How can a government fix its debt problem?

We have all read about the standard “fixes” for a governmental debt problem–(1) inflate your way out of the problem, (2) cut programs and/or raise taxes, and (3) restructure debt, perhaps delaying repayment and giving bondholders a “haircut” on promised payouts.

A fourth one seems to circulate through peak oil circles, namely “debt jubilee”. It seems to me that there is really a fifth option as well, and that is the one that may actually get used more this time around, at least in some parts of the world. The fifth one is “do a disappearing act.” The government in question folds up, and maybe a new government is formed, or maybe not. If debt is really a problem, the new government would not take on the obligations of the previous government.

The country that exemplifies the “do a disappearing act” is the Former Soviet Union, but there are other examples as well. Both Czechoslovak Socialist Republic and the Socialist Republic of Yugoslavia broke up as well, about the same time. In the case of Yugoslavia, a war was involved, but in the other cases the breakup was relatively peaceful.

It takes energy and money to maintain a country that covers a large area. If energy is cheap, then it is easier to provide needed services–economic growth is higher, costs of transporting goods long distances are lower, and collecting taxes works better. As long as a country is growing economically (especially if there is job growth to go with the economic growth), then it is easy to collect rising amounts of tax dollars, because the tax code that is in place provides rising tax revenues simply because of income growth, without formally raising taxes.

When an economy shifts to no growth or actual economic decline, with falling GDP, then it is much more difficult to keep tax revenue from falling. There are theoretical ways of fixing the problem (all of the ways on the list above), but if there is a major imbalance, then solutions (2) and (3) above don’t work well at all, and a government needs to resort to some other approach.

Example of the Soviet Union Breakup

If we look at the example of the Former Soviet Union (FSU), we find that they were faced with falling prices with respect to their major export, oil, and because of this were having major financial problems, prior to their break-up:

Figure 1. Former Soviet Union oil production and oil price (2010$) based on BP Statistical Data

The peak in oil prices came in 1980.  The Soviet Union continued drilling. We don’t know what their cost of production was, but presumably, they could continue to make at least some profit at the lower prices in the early 1980s. Wikipedia tells us, “Although statistics of the Soviet economy are notoriously unreliable and its economic growth difficult to estimate precisely, by most accounts, the economy continued to expand until the mid 1980s.” In another Wikipedia article we read, “The dramatic drop of the price of oil in 1985 and 1986, and consequent lack of foreign exchange reserves in following years to purchase grain profoundly influenced actions of the Soviet leadership.”

In 1987, FSU production hit a peak of oil production, presumably reflecting the fact that there was less oil available that could be profitably pumped at the low prices. This would seem to tie in with the lack of foreign exchange reserves, mentioned above. Finally in 1991, four years after oil production fell, the FSU collapsed. It was only when prices started rising again in the 2000s that production began to rise.

Figure 2. Former Soviet Union Oil Production and Consumption, based on BP Statistical Data.

When we look at FSU oil consumption (Figure 2), we find that it did not fall until 1991–the year of the collapse. The actual collapse came in December. Prior to that, oil consumption had remained level, despite falling oil production since 1987 and despite falling revenue from oil production, starting even earlier.

After the collapse of the Soviet Union, both production and consumption fell further. In fact, production and consumption of natural gas and coal fell as well. Even today, consumption of oil is low. Natural gas consumption has risen somewhat, but the FSU uses much less fossil fuels than it did prior to its breakup.

Why a Government Needs to Keep Tax Revenues Growing

A government exists to provide services to its citizens. Some of these services are things that take place on an ongoing basis–road building and repair; operation of schools; police and armies; issuance of patents; operation of parks; and regulation of food and drugs, for example. Some of these are more long-term–for example, Social Security, Medicare, FDIC guarantee of bank accounts, and PBGC guarantee of pension payments.

Maintaining these programs depends on economic growth to a significant extent. Long-term programs especially depend on economic growth, to keep them properly funded. Pension plans are based on the premise that the stock market will keep growing, and that bonds will pay out according to plan. If this is not the case, the government gets left trying to make up the shortfall.

Even on a short-term basis, governments are hit doubly hit by the recessionary impact of high oil prices:

(1) Outgo is higher, because of stimulus costs, bailouts for organizations that need bail-outs, and higher benefit costs, directly or indirectly because of unemployment.

