to be in 12-120 months as a factor. I used to be able to allot some of my capital to startups in tech and other places, this was based on semi-predictable returns in other areas, or semi-predictable stability in certain areas. I was stunned when my steady conservative investment in Swiss Francs was destroyed overnight by a government who wanted/needed to peg that to the Euro in a race to the bottom of deflating currencies. That is one example of many turns that are still happening in the business world. My mentality as well as many others I know is in a full defensive bunker mentality. How does one retain one’s assets or value in the current situation? That of course assumes you have them.

    For me that is investment in local land, food, energy, water, and a web of local friends and guildsmen to pull them off, this means educating a number of people in practical skills. For those around me with $120,000 of student debt and an Art degree, I have no answers…..

    • I think that people sometimes forget that a web of local friends is important in any survival plans. Knowing something would be very helpful as well.

    • Xabier says:

      Everyone I know – rich or poor – who pays attention to what is happening is thinking in terms of ‘bunkers’, I agree with you!

      Those who do not are simply not paying attention.

      Most do not want to take it in.

      But the politicians and central bankers still want to hook people into debt for ‘education’ of dubious value, to inflate asset bubbles and build high-maintenance infrastructure that cannot possibly be maintained in the medium-term, to generate ‘growth.’

      In terms of ‘bunkers’, I increasingly feel that Luther got it right: ‘My God is a Strong Castle’, wasn’t it? Even if you lose the value of your assets, you have your soul!

  5. philsharris says:

    Gail
    Succinctly put as we peer forward down the ‘foggy road’.
    Thank you.

    We are still close to the zenith of world trade and perhaps a short way still to go to before the zenith of world energy use. Coal was out-competed for many purposes in your USA and my Europe by petroleum, and a new business plan was created that depended increasingly on imported oil. For example, Portugal, Spain and Greece came late to the party (they were all military dictatorships) but the new business plan seemed to allow them to jump straight to the efficient urban world typical of OECD. On the other hand, China was able to vastly expand its coal-based economy at the same time as taking advantage of the modern business plan enabled by oil, and in a new and very effective way retrace our earlier path to industrialisation?

    I have open questions. Does being at the top of the global petroleum economy, with all the sunk investment that has been involved, mean that you, USA, have further to fall (collapse), and are likely to go down very fast and very deep?. Or does it mean, rather differently, that, starting so high, there is more leeway to contract to a different business plan based on still remaining domestic resources, and thereby still reap the benefit of exising modern structures? To put it another way, is the USA for example currently a co-beneficiary of a still expanding China? Can the US over the next decade or so begin to do without China, or vice-versa, and will that decide between my questions?

    The real problem you are defining it seems to me, is overshoot once a business plan turns negative. And we could include war in its various forms as a feature of overshoot. Geopolitics as well as current global financial mechanisms may make the defining contribution?

    best

    Phil H

    • schoff says:

      For the US, it depends on what stops working, and how much government (and government services) survives. Grid down in the US (or a region of the US) would be the end of the cities, and I’m not sure if 10% of the population would survive a 12 month cycle, partially because there would be no government (services) fairly quickly. In Swaziland grid down might not be noticed by 50% of the population, and the government would still operate to the extent it operates today. A long descent allows for canibalization of things, DC elites remove more assets and funds from the provinces, I fix my house by removing things from the local abandoned house, etc…. One mines the “excess” infrastructure. A long descent for Swaziland means that no more free food comes from Europe or the US, possibly the Chinese remove all the food from the land that they own, etc…

      The US is clearly still a co-beneficiary, we give them pieces of paper (well really digital bits) and they send us the sweat of their population and destruction of their environment in the form of consumer goods, and dangerous food. It would appear the GE consumer products (and others) are bringing back manufacturing of goods formerly manufactured in China already. Doing without China would be bad, I’d hate to give up my iphone when it broke and couldn’t be replaced, but I’d be scared out of my mind if someone nuked Seimens Power Generation, where would we get transformers? (back to grid down).

    • It is hard to see how all of this will play out. Countries or areas that have financial services as their main source of income are not likely to do well at all. We have already seen the problems in Iceland and Cyprus. On that basis, things do not bode well for London, and probably Switzerland.

      The one thing the US has going for it is more arable land per capita than a lot of other countries. In theory, it could catch itself on the way down, and go back to an earlier way of growing food and getting it to market. Our ability to produce food could be helpful in dealing with countries such as Saudi Arabia and China, that are likely to be short of food.

      I think a lot of it will have to do with how governments react, and whether governments of the type we are accustomed to can stay in power. If start having a lot of internal fighting, it will be hard to do well.

      • Jan Steinman says:

        “If start having a lot of internal fighting, it will be hard to do well.”

        Especially since the US has more guns per person by nearly half again over the second highest.

        I just heard of some city who cut their police budget and is, instead, giving out free shotguns to people who live in high-crime neighbourhoods.

        One of many reasons I crossed the 49th. But I’m under no illusion that, should the excrement hit the ventilator, guns would be blocked at world’s longest undefended border.

        • I understand that gun ownership has decreased in the last 20 or 30 years ( I forget what the reference said.) I understand that ammunition is in somewhat short supply now too. So maybe the problem is getting less bad.

      • philsharris says:

        Gail
        Indeed, I agree; hard to see how this is going to play out.

        Your thesis, as I understand it, is that finance tied as it is to huge trade imbalances in US/world trade (with oil the key component) is likely to trigger massive failure in US business, (existing modes of doing business go into a deflationary spiral perhaps) which could mean that US government cannot function? This could be quite sudden and might even feed into seccessionist tendencies within USA – like the Soviet Union?

        If US government were to fail then all bets are off. However, take farming (or the electricity grid, or the pipeline system for oil and NG for that matter) the US uses very little of its total fossil fuel in farming, and farming could be financed and done by diktat. Even under business as usual (BAU credit/profit), business adapts existing structures.The speed with which the rail system is being adapted where pipelines cannot do the job of moving oil from multiple new sources and regions might be an example. In a more extreme future I can imagine that farming, as the critical example, could still create a large export surplus if it were fully underpinned by determined government. As I just said, farming as primary production takes a very small proportion of US fossil fuel consumption, and the movement of primary product like grains is not such a very big deal. Food processing and retailing and livestock and horticultural businesses use more resources, but these will adjust.

        For sure Jeffrey Brown has convincingly described the noose being drawn round the US neck in the form of the shrinking available ‘world exports’ of oil. It seems likely that global financial arrangements, which very much include the US and the dollar, will have difficulty coping with this trend, and will ultimately be re-configured. So I agree that ‘finance’ trumps ‘resource decline’ and could easily ‘jump’ to a new configuration, leaving the US a lot less well-off.

        Here is the nub it seems to me. The USA, the whole of US business, is vulnerable to a sudden increase in poverty among its citizens. I think we have already observed that. Expect a lot of very real and sudden ‘cutting of corners’ and a lot of ‘make believe’ about what is really happening? My guess is that ‘collapse’ is what you are into just now, and have been for a while. ‘Lehmans’ and what followed did not come out of thin air. If, however, US BAU gets a new lease of life and poverty stabilises for a while, and there are no huge external shocks, the US might superficially not look very different for a while yet, even if it has taken a significant step down.

        Best hopes as Alan Drake puts it

        Phil

        • One major issue is whether the banks are closed, and whether they can be replaced. If the banks are closed, it is hard to pay salaries to people, and it is hard to purchase anything.

          Even if the banks aren’t completely closed, there may be a problem with getting the credit needed for carrying on international transactions (or for the people at the other end to accept it).

          I don’t see the “very little” issue as being important. If the process for paying for the fuel is broken, it is broken whether much or little is used.

          • philsharris says:

            Gail
            I’m sure you are right about devastation from an initiating financial trauma. My understanding is that we in UK came close to such a moment in October 2008; some say 12 hours to closed ATM and frozen bank transactions.

            Presumably, unless government at all levels loses legitimate authority, credit/currency can be issued by government? Issues such as prior debt or savings become 2nd order? The farming system (and the industrial assets and power that enables it) can still be made to function even if you all have to live on food stamps?

            Interesting that there were no famines across the whole FSU (c.f. Stalin or Mao or British India), and there was still enough oil being produced in Russian Federation for basic functioning even if a lot of people were a lot less well off and lost the whole of their savings and in many cases the title to their housing, and, for the men especially, their jobs. You could be a lot more fragile in USA, but my guess (not worth a lot perhaps!) is that if/when the chips are down the USA is more resilient than it looks. I would agree however that you look, both as an economy and a society, very much more vulnerable to poverty, and to sudden jumps in poverty with their results, than proved the case in core Russia. Would you prove politically and administratively resilient? I have no idea.

            best
            Phil

            • The government can issue money. No one says that other countries have to honor it.

              I think we need to look at what happens in the near future to countries hitting limits, like Egypt and Cyprus and Greece. Can they just go to the marketplace and buy what they want?

      • Andrew P says:

        The Soviet Union failed because it could not feed itself. They had to use US Dollars to import food, the US pushed them to the brink financially, and once Gorby’s (deliberate??) mismanagement gutted the fundamental underpinnings of their system, it was game-over pretty quickly. The US can feed itself, but I see ObamaCare as the US equivalent of Gorbachev’s Perestroika – an attempt to reform that which cannot be reformed. Is Obama trying to bring down the US the same way Gorby brought down the USSR?

        • Jan Steinman says:

          It may have been food that superficially caused the collapse, but only as a second-order effect.

          The former Soviet Union collapsed because they hit their own peak oil, and they couldn’t get enough US$ to import oil.

          I think Dmitry Orlov covers this quite well.

          By the way, they “feed themselves” quite well, in comparison to the US. Well over half their food production comes from individuals and small farms, so if something like an oil shock causes a drop in production from the big state farms, most people can scrape by.

          Imagine what would happen in the US if Big Agriculture failed. Do you think suburbanites would start eating their lawns?

        • The fall of the Soviet Union had a lot to do with falling oil production, and this in turn was related to world oil prices. Once world oil prices went back up, FSU oil production went back up.

          Former Soviet Union oil production and price

          • BC says:

            Gail, if you have the opportunity, perhaps for an idea for a future post you could look at world food production (cereals, wheat, coarse grains, rice, etc) per capita and prices juxtaposed to world real GDP per capita and the production of crude and liquid fuels per capita and prices since Peak Oil in ’05 and the onset of the “Great Recession” in ’08.

            It appears that Peak Oil is coinciding with a peak and decline in world food production per capita since ’05-’08 along with accelerating rate of increase of food prices and the peak in public and private debt per capita, gov’t receipts per capita, and the rate of change of real GDP per capita.

            Needless to say, the developing world, where 35-50% of income is spent on food, will experience the worst effects of Peak Oil, falling food production per capita, and rising food prices hereafter. However, the areas of fastest growth of population, consumption, and real GDP per capita have occurred in the developing countries over the past 20-30 years. Higher energy and food prices will by defintion result in a slowing of growth in the developing world, which implies slowing, or eventually contracting, real world GDP per capita.

