The United States’ 65-Year Debt Bubble

When I write about high oil prices having an adverse impact on the economy, quite a few readers respond by saying, “No, most (or all) of the problem is a debt bubble.” They seem to think that poor underwriting of mortgages a few years ago allowed a debt bubble. Once this bubble is past, or some similar bubble, our problems will be over.

I decided to see when the debt bubble really started. The answer surprised me–it appears that we have been building a debt bubble since at least 1945 (Figure 1 – based on Federal Reserve data).

Figure 1. US Non-Governmental Debt, Divided by Nominal GDP

Furthermore, it appears that this 65-year bubble is beginning to deflate. I believe that this is occurring because high oil prices are putting a cap on economic growth. If I am right, it seems to me that the drop in non-governmental debt shown in Figure 1 can be expected expect to continue, possibly eventually dropping all the way back to the 1965 debt level–that is, about 15% of today’s debt level.

There is a close link between growing debt and growing GDP. GDP growth is a gross measure; it does not take into account the amount of debt required to finance this growth. The increasing level of debt since 1945 has enabled economic growth to be higher than it otherwise would be, and has allowed the US to buy goods and services from abroad that we could not otherwise afford. If high oil prices cause economic contraction, as I believe is the case, we may see the situation reverse itself. Instead of rising debt leading to growing GDP and growing imports, we may instead see shrinking debt leading to declining GDP and declining imports.

Such a situation would be bad from many perspectives–stock market prices, bond defaults, and ability to purchase needed goods from abroad. Commodity prices may drop as well, because many people are likely to be out of work.

Two Views of Debt

It seems to me that there are two basic views of debt:

Modern View. If the economy is expected to keep growing indefinitely, debt is viewed as  helpful–something that will allow consumers to buy goods, and pay for them over the life of the goods and will allow businesses to build new facilities, and pay for them over the lives of the facilities. The existence of debt products also facilitates pension plans, since bonds are often used to fund pension plan.  The Modern View also permits governments to offer “Social Security” plans to citizens, since the expectation is that the future will be at least as good as it is today.

Traditional View. If people believe that life is a roller coaster, with some good years, and some bad years, but no clear upward trend, then debt plays a more limited role. The expectation is that citizens will set aside funds in the good years, so that they will be able to take care of themselves in the bad years. If new businesses are formed, accumulated savings rather than debt will tend to be the major source of funding. Debt will still be used to a limited extent, for example, by governments to finance wars; by businesses to cover goods in transit; and by families who truly hit hard times. But citizens and businesses will generally be wary of debt, because of the frequency of debt defaults.

Admittedly, this summary is somewhat subjective, but it is tied to an observation I have made many times before: it is much easier to pay back debt with interest in times of economic growth than it is in times of economic contraction, as illustrated in Figure 2.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

The Modern View of debt has gradually developed, as the world has expanded its use of fossil fuels, and as a result seemed to be on a never-ending growth path. Economists, actuaries, and financial planners have all built models assuming that growth will continue, and as a result, debt, and perhaps even growing debt, is possible. But back in 1945, many people in the United States still held the Traditional View of debt. Because of this, the level of debt was much lower than today, as illustrated in Figure 1.

What Happened after World War II

At the end of World War II, the US government found itself in the uncomfortable position of no longer needing as many workers, once the war effort was over. At the same time, it needed to repay the debt it used to finance the war. If no change were made in people’s spending habits, the result would have been a high unemployment rate (because of the layoffs) and a high tax rate (because of the need to repay the debt, with many unemployed).

Figure 3. US Governmental Debt (Including state and local debt) divided by nominal GDP, based on Federal Reserve and Bureau of Economic Analysis Data. Excludes internal governmental debt, such as Social Security Debt.

There was an obvious way to “fix” this problem: encourage citizens to borrow more.  If people could be encouraged to borrow money to buy a new refrigerator or a new car or even a new home, then many more of these goods could be manufactured and sold. Businesses could also borrow to set up new manufacturing facilities. Little by little, what I have described as the Modern View of debt took over, and the ratio of non-governmental debt to GDP soared. GDP measures the cost of the new “stuff” sold, not whether the goods were bought on credit, so this approach greatly ramped up GDP.