(2) Income is lower, because fewer people are employed and pay taxes. For local governments, there may also be the issue of falling home values making it harder to collect enough tax revenue.

Figure 3. Average quarterly oil price and US Federal External Debt

Governments find themselves quickly going into debt, when recession hits following an oil price spike. Figure 3 shows how quickly this happened for the United States, when oil prices spike in July 2008. It also shows that the increase in debt is continuing. Now we have a second oil price spike, and the possibility of another recession. If the government tries to provide stimulus as in the past, it faces the possibility of a widening gap between revenue and expenditures. If the government cuts benefits and lays off workers, it is likely to send the country further into recession. But sometimes there seems to be no other choice.

Considering Options to Get Out of a Debt Problem

Option 1. A country’s first choice for dealing with debt is to try to inflate its way out of debt. Ben Bernanke is known as “Helicopter Ben” for his speech in which he mentions Milton Freeman’s previous mention of using a helicopter drop of money to prevent deflation.

In order to allow citizens to repay their debts, it seems to me that what needs to be inflating is salaries. Also, enough people need to be working, so that most people are actually collecting the funds needed to repay debt. If salaries are inflating and enough people are working, then business revenues and government revenues will inflate as well, so that repaying debt plus interest won’t be too terrible a task. At this point, there is not even a hint that salaries are inflating, and that the unemployment problem has been solved.

Option 2. If a country has just a “little” debt problem, then option (2) above, raising taxes and/ or laying off workers/cutting programs might work. The downside is that it is likely to send the country further into recession, and will make many voters unhappy. A politician who wants to be re-elected may therefore find this approach objectionable. In most cases, it needs to be combined with cutting longer term programs, something else that voters are likely to find objectionable.

Option (3) above, restructuring debt, perhaps delaying repayment and giving bondholders a “haircut” on promised payouts, would be a shock to financial markets. Governments are accustomed to borrowing increasing amounts of money. Once restructuring of a debt of a major country starts taking place, that country is likely to have a hard time obtaining new debt, except at very high interest rates.

If a country defaults using this approach, the action is likely to be looked down upon by both governments of other countries and by voters. Unless the revenue/expenditure problem was really tiny prior to the default, the government will still faces a major need for austerity–cutting programs and raising taxes, in order to match revenues and expenses, and have enough to repay the debt on the more generous terms. Option (3) only works if the country is in a fairly good financial state prior to the default–that is, on an ongoing basis, can pay for its programs, and still have money left over to pay back debt. There are many OECD countries not doing this well.

Option 4. A debt “jubilee” of some sort, in which all debts are forgiven. I have a difficult time seeing any agreement to this kind of thing happening, because there will always be winners and losers, and the losers will be unhappy. There are assets underlying some of the debt, and the question will be, which of the several possible claimants should get the underlying asset. For example, if a person has paid for 25% of the value of his home, should he get to keep it, or should one of the various owners of the mortgage on the home get possession of the home? Some of these debts will be international. What is to prevent retaliation, in the form of a grab of property of some other property-owner, if there is a default in a foreign country?

There is also the problem that the debt jubilee doesn’t really help with all of the long-term programs that cannot really be funded with declining resources.

Figure 4. Two views of future growth

When programs such as Social Security, Medicare, and guarantees of banks, insurance companies, and pension funds were established, the view was that resource growth /economic growth would continue forever, as in Scenario 1 of Figure 4.  If the real situation is more like Scenario 2 of Figure 4, there is a need to rework the whole system–reduce promised benefits, and probably forget the bank and pension guarantees. It is hard to see that these ideas would “sell” well with voters.

Option 5 looks like the easy way out. Just give up, and let a new government come in, and start with new programs and a blank slate. Or a revolution or civil war might produce this same result.

There seems to be a chance that if Option 5 occurs, there will never be a replacement for some governments. No replacement central government came into existence in the case of the Soviet Union break up, or the breakups of Czechoslovak Socialist Republic and Socialist Republic of Yugoslavia.

There are many locations where such break ups would seem to be possible. The European Union is one entity that would seem to be at risk of break up, if things continue to go badly with respect to the debt of individual members. The United States seems solid, but when a person looks at its debt situation, there would seem to be at least a small chance that at some point in the future, it will cease to exist. Canada doesn’t have quite the debt problems of the United States, but it has huge disparities among regions that increase tensions, especially if the US should break up.

