Inflation, Deflation, or Discontinuity?

A question that seems to come up quite often is, “Are we going to have inflation or deflation?” People want to figure out how to invest. Because of this, they want to know whether to expect a rise in prices, or a fall in prices, either in general, or in commodities, in the future.

The traditional “peak oil” response to this question has been that oil prices will tend to rise over time. There will not be enough oil available, so demand will outstrip supply. As a result, prices will rise both for oil and for food which depends on oil.

I see things differently. I think the issue ahead is deflation for commodities as well as for other types of assets. At some point, deflation may “morph” into discontinuity. It is the fact that price falls too low that will ultimately cut off oil production, not the lack of oil in the ground.

Even with little oil, there will still be some goods and services produced. These goods and services will not necessarily be available to holders of assets of the kind we have today. Instead, they will tend to go to those who produced them, and to those who win them by fighting over them.

Up and Down Escalator Economies

It seems to me that economies operate on two kinds of escalators–an up escalator, and a down escalator. The up escalator is driven by a favorable feedback cycle; the down escalator is driven by an unfavorable feedback cycle.

For a long time, the US economy has been on an up escalator, fueled by growth in the use of cheap energy. This growth in cheap energy led to rising wages, as humans learned to use external energy to leverage their own meager ability to “perform work”–dig ditches, transport goods, perform computations, and do many other tasks that machines (powered by electricity or oil) could do much better, and more cheaply, than humans.

Debt helped lever this growth up even faster than it would otherwise ramp up. Continued growth in debt made sense, because growth seemed likely for as far in the future as anyone could see. We could borrow from the future, and have more now.

Unfortunately, there is also a down escalator for economies, and we seem to be headed in that direction now. Such down escalators have hit local economies before, but never a networked global economy. From this point of view, we are in uncharted territory.

Many economies have grown for many years, hit a period of stagflation, and ultimately collapsed. According to research of Turchin and Mefedov documented in the book Secular Cycles, such economies have typically gotten their start by learning to exploit a new resource, such as using land cleared for farming, or learning to use irrigation, or in our case more recently, learning to use fossil fuels. These economies typically start out by growing for many years, thanks to the opportunity for more population and more goods and services from the new resource.

After a while, a period of stagflation is reached. Population catches up to the new resource, and job opportunities for young people become less plentiful. Wage disparity grows, with wages of the common worker lagging behind. The cost of government rises. Because of the low wages of workers, it becomes increasingly difficult to collect enough taxes from workers to pay for rising government costs. To work around these problems, use of debt grows. Needless to say, this scenario tends to end very badly.

Our situation today sounds a great deal like the down escalator situation. As I have discussed previously, wages stagnate as oil prices rise. In fact, most increases in wages have taken place when the real price of oil was less than $30 barrel, in today’s dollars.

Figure 1. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.

Figure 1. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.

As oil prices rise, wage-earners hit a second problem–higher outgo for fuel and food, since fuel is used in growing and transporting food.  Thus, wage-earners are hit on two sides–flat income and higher outgo for necessities, leading to less discretionary income.  Governments find that they need more taxes to pay for increased benefits for the many who no longer have jobs. These higher taxes place another burden on those who are still working. Businesses find their profits pinched by higher oil prices, and respond by outsourcing to a low wage country, or automating processes to cut costs, lowering the amount local citizens earn in wages further. Furthermore, even apart from oil issues, globalization tends to pull US wages down.  All of these issues tend to add to the down-escalator phenomenon for the US economy.

In past years, governments and businesses have made promises of many types, such as bank account balances, pensions, Social Security, Medicare, insurance policies, stock certificates, and bonds. The question becomes: what happens to these promises, as we step off the up escalator, and onto the down escalator? All of these promises could be paid when we were on the up escalator. The amount that gets paid is much less clear, if we are on the down escalator.  In this post, I would like to examine what happens.

The General Price Trend: Downward, with Discontinuities

Each year, an economy produces various kinds of goods and services. It grows crops, and extracts minerals. It uses energy products to process the crops and minerals into finished goods, and to transport them to their final destination. The amount produced depends on the amount of goods and services potential buyers can afford. If wages are stagnant, and the government’s share keeps rising, the amount wage-earners can afford (in inflation adjusted dollars) keeps falling.

Since the early 2000s, the cost of extracting oil products has been rising, because the oil that was cheapest to extract was extracted first, and the “easy oil” is now gone. There tends to be a relatively small amount of a resource available cheaply, and increasing amounts available at higher and higher prices (Figure 2, below).

Figure 2. Resource triangle, with dotted line indicating uncertain financial cut-off.

Figure 2. Resource triangle, with dotted line indicating uncertain financial cut-off.

In fact, minerals of all types tend to follow the same pattern as oil for two reasons: (1) Mineral extraction follows the same pattern–cheapest to extract first, moving to the more expensive to extract, and (2) Oil is generally used in extraction. If the cost of oil is rising, its cost tends to get passed on. Of course, in some instances, technological improvements can offset rising prices, but for most of the time since the year 2000, cost of commodity extraction has tended to rise.

There has been a lot of publicity recently about more oil being available, and more natural gas being available. This additional availability is because of high price. It doesn’t bring the cost of extraction down. In fact, if price drops, extraction is likely to drop. This drop will not occur immediately, because much of the cost has already been paid on wells that have already been drilled, so extraction from these wells tends to continue. But future investment is likely to drop off quickly if prices drop, bringing supply down, with a lag.

Because of the downward escalator the economy is on, wage-earners don’t really have enough money to pay the higher prices that are needed for increasingly costly extraction of oil and other minerals. Instead, prices tend to be volatile. The general trend can be expected to be downward, because even if  oil prices rise when the economy is functioning fairly well, at some point, the higher price leads to adverse feedbacks, such as consumers defaulting on debt and cutting back on discretionary purchases. The result can be expected to be recession, and again lower oil prices.

The big danger is that lower oil prices will lead to lower oil production, and this lower oil production will become a problem for business and commerce around the world. The United States is likely to be one of the countries whose oil production will be affected most by lower oil prices, for three reasons:

(1) We tend to have most tight oil production, and tight oil production tends to be high-priced production. It also drops off quite quickly, if drilling stops.

(2) Shale gas drillers tend to use a lot of debt. Shale drillers will especially be hit if interest rates rise because of debt problems.

(3) Taxes and fees related to oil production in the US (unlike many countries) do not vary with the price of oil. The US government will continue to get most of its revenue (estimated to average $33.29 per barrel on a $80 barrel of US tight oil by Barry Rogers, Oil & Gas Journal, May 2013), even as companies find themselves short of funds for new drilling.

If oil production is down, US oil consumption to be lower as well. The reason for low oil price is likely to be recession and greater job loss. With fewer jobs, less oil is needed for making and shipping goods. Furthermore, the many unemployed cannot afford cars. The pattern of  declining demand in the European Union, and Japan is likely to continue, and get worse. (See my post, Peak Oil Demand is Already a Huge Problem.)

Figure 3. Oil consumption based on BP's 2013 Statistical Review of World Energy.

Figure 3. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

In 2008-2009, the economy was able to somewhat recover, so commodity prices increased again. This recovery was not based on US economy fundamentals–a large part of it seems to be related to artificially low interest rates and deficit spending. As interest rates rise, and as deficit spending is eliminated through higher taxes/lower benefits, the US economy seems likely to head back into recession, with more job loss, probably worse than last time.

Countries with low wages to begin with may be spared of some of the down-escalator economy dynamics for a few years, because their low wage levels will continue to make them competitive in a world economy. These countries will attract a disproportionate share of new jobs, allowing them to continue grow for a time, even as the US, the European Union, and Japan continue to lose jobs.  Thus, world oil prices may be able to bounce back, but probably not to as high a level as in the recent past. Eventually, these countries will tend to follow the rest of the world into stagflation and collapse, because of the interconnectedness of the global economy, and the similar dynamics that all countries are subject to.

Chance of Discontinuity

In order for the models to work in the expected way, business as usual must continue. A few obvious problems come into play:

(1) “Demand,” as defined by economists, is what consumers can afford to pay. Therefore, a jobless individual without any type of government compensation, would have no demand for food, clothing or shelter–at least using the term in the way economists use the word. All of us know that in the real world, lack of a job and lack of government benefits causes problems. At some point, marginalized people will riot and  overthrow governments. Civil war may take place, or war against another country.

(2) Part of Business as usual is continuing availability of debt. At some point, it will start to become clear that the economy has gotten off the up escalator, and moved to the down escalator. On the down escalator, much less debt makes sense. It probably still makes sense to use debt on a short-term basis to cover goods in transit, and it may make sense to use debt to finance investments with a high expected rate of return. But in general, debt is likely to become much less common, greatly worsening the down escalator problem.

(3) As long as the economy was on an up escalator, increasing economies of scale were part of what caused a positive feedbacks. When the economy is on a down elevator, we have the reverse effect–higher fixed costs relative to production. This is even an issue when reduction in sales are intentional–for example, increased water conservation tends to lead to higher fixed costs, per unit of water sold, and greater use of high-efficiency light bulbs leads to greater electricity fixed costs (such as grid costs) per kWh sold. These higher fixed costs tend to push up prices for services further, increasing the down escalator effect.

(4) Investment in a capitalistic system does not work on a down economic escalator. Who wants to invest, if it is probable that the economy will shrink, leading to increasing diseconomies of scale?

What Happens to Government and Business Promises?

There are many kinds of promises currently outstanding:

1. Government promises

  • Social Security
  • Medicare
  • Unemployment insurance
  • Continued maintenance of roads
  • Free education for all through high school
  • Government debt (Federal, state, and local)
  • Financial help after hurricane damage
  • Guarantees of bank accounts and pension plans

2. Insurance and bank promises

  • Life insurance policies
  • Annuities
  • Long term care policies
  • Pension plans
  • Auto and homeowners policies, etc.
  • Bank account balances

3. Promises by companies of all types

  • Stock – implied promise it will be worth more in the future
  • Loans borrowed will be paid back (to banks or on bonds)
  • Pension plans
  • Implied guarantee of future 24/7 electricity availability; grid maintenance

What happens to these promises? Over time, it is clear that pretty much all of them will disappear. They are up-escalator benefits that work when there are plenty of fossil fuels and the economy is expanding. They don’t work for very long on a down escalator.

Promises to Individuals

At the level of the individual, one of the implied promises has been is that an individual who gets a good education will be able to get a good paying job. This is one of the promises that is already disappearing.

There is also a second implied promise–people who actually perform the work, will be compensated for it. This promise is falling by the wayside, as wages fall (partly due to globalization, and partly due to other down escalator effects). At the same time, governments need higher tax rates, to pay for all the promises made to those who are retired, unemployed, or have wages that are too low to support a family.

Goods and Services Produced in a Given Year

In any year, there will be a mixture of people buying goods and services:

  • People who are currently in the work force
  • Retirees
  • People who own assets and want to sell them

One thing that may not be obvious without thinking about it, is that all of the people wanting goods and services have to compete for the same set of goods and services that are available at that time.

For example, we grow a certain amount of corn and rice, and we extract a certain amount of oil and coal and copper, and we make a certain amount of electricity in electric power plants. Because of inventories, there is a little flexibility in these amounts, but basically, the amount that is available is determined by market prices and availability of supply lines. If the amount of goods and services produced is decreasing, because we are on a down escalator economy, this smaller quantity of goods and services needs to be shared by the entire population.

If there is relatively little available in total, and those who produced it don’t want to part with it, a person trying to trade accumulated “assets” for current production will not receive very much scarce production in return for his accumulated wealth, no matter what form it may take. In the case of most assets (stocks, bond, gold, silver, etc,) this means that the value of the asset tends toward $0. If currency is viewed as another asset, its value may go to close to zero as well. In fact, if there has been a government change, its value of the currency may be exactly zero.

How about Quantitative Easing?

Quantitative Easing (QE) represents an attempt to reinflate the economy by making more credit available to the economy, at lower interest rates. It also has the effect of reducing the interest rate the government pays on its own long-term debt, thus holding down that taxes the government needs to collect.

In terms of inflation/deflation effects QE has, its primary effect seems to be to artificially inflate asset prices–stocks, bonds, home prices, and agricultural land prices. The announced goal of the Japanese QE attempt was to try to raise the inflation rate (generally) in Japan to 2%, but it has not had that effect. In fact, the same link shows that in general, QE has not led to inflation.

In my view, the primary effect of QE is to create asset price bubbles. The price of bonds is raised, because of the artificially low interest rates.  The price of stocks is raised, because people switch from bonds to stocks, to try to get yield (or capital gains). To get better yield, businesses find it worthwhile investing in homes, with the idea of renting then out on a long-term basis. Very little of QE actually gets through to wages, which is where the major shortfall is.

QE will at some point stop, and the asset price bubble will deflate. (Crunch Time: Fiscal Crises and the Role of Monetary Policy by David Greenlaw, James Hamilton, Peter Hooper, and Frederic Mishkin points out that QE is not viable as a long-term strategy.) This is likely to add to deflation woes. The higher interest rates and the need for higher taxes to cover the higher interest the government needs to pay will add to the down escalator effects, making the trends noted previously even worse.

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 and tagged , , , , , , . Bookmark the permalink.

348 Responses to Inflation, Deflation, or Discontinuity?

  1. DaShui says:

    I wanna know the secret of how to travel around the world as a peak oil writer!

    • Actuaries are well paid. If they also always live in inexpensive housing and drive inexpensive cars, they save money. My husband is also still teaching most of the year. Leaving that money in the bank now does not seem like a good choice. So we visit people we would like to visit, and see parts of the world that are interesting, when my husband has vacation.