Figure 4. Average annual increase in real GDP, for 10 year periods, based on Bureau of Economic Analysis data.

This approach of getting people to borrow more so as to ramp up economic growth worked very well in the early years, but less well recently, as can be seen from Figure 4. Part of the problem was that US oil supply started to decline in 1970, so that the US had to import more oil. The US also cut back on the kinds of goods it manufactured, with much of the heavy industry moving to other countries, necessitating more imports of such goods.

Figure 5. US imports and exports divided by GDP, based on BEA data.

The existence of all of the debt, and the fact that buyers in other countries would take government bonds in payment for goods and services, allowed Americans to continue to buy more goods and services imported from abroad, even though we did not have enough to trade in exchange.

A person might think our trading partners would have objected, but because US debt was considered a good investment, the system continued. For each year since 2001, the percentage growth in real GDP has been greater than the gap between exports and imports as a percentage of GDP–a hint that perhaps the situation was not really sustainable.

We saw in Figure 4, above, that over time, growth in real GDP decreased. At the same time, the amount of debt required to create each increment in GDP increased, as shown in Figure 6, below.

Figure 6. Increase in US Debt (all types including governmental) divided by increase GDP, for 10 year periods, based on Federal Reserve and BEA data.

Part of what happened was that a limit was being reached on how much debt reasonably could be carried. Almost everyone who could afford a house already had one. Businesses had expanded as much as they felt was prudent. Other kinds of debt that were added, but the new kinds of debt weren’t as efficient in providing funds to for citizens to actually buy things–securitization of mortgages, for example, and the interest rate “carry trade. ” In the early 2000s, some of the debt that was added was really ill-advised–allowing people with inadequate incomes to purchase homes, for example.

I don’t have figures for other parts of the world, but my impression is that many other countries followed a similar pattern of rising debt levels, as the Modern View of debt became the norm in economies around the world.

Where Do We Go From Here?

One popular view is that all we have to do is unwind some of the badly made loans, and the financial system can go on as before. Or perhaps we have raised the amount of debt too high, and the interest payments are now a drag on the economy. In this view, if we keep interest rates low, and bring the debt level down to that of a few years ago, maybe the economic system will work as before.

It seems to me that the real issue is that we live in a finite world. The idea that debt can continue to expand is simply false. The world economy will hit limits of many kinds–for example, the amount of low-cost oil that can be extracted; the amount of fresh water than can be obtained, without resorting to high-priced desalination; the amount of pollution that we can deal with, without huge health problems; the amount of CO2 that the atmosphere can absorb, without huge climate and ocean difficulties.

Because of these issues, the Modern View of debt is simply false. It is based on a temporary phenomenon. Debt can only expand for a while, in a finite world. Once we start hitting limits, debt expansion at first does less and less, and ultimately falls apart under its own weight.

It seems to me that the limit we hit first is that of adequate low-priced oil. There is plenty of oil theoretically available–but it is high-priced oil, that puts the economy into recession, as more resources need to be devoted to oil extraction, and fewer resources to other endeavors. Saudi Arabia and rest of OPEC claim the ability to provide more oil quickly, but when oil prices rise, they don’t really come through (Figure 7).

Figure 7. World and OPEC crude oil production, and Brent spot oil price, based on EIA data.

High-priced oil has caused financial difficulties for many governments around the world, because when oil prices rise, food prices tend to rise as well. Citizens cut back on discretionary goods when food and oil prices rise, causing recession. During recession, governments collect less taxes at the same time they are spending more on unemployment benefits and stimulus funds. As a result, governments are increasingly prone to debt defaults, such as those now being discussed for Greece and other European countries.

What I expect to see next is one country after another defaulting on its debt. Each default will set off a chain reaction of under-capitalized banks needing bail outs, and, as a result, more governments getting into financial difficulty. The IMF will try to fix the problems, but eventually the level of difficulty will be more than it can handle.

Where will the deleveraging stop?