            • Thanks for the idea. We seem to have a convergence of a lot of things going wrong at once. The developing countries certainly look like they will be hit hard.

  6. Greg Chadwick says:

    Gail, this post makes a Steven King horror novel sound like a children’s bedtime story, but unfortunately you’re not writing fiction.

    Your logic is sound and the data and recent events seem to support it quite well.

    You seem to be moving the time frame for collapse forward a good bit. Up till now observers have suggested that economic disintegration will become severe when the total output of oil begins to decline. Jeffery Brown and his ELM (Export Land Model) indicate that our problems will begin before that as net exports decline faster than the actual depletion rate.

    But you’re saying that before those two scenarios can do us in, financial collapse will be triggered by the high cost of oil. We won’t need to wait for the actual decline in global oil production, or declining net exports, our one-way ticket Olduvai will have already arrived in the mail.

    This strongly suggests that all future promises to pay by governments, businesses and individuals, financial institutions; look what just happened in Cyprus, and the currency of most nations, won’t be worth the paper it’s printed on.

    The rules of the game have definitely changed, but politicians, governments, banks and Wall Street are still bogged down by old assumptions that no longer apply.

    Conventional wisdom regarding financial planning and technological progress are now obsolete. We badly need new models for looking at the world – and fast.

    • Yes, you are right.

      Peak oil people have come up with one version of what is ahead, and “sold” it widely. Sustainability folks like a similar version of the story, because it makes it sound like a little downsizing is mostly what it takes. According to this view, getting people to buy a Prius should considerably mitigate the problem. There are also all kinds of other nice sounding statements that can be made–we can all be happy with a little less, etc. Peak oil and climate change folks can get together on what should be done for the future, because all that seems to be needed to be done is a little cutting back.

      I have believed this version of the story that I write about here to be true for quite a while. This version is really a version of the “Limits to Growth” story, except that Limits to Growth models do not include a financial sector. The lack of a financial sector is a huge problem in making accurate projections for the Limits to Growth model, especially now (more so than in 1972, when the first book was written).

      I think that the slow decline view comes from a misunderstanding of Hubbert’s global peak oil/peak fossil fuels curve. He only made his projections in the context of some energy source (nuclear or solar) ramping up to a much higher level, before the decline sets in. If the other energy source isn’t in place in quantity (and cheaply!) well before the decline sets in, there are huge problems.

      Hubbert's view of fossil fuel decline.

      • Xabier says:

        Gail

        I think this is your key insight that others lack, the financial side.

        For instance: I ‘get used to a little less’, partly because I can’t afford it, (my income is being squeezed, the cost of heating, fuel, food rises sharply), and partly also because I choose to.

        And so I buy less, in every sector – food, fuel, heat, clothing. And pay less taxes.

        In consequence, the businesses I used to patronise feel the squeeze – they sack people, they default on loans, leading to further sackings and defaults……threatening the viability of financial entities, the abiliity of governments to hand out benefits to the unemployed, to employ people, and so on….

        This is clearly where we are NOW.

        • Ert says:

          Good ways,

          it’s also my way: Work less in the payed job, spend less, do more work directly or in direct exchange – less taxes, less debt, etc. If that would be the way of everyone – nice thing. In the end, the only way to slow down the big shop, consume less and still have a good life.

          Unfortunatly that is not what the people are conditioned to. Whats goint on is basically portraied in the movie “They live” from 1988 by Carpenter based on the short story “Eight O’Clock in the Morning”.

          • While you can work less, businesses and governments are set up planning for growth. Their huge amount of debt demands growth. So from their point of view, this is a real problem. (Of course, the jobs aren’t really there, even if all of the folks who left the work force looked for them, and that is a problem too.)

          • Xabier says:

            Sadly, we can summarise it thus: lead a sane life as an individual, and you crash the debt-system built on unceasing ‘growth’ and the limitless expansion of credit. The result will not be pretty….

  7. BR says:

    Great post. I did have a question though, relating to the collapse you describe here and your forecast for 2013 — given the fact that both short-leading (e.g., conference board LEI, which have a very good track record) and long-leading (e.g., ECRI long leading indicators) are both pointing up for the U.S. despite the slump going on in Europe, isn’t it quite possible that the U.S. will avoid a recession and this’ll be like the late 1990s where whole regions of the world slumped without dragging the U.S. down?

    I’m not making a prediction, it just seems that while what you write make complete sense to me, the leading indicators are pointing the other way.

    • I think the leading indicators are influenced by all of the deficit spending and quantitative easing that is being done. The US is also in much better shape than Europe in terms of having our own oil supply, and in terms of not having to contend with the Euro, and the problems of not being able to let countries raise and lower the levels of their own currency.
      (This is a post I did a while back on why Europe is doing worse than the US: Why High Oil Prices are Now Affecting Europe More than the US.)

      If Europe goes down, I wonder if the financial system will pull the US with it, regardless of where we seem to be at the time. I have been surprised that the Euro has held together as long as it has.

      If the US can make it on its own, it is possible that Europe will go down, and the US will continue for a while longer (few years?) before it falls into collapse.

      We haven’t had much experience with these things before. My guess has been that the US would hit problems by the end of 2013, because by then Congress would need raise taxes/ cut programs, and the effects would start filtering through the system. But I could be wrong, and it might be a little later.

      • Jeff Berner says:

        Gail,
        I appreciate your perspective but I see the situation in Europe as being a bit more complex. The situation in Ireland, Iceland, Spain and Portugal appears to be similar to our own bubble in housing and lending. Italy’s ills are more to do with the results of the global recession. Greece should be looked upon as a unique situation where corruption and gamesmanship were used to privatize the profits and publicize the risk of Greece joining the Eurozone. In contrast, Germany and the Scandinavian countries seem to be on sounder footing. So when looking at the situation.as a whole I have a difficult time speaking of Europe as being uniform.

        • That could be. But it is striking that all of the countries with problems use oil as a large percentage of their fuel usage. They also show declining fuel consumption in recent years.

          They may have gotten to these situations in different ways, but in many ways, they look similar in their energy data.

          Per capita oil consumption of countries with recent bank bailouts

    • BC says:

      BR, in real per-capita terms, the US is still in recession since ’08. 50% of new college grads are unemployed or underemployed. Labor underutilization for those age 16-24 is 20-35%.

      The 5- and 10-yr. avg. rates of real GDP per capita are the slowest since the Great Depression, the 1890s, and Japan in the ’00s to date.

      Reported earnings for the S&P 500 are contracting yoy for the first time since the onset of recessions in early ’08 and early ’01.

      Non-financial corporate debt is at a record high to GDP going back to 1929 and Japan in 1989-95.

      World crude oil production per capita is down 10-11% since ’05.

      World cereals production per capita has not grown since ’08.

      The avg. 6- and 12-year S&P 500 P/Es are near all-time record highs of 29 and 27 (historical avg. of 14 and 8-10 for the secular bear market troughs), and the former is above the level of historical overvaluation that occurred at the dot.com bubble peak in ’00-’01. There has never been a positive 3-, 5-, 10-, or 20-year change for the S&P 500 with the 6- or 12-year avg. P/E at or above 20. Stocks are being priced to return no more than the 2% dividend before taxes, fees, and inflation, whereas an investor must accept cyclical drawdown risk along the way of 35-50%+. What percent of Boomers can tolerate this kind of risk for no or negative returns to equities with interest rates at 0-3%? I wager none.

      Growth of a debt- and oil-based, financialized, deindustrialized, mass-consumer economy is no longer possible under the aforementioned conditions. Apart from ecological economics and the LTG models, there exists no conventional economic theory, school of thought, or systems model for a once-in-history peak and decline in net energy, food production, and real GDP per capita so as to properly inform economists, CEOs, politicians, and mass-media influentials and opinion shapers to prepare society for an orderly transition to what comes next.

  8. Pingback: How Resource Limits Lead to Financial Collapse | Business Idea Research

  9. davekimble2 says:

    I agree that we are talking about a bridge to nowhere, but you haven’t mentioned that the Capitalist method of allocating scarce resources (highest bidder wins) makes the situation worse than it need be. When demand at today’s opening price exceeds supply at today’s opening price, say by 1%, that doesn’t translate into a 1% increase in the price, but a bidding war. The price continues spiraling upwards until only two bidders are left, and then the second-highest bidder finally gives up and does without the resource too. This is not a sensible or fair way to allocate scarce resources. With central (worldwide) planning, everyone would take a 1% hit to the amount of the resource they get, and the price would stay constant, at a level related to the cost of production.

    Another negative impact of Capitalism is that individual corporate planning decisions, which have to lead by years the availability of novel goods in the market-place, plus the time it takes to collect actual sales information and tell government agencies about it, so that everyone can know the true state of the economy, is what leads to booms and busts. There IS a feedback mechanism there, but it comes too late to make the right adjustments to macro-economic settings. With central planning, a regimented program of what will be available to buy next year may not please all of the customers, but at least it would ensure that basic needs are met. And if you have a job at the start of the Five Year Plan, you will still have a job at the end of it, instead of going to work one day to find your employer has gone bust and you are out of a job and about to lose your house and car.

    Of course moving away from Capitalism is impossible when all the major parties are selling growth and prosperity to the electorate – whichever party puts forward a policy of managed decline will be laughed off the stage by the party that says that they can still give everyone prosperity. Thus the politicians can’t change, and a collapse is inevitable.

    David Korowicz “Financial system / supply-chain cross contagion – a study in global systemic collapse” http://www.feasta.org/wp-content/uploads/2012/06/Trade-Off1.pdf is a very relevant read.

    • Talking about central worldwide planning is pretty pie-in-the-sky. I am not sure it could really be done. Some of us have recollections of the Russian attempts at planning for Russia, and that worked pretty poorly. China’s planning (for now) looks like it has gone pretty well, but I wonder how history will judge the situation 10 years from now. There is quite a bit about it that is unsustainable.

      There already are not enough resources to go around, if people who currently get essentially nothing are included in the allocation process. Any allocation process that gives India, China, and Africa enough, is not going to give much to Europe and the United States. I expect leaders in Europe and the United States would be upset about this.

      Thanks for the link to David Korowicz’s report. He does good work. He also wrote an earlier report, called Tipping Point, which is very good.

      • Central worldwide planning in basic terms means planning ahead for human nature
        and that is roughly the same as herding cats

      • davekimble2 says:

        The Russian system has had a bad press in the west. When the Bolsheviks stepped in to the power vacuum of 1917, the country had just lost a major war, was totally bankrupt and very short of food. Yet by WW2, despite outside interference, it had become a major power. Then it sustained massive casualties and damage, yet still emerged a major power. In the post-war period they had full employment, free education, free medical services, female equality, and technological, cultural and sporting achievements aplenty.