      Also, some of my trips have been paid for by groups I am speaking to.

      • Jan Steinman says:

        You’re always welcome here, Gail. Given enough lead time, I can probably arrange a public appearance as well, if you want to put together a BC tour.

        • I have not really ever thought of “putting on a tour” somewhere. It seems like I can reach more people writing than speaking, and I have a family who needs me (husband and adult son who lives with us). I do give talks, but I haven’t gone out of my way to find them.

        • Stilgar Wilcox says:

          In Canada?! The last time my wife went to Canada as part of a book tour back in 96, which just happened to also be in BC, she received a lot of prejudice because she’s American. Unless that has drastically changed in the intervening years I highly advise not going to Canada, Gail.

          • Jan Steinman says:

            The problem with anecdotes is that they almost always involve something other than what is reported.

            I’ve found Canadians to be an open and receptive bunch, as a whole. We’ve hosted Nicole Foss here, and people loved it. We hosted Starhawk, and nearly maxed out the biggest venue on the island.

            Of course, one way to get a bad reception is to come into some other country — any other country — and tell the locals how they should be doing things, not that your wife did that. But Americans do tend to do that!

            As Steven Covey says, “Seek first to understand, then to be understood.”

      • I might also that my background is very different from most “peak oil writers”. Most of my trips are paid for either by academic or actuarial groups. I write in all three settings–actuarial, academic, and web site. One of the things I can do, is help academic authors make their articles more accessible to a wider audience. So I have learned to know a lot of academic writers, through this role.

        What I write about is not traditional peak oil (with oil production determined by geological decline only, with no financial consideration), which makes my writing somewhat less than acceptable to many from the peak oil community. But academic audiences who are looking for an outside speaker, and actuarial audiences who are looking for an outside speaker find my different way of looking at things useful. While these groups may not pay “regular” academic/actuarial speaker expenses, they sometimes have money set aside for a few outside speakers of special interest.

        • Adam says:

          “audiences who are looking for an outside speaker find my different way of looking at things useful”

          After the oil price spike of 2008 subsided, I thought that “peak oil” (however defined) had been a dream and normal service had been resumed. Your inclusion of the financial (affordability) side explains the missing part of the puzzle, and therefore seems just not “different” but correct.

          I first stumbled upon “peak oil” in 2004. A BBC documentary on poverty claimed that Bangladesh would be as rich as the UK by 2090, assuming its growth rate continued. My mind suddenly boggled. I thought of all the other poor countries that would have to catch up and buy so much “stuff” that people would have to hire “self-storage units”. I googled “future world resources” and found the “Life after the oil crash” site (now defunct). It all made perfect sense, and numerous lights switched on in my head. (And let’s face it, here in 2013, even the UK isn’t as rich as the UK was in 2004!) But when I tried to talk about it to people, I just got looks of embarrassed incredulity – until 2008. These days, nobody I know talks of it, so when the “discontinuities” arrive, I think you’re right – people just won’t understand the resource scarcity issues behind it.

  2. Pingback: Inflation, Defl… | Southern Energy and Resilience

  3. Prudentis says:

    I think you make some very valid and interesting points. You paint a very realistic picture of future possibilieties.
    I have however one problem with your reasoning concerning gold. As most economists nowadays, you seem to think of gold only as an asset. I don’t recall a period in history, where gold acted as such, other than the recent, fiat money, infinite debt, we-can-grow-the-money-supply-indefinitely, ressources are inexaustable era. Other than that, gold has always been only one thing: a store of value (also known as money). Silver also has had the historical role of a value storage, but it is much diminished in recent history by silver’s industrial use. So I guess silver runs a much bigger risk of ending on the “asset” side of diminishing value.
    As for gold, I don’t see it rising anywhere near the hights some goldbugs dream of. On the other hand gold “value” falling in accordance with “real” assets would be quite a historical novelty.
    After all, to even have a “value” of something, you have to have some kind of reference point. If currencies fail (and they will), there is literally nothing else left _but_ gold as a measure of “value”.
    That is, if you do not envision an EOTWAWKI scenario but a more realistic “elevator ride” down as you call it but still in a modern world that is diminishing, but not entierly going to hell.
    There may be other “things” that could be a better store of wealth for the coming disturbances, be it farmland, forestry land, tools of production, etc. but they are all harder to store, more difficult to asses i terms of post-oil value and most have counter-party risk.
    So if you go out and pretty much say, that even gold investing isn’t a viable preparation for the coming crisies, than be so good and give us your ideas, what might be.

    • The question is how what really is produced will be divided up between those who are currently producing it, and those who think they have stored up a prior claim to it.

      If there is barely enough for those who are currently producing it, I would suggest that prior “stores of value,” no matter how wonderful they may claim to be, will not be of a great deal of worth. There will be certain essential services that some will provide (dentistry; midwifery; making cloth, clothing and shoes; and grinding grain come to mind) that some will provide, that will be essential as well. “Store of value” works well in an expanding economy, but much less well in a shrinking economy, as far as I can see.

      I would suggest spending it now, if you expect your assets to have value. If you spend it on things that are meaningful to you, no one can take your experience away. If you spend it on land, tools, and practical experience as to how to use these things (the education part is more important than the land and tools), it may be helpful–especially if things go right, and no one takes it away from you.

      Unfortunately, “You can’t take it with you,” is as true now is it has ever been.

      • Land most certainly can be taken from you, and if Da Goobermint falls, what is the meaning of the “Title” to the land? The paper that is written on is as worthless as the paper the Fiat money is written on, in fact they are practically one in the same thing.

        Once there are real shortages, one has to suspect there will be Land Reform of some sort, either a Communist or Fascist solution of collectivization or a neo-Feudal sort of Warlordism. Hard to see how the individual land holder does very well under either scenario.

        The best way to combat these outcomes is through neo-Tribal collectivism, which is what we are exploring with the SUN (Sustaining Universal Needs) Project. You can find out more about SUN on the Diner.


  4. Edwin Pell says:

    Hi Gail, somethings have a global market and something have only a domestic market. I think these can behave differently. Oil has a global market and will remain high priced. Housing stock in Detroit has only a local market and will continue to fall.

    • Those are good points. Also, the size of the market can change, if oil based transportation goes away. Coal that cannot be transported with oil becomes usable only within a very short distance.

      • yes energy is generally only usable in any volume if you can transmit/transport it in some way
        The Romans had their glorious fountains, (the energy in falling water) but only as a result of thousands of slaves building miles and miles of aqueducts. eventually the aqueducts fell down because the Romans lacked the means to maintain them. (the energy input of the slaves)
        when the means to move and use oil is no longer viable, our oil based energy system will also grind to a halt

        • Exactly! Oil and natural gas are incredibly difficult to extract, if we don’t have our current systems in place. Some coal is not so difficult to extract, but it still is very difficult to transport, without oil based systems. If we cannot maintain what we have, we lose it.

  5. Adam says:

    “If currency is viewed as another asset, its value may go to close to zero as well. In fact, if there has been a government change, its (the?) value of the currency may be exactly zero.”

    Meaning that, if there is not much to buy, then your currency is worth very little. This was the case in communist East Germany in the 1980s, so most people had savings that couldn’t buy anything worthwhile. From Wikipedia: “Upon adoption of the deutsche Mark in East Germany on 1 July 1990, the East German mark was converted at par for wages, prices and basic savings (up to a limit of 4000 Mark per person, except a smaller number for children and a larger number for pensioners).” In 1991 I asked a West German friend how he was enjoying reunification. He complained that there was such a pent-up demand from the former East Germany, that he often couldn’t find his favourite brands of products in the shops and had to settle for a lower quality alternative. Not the answer I was expecting!

    In Suriname in the 1990s, inflation was so high that the coins became worthless, and only banknotes were used. In 2004 Suriname introduced a currency reform, whereby one new Surinamese dollar was equal to 1000 old Surinamese guilders. The central bank announced that the old coins would become legal tender in terms of the newly created Suriname dollar. It probably had enough old coins in stock to do this without minting new coins. The previous 1 and 2½ Guilder coins had (curiously) been inscribed 100 and 250 Cent, so it was possible and legitimate to reuse them, and people did. Those who’d held onto the old coins got a windfall profit (though in reality probably a small one). I know of no other country that has recycled its coinage in this way. (I’m a coin collector – can you tell?)

    But Gail, if you take a $10 bill to the shops and find it is only $0 when you get there, make sure that you haven’t just rubbed some of the ink off. :-)

    Thank you for another superbly lucid, informative and insightful post.

  6. Don Stewart says:

    Dear Gail and Others
    Here are some more thoughts about the intersection between Gail’s thesis on how the future will play out, Gary Klein’s book on Insights, and the discussion today between Charles Hugh Smith and Gordon T. Long. I will also extend the subject to a discussion of what each of us should be doing to prepare for whatever the future holds.

    You can find Smith’s blog post at:

    Take a look particularly at the first three charts. If you have time, also click through to the conversation between Long and Smith. Note how they keep questioning ‘Why do we keep doing things that have failed?’

    Gary Klein identifies one path to insight as Creative Desperation. Among his examples are:

    1. A firefighter trapped by a rapidly advancing forest fire who started a fire in front of himself and then threw himself into the ashes while the fire burned around him. He saved his life.
    2. A hiker who wedged his arm between some rocks. He admitted after a couple of days that the hand was dead, so he conceived the idea of cutting off his arm. But his knife was not capable of cutting through the bone. In frustration, he heaved his body and felt his arm bend. It occurred to him that he could use leverage to break the bones and then cut through the skin and muscle with his knife. He saved his life.
    3. An executive of a company which used time sheets to comply with government regulations who could not get employees to promptly fill them out, even with threats. Giving up on threats, she changed it to giving Hershey’s Kisses to employees when they turned in their time sheets. Compliance suddenly disappeared as a problem, replaced by the much easier task of keeping a supply of Kisses on hand..
    4. With the French Republic in grave danger, Napoleon conceived the idea of attacking the invaders supply lines using light artillery. The invaders withdrew.

    In all these cases, some fundamental assumption had to be given up in order for the alternative path to present itself.

    Now consider the situation that many of us perceive ourselves to be in. Additional debt no longer leads to an increase in wealth. Yet our leaders can think of no alternative except creating lots more debt. The trajectory of US government debt is clearly unsustainable. Therefore, there is no apparent way for the US Government or insurance companies or private companies with pension plans to pay off their unfunded liabilities. (And the unfunded liabilities should, perhaps, include a zero rate of return on the securities backing up those liabilities…as per the first chart in Smith.) Listening to Gail, we may perceive that the lack of capital is a severe impediment to pie-in-the-sky projections of new projects to save us. Please note the discussion that Smith and Long have on the decline of free cash flow to corporations. Also note the chart showing the disconnect between bank deposits and loans. So we may perceive ourselves as being in a situation much like Gary Klein’s four examples.

    The question, then, is: Is there some treasured assumption that we can give up which will permit the path forward to be recognized? We may be in a position analogous to the firefighter and the hiker in terms of making the sacrifice of something near and dear to us.

    Don Stewart

    • Thanks for the links and the analysis. Our unfortunate problem is that capitalism has been set up based on a model of growth lasting forever. In fact, all of the many promises that have been made, implicitly or explicitly depend on growth.

      We need to have our electric system, education system, and road system to continue, if we are to continue with anything close to BAU. But it is hard to see that these can continue for very many more years, in the way that they have been put together, even if we could come up with a fix to our financial system. So we seem to have a real fix.

      I will keep these links in mind.

    • Scott says:

      Yes Don, bankruptcy could be near when rates rise. The debt is too big to roll over at the higher rates, I think they will manage to keep rates suppressed for a time longer than we expected because of this.


  7. Christopher Johnson says:

    Dismal it is, your science and our weather. Has anyone noticed that on the US East Coast it has rained every day since the 2nd of June. In some parts of the world they call it ‘rainy season’ or monsoon. I’ve not seen such weather here for almost 40 years, and it breaks all known records. Is this a gaiea response to cleanse the CO2 while cooling the air?
    Our practice of the dismal science may be equally inappropriate, or out of whack. Whoever said that inflation and deflation are anything other than temporary conditions fo the money supply? And that they can and do change continually, and minutely. Was that some Chicago fellah?
    However, more to the point, it appears that the reported demise of ‘less expensive’ oil may have been somewhat premature. Shale oil and shale gas is turning up all over the place, even though you won’t find many news reports on TV. The latest Economist has an interesting piece ‘Spooked by Shale’ about shale’s destruction of that bulwark of free enterprise, Gazprom, whose market capitalization has dropped from $367B in 2008 to $78B today. Putin was always better at interrogations than industrial strategy…

  8. timl2k11 says:

    I think inflation and deflation are two sides of the same coin (in the classical use of the terms). They are both possible outcomes of a recession. The monetary base can inflate because of unchecked government debt and money printing (hyperinflation). The monetary base can deflate because of debt defaults due to a decline in growth or severe recession.

    • I am not sure how parallel they are.

      Debt defaults can definitely reduce the monetary based, since we were assuming that that debt would provide value in the future. If an employer defaults on loans, its workers can lose their jobs.

      The way that the monetary base inflates is not quite as clear. We have seen one recent example of attempted money printing that mostly puffs up asset prices, rather than getting money back in workers pockets, where it is needed. So the effect is very narrow. Perhaps another approach would work better, but the money needs to get back in workers pockets. It is hard to do that by pumping up asset prices. If there is real value being added to society at low cost, then pumping up can happen. But this is not happening as much with high priced oil.