There would even seem to be the possibility of breakup at a lower level than country. If the United States should break up (with perhaps some states regrouping to form new unions), it seems as though a state with huge debt problems, such as California or Illinois, could also break up, leaving counties to regroup as they choose.

There are no doubt many countries around the world where this pattern could hold. Many countries were put together by combining people of various ethnic backgrounds. If things go badly financially, and transportation becomes more difficult because of fuel problems, these countries  too could be at risk of break up.

Obviously, if this pattern of break-up were to occur, there would be huge ramifications for international trade, for international businesses, and for lives of individual citizens. We can hope that I am wrong, and that our current systems for handling debt problems will somehow work provide solutions for most.

This entry was posted in Financial Implications and tagged , by Gail Tverberg. Bookmark the permalink.

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 financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.

71 thoughts on “How can a government fix its debt problem?

  1. It is now perfectly clear that nobody in Russia can be certain about anything at all. ..Today s session of the Duma s subcommittee for budgetary legislation revealed that the volume of percent payments on foreign debt had been miscalculated in the budget and would exceed the sum calculated for the budget.

  2. On the contrary, guys. You’re completely wrong. Nothing is open ended. It doesn’t need to be.

    Global warming is not important to me, nor is it to you.

    We only have about 10-15 years before the wars start over oil scarcity. Or less. Libya is a skirmish. I’m talking about proper, serious wars. Phase I is you try to “secure supply”. Phase I is silly and foolish. Phase II is when you interdict supply. Phase III follows quickly. That’s when you suppress consumption. That’s within a decade. And Global warming doesn’t matter with that time frame in play.

    No, not wars over energy. Not wars over resources. Wars over oil. Why worry about global warming when you’ll likely be dead that soon, along with 5.5 billion others? And that’s likely. Not possibly. Not conceivably. Likely. The remaining 1.5 billion in Brazil and Indonesia (with three growing seasons a year) won’t care if the ocean rises some, or even a lot. They’ll be properly desensitized to death. And if it got even worse in those wars and killed all 7 billion, I’m still not going to care about it.

    So if this dabbling in global warming in a discussion of proportionate response was some attempt to categorize right wing thinking, I think you fail. I don’t deny it. I don’t accept it. I haven’t studied it and don’t care about it. It’s a lot like Artificial Intelligence. One of the most talked about, most written about, most grant proposal engendering concepts of the past 40 yrs, and also the least consequential. The dead don’t care.

    Those, the wars, of course, are the overall reason that you don’t want to defund the US military. If you’re an American, your odds (and your family’s odds) are better if America continues its disproportionate burning of oil. America does that more or less only by depopulating the competing oil demand. China’s east coast population has to go, and anyone else challenging our 4% of global population with 24% of annual oil consumption burn will also have to be . . . depopulated. Simply that. Worst mass murder in history. You’ll look at your kids and you will shrug and it will not bother you at all to be labeled such. After a few decades, the history books will forget to include it.

    Circumstances that present unthinkable thoughts to you do not care if you do not want to think them. Geology doesn’t care if you’re queasy. You kill the competing oil demand, or you volunteer your family and countrymen to occupy a death slot so that a Chinese family doesn’t have to.

    Or you do what you will choose to do. Delude yourself into believing that mathematics is wrong and the indomitable human spirit can triumph over the relentless horror of geology and maybe . . . just maybe . . . pleasant thoughts can substitute for calories. Maybe joyous dreams of 40 mile range electric cars with 30 horsepower will plow 35,000 acre farms before planting season expires, and can harvest those 35000 acres before the crop freezes and rots in November. Those magical batteries will do that in someone’s dreams at John Deere, the company that presently needs 450 horsepower to get that plowing and harvesting done on time.

    Mathematics trumps ideology, guys. Death is coming. Volunteer your family to meet the scythe, or fight.

    • Owen, to some considerable extent you are agreeing with the key premises and conclusions of Gail’s finite world site. That is that resources in general and energy in particular are in finite supply on earth and that scarcity issues will hit us very soon.

      The scenario you paint is quite likely to play out. However, to regard it as a complete nihilistic inevitability for the whole globe is possibly taking it a little too far. Fighting over oil is a negative sum game though this fact in itself will not prevent it from happening of course.