This is the big question. More debt helps keep demand for goods and services up, and helps keep GDP growing. But the economy needs to be expanding, in order for it to make sense for debt levels to rise. If the economy is shrinking (or even flat), businesses don’t see a need to expand, so have no reason to borrow more money. Homeowners are worried about their jobs, so are not interested in buying more expensive homes. If high oil prices are part of the equation, higher prices for oil products and food cut back on the funds people have to pay for discretionary goods of all types.

It seems to me that there is a significant chance that we will find ourselves transitioning back from a Modern View of debt to a Traditional View of debt. If this happens, we are at risk of the ratio of debt to GDP dropping way back–not to 2005 levels, or 2000 levels, but to 1945 levels, or even lower. A big part of this slide downward might come through debt defaults. Such a change would greatly reduce this country’s ability to buy imported goods, and could result in huge economic dislocations.

I have not said much about governmental debt. The US Federal Government uses “cash-basis” accounting, rather than accrual accounting, so I don’t see its supposed debt level as being all that helpful in understanding its financial position.  The US Federal Government’s liabilities are much higher than its stated debt level would suggest, since it makes many promises which it does not set up reserves to handle. For example, it guarantees bank deposits and pension plan payments, up to prescribed limits, but these guarantees are not reflected in its financial statements. The US government can theoretically issue more debt to meet its obligations, but there is no guarantee that Congress will continue to approve ever-rising debt levels, or that willing external buyers can be found for the debt.

I expect that the world will need to develop an entirely new financial system to fix the 65-year debt bubble. Our current debt-based approach simply is not workable without long-term growth. But making such a transition will very difficult–perhaps impossible. Individual countries can perhaps each set up their own system, but trying to integrate them would seem to be very difficult. It is possible that at some point we may find ourselves without an operating international financial system.

This is why I see the near-term outlook for the world financial system as very ominous. We have a seriously broken system, but no good way of fixing it.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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90 Responses to The United States’ 65-Year Debt Bubble

  1. Iaato says:

    Yes. Over the longer term, the monetary system will have to contract as the economy contracts in order to have an operational, fiat-based currency that people can trust. In addition to that, the current outstanding debt ($1.5 quadrillion dollars worth of derivatives, anyone?) will have to be repudiated at all levels of scale, including international deficits and your neighbor’s mortgage. In addition to that, the $200plus Trillion dollars worth of promised entitlements to the future that represent a credit ponzi scheme will have to be negotiated downwards on an expanding, incremental timeline. Then, as you said, the amount of debt in the system and the positive feedback loops that stimulate and encourage debt generation will have to be expunged.

    This is a tall order for a dysfunctional system bordering on collapse. My guess is that we are going to have a long period of relocalization of monetary systems, from the global scale down to countries down to regions down to towns, depending on how fast all of this occurs. There may be a period of barter if things happen quickly or war breaks out. An eventual new monetary system will have to be less vulnerable to counterfeit (nee money printing), more local, with no debt mechanisms beyond individual IOUs, and, at finally at that point, will become deflationary. Until then, because all of this is manipulable and the monetary system needs to grow politically speaking to cover all of the ponzi mechanisms, we are stuck with inflation..

  2. You wrote, “we have been building a debt bubble since at least 1945.” The date made me think of how the US became a net oil importer in 1948. It might just be a coincidence, but I wonder if there’s a plausible link there.

    I imagine there are countries that import a lot of their energy and haven’t built up a debt bubble. But it seems the U.S. was used to having a surplus of energy, and then continued running as if it had a surplus, long after it had been forced to import a lot of energy.

    Anyway, that’s just an aside. Great post!

    • Iaato says:

      If you look at the percapita oil consumption for the US above, one can suggest that credit optimized growth, as Gail says, until our oil production peaked in 1970. The oil consumption plateau since then with expanding debt has finally caught up to us, but has only become critical in this past decade, as per capital oil consumption has begun to decline.

      The ponzi scheme only works as long as everyone continues to pay into it. Once people start to drop out, the whole thing falls apart.

      • Agreed!

        Regarding the link, I see oil consumption as mostly going with jobs, because people who have jobs can afford to buy goods made with oil, and to drive vehicles using oil. Also, many job use oil in making and transporting goods. The dropping oil consumption in the developed countries and the rising oil consumption in the less-developed countries to me goes with the shift in jobs to the less-developed countries.