  9. Don Stewart says:

    Dear Gail and Others
    Some of you may be interested in looking at the newly published book Seeing What Others Don’t: The Remarkable Ways We Gain Insights. The author is Gary Klein, who has done a lot of work for the US Military, US intelligence services, and private corporations. He has a lot of experience and is definitely not in the ‘one simple trick can solve all your problems’ camp. He even criticizes Saint Steve Jobs for one of his less successful attempts at creating more insight.

    In brief, we have a conflict between the necessity to minimize errors (things like Six Sigma programs) which encourages the planning and checking of minutiae, and the need for insight and new solutions which are usually inconsistent with previous plans. As an example, he studies Daniel Boone’s successful rescue of three girls from Boonesborough who had been kidnapped by Native Americans. If you read the story, you will quickly see that Boone demonstrated a high degree of insight and determination which could not have been facilitated by some formal planning process. If Boone had listened to good advice, the three girls would probably have been dead.

    Klein criticizes professional scientists who have studied the issue of insight as focusing on problems that can be presented to college undergraduates which are not really relevant to the real world. Klein’s method involves collecting and studying stories. Klein is also humble enough to admit that, sometimes, it takes him 15 years to see the solution that he should have thought of long ago.

    Briefly, Klein thinks there are three basic paths to insight (although more may be discovered). The first is Contradiction, in which a weak anchor is used to rebuild a story. For example, Einstein relaxed the weak anchor of fixed time and space to allow the speed of light to be fundamental and space and time to warp and bend. In our case, we might begin to examine the assumption that plenty of cheap oil is a prerequisite for a reasonable life.

    The second path is Connection. In this path, we know quite a bit, learn something new, and fit that new knowledge into a coherent world view. Things like the current crop of cell phones are examples of Connection insights. If you are a good gardener, then learning a better way to manage water will probably come via the Connection Path.

    The third path is Creative Desperation. The situation I have previously described with Napoleon and the light artillery and the retreat of the invading British and Spanish forces is an example of Creative Desperation. In our case, it might be the stark realization that Business As Usual is no longer possible.

    The author gives some very cautious advice about fostering Insight in one’s own life. I think his most useful advice is contained in the chapter on teaching others. Each of us needs some helpers in order to survive on the Down Escalator. Klein will give you some good advice about how to converse with other people on the subject. Couple of quotes:
    ‘Devise an exercise enabling the student to discover the flaw for himself.’
    and ‘Teaching depends on what other people think…not what you think.’
    and ‘Emotion helped to translate the insight into lasting organization change.’

    Klein points out that two mighty organizations–Eastman Kodak and Encyclopedia Britannica–had plenty of insight into their predicament. What they lacked was the will power to follow through.

    In my opinion, the best way to use the book is to understand the nature of the Creative Desperation situation and work through it as it applies to a Down Escalator. Once the basic direction has been identified, then one can fine tune one’s path by using the Contradiction Path and the Connection Path.

    Don Stewart

    • timl2k11 says:

      One of the things I believe I have been blessed with is great insight. That’s not merely a grandiose observation. People keep telling me this. Maybe if there is a downturn I can finally put it to use. (It’s too late to prevent a downturn, I don’t care how much insight I have). Either that or perhaps I will be killed for the 150,000 kcal on my person.

  10. Pingback: Inflation, Deflation, or Discontinuity? – A question that seems to come up quite often is, "Are we going to have inflation or deflation?" They want to know whether to expect a rise in prices, or a fall in prices, either in general, or in c

  11. Stephen says:

    I think we will have to re-think priorities of life, and even re-think the role of the banking system in our lives. If hyper deflation (or the down escalator is the permanent path we are on), we will need to accept that every debt (consumer, business, or government) is not going to get paid, and eventually we may have to repeal the rule of the creditors taking everything we own to pay the debt or we will be dead. We can change to a sustainable society faster if the rule was repealed, rather than if we keep the rule. In fact, it would be better to use what money we do have to re-work the landscape into a sustainable design and teach people how to live without counting on mass scale marketing by teaching organic farming, survival skills, how to live with reduced power and fuel, etc. We will have to put human race survival as a much higher priority than mass scale marketing, big box retail, economic growth, or the bankers making more money as a national priority. In fact, I predict we will have to give people other than business executives, wall street bankers, and the like at city, county, and state planning tables and at policy decisions.

    Full reserve banking will also have to be implemented as the partial reserve system will not survive a down slope for long. Such banking may have to be under government control or heavy regulation.

    As a taste of things to come, look at Detroit, Greece, Cyprus, and others. They recently defaulted on many debts as they don’t have the money to pay them. Many of the creditors will not get 100 cents on the dollar. In some cases, private money had to be taken out of accounts to bail out the government. As David Walker put it, in the USA we have a 53 trillion dollar financial hole in unfunded obligations. It is inevitable that many other countries will default.

    • es330td says:

      “…in the USA we have a 53 trillion dollar financial hole in unfunded obligations.”

      This is not actually true. Congress can and is certain to reduce these obligations by a simple vote at will. SS/Medicare/Medicaid are not part of the Constitution and the US Government owes exactly zero dollars to anyone who has already paid Social Security/FICA taxes. Should Congress choose to halve SS payments tomorrow the only recourse is the ballot box.

      • We have let people think that the economy can grow in such a way that the economy will allow most people to retire, and to have health care paid for and a basic safety net of benefits. Congress could in theory take these benefits away, but they would be very unpopular if they did. In fact, they would be voted out or thrown out, if people knew how bad it was. In some ways it is not all that different if the government actually issues bonds for the purpose, or convinces people that the benefits will be there so they can plan around them. They are just as gone, if they cannot be funded, regardless.

        • Agent22276 says:

          I would add that the imputed compounding interest to the $54 trillion in total US credit market debt owed to term is now an equivalent of 100% of US GDP.

          Moreover, bank assets, including the Fed’s balance sheet (the largest Fed member banks own the Fed and technically the Fed’s assets), are also an equivalent of 100% of GDP and 100% of US equity market capitalization.

          Effectively, the largest Fed member banks, i.e., TBTE banks, have a 100% equivalent claim on all US value-added (un)economic output in perpetuity.

          Also, the cumulative revenues of the Fortune 25-100 firms are 40-75% equivalent of US GDP, with the Fortune 300 having revenues of 100% of GDP and revenues flat to falling. Since the 1990s, a growing share of economic exchange is occurring between the firms of the Fortune 25-300 and the US gov’t, even as the Fortune 300 employ fewer than 13% of all US workers. I expect this trend to continue indefinitely, with the acceleration of automation of labor in the services sector eliminating employment, income, and purchasing power at increasing rate and scale worldwide.

          The US economy no longer creates net new full-time private sector living-wage employment, and employment conditions are set to deteriorate further hereafter. Anyone who is optimistic about US economic conditions hereafter is either protected from evovling market forces or is not paying attention.

          • I haven’t looked at those particular numbers before, but agree that things are badly out of balance. If it were possible for all economies of the world to compound indefinitely at high growth rates, then the assumptions made by economists/actuaries would be reasonable.

            With respect to Social Security, the actuaries understand that what they are doing is simply splitting up what will be produced in future years between workers and beneficiaries–in other words, all that they are doing is making a primarily “pay-as-you-go” plan work. So the thought is to give out less benefits, and make retirees work longer, if things don’t work out as planned. But I am fairly sure they have never thought through how badly things could go astray. Even the amount of prefunding that was collected in the past to try to smooth out the baby-boomers’ bulge in benefits got spent (outside the S. S. trust fund) because government funding is on a pay-as-you-go basis. Thus, the extra funds are just more government debt in the S. S. Trust Fund, and are often not even counted in government debt, because the debt in the S. S. Trust Fund is not marketable.

            • Scott says:

              Hello Gail, I think for those us in our fifties, it is perhaps less than 50/50 that we will see social security as there really is no “trust fund”. They may pay us in dollars but I believe that will buy less however. But by the time we reach the age it may be changed to an older age like 70.

              The unfunded liabilities in the USA of SS and Medicare are really not funded and just based upon hopeful outlooks. We should not look towards these programs to sustain us in the future.

              I know we see deflation but inflation is the best way for the government to honer these payments with printed money that buys less to keep things going for a time.

              My savings would go into gold and silver then and not the dollar aside from buying food, tools and needed things to store for the future.

            • Jan Steinman says:

              for those us in our fifties, it is perhaps less than 50/50 that we will see social security…

              I’ve “known” this since high school, and have thus done everything legally possible to reduce or eliminate both what I paid in, and what I was expecting out.

              My guess is that there will be a sort of “event horizon,” an age, beyond which, there will be no Social Security. Similar to the “Disney Copyright,” they’ll just keep boosting the pay-out age in order to exclude enough people so that it will remain somewhat solvent.

              How they justify doing so will be interesting. But it will be absolutely necessary in order to keep young people paying in — any other way of dealing with the SS problem will result in a massive revolt among those paying in.

              My savings would go into gold and silver…

              Yea, lots of calories in precious metals! :-)

              (I know that’s unfair. You did mention “food and tools” as well. But a lot of people are banking on gold and silver without accounting for food. I’m no so sure gold an silver will continue to buy in food what it will today. Whiskey might be a better investment!)

            • Scott says:

              I hear you Jan, most of us on this site most likely are making other plans aside from social security if they are able. It is a tough one, when we have a paper currency, and I think any commodity is better than paper, unless they are my treasured books that I love to read.

              I think many understand there are not many good choices to avoid a currency collapse aside from lots of food and needed things stored and of course we may have to learn to grow almost all of our food instead of just part of it like we do know. So we have been getting started. Even to grow and produce our own food we are dependent on getting loads of good dirt brought in to fill the raised beds. We may have to depend on composting, but it is hard to get bed filled with out that delivery truck of great compost. So getting those things established now may help a bit.

              As far as money goes, in a currency collapse, I still believe the old silver/gold dollars will trade as they have for many hundreds of years and if those no longer trade we surely have real trouble. Then our food and tools are our main thing. We also store some seeds, they are in cans in the fridge or freezer to make them last longer. There are lots of places that sell them now online they come in a #10 coffee size can sealed.

              I think my biggest challenge will be getting water, I even have saved some 5 liter wine bags to use and refill at the creek or river near here if needed. But that is not really enough to use in the garden so if we cannot get gas for our generator it will get even tougher to garden. I know it is true that in many parts of the world the crops are entirely dependent on the rains of mother nature and tough investment for a farmer. Replanting is not free.

            • Governments have a tendency to fall apart, when the economic programs they have promised cannot be paid for and when they cannot pay their debts. Governments may be overthrown with a coup, or any number of any other outcomes may take place. While the government may like to inflate away their debt, whether they really can do so is an open question. For example, Japan has not been doing well in this regard at all. Even its latest attempt at QE is not working.

  12. donsailorman says:

    As usual, I agree with your analysis. However, rather than one huge discontinuity I think there will be several over the next fifty years. You seem to suggest that there may first be financial panic along with debt deflation as businesses and individuals and governments default on their obligations. Then it seems that you expect rapid inflation, perhaps hyperinflation. That sequence of events is a plausible scenario, but it is not the only plausible one.

    If unemployment in the U.S. increases in the headline number above 10% I expect the Treasury will run humongous deficits–two to five trillion dollars per year. The Federal Reserve System will monetize these deficits, and the probable result is double digit inflation–possibly escalating to true hyperinflation if the unemployment rate keeps increasing. Thus I think that it is plausible that we will have serious and escalating inflation even if there is no debt deflation.

    Note that 2008 could have resulted in debt deflation and a rerun of the Great Depression, but because both the Fed and the Treasury were aware of this possibility they took aggressive action to avoid falling prices and falling wages and bank failures. Thus, what will happen depends in large part on what the Fed and the Treasury (with Congressional approval) will do.

    Another issue is timing. When will the first major discontinuity occur? Not I think in 2013. Probably not in 2014 either. BAU may have several years left. Note that oil prices have been–very roughly–stable over the past year or more. Global GDP is still growing, though at a reduced rate. Prior to the first discontinuity I expect to see a sharp decline in real global GDP.

    • Scott says:

      Don I agree, I think the next one is going to be bigger and will require a monetary response larger than in 2008, I think we will see inflation eventually if they print all those trillions to fight the deflation.

      • Dogtrainer says:


        Maybe this is the answer you have been looking for regarding whether it is going to be inflation or deflation? The answer comes from Martin Armstrong in his article: “Beware The Taxman Cometh” (

        Armstrong states there is not going to be hyperinflation because “…HYPERINFLATION only takes place in economies where there are no bond markets – NEVER in the core economy!” Armstrong backs up this outcome by describing the behavior government uses to prevent hyperinflation:

        When there is a VIABLE bond market, the bondholders yell and scream and then threaten government they will collapse if nobody buys their bonds. This creates a massive DEFLATIONARY trend as government hunts down everyone and LIBERTY vanishes into thin air.

        Armstrong is saying government will use its various powers to tax, regulate, confiscate, administrate, and others to redistribute (transfer) wealth to the bond holder Therefore, there is no need to put the fiat printing presses into overdrijve. As you know the bond holders are the owners of the Federal Reserve.

        Therefore, at most it will be a slow (gradual) inflation as we currently have with times of acute deflation as the government strips people of wealth.

        The key to surviving in such an environment is to develop a strategy that would allow you to hold on to most of your wealth while maintaining an adequate standard of living.