      Insisting that the US has some kind of right to burn all or most of the world’s remaining oil wastefully is dangerous, myopic nonsense. The US has in fact neither the right nor the might to do this comprehensively. Furthermore, the US has no pressing need to do so and could maintain a very good standard of living (equivalent to the West European standard) on about a quarter of its current oil consumption. The US (with ample solar and wind resources) could also transition in the long run to 100% renewables.

      Clearly, this will not maintain the US at current living standards. Clearly, the US like the rest of the world will have to stabilise population or even depopulate to some extent. But a basic acceptable living standard, continued national unity and high relative international power could all be maintained by the US with a more enlightened policy. You seem to want to throw all that away in an orgy of SUV ownership and a fight to the last bullet to defend your right to extravagently waste oil and other resources. That just does not make any rational sense.

  3. Now that was a meaningful reply, Ikon guy.

    “The scenario you paint is quite likely to play out.”
    This defines everything, and I think perhaps you don’t sign onto the concept of “everything”. It’s nihilism, but it’s not nihilism for nihilism’s sake. It’s nihilism because the math declares it relentlessly inevitable.

    “Insisting that the US has some kind of right to burn all or most of the world’s remaining oil wastefully is dangerous, myopic nonsense. ”

    Might makes right. Pretty much every single time. God fights on the side with the biggest artillery.
    It is indeed dangerous, but the point is to make it dangerous to the competition, not your kids. It’s certainly not myopic nonsense. It’s the opposite. It positions to dominate the inevitable.

    If . . .WHEN . . .civilization loses the definition of Non Farm Payroll and all payroll becomes farming, soon, and the world has no vote for women (this came from oil’s downshift of the importance of muscles to society), and a locale has landowners who have 50 year life expectancy and serfs working the land with 25 year life expectancy, you’ll want your kids to own the land. Point being, regardless of the level of life, or of society, you will always want your kids to be in the dominant configuration. That’s why it’s not myopic. It positions to dominate the inevitable, regardless of what society that is dominated looks like.

    “Furthermore, the US has no pressing need to do so and could maintain a very good standard of living (equivalent to the West European standard) on about a quarter of its current oil consumption. The US (with ample solar and wind resources) could also transition in the long run to 100% renewables.”

    We’ll just have to disagree about the idea that 25% of present US consumption could provide an acceptable standard of living. There’s not much slack. The Sunday afternoon drive with the family doesn’t happen anymore. The Indy 500 does, but that’s much more trivial than all families doing (or rather not doing) Sunday afternoon drives. Jet airliners don’t fly empty; they fly because there is demand. Travel budget managers don’t squander their money. You want to ground the airlines, that will be that for academic seminars. Think you can telecommute academic seminars? If you could, that travel budget would not exist. Think Pepsi has its trucks drive farther than they need to for distribution? Think Pfizer does? Anyway, my perspective is oil consumption defines civilization, and human beings will always seek to be more civilized, as it were, than the competition. Pepsi distributing with trucks will defeat Coke distributing on horse drawn wagons, and Coke very properly with its profound responsibility to its shareholders will not permit that, and will buy trucks. There’s not much slack. 25% is rather absurd.

    As for 100% renewables, I know rather a lot about solar energy from doing recon spacecraft design studies. Rule of thumb . . . 1000 watts per square meter at the earth’s surface. That’s before you lose anything to friction, solar->electricity conversion efficiency, battery charge/discharge efficiency, and battery failure itself. Just assume perfection.

    That’s 1000 watts per square meter. That’s 1.3 lousy horsepower.

    Your Camry needs 100 horsepower to do what it does. The 18 wheelers that put food on your Walmart shelf need 400 horsepower. That’s 307 square meters (and just park in the back of your mind that conceivable state of the conversion efficiency art (as opposed to present commercial state of the art) unmagnified is about 18%) to run your truck around bringing food to NYC from Iowa if you had perfect solar panels for it.

    There were 1 million people in NYC in 1900, just 100 yrs ago. The horse population was 300,000. A human eats 1.5 pounds of food per day, including packaging and moisture in the food itself. It took those 300,000 horses to haul 1.5 million pounds of food into NYC each day on average from the suburb farms. That’s the distance that holds spoilage down for horse transport. There are now 8 million people in NYC eating 12 million pounds of food a day. There are a now few thousand horses there and no suburb farms.