        • Iaato says:

          The Maximum Power principle (MPP) says that “you can’t play for long unless you steal your opponent’s gamepieces.” And after the 1970s, and due to the US’s powerful momentum, oil prosperity, and military might, we did just that, beginning with Reagan. Through the IMF, World Bank, and other organizations, we manipulated the global currency system and achieved petrodollar status so that we could continue to expand our monetary system through expansive international loans, putting poor countries in debt to us so that they were forced to sell their resources to us at a disadvantaged “distress sale” rate. In other words, the system self-organized into a design where the US, already in power, designed new feedback loops to bring in even more power. The MPP basically says that in a situation with surplus energy, them that has typically get more.

          In descent without surplus energy, however, that autocatalytic loop stops working, and more cooperative, efficient system designs win out. Yes, dropping oil production/importation will mean less employment and eventually more strife, unless the government pulls an FDR. I don’t see much chance of that happening. Speaking of exporting jobs to other countries, did anyone catch Leslie Stahl’s interview with Immelt of GE on 60 minutes last night = : o

          • Thanks for pointing out the application of the MPP here. Having the US dollar as the reserve currency seems to have helped in this direction as well. When a person looks at the long-term excess of US imports over exports, the situation is amazing.

            I found Leslie Stahl’s interview if Inmelt of GE on the Internet. When asked whether he doesn’t work for the American people, Immelt says he works for GE shareholders. He also points out that the growth is now overseas, so that is where they are putting their plants, and that is where the vast majority of the new jobs are. Leslie points out that it is a “trickle” of jobs that are being added in the US–much fewer than have been moved overseas in the past. Immelt points out that even when GE increases manufacturing outside the US, it helps US jobs, because some component parts for the overseas manufacturing are made in the US.

            It is hard to see Immelt doing much for the US jobs situation.

            • OldStone50 says:

              I fully understand the “jobs in America” orientation that people tend to take. But I’d like to point out that people everywhere need to produce food, shelter, clothing, etc, whether directly or indirectly. This is to say that, if I take a “jobs in America” first attitude (and screw those foreigners), why not a jobs in New Hampshire first attitude? Why not a jobs in my town in New Hampshire first attitude? Indeed, why not a my job first attitude? This latter attitude is exactly what you seemed to accuse Immelt of having.

              Each of us, each of our towns, each of our countries is not an isolated entity. The “me first” attitude, while understandable, is not admirable. When we talk of the US economy, it should always be in the context of the need to create as best we can a just outcome for all the people of this planet. I know it is hard, when you are rich, to sacrifice your own wealth to help the poor, but it remains desirable to do so. And an unemployed person is an unemployed person, regardless of where she lives.

              A focus on the US budget is justified because it is such a huge component in the Earth’s budget, but it is still only a part of that budget. One of the failures of the Modern System is that it has not advanced political thinking beyond colloquial self interest.

            • Somehow, we need an integrated system that works. Right now, we have an integrated world-wide system that doesn’t work very well, and is going downhill fairly quickly, as the financial system is reaching limits (partly because there aren’t enough people employed in the US).

              One of our problems is that we need a new, more localized version that works, but we have only the slightest idea of what that would look like. Normally, systems build themselves over hundreds of years, with inputs from people and companies around the world. I am not sure how we get to a new more-localized system that would work.

    • Thanks! We certainly have been good at living beyond our means.

      I know that the US has been an oil importer for a long time. Where does a person find the specific date when it became a net importer? BP data only goes back to 1965. EIA’s net imports (combining products with crude oil) only goes back to 1973. If one looks only at crude oil, the date according to EIA where we permanently switched to being an importer appears to be 1944 (which is very close to what you said, 1946). Products imports/exports are not as obvious. Has someone looked at this?

      Your point is a good one though. It is right about 1945 that the US became a net oil importer.