        • I think the proposed fix is a temporary fix at best. I am not convinced the governments are going to hang together as well as everyone believes. Perhaps federal government simply becomes to poor to provide most of the programs it has promised, so it turns those programs back to the state (who in turn turn them back to lower levels.) Or people rebel, and put in a much more extreme government. Or the whole system falls apart.

          Paying back bonds is much easier when there is economic growth that comes with cheap energy. When this dries up, the whole system tends to fall apart.

  13. The more thing change, the more they stay the same

  14. Philip Backus says:

    Gail, An informative post as always and like Hitchcock’s works the lack of hysteria is far more chilling and apt to cause change in people’s behavior than oil sucking alien space reptilian conspiracies will. What you are telling the public is what our politicoeconomic leaders should be saying…and are not. I find your assessment of our dilemma accurate and highly usable when analyzing my own personal risks. Thank you for your work and your sense of duty to humanity.

    • Adam says:

      Alien space reptilian conspiracies? Funny you should mention that. Here in the UK, my greatest nightmare is that the populace will elect David Icke as their leader once the Emergency sets in. Not sure you will have heard of Icke, across the pond.

  15. ravinathan says:

    I am delighted that you chose to wade in this topic Gail and a wonderful essay it is. I would like to point out that your assumption of rising interest rates is not consistent with the down escalator. Yes, the Mishkin et al paper that you referred to does discuss the threat scenario of ‘fiscal dominance’ with the fed forced to monetize government debt (with resulting spikes in interest rates). This scenario from my reading is predicated on two assumptions – positive real economic growth (5 percent nominal, or 3 percent real given 2 percent inflation) and the availability of substitute investments for global investors outside of the US. Yes, the authiors are still in the dream of continued real economic growth in a finite planet!
    If we assume a down escalator, as you argue, then we are forecasting a global depression. In this scenario where are global creditors going to go and why would US interest rates rise? With a global economic collapse, the Fed can continue to monetize government debt and the US can still remain the cleanest dirty shirt. In fact they may have no choice if global investors rush into the US as a safe haven, for the dollar would rise and interest rates can go negative as we saw in Switzerland recently. In my opinion, the reason that treasury bond yields rose recently were due to rumors of fed exit and sales of treasuries by emerging economies in a Hail Mary effort to keep their currencies from imploding – for example India whose falling rupee increases oil import costs more than it helps exports. Yes, the fed is concerned about getting locked in to a scenario of fiscal dominance, however their strategy of using a deferred asset account would mean that they can continue funding their financial obligations out of thin air without requiring the treasury to recapitalize them! As the Mishkin paper points out, if the fed does not sell its assets, they would not have to account for portfolio losses since thay value their assets at par in their balance sheet and could let securities mature over time. Consequently being long US treasuries may be the best option for portfolio investors at least in the medium term.
    Yet another scenario is suggested by Jim Rickards of Currency Wars, where the IMF expands its balance sheet by issuing SDR’s to purchase outstanding debt of major western economies. In effect this would be a debt jubilee for national treasuries with the possibility of a global reset and a new international reserve currency. Unfortunately, I believe that Mr. Rickards sees the debt problem clearly but not the energy predicament and I may be wrong about that.

  16. Pingback: Tuesday Morning Links |

  17. Ikonoclast says:

    Gail says:- “(the) primary effect of QE is to create asset price bubbles.”

    This is correct in itself. However, there are strategies other than Q.E. (quantitative easing) which governments can attempt to use. Q.E. because of the way it is structured, funnels funds to the banks. Currently, for various reasons including a tightness in energy supplies, Q.E. funds tend to go into the stock market and other asset markets rather than into investment to expand production.

    Governments could also attempt more traditional Keynesian pump-priming via deficit spending (money printing if you like). If there is spare capacity in the economy in the form of unutilised labour and plant and also in the form of readily available energy and raw materials, then this spare capacity can be put to work creating both more production and more demand for that production. Under that scenario, inflation would not take off.

    The US has spare labour as proven by the high unemployment rate and the usually un-mentioned under-employment rate which is even higher. The US also has idle industrial plant as proven by the industrial production capacity utilisation figures (77.6% in May 2013 according to Federal Reserve figures).

    In this case, an attempt to pump-prime by counter-cyclical Keynesian spening would be effective unless there are some other countervailing factors. The main candidate for a countervailing factor would be energy and raw material shortages. If these manifest themselves, crude pump-priming of the economy probably cannot work. In that case, ineffective pump-priming (money printing) with money going almost direct to wages via national works (for example) could have an inflationary effect.

    At this stage, whilst we may predict depression due to resource shortages and their knock-on financial effects, we cannot predict which of deflationary depression or inflationary depression will occur because we cannot predict which policy a government will choose (austerity, Q.E. or money printing).

    However (again!), if government is wise to the above factors then it will make a conscious choice to adopt the policy that leads to either deflationary depression or inflationary depression. In the case of the US, government pretty much operates at the behest of the plutocrats, the richest 1%. So ask youself, what do the super rich want, deflationary depression or inflationary depression? I strongly suspect they want deflationary depression. This better protects and indeed enhances their wealth whilst further impoverishing the rest. So austerity policies followed by deflationary depression look like the best bet. But it’s still only a bet. Nobody knows for sure.

    The chaos unleashed by deflationary depression would be severe but then again inflationary depression could lead to much the same chaos. Let’s just mention that US Homeland Security has recently purchased 1.2 billion bullets and IED-proof Armoured Personnel Carriers. Gee, I wonder what they think they need that materiel for?

    • Edward Kerr says:

      I could be mistaken but it seems to me that the government has chosen both QE and austerity. Of course, in it’s usual way, it doles them out asymmetrically. QE for the rich to prop up stock prices and austerity for the poor to bludgeon them a bit more.

      What I doubt they (the rich) get is that all the printed money in the world is not going to solve the resource problems that are rearing their ugly heads. Their future will not be made ‘rosy’ by dollar bills.

      HS is well aware of what is coming and with the purchases you mention they are telling us that: yes you are going to die but you will do so in an orderly (and most probably rapid) fashion. A global population decrease has been decreed and they will not be dissuaded

  18. The real wild-card here is political change. As the economy contracts, ethnic and religious strife is likely to increase, and political actors will likely take advantage of these issues by scapegoating certain groups. No coincidence that anti-semitism increased during the great depression, and world war II started at the end of the depression. Thus, the fall-out from financial crisis could be far worse than the crisis themselves.

    • xabier says:


      Just look at the anti-‘Baby Boomer’ propaganda that is being actively disseminated now: the 21st century scapegoats ‘who took too much for themselves and crushed the lives of the young’, or so it goes.

      And looking at comments under news articles, a lot of young people, frustrated at low wages, poor prospects in general and inability to buy property, etc, are buying into this poisonous and inaccurate narrative.

      As soon as you see a narrative that identifies a whole (bogus) class of citizens as ‘enemies of the people’, you know your society is potentially in deep trouble indeed.

      • Christopher Johnson says:


        Please allow me to expand on your theme, sir. Our parents were ‘the greatest generation’, honed in their youth by the Great Depression and the great Second World War. They listened to the ‘first generation of child psychologists’ to prepare us Boomers, and ended up spoiling us thoroughly. Or at least they used to say to before passing from the scene. Never sure whether or how much one’s humor reflects reality or an attempt to relieve the pain of that reality, we must exercise some judgement. But of course in our advanced youth our generation became the one that really upset the world: protesting in the late 60s against all the things that our parents wanted to do.
        Protesters at the Pentagon in 1967 queued up in the hallways to use the rest rooms; the building was wide open, as were all public buildings. So on top of everything else, we can be blamed for the ‘increased security’ everywhere, which must mean we’re somehow responsible for all those things which threaten our security.
        Our parents tried to help us and we made a mud pie of the whole thing. And will continue to.
        Cheers, Chris

    • dolph says:

      America has become a multicultural society filled with people from all corners of the globe.

      You can view this as a good or bad thing. It’s good in a sense that it will be difficult to scapegoat any one group…who exactly do you scapegoat when there are so many different types of people?

      However, this also means that things will remain dysfunctional. The majority/minority dichotomy is one that provides cultural cohesion and meaning for a society. The norms are provided by the majority, and minorities assume those norms as their own out of necessity.

      America lacks any norms now. Nobody can agree on anything, which tells you that the whole experiment might be coming to an end.

  19. I am very impressed by the simplicity and common sense of your posts Gail. You make more sense than just about anyone else in the blogosphere. I agree with your predictions, even though they are somewhat counter-intuitive. The real issue is when will these things happen? I think that perceptions, even if false, can carry civilization along for a while. Like the road-runner cartoon when Wiley Coyote chases the road runner off a cliff and remains suspended over the chasm until he looks down and realizes his mistake, society can continue on until it becomes near impossible not to look down. At this point mass panic sets in, and things change so quickly and catastophically that it is impossible to predict what will happen next.
    Some people I know swear by gold, some people believe we should move back to the land, others that we are better off in cities. It seems to me that our best bet is in developing resilient social networks, social capital, and social support. If you think of the Amish, they are self-reliant largely without using fossil fuels by coming together and helping each other when it is needed, and otherwise having a solid work ethic and strong family ties.
    Religious movements will become stronger and more influential because people will be more afraid, people will be more uncertain, and people will tend to think more in terms of black and white.

  20. Leo Smith says:

    Interesting view Gail.
    What you seem to be saying is that s more money time energy and people are spent on extracting energy, there is less left over to extract anything else and process it, that is the cash flow of the global economy shifts from other things into raw energy production, leading to inflation in oil, and deflation in all the less necessary things to have. They may now be cheap, because demand has fallen, but we still cant afford them.

    Its a pity you aren’t a systems engineer, because the global economy maps well into such analysis, even down to debt being essentially the feedback component. That is debt represents the difference between where we are (output) and where we are trying to get to.
    Under this analysis if we run into a resource limit, debt will stagger up massively as we try to drive the economy to levels of growth it is incapable of sustaining.
    The answer is to not shoot for unattainable growth: under these circumstances there will be a period where output is highly hypothecated for debt reduction, – a period of negative growth or contraction, followed by the (if the damping is correct in the system) asymptotic approach of a more or less steady state. The world economy stays at a given level, representing what it is physically capable of producing, and, with labour being surplus to requirements, individual wealth becomes the inverse of population.

    That is, if the population was one tenth, the production levels would barely alter, provided that tenth were skilled enough to keep the machine running, as it were, and everyone would be ten times better off materially.

    That is probably where we will end up eventually, but in between there is a far far greater and more unpleasant scenario. The prospect of rising populations leading to per capita wealth reduction to the point where actual human survival is compromised. That acting as an overall brake on population, by simply allowing mass death due to essentially poverty..

    This solves the debt problem. Pension funds having few people to service, can afford to lose money they have lent to people who can no longer pay it back, being dead. Debt can in the end be cancelled out. If both lenders and borrowers have ceased to exist.

    • I think the part of the dynamics you are missing is that all species reproduce in far greater numbers than needed to replace themselves. Humans are unique, in that we have managed to overcome natural selection with our intelligence. We first starting doing this when we learned how to control fire (applied to biomass), over 1 million years ago. With this extra energy to help us along, plus other energy we gained from training animals to do what we wanted them to do, and plants to live in unnatural environments, we could overcome natural selection, and population could grow. This growth, in and of itself is a huge problem, and would likely to be a huge problem, even if our numbers dropped back to 1/10 or 1/100 of what they are now.

      So a smaller population is better, but we can’t let it stay that way. (Researchers claim education of women helps, but education of women is only possible with a fair amount of fossil fuels.) There is also a depletion/pollution aspect of the resources (soil less fertile, too much salt from irrigation), but that historically doesn’t seem to play as big a role as population growth–or maybe it is 50 – 50.

      You are right. It would be better if I could put together a full systems engineering model of it. If we can’t get rid of the population rise/depletion issue though, it seems like the system fails quite quickly.

      • xabier says:


        The population and resources argument will simply never get through to some people.

        Only yesterday I read an article in the British press by an economist, claiming that, since the populations of other European states were declining and ageing dramatically (creating an immense problem with paying state pensions), Britain should encourage a baby boom in order to ‘increase the relative importance and prosperity of Britain in Europe’ and get those pensions paid by all those eager young earners in 20 years time.

        His basic axiom was: ‘the larger the population, the greater the wealth.’ Not a hint of a mention of finite resources, and the fact that the UK is now lacking in the resources that were the foundation of the building of her industrial production and power in the 19th century.

        This sort of thinking, if one can dignify it thus, is very common now. Training as an economist does indeed seem to have left resources issues out of the equation, and Malthus is only ever mentioned to jeer ‘Well, he got it wrong didn’t he?!’ To mention population as a problem is to be a ‘neo-Malthusian’ it seems, which is of course intended as an insult.

        You might think, reading these people, that we were in the 1890’s, when European states needed a lot of manpower for their armies, fields and factories…..

        • I think that there is still probably a lot of thinking in this direction in actuarial circles too. I am not a pension actuary (or even a life insurance actuary–I have worked on the property casualty sides, with medical malpractice, workers compensation, private passenger auto, and homeowners). There is a belief that if there are more young people, they will have jobs and support the older people. No one realizes that these young people need resources to make things. The economists have encouraged this incomplete thinking, and the actuaries hove not really thought things through, either. They haven’t really thought through the interest rate issue either–how much economic growth is required for a given real rate of interest.

          I expect to be doing more public speaking with actuarial groups in the near future. I should probably be bringing up this issue more.