        Of course they also had the KGB and the gulags, but these were mirrored by the FBI/CIA and the “black sites” around the world.

        If they had not been pressured into the nuclear arms race by constant military threat, economic blockade and diplomatic antagonism by the US and its client states, they would surely have been the envy of the 99% in the west. Such is the power of propaganda.

        Yes, it seems it must be “pie-in-the-sky” because nothing has changed there, and no one has the solution to Peak Energy (your take on EWG’s latest report http://energywatchgroup.org/Releases.26+M5d637b1e38d.0.html would be good), so Collapse it is, probably with WW3 thrown in.

        • Bicycle Dave says:

          Hi DaveK2,

          I think you make an important observation about Russia – the west has generally accepted the propaganda about the evils of “central planning” and the absolute necessity to allow “free enterprise” and capitalism to be free of “government interference” and “over regulation”. It’s hardly obvious that free enterprise has been a huge success in terms of creating a state of well-being for most of humanity and all the other species we share the planet with.

          As you might guess, I respect the opinions of people who research a country while traveling by bicycle (foot, mule, or slow train also) and interacting with common folks. Dervla Murphy is a person I hold in highest regard. Her first travel book “Full Tilt – Ireland to India with a Bicycle” in 1964 is truly a classic. In 2008 she published “Silverland: A Winter Journey Beyond the Urals” – a train trip through Siberia. Dervla is unlike almost any other travel writer as she is a great student of history and very insightful about contemporary politics – and, is very opinionated and outspoken. Her commentary about post-Soviet Russia provides a very nuanced and enlightening view of both the good and bad aspects of the Communist experiment. Hardly the same impression we get here from the USA MSM.

          You may have noticed that this blog has a noticeable right-wing bias – both Gail and most of the people who post comments have this bias IMO. Please note that I very much respect Gail’s work and her contribution to our understanding of the nature and contours of the “The Limits to Growth” in today’s environment of depleting natural resources by an unsustainable human population level. This is why I follow her blog. And, Gail seldom supports any proposed “solutions” to our predicament. She once commented, something to the effect, that we would have been better off focusing on better birth control and more localization then most of our misplaced faith in the promises of new technology. I totally agree with that notion.

          But there is often a fine line between problem definition and proposed solutions. Suggesting that the Affordable Health Care Act (Obama Care) is a problem shows this bias (“ObamaCare will destabilize”). This “Act” is not the problem – natural resources being depleted by an unsustainable human population is the problem. Gail’s blog is titled “Our Finite World” and her current post is titled “How Resource Limits Lead to Financial Collapse”. Finite resources are the problem, not some attempt to be humane in the access to health care. Equitable access to health care can actually contribute to stability.

          Numerous comments posted here evidence a kind of Libertarian orientation: governments and politicians are mostly corrupt and useless, Obama playing the same cards as Hitler, work less in paying job to pay less taxes, etc. It’s not very often that someone here promotes the United Nations as a useful institution. Although skepticism is important, cynicism is just being lazy.

          I don’t think any kind of “total solution” is possible for the predicament we are now in. However, I do think some mitigation is theoretically possible if we could achieve some useful level of “global cooperation”. Human cooperation is the only possible mechanism for avoiding some pretty nasty consequences for humanity and the rest of the planet. But the idea of cooperation took a wrong turn after the advent of agriculture. The evidence seems to be mounting that humans benefited more from cooperation than hostility in our hunter-gather stage (vast majority of our existence). Agriculture brought forth royalty, shamans, and warrior classes to keep the peasants toiling in the fields and supplying food and other benefits for the guys who figured out how not to toil in the fields. Today we have elite classes of folks in the political, economic, religious, and military that perform the same roles. None of these groups hold cooperation in high regard – in fact they thrive on competition and non-cooperation.

          These new classes of people are the barriers to cooperation and should be transformed to be more constructive. Social planning is a way to promote birth control; International organizations like the UN are a way to reduce nationalism; Taxation is a way to create equity and fairness; Community centers can replace churches; etc. Doesn’t matter if what I just suggested is the best approach – the key is that cooperation is the only practical way to reduce human population humanely and move to a much lower consumption paradigm. How we get there should be the discussion – knee jerk ideologies regarding political, religious and economic models hardly seem useful.

          • davekimble2 says:

            Someone posted a link earlier to an interview with Dennis Meadows of “Limits to Growth” fame. Unfortunately it was in German, so with the aid of Google Translate and a bit of polishing, the English translation is at http://www.peakoil.org.au/news/index.php?meadows.htm . It is titled “There is nothing we can do”.

          • Xabier says:

            All one can say is: just you try living under the heel of government officials ‘planning for fairness,’ etc. You won’t enjoy it.

            However high the ideals, the result is tyranny. The socialist planned state can be as corrupt as any croney capitalist one: the tyranny of dull ideologues and time-servers, with the ‘citizen’ as vulnerable and as tied as a feudal serf.

            Of course, the claims of unrestricted ‘capitalism’ are equally naive, bogus, and of course, self-serving.

            I’d say Gail is scrupulous in keeping her own views out of her presentations – which is why I read it. It would be nice to keep the pointless Left-Right thing out of the commentaries too, where does it get us?

            By the way, doubts about Obama do not necessarily make one an extreme libertarian: just might mean that one has a nose for humbug! Politics in the USA, if I may observe from Europe, seems to have declined to a very low level of populist demagoguery. When a politician says he’s ‘taking you to a better place’, it IS no different to Hitler, my friend……..and ‘Uncle’ Joe Stalin as a nice chap too, I’m sure!

          • David Harney says:

            Xabier: Perhaps you’re joking. To compare Obama to Hitler and then admonish others to refrain from the “pointless Left-Right thing ” is a bit funny. Kind of like the executioner standing next to the guillotine and making a speech advocating non-violence.

          • Bicycle Dave says:

            DaveK2: Thanks for the Dennis Meadows “Limits to Growth” translation. This is a conversation that should be the cornerstone of public discourse. However, the article was written about a year ago and has hardly become a hot topic in the MSM.

            (I wish WordPress was more consistent with the Bicycle Dave tag)

          • Let me clarify something on ObamaCare (and also on a comments I made on No Child Left Behind, in the comments section). These really relate to how our current system operates, and how the proposed changes to the current system operate. The cause may be noble, but right now, our healthcare system is amazingly bad in terms of high cost and poor results. (I should write a post of this. It is unbelievable! US healthcare costs are something like double those of other industrialized nations, and our life expectancy is 17th out of 17 industrialized countries.) The proposed way of fixing it will not fix the high costs as all. The way I expect employers will react to the provisions of the act is likely to leave workers worse off–they won’t have jobs, or if they do, they will have part-time jobs, still without health care. For example, see this recent report, Part-Tme Work Force Accelerates Ahead of ObamaCare Mandate

            The shift to part-time work accelerated in February ahead of a key, midyear ObamaCare deadline, Gallup reported on Monday.
            Gallup’s survey found that the percentage of part-time workers as a share of the overall labor force surged to 20.6%, the highest level in data going back to the start of 2010 — just as the employment recovery began.

            I don’t come from either side of the political spectrum. I call it the way I see it, which generally disagrees with both major parties.

          • Bicycle Dave says:

            Gail,

            I totally agree that way health care is priced in the US is a national disgrace. Time magazine just covered this in great detail. http://www.time.com/time/magazine/article/0,9171,2136864,00.html It’s actually amazing that people have not taken to the streets with “pitch forks” over this.

            However, perhaps you can appreciate my feeling about your political leanings when you consider that Obama wanted very much to address the cost side of healthcare services. One political party has been especially strong in protecting the profit structure of this industry (although lobbyists work their magic on both parties). The only way to get any kind of bill passed was to ignore the cost side.

            Your statement was “A sixth possibility is the effects of ObamaCare will destabilize an already weak economy, as businesses attempt to circumvent its effects by substituting more part-time workers for full-time workers.”

            An equally partisan statement might read “A sixth possibility is the failure of Congress, particularly on the part of the Republican party, to enact any regulations to reign in the exorbitant healthcare costs that may well destabilize an already weak economy as both individuals and businesses struggle to absorb unreasonable profiteering on the part of the healthcare industry.”

            A more neutral statement might be something like “A sixth possibility is that US healthcare costs will destabilize an already weak economy. A recent analysis in Time Magazine finds excessive costs are due to a chaotic pricing system that produces unreasonable profit levels for the industry while often causing catastrophic financial problems for individuals.”

            I think it distracts from your excellent analysis of your core thesis to have this type of coloring. I doubt I’m the only person who is bothered by statements that smack of partisanship. You have just said that “our healthcare system is amazingly bad in terms of high cost and poor results.” Yes, we can agree on that without compromising your wish to “call it the way I see it “.

            • I don’t think the issue is related to Time magazine. The issue is related to the poor way the bill is structured, and Time is one of many that have noticed the obvious. I am complaining about this particular implementation. This is not to say that some other way of reforming healthcare would be a bad choice. This particular implementation doesn’t work in my view.

        • Yes, Russia did very well indeed in early periods. Their oil and gas production helped them industrialize. This is a graph of the oil production and consumption of the Former Soviet Union.

          Oil Consumption and Production of the Former Soviet Union, based on BP data

          The fact that their oil consumption never went back up by much relates to their inability to reindustrialize after their collapse. Like the US, Europe, and Japan, they cannot compete with Chinese costs.

          Regarding Energy Watch Group’s latest report, the one big complaint I have about these reports is that they represent a future that can’t happen. Collapse comes because of high price, and it comes early on. Until collapse comes, the high price will tend to pull up production of oil, and perhaps other fossil fuels, above what current models (such as those by EWG) suggest. Once collapse comes, production will drop much more quickly than the model suggests. EWG is a group of people basically from the renewable energy sector. They would like to “sell” the idea that renewables are the answer to declining future fossil fuel availability. Unfortunately, it doesn’t work that way. High cost is what brings the system down. If renewables add high cost early on, they are likely to bring it down sooner. If they actually reduce cost early on–say biofuels that are cheaper than oil–they might be helpful. But for the long-term renewables (despite their deceptive name) aren’t sustainable either, especially as part of the electric grid.

    • Xabier says:

      With all due respect, ‘ global central planning’ is a fantasy of c. 1910.

      When we’ve all starved to death, we can chat about it with H.G. Wells in Heaven (?)!!

    • Andrew P says:

      Worldwide central planning might alleviate price shocks in the very short term, but it will guarantee inexorable and accelerating decline. We already know that taking away the profit incentive does very bad things to production and resource extraction, and such a world would end up like North Korea in very short order.

      • davekimble2 says:

        Is “production and resource extraction” such a good thing? I thought that was the problem we were hoping to fix.