    No, there will be no transition to renewables. It is the N word. NEVER. You will not feed Democrat voting NYC with 20 horsepower engined trucks hauling food from Iowa. It’s not ideology. It’s mathematics. This is everywhere and this is forever. The competition has to be depopulated or your kids are going to die, and soon. You do that by force, or you volunteer your kids to die. Choose.

    • Owen,
      The idea that WalMart would be doing BAU in the scenario Ikonoclast is describing is absurd. Powering inter-state, but intra-state/city may be within reach soon, resource distribution systems such as WalMarts with solar-panels is a complete red herring and you, Owen, know it. Consider micro-biofuels currently being developed as jet fuel extenders. I suppose at one point drilled oil acted as an extender for whale oil…. Mankind is not going to subject itself to mass extermination just to maintain the ability to live in Owen’s WalMartian utopia. Long before people submit to a world something like Owen proposes would it not make much more economic sense just to remove the greater part of people like you Owen using other Owens until they are reduced to a sustainable and safe level ? As you, Owen, advocate murder of others I have to presume you won’t find unreasonable if the same ‘final solution’ is applied to you.

      • Owen’s message is ugly but it is backed by math and physics. You response is understandable but is backed by emotion. Nature does not care about emotion. Math and physics are the only things that matter in our universe.

        Do a little research on the math and physics of micro-biofuels and you will see what I am talking about.

        • I was reading Robert Rapier’s post What Happened at Choren? Robert talks about the problems of the company he has indirectly been associated with. The company is now filing for bankruptcy.

          Even if the technology seems to be there, it takes a huge amount of time and money to scale up the new process to work. Without large government subsidies,it doesn’t work.

          It is not even clear that many of these technologies would work for the long term. The issue I have been pointing out is that currently oil is too high priced for the economy to run as it has in the past–the result is recession and debt defaults. The people making alternatives basically haven’t understood this connection. They have assumed that of course oil prices would rise to very high levels, and renewables would suddenly become competitive if they were a little less expensive.

          It doesn’t work that way. Oil prices don’t rise to astronomical levels, because of their recessionary influence. Even if these alternatives were perfected, if they were also high priced, that would have the same recessionary influence, so I am not sure that they would be all that helpful. The government doesn’t have unlimited money to spend trying to help get the price of renewables down. More spending by the government just leads to higher taxes for everyone, and a different way of causing recessionary influences. The processes are complex, so the chances that their prices can be brought down to low enough levels where their use would not be recessionary seems remote.

        • Gail, I heard the EXXON veep in charge of alternative energy explain pretty much what you have just said some years ago. He said EXXON is an energy company, not an oil company, and they intend to dominate the energy market in the future, whatever the energy sources may be. He said that they were ready to go with new technology like hydrogen for vehicles, but without the government mandating it and developing infrastructure, it was too capital intensive for private industry to undertake nationally on the scale required in the time frame required for a switch over. Moreover, he said that the price differential at the beginning would be so great that unless the price of conventional energy were through the roof, the public would not stand for it without some subsidization, not to mention the economy crashing. For automobiles, five years is short period to scale up nationwide and it would take a long time to replace existing vehicles without a subsidy for conversions. But he said that fleets like municipal buses could be converted first and that would get things moving.

          I would contend that if scientists showed conclusively today that the consequence would be certain disaster relatively quickly, then the world would mobilize to do what it takes. Then, if we went down, we would at least go down trying. But many scientists are saying that without actual evidence of impending disaster, like some cataclysmic event, a dire warning alone probably would probably not be enough to do it. But the time that obvious evidence emerges, it will be too late to avert disaster and probably too late to mitigate it very much once the tipping point is reached. So we muddle on.

        • “The government doesn’t have unlimited money to spend trying to help get the price of renewables down. More spending by the government just leads to higher taxes for everyone, and a different way of causing recessionary influences.”

          Again, I don’t believe that you are correct in this under the present monetary arrangement. All developed nations other than the EZ members are monopoly providers of a non-convertible floating rate currency of issue and they fund themselves through issuance, not taxes or borrowing, which have other functions than funding, as Modern Monetary Theory explains. See for summary and references. There is no affordability problem for these countries. The constraint is that issuance not result in effective demand in excess of the economy to expand production to meet it. There is no intertemporal government budget constraint, as MMT economists have shown.

          If you disagree, I would like to hear your economic argument or know what economic literature you are relying on to make this argument for your position.