        • Yes. If there is nothing to buy, how can gold or silver possibly act to accumulate huge amounts of anything?

          • Scott says:

            But Gail, gold and silver has out lived many fiat currencies but I see your point if there are no supplies. I still would take my chances with silver and gold over fiat money.

            Just another tool to keep, but mostly we store food and tools so we can work.

      • Jan Steinman says:

        “(Researchers claim education of women helps [to reduce birth rate], but education of women is only possible with a fair amount of fossil fuels.)”

        I go one step further: I claim that “educating women” merely correlates with higher energy availability — it is not a causal situation.

        Take an uneducated, third-world woman and allow her to burn all the energy that an educated women in an industrialized nation has, and I’ll bet her birth rate will go down, as well.

        The fact is that children are both a slave labour force and a pension plan when people do not have the surrogates for slavery and pension that fossil sunlight provides.

        I wish I had time to properly research and document this. I feel certain of it in my bones, and yet the “demographic transition” types have things all figured out how population will stabilize at nine billion, once we educate all them stupid third-world women. Good luck with that one!

        • xabier says:


          I agree: the argument that higher levels of education necessarily lead to greater prosperity always leave out the energy factor. In fact, most social and political arguments ignore it completely. The disconnection from reality is almost total in some circles….

        • I agree. Education of women can’t happen, unless society has enough energy to spare to make education worthwhile both for the vast majority of men, and women as well. I don’t think any society managed this before fossil fuels came into play.

          Some things we do with fossil fuels can make a huge difference. For example, in dry parts of the world, young girls often have to spend their days walking to distant wells or creeks to get water, so can’t get an education. If there is enough energy to add water pipelines, this can help free up time for girls not to have to spend so much time doing this, and can go to school.

          Reducing the time spent in gathering sticks or dung for fuel is important too, as is finding a way to grow crops with less manual effort. All of this takes energy.

          We are still a long way from solving our population problem. The “education of women” answer just makes it sound like it is an easy one to solve.

        • Tarjei V says:

          Professor Robert Wyman (Yale) has a course called “Global problems of population growth”, a very thorough approach:

          • Tarjei V says:

            By the way, thanks for an immensely interesting blog. I have a question it would be nice to hear your take on.
            Reading Paul Krugman (to use him as an example, he has many likeminded colleagues of course), I can´t help but be struck by the obvious intelligence and deep thinking he displays. Still, I feel you have refuted his optimism – especially when it comes through servicing future debt – through your writings. So my question is this:

            Does Paul Krugman “know better”, that is, does he acknowledge the imminent threat of finite (expensive) resources and collapse, but doesn´t let on? In which case, why?
            Has he got a blind spot? (He very rarely touches energy questions in his NYTimes articles, for instance). In which case, how is that possible? What societal factors enable extremely intelligent intellectuals to acknowledge resource depletion and environmental destruction in words, without really incorporating it into their intellectual framework?
            Stating that the “dismal science” is just too wrapped up in itself, is, I suspect, only part of the answer. Something else is going on, but what?

            I suspect an answer to these questions can be enlightening. That´s why I ask you, Gail! :)

            • Thanks for the suggestion about an article. I think part of the problem is that our “story” about how the world works is so inaccurate, that people don’t really understand how important a role cheap energy has played in recent years.

          • Thanks! It looks like the material is free.

          • Tarjei,
            I’ve wondered the same thing about Paul Krugman. I found these comments in one of his opinion pieces for the NY Times located here
            the title of his piece is “The Finite World” and it ran Dec. 2010.

            “…Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. True, alternative sources, like oil from Canada’s tar sands, have continued to grow. But these alternative sources come at relatively high cost, both monetary and environmental.

            Also, over the past year, extreme weather — especially severe heat and drought in some important agricultural regions — played an important role in driving up food prices. And, yes, there’s every reason to believe that climate change is making such weather episodes more common.

            So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.”

            So it appears that he has some understanding of the issues we are discussing but does not appear to believe that we are running out of time to fix them. I’m not sure why he seems to believe that resource constraints will not bring an end to economic growth. Maybe it’s easy to ignore the possibility of an economic collapse when you receive so much money and fame to think otherwise. What is that old saying about it being hard to get a man to tell the truth when his paycheck depends upon him telling a lie….

          • Tarjei V says:

            Jody: Interesting quote from Krugman! But seeing as Krugman is a “hard numbers” man, where are the numbers? Where are his calculations to convince us that alternative energy optimism is reasonable? Is he, like so many others, just humming the tune of fusion-or-whatever-something-will-come-along-so-nevermind…Gail is right, of course, in pointing out that the historical importance of cheap abundant energy is poorly understood. So we´re kind of back to square one. Mr.Krugman often answers his critics in matters fiscal and monetary in the following vein: Have you thought long and hard enough about this? Or are you just adopting a just-so story that suits your fancy…? – Well, Paul, are you? ;)

          • p01 says:

            Does he have the guts to link population to food production, or is he babbling about how humans are different? I have yet to hear a High Pr(ofessor)iest saying articulating the Heresy.

    • “Its a pity you aren’t a systems engineer, because the global economy maps well into such analysis, even down to debt being essentially the feedback component. That is debt represents the difference between where we are (output) and where we are trying to get to.”-Leo

      Our next podcast is with a Systems Engineer, George Mobus of Question Everything. It’s a Doozy, ran 3 hours in raw recording time. Following George is David Korowicz, the Physicist who wrote the Financial Contagion and Tipping Point papers.

      You should find plenty in both podcasts to chew on from a Systems standpoint.


    • Podcast with George Mobus now UP on the NEW Diner Blog!

  21. davekimble2 says:

    I don’t think you have focused enough on the discontinuities, in particular the insolvency of major banks – one minute they are sound, and the next they are bust. Credit Default Swaps aim to protect against that, but can the counter-party to those swaps meet their obligations? After Lehmann failed, AIG rushed to the FDIC/Fed and said if they weren’t immediately bailed out, they were bust too, and the contagion was obvious. Money-printing went into overdrive, and it hasn’t stopped, or fixed anything.

    Commentators like Ron Paul and ZeroHedge say the Fed should be audited, but can you imagine what would happen if that was really to be given the go ahead? They say ‘let the free market sort it out’, but who is going to meet all those government obligations you listed, when the money isn’t being printed to pay for it?

    “At some point, marginalized people will riot and overthrow governments.” Yes indeed, but can US debts be that easily written off? How would China and Japan react to the news that their $5 trillion of USTs are worthless?

    I see overthrown governments in US, Canada, UK, Eurozone, Switzerland, China, Japan and Australia at the very least, if WW3 doesn’t intervene. You know – the discontinuities.

    • Christopher Johnson says:

      Mr. Kimbles:
      Basil 3 may have some impact, depending on implementation timing. Wall Street banksters beat back the Dodd-Franck Act (which remains a travesty in many ways), but the Sharrod-Vitter bill is picking up some support. It would require a flat 15% deposit set aside for everything, including derivatives. Of course the Wall Street banksters are fighting it, but the smaller banks are strongly supporting.
      Are the 1% entitled to threaten everyone else’s existence?

    • Scott says:

      I see your point about overthrown governments, I guess the question is who will overthrow us.

      There are a lot of strong people here that have guns too and they would not stand still for that.

      Not without a huge war first…

    • Scott says:

      Dave, I guess one could argue that the USA has already been overthrown by corporations and business interests, special interest groups and also bankers like the Federal Reserve.

      That was the sneaky way to overthrow us.

    • Perhaps the discontinuities can be the subject for another post. The more specific a post gets, the scarier it gets. At some point, readers have a hard time even thinking about it. For what it is worth, way back in 2007, I wrote a post on The Oil Drum where I talk about the squeeze of high prices (maybe didn’t get that part right–maybe should be squeeze of few jobs) and some possible impacts. The Economic Impact of Peak Oil: What’s Ahead?

      • Adam says:

        “The more specific a post gets, the scarier it gets.”

        I personally know 17 people who have committed suicide after reading doom blogs (not that this is one, of course), so probably the government will ban them soon. In the meantime my ambition is to get into the Guinness Book of Records (do you have this book in the US?) for causing the world’s highest doom-blog-reader suicide rate. So please give generously to help me set up a doom-blog-reader-suicidee pyramid scheme. If we can reach peak doom-blog-reader suicide rate before the Emergency, it will help to mitigate world population overshoot.

        The most chilling, poignant and artistic representation of our predicament that I have seen to date appears at the following point in the film “Oil, Smoke and Mirrors”:

        Nobody in the BAU world has convincingly explained to me how we escape that terrible parabola.

        • One of the people with more experience with me, before I wrote the 2007 post, explained to me that I should frame what I wrote as a scenario that might happen. Otherwise, it would simply be too much for people to even read or discuss.

          I think all of this gets out of people’s comfort zone. It becomes necessary to explain things in a way that allows people to keep some distance from it, or we start causing suicides and other unplanned outcomes.

        • p01 says:

          I personally know people who have committed suicide because of living like shit, then given some hope of a better life, and then live like shit again, but also in crushing debt slavery this time around (there’s no personal bankruptcy law, if you can believe that). I come from a country were peak oil and crushing depression/repression have already happened (starting circa 1976 and culminating in 1989 with the Romanian Revolution) and after a short euphoric bubble caused by giving people credit to play with, things are irrevocably going down the drain relentlessly again.
          I can assure you it’s a legitimate reason.
          Suicide for reading “doomer” blogs while living better than any kings of old is kinda stupid.

      • Adam says:

        “The more specific a post gets, the scarier it gets.”

        The most chilling, poignant and artistic representation of our predicament that I have seen to date appears at the following point in the film “Oil, Smoke and Mirrors”:

        3 minutes and 5 seconds into the YouTube film – I jumped to the spot in my previous post, but it didn’t work (though it always does in posts on forums, etc.).

        • Adam says:

          reverseengineerre said:

          > We discuss this stuff every day on the Diner. Collapse as Entertainment. :)
          Thanks for the link. Best find out what I’m in for. :-(

          > Just remember, we won’t run out of food as long as there are still other people around.
          Yes, I’ve read about what the peasants of China and Ukraine had to resort to. Here’s hoping I’ll never be on the menu…and that there’ll still be room for a sense of humour in the years to come.

    • If a currency is worth next to nothing, that usually works out to hyperinflation. So gold could cost $10,000 oz. The question then becomes, “How much does a loaf of bread cost.” If the loaf of bread costs $20,000, then it takes 2 ounces of gold to buy a loaf of bread, and gold is still worth a lot less than it is today. When everything is in a race toward the bottom, you could get some funny relationships.

      • xabier says:


        There are many ironies in ‘the search for safety’ using gold and silver, etc.

        I always think of those hoards of gold and silver we find now and then here in Europe which were buried by their rich owners (one presumes, maybe by robbers?) during the fall of Rome, in the hope of reclaiming them one day….

        In the Warsaw Ghetto, during WW2, dealers accumulated treasures from their fellow Jews in return for desperately needed food, etc: they thought they would be rich when things got back to normal.

        Both groups were rather mistaken in their assumptions, to say the least.

        Rather luckier were the rich Jews who fled Nazi-occupied France to Spain, where at least Franco wouldn’t murder them. Their gold and jewels got them guides over the mountains, but the guides made sure to take every last thing they had on them, even if they rarely murdered them (it would have been bad for business if word got out).

        • Scott says:

          Hi Xabier and others,

          There is really not a lot of choices if you do not trust the fiat money system. Gold and silver are cheap to me these days and I would choose to have some coins to put away for later. Silver and gold have a history of rising from the fiat money disasters, sort of rising out of the ashes of financial collapse. My best bet is on gold and silver with small denomination coins and food storage and of course our back yard gardens. What else can we do? I am not a big hunter or fisherman, but I have supplies for that too. There are not a lot of good answers to this problem.

          • I am in favor of at least some diversification. Some coins maybe are helpful. There certainly will be a downhill slope, and they may be helpful then. If nothing works terribly well, there is nothing to be lost by trying some coins.

  22. Will the US $ remain a successful fiat currency?

    • timl2k11 says:

      I can tell you with 100% certainty, no.

    • The short answer is “No”.

      If things really go to pieces, it is hard for a government to continue in power. There are various ways this could happen–a new group could come in and promise great things, with a new constitution. Or the Unites States could break up, more in the way the Former Soviet Union broke up. Or the richer states could decide to secede. If there is a new government, there could very well be a totally different currency.

      I think inter-changeablity of currencies may go downhill over time. Countries may trade with trusted partners, if they trade with anyone.

      So there are multiple ways the downfall could come.

      • I’m currently reading Dmitry Orlov’s book “The Five Stages of Collapse.” His book explains many of the issues and cites a precedent after each chapter.

        It’s very good because of his personal insight and investigation into the collapse of the USSR. It’s too big of a question to proclaim “This is how it will be” but I’m pretty sure he comes close to the mark. His book won’t be the last word though and as it unravels we will witness a history like none other. Thanks.

        • Jan Steinman says:

          I have not read the book yet, but I reviewed a presentation that contained the core concepts, and sent him some feedback.

          Based on that, I think this is an extremely useful book. Too often, we get caught up in either-or thinking, either “business as usual” (perhaps with some solar panels and electric cars thrown in) or “Mad Max”. Orlov paints a picture that is larger, more inclusive, and in many ways, more hopeful than the typical bipolar thinking. You can plan for the five stages. We all should be functioning as though Level 1 (financial collapse) has already occurred. Level 2 is (Credit Collapse) is something we should be making earnest preparation for, by forging tight bonds with suppliers and markets, so we don’t end up trading boxes of brassieres for boxes of produce.