        North Korea has also had a very bad press in the west. They were invaded by Japan in 1927, then involved in a devastating war, caused by US expansionary aggression, and since then have been under economic sanctions by the west for 60 years! It is any wonder their economy is a mess. It’s not their fault – the north of Korea used to be the industrial heartland, with the south was the agricultural area. Its not their fault they can’t grow much food in the north – a lot of industrial countries can’t produce all their own food. Sanctions mean they can’t trade manufactured goods for food – the US is effectively trying to starve them into submission. And when the US does offer them food hand-outs, it is only on condition that is distributed by USAID, which as we all know is half-filled with CIA spies.

        Propaganda is a very powerful thing. http://www.youtube.com/watch?v=6NMr2VrhmFI
        is a North Korean video (with subtitles). Everyone should watch it and see if it rings true.

        The European Common Agricultural Policy is an attempt at central planning in food, with some scope for the entrepreneurial spirit. Of course it is derided by the 1% and MSM, but in practice it works for the 99% very well. It is the entrepreneurial bits that cause all the problems.

        Sorry to labour the point, but it seems like you Amerikans don’t realise you are in the Matrix.

        • I haven’t done much reading about North Korea. I can understand why that would be a problem. It starts to sound quite a bit like Cuba.

          BP doesn’t give a breakdown of energy consumption for North Korea, but the US EIA does. I should probably look at its indications. If I believe EIA data, population is still rising, even as oil consumption is falling. North Korea’s oil consumption hit a peak in 1991, the year of the fall of the Soviet Union, and has regularly declined since then. Cuba had a very much more modest fall in oil consumption.

  10. Pingback: How Resource Limits Lead to Financial Collapse | Manuel G Fermasis

  11. Bill Simpson says:

    If I had to bet, I would bet that Japan will probably be the first country to melt down. Their population growth is below replacement rate. They have almost no domestic energy sources except nuclear, which they have shut down. I think they are the largest importer of LNG to keep their electricity on. Their debt is at 240% of their GDP, and is set to rise fast, as Abo seeks to stimulate the economy by increasing inflation with massive additional public sector spending. They spend about 25% of government revenue on interest payments (or so I heard?), so if interest rates rise even a little, look out below. They need diesel to fish. They have to import nearly all of it.
    Japan is a financial ticking time bomb. I think it will blow up fairly soon. I give them about three or four years. That will be the black swan that just might take down the global financial system. Unless Spain or Italy beats them to it. The banking sector in the EU is about three times larger as a percentage of the economy, than in the USA. That might be too big to save.
    Europe can probably be managed by the wealthy elite, because it has much more farmland and fuel resources than Japan. If Japan gets hit with hyperinflation that makes their money nearly worthless, they could literally starve. Who will send them food, LNG and oil in exchange for worthless paper yen? And in a global economic crisis, they might find it difficult to barter new machinery and cars in exchange for food and oil. They aren’t getting along too well with China. Russia still has a couple of their Northern Islands. But maybe Putin will play Santa Claus.

    • SlowRider says:

      I agree to your conclusions, European banks are a mess. But the Euro is designed to survive as a store of value better than the dollar.

      • Andrew P says:

        And where does one store Euros in a system where most of the big banks are insolvent, the sovereigns are insolvent, and deposit insurance cannot be relied on? Wrapped in plastic in a tin? You are better off storing gold. At least it won’t be chewed up by mice to build a nest.

    • I agree that Japan is in deep trouble. It is hard to see how they have gotten along this far. It doesn’t look good for them.

  12. SlowRider says:

    Another good post!
    In your observation of financial problems, you don’t mention the vast fortunes in the world that were made during the expansion of the last centuries. All of these hundreds of trillions belong to someone in the form of “assets”. Some of them physical assets like corporations and property, but most just paper wealth inside the financial system. Now if that system becomes unstable by debt defaults and overprinting, this big money will run for the hills! That’s what they try to prevent at all costs, because it’s the end of the debt-based economy, and the start of real depression. We should be thankful, they buy us a one-time opportunity to prepare on a local or individual level.

    Now the Euro, it is a topic where you sound like mainstream media. The Euro system is putting austerity on debtors. So it destroys artificial prosperity to save the currency. No more nice houses and cars for the ordinary people in Greece and Spain, they will become low-cost workers again, as they always were, maybe for German or Chinese employers. The ECB doesn’t care about the well-being of European economies, only for that of the Euro. Few observers understand the difference. It works out very well for Germany. And the old mistake to think it has a problem with a high Euro. Please google German trade balance. Imports almost equal exports, they just add value to resources and ship the finished goods out. Import demand is stable on a high level, exports are vulnerable to any global recession.

    • Imports = exports now, with the Euro where it is. The question is what happens if the Euro is much higher, and the Southern European countries no longer in the Euro. To start with, the Southern European countries can no longer afford German goods. Probably some of the rest of the world can’t either. That is the issue I am concerned about.

      • SlowRider says:

        If the Euro is very high, imports to Europe are cheap, e.g. oil & natural gas. What better competitive advantage can you imagine in an era of expensive energy? Domestic demand picks up because people can afford more goods and services, production costs for industries decline, so the lower prices on the export markets are tolerable. And Germany isn’t a low cost exporter anyway, it sells quality and prestige.

      • SlowRider says:

        And a strong currency attracts capital. Germany’s bonds have negative interest rates: you have to pay them to take your money for 10 years.

    • Andrew P says:

      Secession can destroy the Euro. If any big State secedes, it could be game-over right then and there. If Italy left and defaulted on its TARGET2 balance, I can’t see how the Germans would accept staying in the Euro anymore.

      • SlowRider says:

        That’s what the MSM tell you, and some national politicians want to build on that story. But at the highest level they want to maintain as much as possible of the Euro. If countries should really leave, it will be called “temporary”, a muddle-through-solution with the free-trade zone remaining in place, maybe even the Euro for international transactions. The most extreme scenario I can imagine is a northern Euro with Germany, Austria, Netherlands, Finland and some of the Eastern countries. That’s way big enough, just look at the small but highly competitive Swiss. Later, after a lot of austerity, France and Italy could return…

  13. Michael Lloyd says:

    Tom Murphy had a good post on the Energy Trap, which seems to me to be a variation on your theme here but with a similar conclusion. http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/

    To those familiar with kinetics, this is all to clear. Debt is merely another mechanism for overcoming the activation energy required to change from one state of the system to another.

    I know politicians get a bad press but I am beginning to wonder whether the ability to face opposite directions at the same time could prove useful.

    It seems to me that we need to use our remaining legacy of fossil fuels wisely and that should be to invest as much as possible in a replacement energy infrastructure and to mitigate the decline. To do that, there has to be investor confidence. Otherwise, the financial system collapse would be hastened.

    So we need to have confidence in a future to invest in order to mitigate our future. A paradox.

    • That is a very good post of Tom Murphy’s. Thanks for reminding me. He calculates why it is so difficult to replace an energy source which is high EROI and not front-ended in development cost with one which is lower EROI and is front-ended in development cost (that is energy used for development).

      If the issue you are concerned about is putting off collapse, you absolutely do not want to transition to low EROI renewables with front-eneded development costs for this reason. Even if you don’t move to renewables, the collapse will take care of fossil fuel consumption (plus population and lots of other things). All that the transition to low EROI renewables does is move forward the date of collapse.

      • Michael Lloyd says:

        I think that a collapse or a series of collapses are likely now to be unavoidable. Nevertheless, we may be able to defer the timing, to mitigate the severity of such collapse or collapses and to reach a more stable state at a more comfortable level than might otherwise occur.

        That would be worth attempting, if, and it is a big ‘if’, it is possible. But to do otherwise, seems like fatalism.

        Even with a collapse there will be winners and losers. The winners are likely to be those who have anticipated well and consequently are better adapted to the new state.

        • Jan Steinman says:

          On “winners and losers:” I’d divide it up into three categories: 1) mega-winners, 2) able to make do, and 3) sliding off the end.

          I suspect for everyone on this list, we can take action to be in #2 rather than #3.

          The infamous “1%” — or more likely, 0.1% — will be the mega-winners, if they play their cards right. They will be able to control hoards of people in category #3 just by feeding them.

          It’s going to be hard to stay in Category #2. You will need skills to grow food and repair things. You will especially need negotiation and people skills. Keep your head down. Keep a low profile. Be someplace that is perceived as low-value.

          At least, that’s my theory, and I’m stickin’ to it! :-)

        • Regardless of the state of collapse, there are probably a few things that can be done. Making more solar ovens would probably be a good choice. Making more metal tools for farming, especially knives and other things that cannot be easily made out of recycled metal would be helpful. We can teach people to plant perennials that produce food in their area, and show them what types of wild plants are edible. Even if things turn out better than this, not much is lost by these kinds of adaptations.

  14. Mel Tisdale says:

    So, we seem to have Two Horsemen of the Apocalypse: the deficit that has to be faced sometime soon before there is no road left to kick the proverbial can down and this resource based one. All we need now is for Death to come along on his trusty steed and we are ready for the finale.

    It would be comforting to some extent if it were clear that the politicians were aware of the danger. One assumes that they are looking at the situation closely and are putting on an act for our benefit, well aren’t they always? I wonder when they are going to come clean. They keep talking about the need for economc growth, but this seems very difficult if not impossible, yet many claim that it is essential if we are to deal with the deficit.

    We are in a mess! (expletives deleted).

    • Ert says:

      @Mel

      Regarding the talk of Mr. Meadows at the enquett comission of the german Bundestag and the following discussion I have mixed feelings. There are those that probably share the views stated here – and others that oppose these conclusions (for whatever reasons).

      At my workplace there are a lot of higher positioned people that know exactly whats going on – but that is between 4 to 6 eyes only. What can you do as a company embedded in the whole game? Saving as lot of ressources and energy as to save money and 2nd as economically possible – thats what they try… and I have no better idea. But other (managers) are totally oppose to those ideas – they see the whole thing continuing the thing until 2025 oder 2030 as they are now.

      Mr. Meadows phrased it best in an interview with Format (Austrian Magazin: http://www.format.at/articles/1222/525/329547/da). He says that the global director for Airtravel of the Worldbank said to Meadows that PeakOil is no topic for them – it is taboo. Whoever brings it up is fired or moved to a different section/job. This, as the story of peakoil destroys the belive of growth. And without growth one had to change everything…..

      Meadows is quite depressed concerning what we still can do in the remaining timeframe.

      • Mel Tisdale says:

        Somewhere in America they have legislated against sea-level rise, so don’t worry, the oceans cannot possibly defy such ordinance. If they can only now ban all temperature rise, climate change won’t be much of a problem. We still have about a degree or so rise in the system that is going to happen anyway, but I am sure that will be permitted.

      • Yes, I am acquainted with Dennis Meadows. He can see that the limits are not all that far away, and that not much is being done. Population is one issue in particular that gets ignored.