          This is key, because if we think that affordability is the problem, then we are going to think that we are boxed in financially when we are not. Government can creating unlimited financial resources and its cost of capital is zero because it simply issues currency to pay interest on the tsy securities it issues. The government can control interest rates along the yield curve, and it doesn’t even need to issue tsys at all. The are political restraints imposed in the name of “fiscal discipline” that do not reflect operational reality and can be removed at any time. They just create an illusion of the gold standard that is no longer applicable in this monetary regime.

          • Governments can print money, but they can’t print resources. It is resources that we needed, not money.

            Take your money printing to the logical conclusion–stop all taxes, just print money. Every country would do this as well. But this doesn’t fix our basic issue of diminishing resources. If we spend more resources on what we consider to be renewable energy, and it is in fact an energy “sink,” the world will be that much worse off for the energy and other resources wasted on the project. I would think that country would be that much worse off as well, because the frivolously spent resources are not going to be easily made up, just by printing more money, if every other country can do this just as well.

        • GAil, we agree the problem is real resources. I am saying that there is no affordability problem in funding alternatives sourcing at the federal level, and through international cooperation at the international level. Deficits and debt are not obstacles for currency sovereigns, who can always fund themselves directly through issues and do not need to borrow. No borrowing, no debt. Even now, the US national debt is actually non-government saving of net financial assets provided by issuance through deficits. No borrowing from the private sector involved. At the macro level, it’s a wash and tsys simply switch government liabilities of zero maturity ( reserves created to clear Treasury expenditure to government liabilities of non-zero maturity. This does not affect the amount of net financial assets held by non-government. It just affects the composition and term.

          The question facing humanity now is whether sustainable renewal solutions can developed and deployed (scaled up) in time to avert impending disaster. Without a concerted and coordinated effort largely funded by the federal government, this will be not be possible. There is no financial reason not to give our best shot ASAP. At this point, efficiency is not even paramount, effectiveness is. We can burn through some financial resources to allocate available real resources, human and non-human, to the solving the design problem of improving the efficiency and effectiveness of energy resources. If we are not successful in this, we are toast as a species, and if we don’t try, e.g., because we think we can’t afford it, we cannot hope to be successful.

        • Hi Tom Hickey,

          Honestly, I don’t understand the technical aspects of your monetary discussion. However, I do agree that a government can use newly printed money to allocate resources to a particular effort. For example, if we actually faced a military attack the government could use money to marshal all available resources into the production of war material – and few would complain about this. However, ultimately, it comes back to resources – theoretically, once all available resources were used in the war effort, no amount of money would create new resources.

          However, I think your argument neglects a much broader point –

          We can burn through some financial resources to allocate available real resources, human and non-human, to the solving the design problem of improving the efficiency and effectiveness of energy resources. If we are not successful in this, we are toast as a species

          I don’t believe there is any combination of efficiency/effectiveness and/or design of new energy sources that will allow us to continue to sustain 7 -> 9 billion humans. Nor can western nations (US in particular) sustain anything similar to our current energy intensive lifestyles – especially the driving of private automobiles as we now do.

          It can be argued that the most important need is for the majority of humans to simply understand the problem and take rational steps to mitigate the effects of Peak Everything. Moving beyond efficiency and conservation to actual “curtailment” (including breeding curtailment) could be done without a radical change to our monetary practices. Perhaps we could phase out private autos and redirect money and human talent to more sustainable efforts and thereby buy time with our current oil supply.

          I contend that the real issue is that the collective human mind has been mislead by religious, corporate, and political entities. To avoid “toast”, I think our first priority is to regain our natural critical thinking ability – like we had thousands of years ago to survive. I don’t have much hope for this happening, however.

        • Bicycle Dave,

          For an overview of MMT see the MMT Wiki. MMT provides an operational description of how the current monetary system works. In essence, there is no operational limitation on currency issuance under the present system, so no affordability problem. The only constraint is availability of real resources. If this constraint is exceeded then inflation will result.

          Of course, currency creation cannot create real resources by itself. But it can fund technology that extends present resources and taps new ones by providing capital that the private sector is either not willing or able to provide. Government can also marshall resources in a coordinated fashion as it does not war time. Many of us see the combined energy and climate crisis that looms as a threat to survival worthy of the same commitment as the threat of foreign invasion. The US managed this very well during WWII. President Lincoln financed the Civil War using “greenbacks.” After WWII the debt to GDP ratio was 120%; yet, the following decades saw huge growth.