          Level 3 (Governmental Collapse) is one in which I think Orlov glosses over a lot of details, and perhaps it should be split into several sub-levels. I think Orlov was overly influenced by the Soviet Union collapse here. In a North America dominated by Federalist governments, I think it will be much different here. We may see it devolve instead of collapse, into a Swiss-style confederation, with the Federal government becoming weaker and states becoming stronger. It seems that Federal programs and institutions are already devolving, with states forced into taking up the slack.

          The Soviet Union only went through three levels of collapse, and what Orlov writes beyond is speculation. Again, there may be more to consider than Social and Cultural collapse. For example, John Michael Greer seems quite fond of social societies as a general support mechanism that may well survive general collapse — but perhaps Greer’s vision is more hopeful and less deep than Orlovs. Will we progress past the point at which the Masons, Salvation Army, and other independent social societies can operate? I hope not. Because that leaves only Cultural collapse, which is the “Mad Max” scenarios that so many represent as the only alternative to Business As Usual.

          There is much hope in this approach, similar to the Kübler-Ross five stages of grief model, or Abraham’s 22 Steps from Fear to Love model. It is much easier to prepare for the next level of collapse than it is to prepare for Mad Max. This is why I persist in trying to set up a socially-based sustainable agricultural centre, arguing against those who claim that someone powerful will just take it away — Orlov Level 5 collapse. There is much to be done between here and Level 5!

          It is certain that these stages of collapse will not be ubiquitous nor contemporaneous. The Soviet Union has been through Level 3, and Greece, Spain, and perhaps the other PIIGS will soon be through Level 2. I chose to move to a place where I thought we’d have more time, even while some places around the world go all the way to Level 4 or 5.

          Again, I haven’t read the book, but at least read Orlov’s 2008 introduction of the concept. You will find it discomfiting, reassuring, and energizing. There is more to the future than just “Mad Max.”

        • I agree Dmitry has a lot of good insights. But this time will be different. It is not just the Former Soviet Union, and the problem is more than too low an oil price for an oil exporter.

      • Gail,
        Money is whatever we accept as payment for goods and services. Do you think the US currency and coins may still serve the purpose of being a medium of exchange even if our financial system were to collapse? I believe this may be possible because of how little physical money there is currently in circulation compared to the size of our economy. Most people no longer even carry cash or checkbooks, preferring to use debt or credit cards. Those instruments of exchange will be the first to disappear in the event of a collapse when banks no longer function. All the electronic wealth will disappear, but hard cash will still remain. This might also be a good reason to buy silver and gold coins.

        • I understand what you are saying(I think) about real cash and will it have value. I’m fairly certain(my opinion) the cash(paper money) will be worthless. Not just because it’s only paper(though that is reason enough) but also because as oil raises its price everything else will rise in price also. Example: bread is $50.00, fruit is $25.00, boots are $300.00 and a gallon of gas is $25.00. Having paper money may be a moot point.

          In regards to coinage I do think that will carry some value. Silver and Gold has always had value because the things that could be made from it. Even copper and nickel will be good again.The real materials can have and hold a real value.

          I have lately been buying small amounts of silver and gold for the future. Real Kennedy Silver dollars and real gold pieces. I buy it in as small a denomination as I can because if you own a brick of gold you can’t really make change on your transaction. If in the future someone finds out you have a brick of gold then that may put you in danger from the criminal of society. My object is to have a money resource backup that is useful and sensible(???) if the collapse occurs. I don’t really know if any of this is actually sensible or useful but that is part of what I am doing nonetheless. Thanks.

          • Scott says:

            I agree, small coins or bars of silver and gold along with some food and seeds and other needed goods are a good thing to have.

            Gold and silver have traded for many thousands of years and it will have value longer than most assets there is a deep cultural value through out the world to trade these metals.

        • My understanding is that in ancient times, and even in recent Argentina, the main issue was having a common denominator to convert goods to. Everything could be denominated in bushels of wheat, for example. Or everything could be denominated in US dollars, or in ounces of silver. A currency which had previously been used–US dollars–might be the easiest for this purpose. Then, when trading was done, each person could “run a tab,” and change be made in goods, even though the intermediate calculations were done in some form of units like bushels of wheat. From this point of view, silver coins might work, or US dollars might work. Gold coins would be too high denomination to be as helpful. But neither one of them address the need to be able to do long-distance transactions, especially if international trade drops off.

          As I have mentioned before, diversification is not a bad idea, because none of us knows the answer for sure. Also, things can be expected to change over time. But don’t expect that a big pile of silver or gold will necessarily save you.

          • Scott says:

            Hello Gail, you know my feelings about Gold and silver, the old silver dollars are best or the smaller silver and gold bullion. I do believe it will help us for a time in early and mid stages of collapse. These old silver dollars and gold have been money for many thousands of years.

            The old US money 1964 coins are 90% silver and are recognizable and easy to trade. Also the recently minted coins from the US Mint silver eagles will be money for a time I believe and trade-able for goods for a time. After that we are into our guns and food supplies and time could get really hard. Bullets and food. But I do believe gold and silver will play a part for a time if say the US dollar goes down in flames. Get some while it is still cheap.

  23. Jan Steinman says:

    Thank you for the interesting perspective. I have always been a bit troubled by the deflationists, because I could not understand their argument. If oil is getting scarce, and everything is based on oil, there should be inflation, no? Thanks for explaining how it might not work out that way.

    One thing is certain: our trophic needs will continue. I suppose people may start eating lower on the industrial food scale: buying bread instead of frozen pizza, then making bread instead of buying it. And certainly, a stroll through Mall*Wart convinces one that our average caloric level could decrease considerably — fat still has nine kilocalories per gram, whether you ingest it, or burn it from your own reserves.

    But unless population declines, food will still be in demand, no? So it seems to me that an “investment” in growing food is still a good thing to do. Worst case, you’re able to feed yourself while others starve. Best case, the demand is high, and you can earn enough (perhaps only through barter) to afford other essentials and perhaps even some modest luxuries.

    Doesn’t this mean that agricultural land will hold its value? Or am I missing something important here? I know people who lost their shirts in the ’70s when their speculation on farmland failed because farmland deflated like all other real estate, but I have never understood why good productive farmland would deflate unless population was falling.

    • Don Stewart says:

      Pardon me for butting in–I don’t mean to derail anything Gail might say to you in response.

      Lets imagine a very simple economy. The economy makes 100 tons of grain and 900 tons of widgets. The 100 tons of grain are divided between small, organic farmers who grow 25 of the tons of grain and gigantic industrial farmers who grow 75 of the tons of grain.

      The economy has a money supply of 10,000 dollar bills plus 90,000 dollars of credit. Oversimplifying, lets assume that the total money supply determines the price level, so everything is 100 dollars a ton. But the people who have lent money to the creditors ASSUME that they can reconvert that debt into dollar bills and hence into real good. IF they wake up and realize that the economy is on a down escalator, then the 90,000 dollars of credit simply vanishes into thin air. The remaining money supply is only 10,000 dollars, and so the price level for the commodities will fall to 10 dollars a ton.

      The small organic farmers were, pre-crash, getting 25 times 100 or 2500 dollars from the economy. Naively, after the crash, they will get only 25 times 10 or 250 dollars from the economy. If the government enforces debts, and the small farmers had taken on debt, they are in trouble like all other debtors.

      Now let’s add some dynamics to the assumptions. We might reasonably guess that the industrial farmers will simply fail as their dependence on failing supply chains takes its toll. So food production will fall (at least initially) to 25 tons. But people need to eat and will sacrifice most anything for food (or commit crimes, sell their firstborns…you name it). So we might suppose that the small farmers will get half of the remaining money supply (which is not too unrealistic if you look at history)…5000 dollars. So, in terms of money income, the small farmers might double their income.

      Of course, you also have to think that vacations in the South Pacific are going to be as scarce as hen’s teeth in that brave new world, and so what the small farmers are able to buy isn’t what it would buy today. They may become medieval like lords who have power but not the types of luxuries that people on food stamps have today.

      Don Stewart

    • xabier says:


      Worst case is that your agricultural land does indeed retain value, and therefore it attracts predators and is taken from you: land reform being one possibility (see the history of Europe in crisis) or simple indirect theft by a neighbour using litigation to drive you under and buy your land in the fire sale. Or bankruptcy due to high land taxes or fines.

      To hold a valuable asset in times of crisis is always fraught with peril.

      If the world becomes very localised, that leads to networks of local corruption, which can be very dangerous: alliances of property developers, big land owners, local officials and crooks. Well, that’s what I’ve seen in Spain. Best option: get in with the powerful people.

      Anglo-Saxon rule of law is a historical anomaly: this is hard to appreciate for those boprn in countries which have never experienced profound political upheaval like the US and UK.

      Still, any property can be stolen or lost, and that shouldn’t stop us putting our effort into things we believe in!

    • Doug W. says:

      For individuals and families it doesn’t have to be prime agricultural land. A more marginal piece of land that is well drained could be very useful

      • xabier says:


        Exactly: own what is useful to you, but less attractive to the greedy and dominating.

    • I think the major issue with farmland is whether it will be taken over, perhaps by a new government, and run in a way that is viewed to be better–give everyone a small piece, or use very large plots, overseen by someone who is supposedly knowledgable and has access to tools, and can optimize water use and rotation of livestock over various parts of the land.

      Another issue is that land prices have been run up the way everything else has been run up–by artificially low interest rates, and by the view that commodities are the only things that can go up. You would think that land that is good for crops and is in a good location would hold up better in value than other things, though.

      Without fossil fuels, it will take quite a bit more land to feed a person than it does today. (At least, that is the way it worked in the past, without metal fences and pesticides and herbicides). From that point of view, the productivity of land will be a lot lower. Logically, its price should relate to it productivity.

      • xabier says:


        Prime agricultural land in Britain has risen to unheard of prices since 2008. A lot of this is due to people who’ve made their money in finance looking for a safe haven. There are tax advantages, also for forestry land, too.

        It is not really related to the actual productivity of the land, which has not increased proportionately. It is, therefore, another bubble, although not quite built so much on sand as the prime property market in London, which is now utterly insane.

        Recently yields on forestry land have declined somewhat, but prices per acre have risen, so many of these financier types are cashing in and selling.

      • Gail,
        I don’t think the conclusion that “it will take more land to feed a person than it does today is true.” There is plenty of research showing that organic farming is as or more productive than industrial agriculture. The 18th C. French market gardeners and the Asian farmers in past centuries are both examples of highly productive organic farmers.

        Also, our modern agriculture isn’t actually feeding us very well. The U.S. agricultural industry currently uses 175 million acres for planting corn and soybeans. Although corn for ethanol is growing rapidly (and is expected to use about 40% of the crop in 2013), the main products made out of corn and soybeans are animal feed, high-fructose corn syrup, and soybean oil. Confined animal feeding requires imported animal feed whereas pasture raised beef, dairy, and swine utilize grass and hay. High-fructose corn sugar and soybean oil are mainly used in the food processing and fast food industries. We can live without both.

        We assume that modern agricultural is providing the food we need but actually most of agriculture is feeding meat and dairy animals, and the food processing industry. So if you are vegetarian and avoid highly processed food you don’t need this system.

        What happens if this system collapses? The number of farmers has declined to about 1% of our population, and most of the farmland is farmed by the largest farmers or corporate farmers who use an average of 10,000 acres. Interestingly, much of this farm land is cash rented not owned by the farmer farming it. Because GMO seeds, fertilizer, and chemicals are so expensive for so many acres, it also requires very large loans to put in the crops. I know of several farmers in my area that own less than 1,000 acres, rent more than 5,000 acres, and need a loan of $2 to $4 million to plant a crop each year. Without crop insurance (mainly provided by the government) they would not likely get the money to plant.

        In the event our economy goes into an even deeper recession, banks fail, credit fails, government fails (and crop insurance), there will be several hundred million acres of land (mostly in the Midwestern U.S.) sitting idle growing weeds, scrub brush, and fast growing tree species. It is doubtful that any governing group will have the ability to police all this land to remove squatters. Anyone with the tools and knowledge to grow food and live off this land can probably survive and produce food they can market in town. I imagine this is how people will get food and be the beginning of a local economy.

        • Jan Steinman says:

          “The number of farmers has declined to about 1% of our population…”

          Actually, you’re nearly an order of magnitude off: I believe there are nearly 700 people in the cities for each person providing food from the land.

          The historical, pre-fossil-sunlight level was fifteen people on the land to support ONE in the city.

          A reversion to the mean is inevitable.

          • Jan,
            I agreed that the number of farmers is less than 1%. The statistics I found on various websites were:
            US population (2013) 316,000,000; (2010) 308,745,538
            Farmers (2010) 1,202,500
            Legal immigrant farm workers (2010) 757,900
            Illegal immigrant farm workers ? (difficult to estimate but I will assume equal to legal for my calculations.)
            If I add these numbers up and divide by 2010 population I get 0.88% so yes, <1% but not an order of magnitude.

            Still, it is obvious that without fossil fuels, fertilizer, and agricultural chemicals it will require a much larger population of farm workers to supply us with the food we need.

          • xabier says:


            I was prompted to take a look at an old Gazeteer and see what it had to say about our province in Spain in about 1820, Navarre.

            It was very rural, with some basic artisan industry and forestry (and smuggling!) in the Pyrenees.