    • I think they sort of know. I know Alan Greenspan was quoted as talking about peak oil. George Bush and Dick Cheney knew about peak oil, since they were in the oil business. Matt Simmons was Mitt Romney’s oil advisor, in the previous election, so he certainly know about peak oil. But if they don’t have a fix, all they can do is cover it up.

      • david reese says:

        Matt Simmons, arguably the world’s best authority on Peak Oil and oil-related financial matters, died in August 2010.

        • I meant Matt Simmons was the oil advisor to Mitt Romney in the 2008 election. I guess “previous” election didn’t get that idea across well enough.

  15. Gail, excellent article….comments that follow are also educational.
    I have one contribution. It is the following article.

    http://grist.org/climate-energy/two-reasons-climate-change-is-not-like-other-environmental-problems/?goback=%2Egmp_119460%2Egde_119460_member_225874024%2Egmp_119460%2Egde_119460_member_225874024

    I would encourage Gail’s readers to review this article.

    It has two main points that should be allowed soakage to the brain;

    1 – CO2 is very persistent and when released into the atmosphere, it remains there for a very long, long time. After this prolonged period of time, CO2 is absorbed by natural “carbon sinks” in our environment. That’s what makes it fundamentally different to other environmental threats.

    2 – The accumulating effects of CO2 are now building up. A support scientific paper shows that the climate change that takes place due to increases in carbon dioxide concentration is largely irreversible for 1,000 years after emissions stop.

    This widely accepted scientific paper was published by Proceedings of The National Academy of Sciences of The United States of America (PNAS) (http://www.pnas.org/content/early/2009/01/28/0812721106.full.pdf+html )
    and the scientific journal Nature.

    I think this is very relevant to this discussion, and should be acknowledged on its own merit.
    It is not widely identified as a problem, but I feel it will have a large impact on our not too distant future.

    • davekimble2 says:

      > “increases in carbon dioxide concentration is largely irreversible for 1,000 years after emissions stop.”

      The science does NOT show that at all. The carbon sinks start working straight away, and have absorbed 50% of each years’ CO2 output in about 27 years. After 1,000 years they have absorbed ~81% of each years’ output. (see http://www.peakoil.org.au/charts/CO2.decay.gif ). The models vary, but are in broad agreement on this.

      Sure the effects linger for 1,000 or even 1,000,000 years, but sinking starts quickly and tails off – just like any concentration-related process does.

    • I agree that the CO2 is likely causing the climate to change. I think likely collapse changes the discussion somewhat.

      If collapse comes, it will likely wipe out most of the human population and pretty much all of fossil fuel use. The lack of fossil fuel use may not solve the climate change issue (if it is irreversible), but if there aren’t many humans left, they can pick up and move to where the climate is hospitable. The collapse will bring down CO2 contributions far faster than any program politicians could come up with.

      For the earth’s point of view, it is natural to cycle from one climate state to another. When cycling to a new state occurs, it is likely that different species will become top species. Humans are the top species now, but we won’t be if there is a lot more CO2–most likely some types of plants will predominate. This is a huge problem from humans point of view, but not from the earth’s. We are assuming we will continue to be top species–something that is not necessarily true after collapse.

      • Mel Tisdale says:

        The climate changes in line with whatever forces it to change. At present by far the most significant forcing is the excess CO2 that we have pushed and continue to push into the atmosphere. See this and this and this.

        While our CO2 production will drop dramatically in line with the reduction in the human population caused by any significant collapse, all that we have produced recently and are still producing will hang around for at least fifty years or more. Unless we give up and deliberately vacate our top spot, this has to be part of the considerations of those that have to manage the post collapse situation. If by chance we have crossed a tipping point for, say, melting the permafrost or oceanic release of CO2, or both combined, then atmospheric CO2 will increase inexorably to levels that will spell disaster for us and a lot of the other flora and fauna. It is doubtful that humans will survive the climate conditions that will then exist.

    • Andrew P says:

      Don’t worry about CO2. As long as people can adapt to whatever climate changes take place, that is the very least of our problems. And the world might well be in an ice age already if the CO2 had not been emitted, so be careful what you wish for. Based on the timing of the astronomical cycles, we are likely overdue for glaciation.

  16. Mike K says:

    Gail,
    Never posted before love your many articles.
    I noticed government expenditures bend down off the curve in the last few years, (Fig 3) what is driving that?

    • These are from BEA actual amounts. Grants in aid to state and local governments probably are the thing that is down the most. “Current transfer payments” are about flat, so perhaps enough people are getting off unemployment insurance to make up for those that are being added by Social Security.

  17. Leo Smith says:

    well up to your usual standards

    one observation, output only tracks input in systems with no feedback. So your observation that ‘things wont necessarily decline at a steady rate as oil price increase at a steady rate’ is acute and correct.

    In fact there is massive feedback – fast acting positive and longer term negative – in the world economy. Future and other derivative trading is a reflection of feedback that acts well in advance of expected change. company collapses and busts are negative feedback that reacts long after the event ‘in a crash, you don’t lose money, you realise losses on money you are already lost years ago when you invested in a future that didn’t happen’ and so on.

    In this light QE is just another bit of feedback. All it has achieved, and all it was probably ever expected to achieve, was to prevent a massive collapse, and instead replace it with an orderly collapse. Its is no cure. merely keeping the patient alive. It cancels fasts acting positive feedback (positive in the technical sense in that its action is to amplify small changes into big ones, not the economists sense in that it produces desirable changes) and that stops – essentially – too many businesses (mainly banks) collapsing because of short term runs, when they possibly could survive in the long term.

    But in the end, the overall negative feedback of falling EROEI will – must – tell. Its on a different level to finance: finance reflects it, but financial solutions cannot make it go away. If we are simply spending more human activity getting energy, we are spending less on something else. And that means falling living standards everywhere, however disguised politically by inflation, or tax rises.

    And if the QE or other measures fail to stop a rush of negative emotion, causing people to downgrade their expectations markedly, so too will investment stall, and people seek the selfish havens of physical gold, or a piece of land and a rifle, to secure their futures with. THEN you may see rapid collapse as ‘first on the lifeboat, and to hell with the Titanic’, becomes the game .

    I.e. rapid disintegration of a Tainter like sort into geographical areas that guard their interests and cultivate extreme xenophobia. self first, family second, neighbors third, states 4th and who cares about the continental givernment anyway?

    The problem is, that that sort of collapse may in fact – again using Tainters ideas – be exactly what is needful. When you cant save the Titanic, each lifeboat is a survival machine, and your loyalty is to those who share it with you.

    And the mathematics of collapse is rapid and chaotic. Once stability margins are exceeded, things fall apart in seconds. There’s even a TV program…and that is because positive feedback dominates, a tiny blip in a traders right finger, becomes a market crash, because everyone is waiting for just that sign..The mathematics of a train wreck are interesting. The kinetic energy of the train is normally constrained by negative feedback to stay within the narrow envelope that consists of a train travelling uniformly as a unit in s single direction. If that negative feedback – the rails – is unable to keep the wheels on the rails, then that energy becomes dissipated in disparate ways, Bits fly off, bits break, everything tumbles and parts are scattered beyond any power of prediction until what’s left is a high entropy mess of tangled parts that barely even resembles a train, and certainly will never act as one again. As one part exceeds stability, it collapses and loads are transmitted to the next part, and that collapses..
    think 9/11 – as beautiful an example of progressive structural collapse as you will ever see.

    We live in a society that has grown – i hesitate to say been constructed – based on foundations of cheap energy. Rising energy prices will almost certainly not simply cause it to stop growing and smoothly shrink: rather parts that cannot function without that cheap energy will fail, pushing stress onto to other parts that will also fail. How interlinked the structure is and how it will in fact fail, is an interesting academic problem but trust me brother, no one knows the answer. Any more than we knew who owed who what or what the collateral was worth in the bank crash.All we could do was take the stress of with QE..and pray

    • I follow the same line of thinking–but use Hurricane Katrina
      the damage caused by that cost $50 bn, that can only be rectified by spending that much in energy to put it right.
      Thats fine until energy gets into such short supply or high cost….more or less the same thing…. that we will no longer be able to rebuild.
      Nature’s energy supplies really are unlimited, ours are not.
      After we’ve passed that point, whatever nature knocks down is going to stay down, whether that applies to an electricity pole or an entire city.
      Anarchy kicks in in real terms after we pass that point—even though we may deny that we have passed it for a short while.
      On that point—I notice that the grand vizier of deniers, Inhofe… gets a writeup in Huffpo today http://www.huffingtonpost.com/2013/03/29/james-inhofe-climate-change-documentary_n_2980947.html

    • Mel Tisdale says:

      3000 people died in the collapses of the twin towers on 9/11 and this is described as “beautiful”! To add insult to industry the description that these collapses were typical of progressive collapse demonstrates that he has not studied the subject, nor it would seem has he studied fundamental science, such as Newton’s third law of motion, or if he has, he chooses to ignore it (Newton’s third law is either wrong, or the collapse of the north tower should have terminated long before it reached the seventieth floor.) Anyone who cares should watch this There is enough information there to answer any queries, I will not enter into any further discussion on the causes of 9/11 because it is not what this blog is set up to discuss.

      However, the issue of 9/11 as a whole is relevant to this discussion. Some, myself included, have expressed concern that the political class seems unaware of the danger suggested by Gail’s blog post. Is it pure coincidence that 9/11 just happened to be the key to the creation of several instruments, such as the Patriot Act and the Department of Homeland Security to name but two, that will prove very useful to the authorities should they need to control any civil unrest that the collapse might generate? Or is 9/11 evidence that some were ahead of the game? If the latter, do we want people capable of such an act as 9/11 in positions of influence should the collapse occur? Even if 9/11 was coincidental and the Patriot Act etc. would have been enacted anyway, it does not alter the fact that those behind it still walk free and are almost certainly in positions of influence.

    • Thanks for your insights. I agree that QE seems to have been put in place to put off collapse. I suppose if the economy could return to growth (supposing the economy could grow without cheap energy), maybe there could be an orderly return to a better economy. But I have a hard time now, seeing it doing anything other than blowing further bubbles that will collapse. And if it is ever removed, interest rates go up, and it is “game over.”

      We clearly needed reduced expectations for the future, starting quite a while ago. That would have eliminated programs like “No child left behind,” and all of the increased safety standards for cars, and the idea that every hospital needs every possible type of medical equipment that is made. At his late date, we have overshot what is possible on a sustainable basis by such an incredible amount that no one can even think in appropriate terms.

      I photographed a vehicle (auto-rickshaw) I saw in India. (A group of 10 of us, including the driver, rode in a three seater version of this vehicle. Those of us on the edge held on to the frame for dear life, because there were way too many of us in it to fit.) People in this country have absurd expectations–everyone will be able to afford a plug-in electric car. We likely won’t be able to afford what India has now.

      auto-rickshaw I photographed in India in October 2012

      How the whole system will fail is not clear. I am afraid we are beginning to see some examples right now, in Egypt, Greece, Spain and other countries. It may be that these weak countries will pull an increasing number of other countries down with them.