          James Lovelock has said that his research suggests that we have passed the tipping point. Only comparatively few breeding couples will survive and that this civilization is doomed. Even so, he holds that we have a moral obligation to do what we can to mitigate the now inevitable result of profligacy. I agree. We need to get to work ASAP on a “Manhattan Project.” Sputnik woke America up, and we put a man on the moon in record time. We can do this, and the world leader, the US has to provide the international coordination.

          I have no idea what the outcome will be. But I do know that financial resources are not the problem but rather are abundant if we understand how the monetary system operates. Therefore, we are left with our brains and ingenuity to act in a coordinated way to address the challenges raised by real resource availability. Biologically, this is about expanding coordination across populations and increasing the adaptive rate for species survival. It is not about finances. Just as in the face of war, government can provide the capital required to address the challenge with all available resources, human and non-human. Not only can provide, but must provide.

        • Okay. Let’s assume Owen’s message is “backed by math and physics”, yet it is presented in such a fashion as to appeal to the reader’s emotions. Ironic ? If nature does not care about emotion then why do dogs respond to our emotions ? I must assume we are primarily concerned with human problem sets and so to ignore emotions and emotional responses would be a very dangerous miscalculation on the part of all parties involved (be they humans or dogs :)).

          As for physics being one of the only two things that matter in our universe I think I have met a few Chemists that might take objection. Their response might even get a little emotional. As for the Math. Humans DO Math. I suggest you take two math tests. The first test you are well rested and fed in a non-threatening environment with ample time to contemplate your answers. Kind of sounds like school. The second test I suggest you take in the midst of a running fire fight with artillery and automatic weapons as you fight for your life and the lives of those around you, and, of course, you must finish the exam before the fire fight or your life ends (which ever comes first). I leave it to some designated survivor to compare the quality of the results. I nominate Owen.

          Coming to your last sentence concerning micro-biofuels I am going to take wild guess and assume your hinting at the scalability problems current researchers appear to be struggling to overcome. Let’s assume something like a world Gail suggests comes about. Then lack of scalability hardly matters. In sooth, the decentralized nature of smallish bio-reactor technology is a profound advantage in the initial stages of then next real technological revolution (one which has already begun). Perhaps worries about scaling micro/DNA/protien-bio tech beyond the ‘village’ size is purely an artifact of the current financial system. If so, then maybe it is the greed (oops, darn emotions!) that is the problem and not the constraints of “math and physics” ? In any event, the cat, (representing knowledge) is out of the bag (representing a bag?). Heck, the cat is so far out of the bag the kittens of it’s kittens, of it’s kittens, of it’s kitten’s, … of it’s kittens is having more kittens. So take heart math and physics geeks, actually all geeks and especially you bio geeks, the high priced oil future will be the Golden Age of Geekdom and the real start of mankind’s all out quest for creating and mastering practical earth-centric technologies of all sorts. We are about to leave the playpen of technology and get grown-up serious. Wether we walk down the stairs or fall down the stairs to Gail’s future world, the only thing we can afford to use surplus high priced oil on is ever increasingly sophisticated technology and knowledge, not plastic doodads, luxury trinkets, or resurfacing roads from one dying town to the next when gas is to expensive to waste driving on them for anything but trade purposes (assuming US doesn’t wake up before it’s to late and initiate protectionism in labor intensive sectors…heh heh :)). There is no going back to the cave for this species. So cheer up RobM.

          I almost forgot. Owen, while we are taking Gail’s stairway down let’s get off around 1900 and look at some Farm & Equipment Catalogs. I think we will find some very interesting engines capable of putting out a goodly amount of horsepower that were doing ‘industrial’ farmwork without burning gasoline before anybody even heard of ‘Arabian sweet crude’. I’m not making light of your HP-farmwork equation concerns. Quite the opposite. I thought they were provocative, albeit, somewhat over blown.

  4. Fascinating discussion. Thanks to all of you.

    Owen, based on David MacKay’s excellent book “Sustainable Energy Without the Hot Air” (available for free download) I believe 1000 watts per sq m is the solar energy available under perfect conditions. Factoring normal conditions including tilt, clouds and night, you have access to about 100 watts per sq m. So your excellent points are likely an order of magnitude worse that stated.

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