            Of a population of just over 200,000, about 35,000 lived in the towns, and 10,000 were of ‘noble’ status: this was a legal category and many didn’t have that much money, but were the land-owning class, more or less (nobles enjoyed freedom from military service and certain taxes until the 1840’s.) Lots of monks and nuns, too (good way to get rid of excess children.)

            Now the villages are almost dead, the farmers all about 60 yrs old, small farms are being abandoned, and everyone is in town (the main town is I think over 100,00 )or wants to be there, with at best a small plot of land and inherited rural house to spend the weekends in.

            There’s no interest in going back to the land, although something like the English allotment system is being promoted. The rural life is basically seen as cruel and hard, as indeed for the majority it was compared to city easy living.

        • I think the issue at hand, as to why crops didn’t feed as many had as much to do with keeping predators away as anything else. We assume that we can continue to do this. Organic farming still keeps predators way, and uses organic sprays (which will be hard to keep up) instead of other sprays on fruits and other crops. It also often uses watering techniques, and may plow the land with oil based equipment. All of these things are very important in keeping crop yields up. As a practical matter, we know that it took a lot more land, years ago. It is easy now, when there are “easy” solutions to keep dear out, and rabbits away, and to provide needed moisture to keep yields up.

          A big problem, too is using the food before it spoils, when there is not refrigeration and good transportation. This is still a problem in the poor part of the world. There are surpluses in parts of the year, but then not enough other times.

          • Jan Steinman says:

            I agree that “organic” does not mean “sustainable.” But there are things beyond organic — notably, Permaculture — that have better practices. We are transitioning away from sprays to drips, then to gravity-fed systems, and we use trap crops, natural oils and soaps, and other techniques to control pests.

            As for “using food before it spoils,” there are time-honoured traditional techniques for food preservation that don’t involve continuous energy sources, and actually, the third-world is way ahead on many of these.

            I just did a cheese making workshop. Cheese making is perhaps the oldest food preservation technique, predating agriculture to an ignored period of pastoralism that came between hunter-gatherer and agriculture.

            One of my students runs a restaurant in India. She said there is no refrigeration, and even hot water is not commonly available! We made feta cheese, which she plans to store for months at room temperature in large earthen crocks. It would appear India may have a better environment for post fossil sunlight survival than we do, where any new dwelling is required to have hot water service, and any food establishment is required to have refrigerated storage.

            Each of us must constantly work on the question: “What have I done to prepare for a low-energy future?” And figuring out sustainable food production and storage should be at the top of anyone’s list — or being wealthy enough to have serfs figure it out for you.

          • I agree with Jan, “organic” does not mean “sustainable” when one is looking at the current large-scale commercial organic growers. Even market gardeners aren’t always sustainable but most in our area are “organic” even if they are certified organic.
            I was mainly thinking of my own gardening practices. I use compost, mulches, and crop rotation to control pests and provide fertility. I have rain barrels for my green house, but still water from a hose in the main garden. With solar panels providing electricity and a pump that draws water from a well, my main concern is groundwater levels (and parts to repair system if needed). We have planted rain gardens around our property to intercept most of the rain that falls on our property ensuring infiltration and recharge. There are no farmers irrigating crops within 15 to 20 miles of our land so draw down on the groundwater is only due to families with wells.
            I also practice season extension and use low tunnels, cold frames, and a greenhouse. This system also protects crops from pests. Ever since we got farm dogs, varmints such as deer and rabbits are no longer a problem.
            If the U.S. economy continues to recede or perhaps collapse, the job market will decrease. Most families will have adults without jobs and working to grow and preserve food will provide much work and food for families.

  24. Very Good. I have been sharing with others that less oil almost automatically means more debt. Our capitalization foundation since 1859 has been the discovery of oil. Certainly other things pushed us along but if observed carefully the timeline of discovery and production shows that oil saved us. If we can’t pay with that major resource then we substitute debt(our future). Thanks.

    • Debt certainly has been ramping up. One of the reasons for the increase in debt is the higher price of oil in recent years.

      • Bill S. says:

        A lot of very clever people got quite rich by creating often useless debt. Matt Taibbi did an article on how Romney did it at Bain Capital in one of his Rolling Stone articles, ‘Greed and debt: the true story of Mitt Romney and Bain Capital’. I can remember, as I was reading it, how ironic it would be if these capitalists set the stage for the collapse of capitalism by creating too much unproductive debt in order to get rich. What was good for them, might not turn out to be so good for society as a whole.
        The brilliant TV documentary by David Faber of CNBC, ‘House of Cards’ demonstrated how a whole series of people got very rich creating mortgages, and selling them to unsuspecting investors before they could become bad debts. You can watch ‘House of Cards’ on hulu by searching the ‘CNBC Originals’ list. It is a real eye opener!
        Check out the Bill Gross graph of total debt in his Investment Outlook article, ‘Credit Supernova!’ at the PIMCO website. He knows what is coming too.
        Finally, some executive order allows the Federal Government to take over any industry during a national emergency. I think it was first written in WW II. Obama just renewed it a year or two ago.

        • Sometimes there is debt to buy debt, which is in turn used to buy more debt. At some point, there is too little interest to pay for everything, and the whole system collapses. Thanks for the links!

  25. Marianne says:

    Hi, This spring I read about the internation camps that has been build by the US government and the enormous amount of bullets that has been bought. All for internal use if things go out of hand. Or should I say, when things go out of hand. So I think that the US government already antisipates on the down escalator effect.

    • timl2k11 says:

      I have heard about the enormous amount of bullets, but not the internation [sic] camps. But I think you are probably right. There are people in high place who see bad things coming.

    • I think you are right. I think that there has even been an article mentioning the connection of the bullets and interment camps to anticipated problems.

      • timl2k11 says:

        What evidence is there of domestic internment camps, or are these foreign?

      • Lets not get too carried away-
        although there are planning documents to address all sorts of potential problems-
        and recently it has been exposed that British undercover police were infiltrating green activist groups even in the benign world of AGW campaigning.

        Disaster agencies need to be prepared given the extremes that somewhere like the US suffers- Katrina response was a disaster to match the natural one. However governments have a habit of being untrustworthy but we do have a choice-
        We can go into a paranoid survival mode armed with guns and be a real danger to ourselves and others [just imagine being in the dark, cold after a flood as well as being terrified with gun touting terrified people around rather than helpful emergency crews]

        Alternatively we seek good information, we organise into political active and socially aware groups and we stand united.

        • The Snopes article seems to indicate that the rumors that of large purchases of munitions by the US government is probably not too much to worry about.

          The UK Ministry of Defense looks at the balance between oil / cost and assumes that somehow people will be able to continue to pay for it, even at astronomical cost. I would contend that this will not happen. I see the balance being settled at much lower production, rather than higher cost. The UK MOD view is basically a peak oil view.

      • Gail,
        Can you provide a reference to that article mentioning bullets and interment camps? A friend of ours is a postal carrier and last fall he told us about all the deliveries of bullets to various Federal offices such as the Soc. Sec. administration. His fellow postal carriers were all speculating on why the Federal Government was buying up so much ammunition. But I haven’t found any articles discussing this. Very concerning to say the least!

          • Scott says:

            Gail, I am so glad you are getting this message out about the planned US internment camps being built. The ammo shortage was apparent everywhere and still is underway. Folks take notice that our government sees something they are not telling you and they are far too secretive these days to trust and beware.

            I feel sad I did not register to vote the last few years as I kind of gave up on both parties. My gosh they are building these secret camps and planning against us.

            I keep saying this but I hope I am right that we have a bit more time as long as things stay sort of stable as they are now in our country the USA. But we are seeing things fall apart elsewhere like in Egypt and Syria and elsewhere like we looked at Spain the other day. The foundations are cracking around the edges and meanwhile the broke US government pledged Billions to support Egypt just last week trying to cull the violence and stabilize the country.

            Why has our country become the world police and made us broke in the process? And now we have the UN and sorts of funded operation going on many did not vote for. It is slipping away slowly depending on where you live things may be better for a time.

            I do still hold out hope that our generation may be spared the worst of this (depending on how old you are).

            • I am not really trying to get any message out about planned US interment camps. This is not really my subject.

              I read the same things everyone else reads, and am just pointing out some articles. The articles seem to suggest the issue is not as major as some people suggests. Building anything is expensive. I am not sure the government is up to taking on a bunch of projects that require a lot of building. Looking at who is sending e-mail /or calling someone on the phone is a lower-cost type of activity, one that the government can more likely do.

            • Scott says:

              Yes Gail, those camp plans would entail much expensive operations which the financial situation we are looking at may accommodate. But it is good that people are looking at their governments and what they are up to. I am glad we are open enough on this site to look at all aspects of what is happening.

              I think they (governments especially USA) are stock piling goods now ahead of a dollar collapse or world financial crisis or war? You know this is a sign post that says they are worried about something, but they are not saying anything publicly.

              But perhaps – they know that the dollar may not buy what it did before and are now stock piling goods so they can do what they can later? They sure seem to have big plans and thinking of them selves as very big. I would venture to say “too big for their shoes”!

          • Gail,
            Thanks for the information. I wasn’t sure if your first line was missing a word. Did you mean that you “don’t” think there is a whole lot to worry about or the opposite?

            Normally I wouldn’t have been overly concerned, but did you watch any of the videos during the Occupy Wall Street marches? I was shocked by the over-reaction on the part of the NY police officers in several instances. If this is any indication of future police or military responses to peaceful assembly and freedom of speech, I’m worried about the loss of our civil liberties and worse.

            I’ve copied the following from the second website link you provided:

            “The manual states, “These operations may be performed as domestic civil support operations,” and adds that “The authority to approve resettlement such operations within U.S. territories,” would require a “special exception” to The Posse Comitatus Act, which can be obtained via “the President invoking his executive authority.” The document also makes reference to identifying detainees using their “social security number.”

            I can recall what shocked me the most watching the Occupy Wall Street protests….How can police officers act like that towards peaceful political protest? Well obviously they can and if need be they can call on the military to help them control unrest and to “rehabilitate” the dissidents. This is something I would have expected from the Soviet Union government, but not the U.S. government. It is quite possible that our government will react violently rather than admit defeat and allow a collapse. We are naive and unprepared for the violence our own government may exert against it’s own citizens in the event that a “discontinuity” is occurring. Perhaps if the Soviet Union had the largest military in the world and an oligarchy in charge…things would have been different there too.

            • Protest movements and what response US police make to them are not particularly on my radar. I am looking at other issues. So I am not a good one to ask about these issues. I don’t watch television, so I tend to miss all of the drama that comes through that avenue.

          • Gail,
            I don’t watch T.V either, haven’t had cable or any ways of watching it for more than 17 years. Best thing I ever did for improving my mental health.
            But when an event is happening, I look on the internet for information. That is how I happened to be watching YouTube videos of what what going on in NY and around the world as the Occupy Movement was spreading. It caught my attention particularly because the NY Times had so little coverage. I thought that was curious, since the NY Times is reputed to be so liberal.

  26. Brian Bundy says:

    Hi Gail,

    Great entry as always! As I read your site and others I always wonder if there is a course of action that one could suggest if they were advising institutional players (assuming that they had the best interests of the world in mind). It must be a hard day when you win an election or get a promotion only to learn that the ship you took over is in a narrow channel with rocks on both shores and no room to turn around. I’m not defending the crooks, but there must be an honest one somewhere in the den of thieves. Knowing that there are no right answers and all roads lead to collapse is it more responsible to “extend and pretend” or to tell the people what no one wants to hear, knowing they will likely lynch the messenger and it will only hasten collapse? Even if you wanted to speak up in a position like that, would the rest of the cast and crew let you? Seems to me like media is pretty well towing the company line these days. If en mass we all started doing what is wise – eliminating obligations to creditors and governments and learning to provide for your own well fare independent of the global industrial complex – wouldn’t that result in an earlier collapse? Through that lens even the crooks could pitch a defense for their role in extending this thing to it’s last breath.

    I’m afraid I may have stumbled off topic, but I look forward to your input. I enjoy that you participate in the comments section more than some mediators.



    • You are right. The lack of good solutions, and the possibility that good individual solutions will make the situation for the group as a whole worse, makes a person wonder whether even discussing this subject is even worthwhile. This is one (of several) reasons why The Oil Drum has not wanted to touch the issue.

      One thing that comes out of this analysis is that each of us should make the best use of the time we have now, before collapse, that we can. Appreciate each day. Don’t worry about spending money if you have savings. A penny saved in a bank is a penny ultimately lost (unfortunately). This solution actually works in the direction of delaying collapse, as well.

      There is at least some chance that knowing what we have gotten ourselves into will give us some insights as to what might mitigate the problem. For example, as collapse gets underway, (to a greater extent than it already is), we will need to learn ways of coping. An increasing proportion of people will not have jobs, even those with good educations. What does one do to cope with this situation? Most people will not be well enough off to own land. This is ultimately the problem we need to mitigate–how do we keep this problem from overwhelming the system? Perhaps insightful people can help fashion a new system, at least for some small areas. But this would probably require land redistribution, and a plan of lower population. This will be resisted by those who currently own land, and by families who want several children.

      • John says:

        “There is at least some chance that knowing what we have gotten ourselves into will give us some insights as to what might mitigate the problem….”

        I wouldn’t hold your breath. Unfortunately, it seems each generation must learn it each time anew. Everyone will indeed learn new ways of coping, but thru sweat and hitting their own heads, Not learning from our grandparent’s stories of them hitting their heads….

        And this;
        “This is ultimately the problem we need to mitigate–how do we keep this problem from overwhelming the system?”

        We WON’T learn, It will only get solved when the system IS finally overwhelmed.