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  19. Andy says:

    What brings the system down?

    I see all these as having the potential, to bring the system down. I don’t see that they have a high chance of doing so. The people in charge of making sure the system stays up, are generally pretty smart, and have all the resources at their disposal. I’ll give them credit for what they have achieved so far, and not underestimate their abilities. I’d say the factors you have identified could make things worse, but not to the ‘system down’ point.

    I’d also point out that as much as I respect your work, I doubt you are the only person to identify these issues, and there are a lot of smart people already working today on mitigation. Interest rates for example are set by the Federal Reserve System, not the market place, and will be for the future. I doubt a marketplace interest rate would be anywhere near the zero bound.

    Thanks again for your work Gail, I appreciate it.

    • Jan Steinman says:

      “there are a lot of smart people already working today on mitigation.”

      Really? Can you name any?

      Mostly what I see coming from “smart people” is “business as usual!”

      • Andy says:

        I think what you may see coming from smart people may be unorthodox methods to try and continue BAU. I don’t actually see the worlds Central Bankers behaving in a way that could be described as BAU. Trying to maintain BAU, yes. The same for politicians with un-usually high deficit spending.

        It’s not as if this is some problem that they could create a tidy solution for. There are real consequences for overshoot. Since there is no solution, only consequences, what to do? Keep the music playing as long as possible, people wont thank you for advertising on TV that the entire species is stuffed. Better to give them as long as possible to come to that conclusion themselves. Or if you are optimistic you are buying more time for nuclear fusion to become economic.

        Yes there are a lot of people working in the financial sector to keep the banks afloat, and governments functioning. Also plenty of work being done to keep the oil flowing as long as possible, and the coal and natural gas. Using un-usual methods, or unconventional if you prefer.

        • Xabier says:

          andy

          Agreed, lots of capable people are indeed trying to keep the balls in the air, frenetically since 2008, partly out of self-interest of course: but they are coming up against an ever-harder reality, as the methods they are employing serve only to hollow-out the richer societies, with sharp declines in incomes, and poor demographics.

          I like to think of the idiot generals of World War I: they sincerely wanted to win their battles, but succeeded only in sending brave men against insuperable barriers.

          However much the rat tries to get out of the trap, it’s there, and there’s no changing its predicament…….

          • the problem with ww1 generals was that they had trained 40 years earlier—that is before the energy output of the internal combustion engine and the machine gun were realised
            they were of the one horse-power cavalry charge and single shot rifle mentality
            they knew only to repeat what history had taught them as young soldiers
            ………..fast forward to now.
            our political leaders are in exactly the same situation, we are faced with catastrophe, but only have the lessons of history to draw on
            we cannot learn from history that has not yet been written, so our leaders are throwing billions of people against insuperable barriers
            the result will be exactly the same

    • There is a basic issue, “Any system that is increasingly out of balance will break at some point.” It is pretty clear that the current system is pretty much smoke and mirrors. The people in charge do indeed have a lot of smoke and mirrors at their disposal. But at some point, smoke and mirrors don’t work any more. We are starting to see small pieces of the system fail. There is at least a theoretical possibility that the US can keep going for several more years, even as more and more of Europe and Japan fall by the wayside. But eventually, anything that can’t work, won’t.

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  21. A diverse reaction to limits to growth is the most probable outcome. Some countries, states or regions will do well. London, for instance is actually seeing growth and house prices as an indicator continue to rise. I recently wrote
    http://bollocks2012.wordpress.com/2013/03/31/apocalypse-or-how-i-came-to-embrace-the-end-of-the-world/
    which explores Rome as a lesson from history. As an empire it’s very economy was based war, slaves, country estates, urban plebs and constant expansion. It grew because exploiting it’s neighbours was cheap and easy- eventually it was forced to invade wild lands with small populations and little slave resource, infertile lands, zero markets for Roman goods at every growing costs. The roads became too long and the borders too distant to be economical and Roman eventually contracted. In its death it did spawn the Catholic Church and the Byzantine Empire and I think this form of diversity is the likely outcome in our world.

    One is social- so groups reduce their view of society to include less people- welfare suffers and the poor are abandoned to ghettos: the other is trade but in the case of Roman the Byzantine Empire simply delayed collapse. States can survive despite terminal decline but people suffer as N.Korea demonstrates.

    the biggest losers are the middle-classes, Golgafrinchans [http://hitchhikers.wikia.com/wiki/Golgafrincham] a term for the third group in society [the others being thinkers and doers]. In a world with limits, the hairdressers, interior designers, advisers, webdesigners, media consultants are a luxury that can no longer be afforded. Artificial wealth is another area I think is suffering- perhaps for the good- house prices do not reflect their actual material value.

    thoughtful post- thanks

    • Xabier says:

      jules

      A house is surely of inestimable value: it keeps you alive! Caves, tents, houses: no surviving without them in northern latitudes at least…….

      Housing bubbles, of course, are quite another matter.

      North Korea is interesting: it illustrates how whole societies can persist in hellish and degraded conditions for generations – as long as each generation can get enough nutrition to reproduce, it goes on. Orlov points out that the death-rate was very high in post-Soviet Russia, but you never saw the corpses piled up in the streets. Similarly, a society can guarantee food and shelter, and the illusion of ‘career’ and ‘progress’, while the individual citizen’ is a mere indoctrinated slave and allowed no freedom of thought or life – as in the Soviet Union in its heyday.

      When discussing ‘collapse’, it is perhaps worth bearing in mind that there are many forms of surviving that no self-respecting human being of today with an experience of higher civilisation (I don’t mean high consumption! that can be barbaric) would relish. In some ways, survival might be something not to wish for!

      • managing decline- managing the plebs to prevent them wanting a bigger slice of cake is well documented in history. all of it rather disturbing. In Hitchhikers Guide the Golgafrinchans tell the ‘service classes’ of impending doom and get them to escape to a new planet. N.Korea tells them they are in a state of war, in Rome the enemy was always at the gate- and gave them games. Currently we are told/sold the notion of endless frack gas and oil, more growth [just around the corner] rising house prices, new iphones and the next generation xbox.

        in the 70s the phrase- the revolution will be televised should be replaced with – the apocalypse will be serialised.

        If it is slow enough we won’t even notice. Before you know it even the US will think its normal to take the bus and drive a small mini. No one seemed to notice that a house that once cost it’s build price was to be peoples investment fund now.

    • I agree that some areas will do better than others. How long London can do well is a question. Here in the United States the low interest rates on mortgages is encouraging investors (poension funds and others) to speculate in real estate, and drive up home values. It doesn’t have anything to do with “regular” home buyers being more interested in spending money on houses. Could speculation/ new entrants to the housing market be an issue in London, too?

      • London and the south east make substantially more GDP than other parts of the country- it is a law unto its self. Very londoncentric. Investors bought up lots of flats- usually investors buy homes for rent from small investors who paid when the prices were high in the smaller cities. House prices are stagnant or down 10-20%, I know because we are moving and got a good deal.
        But with the goldilock zone of cheap solar pv and thermal and cut throat prices for building supplies I’m building a greenhome and trying to run a business. There will be a point when solar will start going up again when fuel costs kick in.

        • When fuel costs kick up again, a lot more people will be out of work. There will be a lot more political instability, and perhaps even riots. Perhaps the 1% will buy solar panels, but this will still not be a good market for solar panels. The government will not be in the business of subsidizing them, because of its declining economic situation.

          • As my posts attest I tend towards predicting a slow downturn rather than a big crash- I think both the US and Europe are behaving in distinct ways- The US has a bigger divide between the richest and poorest than Europe, and Europe pays double in fuel – it indicates both societies do have leeway and room to decline in.

            The poorer Indian/Chinese get a much better return on their fuel- and are prepared to spend more. The farming side of me will still benefit from expensive fuel- 1 gal of gas cuts a lot of logs and is far cheaper than owning a slave even accounting for a chainsaw that is 2 or 4 times more expensive. The part of me that really suffers is the consumer – ‘the fat lazy westerner’ who spends 10 times more calories than are actually consumed.

            So I don’t share doom in this respect- not at least in the short term or my life- a global rebalancing with static or declining ‘growth’ : yes.

            The efficient humans will do better. And it is also about decisions- the US could offset decline for a few years if it demilitarised, and Europeans need to cut back too.

            Interesting times!

          • I would add- IMO- and it is a guess- is that the cities will do well if they are vibrant: you can get by without a car, they have good mass transit links and they are cheaper for markets to operate in. The downside is they will attract the suburban poor and poor areas will attract riots, crime and poverty. The suburbs and towns [as well as less economic cities] will suffer most if the distance to markets, schools & services are too far. The Medieval landscape of Europe has a lot more advantages over the US.

            Even well past limits the N.Koreans demonstrate that we can pretend to cope, malnutrition will be a problem and people will be shorter and less bright. I suppose the problem is the same that Rome had- what to do with the unproductive plebs. Bread and reality t.v and twitter perhaps?

      • Xabier says:

        London is crazy: there are quite simply queues of wealthy people looking to buy hugely over-valued (perhaps x 6) properties in prime areas, for all the obvious reasons, and the bidding doesn’t seem to stop.

        A retired (45!) financier friend bought one such house to park some of his money safely, felt he might have paid too much, particularly as it required an expensive refurbishment. but in the last year has received many enquiries from international buyers via estate agents: a 20% profit would have been possible. He regards it as insane, and it is.

        Even wealthy British buyers have been squeezed out of such areas. But outside the prime areas of the capital, it’s very different and a dismal story, apart from a few ‘hot spots’.

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  23. Hoyte King says:

    You do society a great service with your work. We think about things, and focus our thinking much better because of your work.

    I would be shocked if you were not aware of what I write below. It is merely an exercise in reminding ourselves to always question and think about what we read. Also, it is hard to dig the details out of the big picture, which may be a problem for our current state of affairs – not enough detail to back conclusions up conclusively for a lot of people. The fact that you rely on them carries a great deal of weight with me.

    Some of the research you rely upon has been convincingly criticized:

    Sing Chew has been “chewed out” for conclusions based on poorly evaluated data, for example.
    http://people.su.se/~widgren/Recurring_Dark_Ages.pdf
    The tragedy for me is that Chew may be right, but is just “biting off more than he can chew” (sorry). Why not do what Tainter did, and team up with others to illustrate his conclusions (most recent Tainter book)?

    Questions raised by Perlin: – A Forest Journey: The Role of wood in the Development of Civilization – These DO need to be explored, as Chew does. (By the way, I found out about Hall’s book and this book thanks to you, and was able to thank you personally last year at the Age of Limits conference. Hopefully, I will be able to make it this year.)