        Why? Because “We will keep doing what we are doing, until we can’t, then we won’t”

        If you think it can be fixed “If enough people get the message”…. Well, you will be disappointed.

        Tell you what, If you can walk around Your Own Neighborhood, Your Own Cul-De-Sac and convince the majority of your neighbors, we stand a chance. If you can’t, then in doing that experment you will learn what I meant.

        • Brian Bundy says:

          John, I have to agree. I don’t think we will find (much less seek) solutions until long after the conclusion of the story is undeniable. That said, I also worry about our attempts to keep the ship afloat are going to make things much worse (war, famine, disease and other unpleasant events). In my reading on past collapses, it seems there are very few times when societies have gone quietly into the night. People tend to hold firmly to what they’ve been told is solid ground even after they learn that it’s really a sinking raft. Otherwise they might have to learn to swim and change is scary.

          My greatest hope is that I am able to maintain freedom of choice and that I am not funneled into some misguided government attempt(s) at a rescue. Such actions could take many forms, a war draft, work camps, refugee camps, land redistribution, resettlement campaigns etc. I prefer to make my own dumb choices rather than have someone else make dumb choices for me. But that doesn’t mean I will fight those initiatives if they come. I suspect a better survival technique is to remain fluid and cooperative and to stay always aware of your circumstances and how they fit into the larger world.

          • John says:

            Yes. I am a firm believer of getting myself square,then my family, then close friends, etc

            But above all the skill to have is adaptability. As Elastic Girl said to Mr. Incredible, “You gotta learn to be more Flexible”.

            Or as Bruce Lee said. “Be Water My Friend”

            Because, “This sucker is going down”

          • xabier says:


            Best thing perhaps is to study the fates of individuals in the great revolutions in China and Russia in the 20thc. It’s not terribly encouraging.

    • timl2k11 says:

      Hi Brian, I know you asked this question of Gail, but I think there a lot of honest politicians in Washington who simply do not know what to do with the information they have. A recent story on “This American Life” highlighted that many republicans accept the theory of AGW, but don’t dare to “come out of the closet” on it, because they would be ostracized not only by their political party but probably also by their constituents (well a majority of them) and even their own community and possibly even their family friends and whatever political connections they have in Washington. I think there are plenty of people in Washington who now the truth, possibly even better then Gail does (simply because they have access to data Gail does not) whose hands are tied because they see no benefit in telling people the truth.
      As an aside, take the term “climate change”. I hate it, because the problem is not “climate change” which is always happening, but “Man-made (anthropogenic) Global Warming”. The problem with the phrase AGW is it implicates “man”. It implicates society, and society does not want to be implicated. If you say the problem is “AGW” you are implicitly accusing your audience and they will be offended. That is why now all we here of is “climate change”, as if man was not implicated.

      • Brian says:

        Let’s just call a spade a spade: We’re screwed, we did it to ourselves, we don’t want to accept responsibility (or even admit that it’s happening in most cases), there is little to nothing we can do about it and none of us know exactly when the show is going to start…..Ah, it’s refreshing to get it all out so succinctly. That said, it’s a beautiful 79 degree day here in Seattle and I have a long weekend planned with my beautiful wife to celebrate our 1st anniversary. I find that the shorter my time horizon, the more manageable and happy life seems…..for now.

        Happy 4th of July week everyone.

        • Jan Steinman says:

          “I find that the shorter my time horizon, the more manageable and happy life seems…..for now.”

          It takes a combination, no?

          I feel manageable and happy when I do immediate things that take my attention, but these are generally things that I’ve planned for the long term: milk the goats, water the greenhouse, weed the garden, etc.

          But if you meant, “Damn it all, I’m flying to Vegas for the weekend to enjoy a short time horizon,” I think all you’ll end up with is a psychological (if not physiological) hang-over.

          So do you agree, Brian, and if so, what long-term things are you doing?

          • Brian says:

            Never liked Vegas. :)

            Financially my long-term planning is limited by student loan debt (can’t wait for that to be wiped out somehow). We don’t own a home and we’re tied to the city for income so most of my preparation has been knowledge based. I have built a library of information that will help me to educate people on our situation as soon as they care enough to ask about it. I have also learned to cook, grow food (small patio garden, but it’s a start), store food, make basic necessities (clothes, soap, basic medicine, fire, shelter, tools etc). I have family with some unused land so we have focused on being fit enough to develop it without tractors should the time come (if we moved there now we couldn’t service my student debt). We have a few acres worth of seeds and a deep pantry to keep us fed in case of supply outages along the way. Above all as discussed earlier in the string I’m counting on adaptability to get me through, but who knows. Any of us could get hit by a bus tonight and all our preparation would be for naught. Fortunately my wife and I enjoy all the hobbies listed above and far prefer spending a weekend hiking and identifying wild edibles to a weekend in Vegas.

            Interested to hear from more people here how they are preparing for the long term while staying sane in the short term. Thanks for asking the question Jan.

            • Jan Steinman says:

              “student loan debt (can’t wait for that to be wiped out somehow).”

              Hmmm… deflation is not good to debt holders, most of whom are hoping for inflation.

              Gail, what hope are there for debt holders in your scenario? Do they just end up losing whatever secures their debt? Or might some “jubilee” or other relief be deemed necessary?

            • I am afraid banks, insurance companies, and pension plans will be hit very hard by debt defaults. All three of these have huge obligations to others that they can’t pay, when there are debt defaults. So what look like debt defaults by one part of they system quickly circle around to hit the rest of the system.

              There is supposedly government insurance for some of this, but it becomes harder and hard to hold the whole system together if the economics behind it doesn’t work. The basic issue is that without a growing supply of cheap energy, true economic growth needed to keep raising salaries doesn’t really take place. The government can try to paper this over, but at some point, it is going to become clear that there is not enough to go around.

            • Part of preparing for the future is connecting with people you want to connect with–others with like interests, family members. We try to plan our vacations and trips so we can reconnect with people. I also try to learn new perspectives on trips. And I try to learn things, from the many commenters on Our Finite World.

              We need to be doing things that are meaningful to us now. Hopefully they will be useful for the long term, but even if they are not, they have helped enrich life today.

        • Happy Fourth of July Week. I am in Uppsala, Sweden today. I had a nice time with several people at Uppsala University today. I will be traveling, so it will be a little difficult to keep up with comments. Be back in the states in a little over two weeks.

          • xabier says:


            Bon voyage. A Swedish perspective would be very interesting, as they are usually portrayed as a model high tax, advanced economy.

            To an outside obeserver, there seems to be problem with rising youth unemployment, and certain racial problems, but most articles in the press on Sweden are so superficial as to be worthless (The Economist published a terrible one a while back.)

            • I can’t imagine any country can pay very generous benefits to retired and unemployed people if the economy turns down, Sweden included. I can’t imagine anyone has thought this through very carefully, though. Scandinavian countries tend to try to work toward consensus, so perhaps they will be able to settle their problems more amicably than others.

              We have only been in Uppsala so far, and have seen a fair number of female beggars with pictures of their families next to a cup. Some were clearly immigrants. We have heard that the unemployment rate of young people is quite high (25%?). (The people we have been with from China have commented on the high unemployment rate of recent college graduates in China as well.)

              The number of bicycles here is amazing, in relationship to cars, several times as many bicycles as cars. Many of the bicycle riders are gray haired. Cars stop for pedestrians, so there are few lights.

              We will be going to Stockholm tomorrow, to do a little sightseeing.

            • A few more observations on Sweden. The tourist industry in Sweden doesn’t seem to be doing all that well. The sightseeing boat we were on today (a beautiful Saturday, in the beginning of July–which should be high season)–was perhaps 60% full. A nice open-air restaurant in a fancy area of town was only about 30% full, at 7:15pm (19:15) on Saturday evening.

              There continue to be quite a few beggars. I would guess 70% or 80% are women. One this afternoon was blonde and looked to be about 22. I gave a little money to a darker haired woman, who said she was from Romania.

              From what I saw of the boat tour, Stockholm is quite different from what it was when it was smaller, making it much harder to sustain if there is an economic decline, meaning fewer have jobs. When it was smaller, there were mills for flour, and various kinds of industry such as clothing and textiles within parts of the city that have now been converted to apartment homes (or condominiums). While it all looks nice, there is nothing made nearby, so much more must be brought from a distance.

              New homes in some areas are heated with biogas from a sewage dump. But the sewage dump will not have nearly as much sewage, if the economy goes down hill. We noticed that the big lock we went through with the boat had its “door” lifted clear up out of the water, apparently with electricity, rather than having gates that open up by the flow of the water. If electrical power is lost, it will be hard to make the lock work (from the Baltic sea to the fresh water lake at the edge of Stockholm). Of course Sweden has lots of trees. We heard that Germany would like Sweden to make more (cheap) electricity with its trees and hydroelectric capability, so that Germany can get use of Sweden’s lower cost electricity capability.

          • Karl says:

            Hi Gail,

            I live in Stockholm.

            When it comes to true beggars (the ones that just sit there and look miserable), you can view them as seasonal workers coming in for the tourist season from poorer countries.

            When it comes to electricity, it is mainly produced by nuclear and hydroelectric power plants, a few percent by wind and bio power. Normally it runs a surplus (10-20%) that is exported (traded on the margin at the Nord Pol spot market) to Finland, Denmark and Germany. So, the risk for the “big lock” not operating is minimal unless the Germans buy us out.

            An interesting real time view is provided by:
            which usually shows that Sweden, Norway and Estonia are net producers of electricity.

            Houses are extensively heated by “fjärrvärme”, heat transmitted by a network of insulated pipes with hot water buried in the ground, often heated by burning garbage and residue from the wood industry at some central heating plant.

            Producing electricity from wood to export to Germany seems very unlikely. More likely is that the production of the totally not needed “green” wind power expansion will be exported on the margin to e.g. Germany, thus raising local electricity prices even more via Nord Pol.

            Some oil fueled power plants exists, but are mainly for backup.

            When it comes to the town of Stockholm it was originally just the area of the old town, with factories and rural areas surrounding it. But as with most cities the town area has expanded and the factories has been pushed out to the perimeter. Alfred Nobel once had his lab in town, but had to move after some unfortunate accident (explosion).

            • Thanks for your comments. Germany has also been a net producer of electricity. I think that there may well be a temptation by Germany to want to rely on more imports itself (from Sweden, Norway, and Estonia perhaps) rather than fixing its own electricity problems. I understand Sweden’s electricity rates are far below those of Germany’s. This creates a temptation for Germany, if it can arrange such a scheme. This is one concern.

              Another is simply the big concentrations of people that fossil fuels have allowed us to have. Before fossil fuels, the vast majority of the population of lived near where food was grown, and worked in its production. Now we have hoards of people in the cities. All will need to be fed. Most will need jobs, even as job availability continues to decline. This is a concern. If things go down-hill, a lot of things could go wrong. We could see riots and government overthrows, in countries where this has not been a problem, especially if the Euro zone comes apart, or if governments cut back greatly in programs for citizens.

              The EU system for allowing people to go from one country to another to beg in nice weather is strange. With so many unemployed everywhere, and the situation getting worse, it seems like the begging problem can only get worse.

  27. Arthur Robey says:

    Over here in Australia the interest rates have been lowered, encouraging more borrowing which creates more liquidity in the economy, which makes it’s way into equities to the delight of moronic commentators. Woopie doo. Were all gonna be rich!

    • Lower interest rates encourages borrowing to buy equities and homes, but it really doesn’t do much about increasing the feasibility of expanding a business, or starting a new business (other than help keep tax rates lower than they need to be, to support services that the government can no longer afford). Of course, businesses (except for oil companies, and some others that can’t move) don’t pay nearly as much taxes as individuals do. They put as much of their earnings as possible in offshore tax havens.

  28. Scott says:

    Another very educational article Gail, It covered the points that we have been discussing. Looks like we have to fear the rising rates more than peak oil right now. I agree our finance system is shaky indeed. We chose to use the national credit card and now we are in debt.

    I guess the best we can hope is that strong willing people will go to work when needed, but it will be hard for them if and when they are facing a broken down supply line where needed parts are not being delivered.

    And even worse letters and bills of credit are frozen, because nothing moves then.

    • You are right – I think rising interest rates and a need to raise taxes are the big problems will we be running into in the near future. The government may also realize it can’t keep raising the debt level either, because of the high cost of servicing the debt. (Not to mention the problems in Europe, China, and Japan.)

      • Scott says:

        Thanks, I guess Gail, we really have to watch China and Asia (and of course the US and Europe) and the other developing countries right now…. and, see if the this slow down takes hold.

        China seems to be on center stage right now from my reading. That may give us a clue where things are headed watching these countries where there economies are heading as we head through 2013.

        They used to say if the USA caught a cold the whole world would get sick, Now I wonder if it is China and Asia in general catching a cold that could make the whole world economy sick?

        Best Regards,


        • If China and Asia slow down the world economy escalator significantly flattens. We are increasingly approaching the situation where the whole world is on a down escalator. Their flattening moves us significantly along in this direction.

          • John says:

            Gail, Great stuff. Deflation, Sounds like Nicole(aka Stoneleigh) over at OilDrumCanada, I’m sorry, Over at AutomaticEarth…. :-)

            Have you read much of Martin Armstrong? The DOWN escalator is where it is at. 2015.75 is a major date in the turning.

            From his site;

            Long time reader of TheOilDrum and this site here. You’re great and point on.

      • Scott says:

        Hello, I saw this report on Egypt today. The middle east is getting so unstable.

Comments are closed.