    On Turchin: A review acknowledging cyclodynamics as basically food for thought. http://www.nature.com/news/human-cycles-history-as-science-1.11078
    Another review that says basically the same thing, while noting that there are historical blunders.
    http://jpr.sagepub.com/content/44/1/130.extract
    And of course – a clash of the titans (a la Nabokov/Wilson http://maudnewton.com/blog/?p=2890):
    Tainter – http://www.readcube.com/articles/10.1038/427488a
    Turchin response – http://www.eeb.uconn.edu/people/turchin/Tainter%20resp.htm

    All good, though. I think and am able to make long term decisions with much more clarity thanks to the above. By the way, as a teacher, one of my mantras is to MAKE MISTAKES. No mistakes = no learning. I love it when my students make mistakes! Sometimes I make them on purpose for my students to catch (and sometimes not on purpose:)

    • Mel Tisdale says:

      By the way, as a teacher, one of my mantras is to MAKE MISTAKES. No mistakes = no learning.

      Or as we engineers say: “You cannot make an omelette without breaking eggs.”

    • It is hard when a person like me is trying to go from field to field to pick up the nuances of whether a particular author is over-reaching what he is trying to say. I try to use multiple references for this reason. So my arguments do not rest on whether Chew was precisely right. I have read various other sources that point in the same direction. Just the past week, I ran across this report: Dodos weren’t alone: Huge bird die-off blamed on ancient man. After a while, a person starts seeing a pattern, whether or not a particular reference is exactly right.

      My impression of academia is that the error tends to be in the opposite direction–everyones write papers very close to what has been written previously, without really examining the assumptions. As a result, researchers miss a lot of overview type issues that they would understand, if they read more widely (and maybe took out a calculator and pencil as well).

  24. Don Stewart says:

    Dear Gail
    You have put an awful lot into this post. I congratulate you on that, but have to admit that it is hard to get my aged brain around everything all at once. So here is an observation for what it is worth.

    In Coming Out Of The Woods, Wallace Kaufman explains just how cheap land in our county in North Carolina once was. The Earl of Granville sold a hundred acres for 50 shillings. Some land was described in deed transfers as ‘640 acres on the south side of the Haw River on both sides of Brooks Creek’. Land was so plentiful that it wasn’t worth doing accurate surveys. ‘When Abraham Pilkington bought 133 acres in 1844 for 19 cents an acre, an ordinary table or chest cost more than several acres of land. The price of a young slave might be more than the price of a thousand acres. In 1870, the ageing owner of large tracts sold 220 acres that included part of my land for 2 dollars and 70 cents an acre. The 2 dollars and 70 cents represented three days’ wages for a farmhand. The price of the same acre today (2000) is almost a hundred times a farmhand’s wages.’ Kaufman points out that as land got more expensive, more precision went into the surveying until today we measure very precisely, indeed.

    There are a couple of observations I would make about this history. First is that land was the foundation of self-reliance in the olden days. With land, one could grow food, harvest water, build a shelter, and sell a cash crop to buy essentials and pay taxes. Thus, it functioned as a sort of safety valve for social pressures. So long as the youngest son could go west, there was no necessity to divide the family estate. Second is the fall in the value of human labor. One illiterate slave used to be worth a thousand acres. Now we have slaves (we call them interns) with college degrees who work on small farms for practically nothing and get zero benefits except some food. Third, as Kaufman points out, the ‘back to the landers’ of the 1970s bought relatively cheap land from people who were only too glad to move to the comforts of town and had few illusions about country life. America from 1940 to 1970 was very accommodating to anyone who wanted to move to town and get a job. Only a few cantankerous cowboys viewed a ‘job’ as a slur (as you can see in a close viewing of The Misfits movie.) That condition no longer holds true.

    More broadly, the value of human labor has fallen relative to a number of basic resources. Land is obviously much more expensive now relative to humans. Crude oil has been rising relative to humans. Healthy food has increased relative to humans (edible industrial detritus not so much). What seems to be happening in the US is that our employment to population ratio has fallen, but that people are adjusting to the ‘new normal’ and many have stopped looking for work. Exactly how they are making the transition, I don’t know except for anecdotal evidence. Should we suddenly begin a serious de-leveraging, then the employment to population ratio may abruptly fall again and the social strains will multiply.

    There are many rigidities in the economy which make it difficult to rebalance in view of the falling value of labor. One is the high taxes we put on employment–whether for social security or Obamacare. Another is the reconstruction of the physical US after WWII which made it much more expensive to get to and from work. Corporations bought large acreage in greenfields accessible only by automobile giving no thought at all to the cost incurred by the workers. A third is the extraordinarily high debt levels which ordinary people have pledged themselves to. One has to stay on the treadmill because there is no ‘bailout’ for people who owe a thousand dollars rather than a couple of hundred billion dollars. A fourth is the enormous rise in wealth disparity. There are wealthy people in this county buying a hundred acres for hunting and paying 20 thousand dollars an acre (maybe they also see it as a long term investment). So a newly unemployed and penniless family cannot compete for land with the class of people that the Federal Reserve is shoveling the money at. Fifth is the loss of self-reliance skills.

    I guess this is a long-winded way of saying that I agree with you about ‘high priced oil’. I would just amend that statement to say ‘high priced basic resources relative to the value of labor’. My observations do not PROVE that some magnificent new technology may not save us. It is possible that someone will figure out how to charge customers a lot of money for human services provided over the Internet and we can all work at home and make a high wage just by being clever and incur minimal job related expenses. But, so far, that is not what I see happening.

    Don Stewart

    • Jan Steinman says:

      “Now we have slaves (we call them interns) with college degrees who work on small farms for practically nothing and get zero benefits except some food.”

      I object to that characterization. A slave is a captive, a chattel. An intern can get up and leave and seek some better situation. (And they often do.) Interns also get practical experience and training.

      I think indentured servitude and even slavery may well come back, but today’s interns are a far reach from that.

      The energy input into food production must come from somewhere. Small farms that eschew applying diesel fuel to the soil to grow food must use cheap labour instead. Some small farms develop long-term relationships with interns that may even result in a “sweat equity” position — hardly a characteristic of slavery!

      The good news is that as the price of fossil sunlight goes up, it gets easier and easier for small, organic farms to compete with large, fossil-sunlight-driven farms.

      • Don Stewart says:

        Dear Jan
        I said ‘slave’ a little tongue in cheek (the internet is too damn literal). Some of my best friends are interns. A chief reason I work part time at a farm is because I enjoy being around these bright, hard-working young people. But I am also very attuned to the problems they face in terms of things like student loans, their inability to form stable families because they have no money, driving old wrecks which fail catastrophically and break their legs, etc., etc.

        I do think it is instructive to compare the value put on a slave in 1844 with the value we put on an intern in 2013.

        Don Stewart

        • Jan Steinman says:

          “I do think it is instructive to compare the value put on a slave in 1844 with the value we put on an intern in 2013.”

          I don’t think you’ve done that, though!

          A young slave in 1844 would probably be amortized over 30 years. If they were worth a thousand acres, and an acre was nineteen cents, then they were worth roughly twelve cents a week, or 1.7 cents per day over their useful lifetime.

          We budget $10 per day per intern: $2.50 for lodging, and $250 for each of three meals.

          In our area, farmland fetches $20,000 an acre. So over a 30-year period, an intern is worth 18% of one acre.

          Yea, I didn’t include the cost of feeding and housing the 1844 slave, but I think my numbers show that the whole thing is a pointless comparison! :-)

          • Don Stewart says:

            Jan
            First, I am not criticizing the behavior of anyone. I am just talking about economics.

            If a slave was worth 1000 acres in the 1840s in North Carolina, and we amortize that over 30 years, we get 33 acres per year (neglecting interest and discount rates and all that stuff). Are you willing to reimburse your interns with 33 acres of land after a year of labor?

            Similarly, if 3 days of labor would earn enough to buy 1 acre, then a person could earn a very nice 5 acre homestead in a couple of weeks of work. Nobody can do that now.

            My point is that the price of land, as measured by human labor, has increased tremendously. And that has repercussions as we contemplate a financial collapse.

            Don Stewart

            • Jan Steinman says:

              Ah, but there are nearly six times as many people as there were in 1844, which means land is simply more valuable. You conveniently left out the “19 cents an acre is 1844″ part of the calculation.

              I don’t understand how you can simply ignore the cost of land in claiming that an intern is worth 33 acres per year.

              Perhaps we’re in “heated agreement” here. You claim that the price of land in labour has increased. I simply point out that the price of land has increased, period — probably due more to there being 600% more competition for it than any other factor.

              Take away six out of every seven people, and land will be the equivalent of 19 cents an acre again. I hope there isn’t a margin call…

            • Don Stewart says:

              Jan
              I imagine that we are in heated agreement. To take another starting point…the gold bugs think that oil hasn’t gone up in price at all because it hasn’t gone up relative to gold, the one true measure. My point is that, compared to what the median person can earn, both gold and oil have increased in price. It really doesn’t make a fundamental difference whether the price has gone up because population has gone up, supply has gone down, or the wealthy are outbidding the poor. If you aren’t one of the favored few, you have to work longer to get it…and may never realistically be able to earn enough.

              We also cannot use GDP deflators. The deflators are dependent on things like how much ‘quality improvement’ was imputed from the conversion from black and white TV to color TV. For a necessity like land (which means food, water, and shelter) or gasoline (which means the ability to participate in modern society), whether mindless distraction is delivered in black and white or in color is simply irrelevant.

              So we have to look at how hard ordinary people have to work to get what they need. Both land and petroleum are getting more expensive. Petroleum became cheaper for a long time, but that has reversed in recent decades. We might also consider that water is becoming more expensive. In the olden days, the water came with the land. And housing came with the land. People built wooden cabins or, out on the plains, sod huts. So a lot of essential things which used to be cheap (or even virtually free with the Homestead Act of 1863 in the US) are now expensive.

              Even in the depression of the 1930s a lot of people returned to the land from cities, or at least had relatives still in the country that they could rely upon. If they returned to the land, they remembered from childhood what to do and were actually useful workers. Not much of that is true anymore.

              We are probably in worse shape for any kind of collapse than any civilization which has ever been threatened.

              Don Stewart

        • I think too that slaves may have had more value than we think of today. In Biblical time, slave and servant were almost synonymous.

          Also, a lot of the young people today who are college grads have jobs that are less than full time and don’t have health benefits. They are doing a tad better than interns, but still often have to live with their parents. It is the younger generation that suffers most when there isn’t enough to go around.

          • Xabier says:

            Gail

            Slaves, servants and value:

            My favourite anecdote from the Middle Ages is of a crusader landowner in the 12thc who ordered his estate blacksmith to take part in a judicial duel, to substitute for one of his peasants who should have fought the duel.

            Why? The ‘lowly’ peasant was far too valuable to risk injury or death, being essential to the value of his land!

            The blacksmith won the duel, and the lord gave him a ride home, and some land as a reward.

            I feel that Don makes some good points about the predicament of many young graduates today: while internship is not really ‘slavery’, it most certainly isn’t a real job, and not something one can hope to build a life and family on. Many other good points, too.

            • I hadn’t heard that one before, thanks. Land, without knowing what to do and having some way of doing it (peasants, your own labor, mechanical labor) isn’t worth a lot, except for gathering wild food from.

    • That is a good point, about the value of human labor falling relative to a lot of things. You talk about land being especially cheap, but I am wondering if that wasn’t mostly a new world issue. If we were to look at Europe, my guess is that land would have been considerably more expensive. (But I don’t know for sure.)

      I know my grandparents managed to do some pretty amazing things early on, which would tie in with labor being relatively more valuable. Once we got to a point where there was a surplus of laborers, then bargaining power for labor went down. Globalization made it worse.

      Increased debt was a way to hide this falling value of labor. Interest rates have gradually fallen, to make a higher amount of debt bearable. But this doesn’t fix the underlying wage problem, and helps lead to too many people in the financial sector of the economy (not to mention medicine, and perhaps higher education–especially administration of higher education).

      • seems to me that we are looking at all this with a time perspective that’s too short—18th/19th c etc
        instead think back 50000 years.
        some visionary didn’t stand outside his cave in the rift valley and grunt—”Africa’s finished…Im taking the missis and kids on a worldwalk—anyone else feel that way?”
        instead, he followed his energy sources. His meat and veg moved according to climate and season, he had no option but to follow.
        when one family group got too big and unsupportable, they had no option but to split and move on to exploit new energy sources, 100 miles maybe, then start over after another generation or two.
        humanity grew like a tree, dropping new seedpods and letting them flourish or die.
        Our movements always found new resources to exploit, and because of that, that approach to our future has become part of what we are. That’s why we are ripping the Arctic apart for fuel and N dakota looks like a pincushion
        We have always had more, therefore there will always be more.
        We built that nonsense into our godspeak, so that it would be ‘told’ to us by some kind of deity, that way it becomes ‘truth’ (is it not written in holy books?—therefore it must be true) now billions of people cling desperately to that delusion because there is nothing else.
        it is heresy to point out that humanity is no different to bacteria other by the speed of reproduction.
        we went forth and enjoyed the multiplying bit, but now there’s no earthspace left
        but we cannot accept that we’ve used it all up. There has to be more.
        there isn’t any, we better get used to it.

        • Bicycle Dave says:

          Well said! I think we should be much more mindful of our pre-agriculture existence.

        • Humans have an instinct to reproduce in excess of the need for replacement (just like every other species). We also have an instinct to look for additional energy sources, so that our offspring can live, and so that we personally don’t meet untimely deaths (just like other species). Religions codify the natural instincts. I don’t think we can blame religions.

          Trying to put an end to these instincts is incredibly difficult. The most acceptable way is through birth control, and that, in part seems to be tied to education of women. But the making of birth control devices/pills requires energy and education of women requires energy. Having children is also important for taking care of the elderly in their declining years.

          Another issue is the impact of declining government retirement programs on the number of children people choose to have. We have had the luxury of excesses that allowed governments to promise retirement benefits to all, thereby negating the need for children for this function. Unfortunately, as the amount of energy we have declines, governments can no longer provide this promised benefit, especially if people stop having children. It is really children in the aggregate that pay for their elders, even if a particular person’s children does not pay for his own parents, through plans such as Social Security. Retirement funding depends on what is available at the time of retirement, and how it is shared between workers and retirees. Admittedly, if an individual has saved up a some gold prior to retirement, it may help that individual get more, but the real issue is the total amount produced versus the amount needed in the retirement year, and how it is distributed.

          • I seriously don’t think we can put an end to those instincts because they make us what we are.
            The reproductive process has been made pleasurable so that we do it as often as we can once we reach maturity, Nature doesn’t care if our antics bear fruit, if enough do, then the species goes on, if not then some other species fills our spaces.
            It really is that crude and simple
            As to taking care of the elderly, many higher primates do that, but only up to a very limited point.
            we have drained our resources by taking it to unsustainable levels simply because we have been able to do so…. so much so that there’s complaints if granny dies of something ”curable” at 95
            children can only care for their elders so long as energy is available to do so
            One cannot persuade economists that spending money provides nothing, only spending energy can deliver ‘something’ food, healthcare—whatever.

        • Xabier says:

          It is this ‘promise of more’ over the horizon which one finds in the rhetoric of the bogus demagogues who arise at times of stress: not making a political point (as some have misunderstood) in saying this, what else does Obama’s undefined ‘better place’ signify?

          Curiously, in Britain and Europe the ever-less convincing rhetoric is of ‘returning to growth’ and ‘implementing tools to rectify and compensate': for the tired Old World, the Golden Age isn’t over the horizon any more, it was yesterday and we have to get back there……

          I think you are right about a basic mind-set among humans, reinforced by the propaganda and advertising of the corporatist-consumerist nightmare we live in.

  25. Ed Pell says:

    Different groups have different problems. The common person has the problem of earning money to buy food and shelter. The ruling elite have the problem of continuing as the ruling elite. I see no good solution to the first groups problem. I do see a solution to the second groups problem. After a 50% devaluation of the dollar and $8 per gallon gas and home heating oil with similar food price increases there will be riots. At that point the identified 0.1% trouble makers (i.e. leaders of the working class) can be dealt with. Camps and executions. This does nothing to solve the food, heat, etc. for the common person problem but that is not the problem they were trying to solve. It does solve their problem.

  26. There is a way to make our predicament into a mere problem – mass die-off. I am sure there are psychotic people out there who happen to have a great deal of access to resources and decision making.

    Such persons would be aware of the results of the Black Plague, for example:
    http://eh.net/encyclopedia/article/Routt.Black.Death

    Conclusion
    The European economy at the close of the Middle Ages (c. 1500) differed fundamentally from the pre—plague economy. In the countryside, a freer peasant derived greater material benefit from his toil. Fixed rents if not outright ownership of land had largely displaced customary dues and services and, despite low grain prices, the peasant more readily fed himself and his family from his own land and produced a surplus for the market. Yields improved as reduced population permitted a greater focus on fertile lands and more frequent fallowing, a beneficial phenomenon for the peasant. More pronounced socioeconomic gradations developed among peasants as some, especially more prosperous ones, exploited the changed circumstances, especially the availability of land. The peasant’s gain was the lord’s loss. As the Middle Ages waned, the lord was commonly a pure rentier whose income was subject to the depredations of inflation.

    In trade and manufacturing, the relative ease of success during the high Middle Ages gave way to greater competition, which rewarded better business practices and leaner, meaner, and more efficient concerns. Greater sensitivity to the market and the cutting of costs ultimately rewarded the European consumer with a wider range of good at better prices.

    In the long term, the demographic restructuring caused by the Black Death perhaps fostered the possibility of new economic growth. The pestilence returned Europe’s population roughly its level c. 1100. As one scholar notes, the Black Death, unlike other catastrophes, destroyed people but not property and the attenuated population was left with the whole of Europe’s resources to exploit, resources far more substantial by 1347 than they had been two and a half centuries earlier, when they had been created from the ground up. In this environment, survivors also benefited from the technological and commercial skills developed during the course of the high Middle Ages. Viewed from another perspective, the Black Death was a cataclysmic event and retrenchment was inevitable, but it ultimately diminished economic impediments and opened new opportunity.

    • tmsr says:

      Starvation would result in riots and civil disorder causing much property damage. A plague, would, as you say, kills people but leave property intact.

    • In a way, that is the story of all collapses. They make the way either for some more humans, or some more of other species. (Unfortunately!)

  27. Don Stewart says:

    Gail
    Are you on your way to being a Washington Insider who counsels the mighty for lots of money?
    Don Stewart

    Energy Secretary Nominee:
    Days of Cheap Oil May Be Ending

    • I saw the ASPO-USA News Release. Unfortunately, today is April 1, and the last line is, “Happy April Fool’s Day.”

    • Ert says:

      Everyone knows…. even the voices are being louder.

      Some companies are also positioning themselves like Volkswagen:
      Average fleet consumption 94g/CO2 per km in 2020 (equals 60 miles on a gallon)
      – Minus 10% water and energy usage to produce a car in the last two years

      Who doesn’t see our predicament as industrial company will parish in the first wave of bankrupts when prices erupt. I don’t know how the US car industry will cope with much higher gas prices, as most of their models still are gas guzzlers. Also every KW/h of energy and every gallon of water that is wasted during production is a production cost – and one has to take care that water is there tomorrow, too.

      Nevertheless – if demand collapses drastically many (all?) large automotive companies might be wiped out – as of the debt burden alone. They take on debt… develop 4 years and have to recover the cost in the next 4-8 years through sales. This kind of business doesn’t like fast changes.

      Source: http://www.volkswagenag.com/content/vwcorp/info_center/de/news/2013/03/CO2.html (Sorry didn’t find a english one at the moment) and http://finance.yahoo.com/news/volkswagen-mexico-improves-water-supplies-143600135.html

  28. russell1200 says:

    A book I started recently, John Lander’s “The Field and the Forge: Population, Production, and Power in the Pre-industrial West”, has been interesting.

    He reviews through the population fluctuations (as per Hatchett, el al) in history, and sites a much deeper range of co-authors than most. The footnoting alone is interesting.

    I haven’t reached that part yet, but one of his takes on the energy breakout is to point out the (retrospectively) obvious point that gunpowder was the first European escape from the energy constraints, and that it did have an impact in how armies fought.

    It will be interesting to see how his ideas play out against Turchin’s- Goldstones.

  29. Pingback: How Resource Limits Lead to Financial Collapse Energy Return on Energy Invested (EROEI) | Alternative Energy Renewable Energy Pakistan

  30. Frank student says:

    I think you are right on the money. But you have not mentioned Glass Steagal which i believe is the only hope we have to solve the economy crisis. It worked for 50 years. Cheers Frank.

    • The Glass Steagall Act (officially called the Banking Act of 1933) limited the activities that commercial banks could do. It was repealed in 1999, and some blame the financial shenanigans that took place in the 2000s on repeal of the act.

      I don’t think putting the Glass Steagall Act back in place would really fix our problems. Repealing the act did allow financial shenanigans to take place, but it was the rising price of oil in the 2003-2005 period that made it increasingly necessary to perform some sort of shenanigans to keep the economy afloat.

      • BC says:

        Correct, Gail. Glass-Steagall was an industrial-era artifact that became an inconvenience to int’l banksters during late post-industrial/deindustrialized, hyper-financialized, militarist-imperialist rentier “globalization”. The repeal of Glass-Steagall was an “effect” of the aforementioned evolutionary progression, not a “cause”.

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