      • Iaato says:

        Of course GDP just measures churn in the economy, so the last two decades has been devoted to a self-amplifying spin-up of the financial, insurance, and real estate industries, bolstered by paper-trading on Wall Street. The graph at the link suggests that the real economy separated from the FIRE economy around the same time the global per capital oil production peaked, and Reagan declared a new dawn in America based on borrow and spend.

        The link below illustrates the MPP, Klein’s Shock Doctrine, or Predatory Capitalism, depending on what you want to call what we’ve done here. You can’t play for long unless you steal the other players’ gamepieces.

        • Thanks! That is a great NYT graphic. Also interesting video in second link.

          • Iaato says:

            And if you steal your opponent’s game pieces, it will distort the system and leave you with something like this below–Kurt Cobb’s ecological economist view of the world.


            The upper layers of that pyramid are going to have to come off, and the bottom parts of the pyramid are going to have to regain the appearance of a natural resource basis as our economy gets back to a renewable basis on ecosystem services. Most of the first 5? 8? 9? layers will have to disappear, with some of it being rebuilt in a new format. That will require complete collapse and rebuilding, IMO.

            Which leads to the proposed fifth law of thermodynamics–Transformity. You shorten the cumulative length of the game the more you steal. The levels of hierarchy that we have built up in our amazingly complex system demand a new magnitude of energy inputs at each level. The higher we build it, the more impressive the downfall–kind of like the game Jenga. Fossil fuels have allowed us to winnow out our resource basis and expand our population as we borrowed more and more from overseas. The system gets more and more skewed and dependent on fossil fuels. Graceful descent then becomes less and less likely the further we go.

  3. St. Roy says:

    Hi Gail:
    Another excellent post! The social turbulence that will follow the unwinding of our financial system may have started the OWS events. This odd assortment of folks don’t yet really understand the big picture, but some articulate leader will emerge that does and that person might take a page from this post to explain it simply enough for the masses.

    • Glad you liked the post!

      Some of these things are hard to explain, and not everyone will understand them, if someone does. One good point that has been made is that our resources don’t keep increasing–in fact, as we pull more out of the ground, they are falling. So paying back this increasing debt with falling resources is more than a bit crazy.

  4. Jan Rufer says:

    The only solution is to globally write off all forms of debt except for maybe person to person loans…

    • I think the big question is, “Who gets the assets underlying the loans?” Does the buyer get to keep a house, if the buyer has made only one payment on it? Does it matter, if it is “Owner-Financed” or goes through a bank? How about a foreign buyer of a factory? Does the foreign buyer get to keep the factory, even if it has only made a small down-payment? Are all bonds automatically worthless (corporate, city, state, and local)?

      Presumably with all of the defaults, nearly all pension plans would be broke, as would all insurance companies. Bank deposits probably would not be worth anything. It would be hard for companies to pay workers, if their bank accounts are worthless.

      Maybe on a national basis, these problems could be worked out, by “printing” more money. But I am afraid on an international basis, it would be very difficult to make things work. Governments would not want to trade with a country that had defaulted on its debt. Other countries might be tempted to seize other assets, it they believed that they had been unfairly deprived of some of their assets.

      I think it would be a big mess.

      • St. Roy says:

        To avoid financial and monetary collapse, I thought Richard Heinberg had a good idea expressed in his new book “The End of Growth”. It was to slice off a decimal point on all debt, savings and other accounts but not touch assets below $25K, the latter to protect pensioners and low income people. If you had a $250,000 mortgage you would now have a $25,000 one. If you had $125K in savings, you would now have $35K. This reset would bring back some balance in the system and make it more sustainable – painful for sure but better than collapse which is were we are headed.

        • I wonder how that would really work in practice. Bonds are debt. Would they be paid at 10% of face value? Would this extend to the Government’s bonds related to Social Security, where the government took tax revenue earmarked for Social Security, and spent it for something else, leaving IOUs in their place? How about multinational businesses–could they just repay 10% of the debt they owe in the United States? It seems like the value of the stock would go up, if the got this good a deal on their debt.

          How much would an annuity that a person had purchased be worth–10% of what he thought he was buying?

          What would happen to the price of homes, if everyone’s mortgage was cut by 90%? The year after the 90% haircut was implemented, what would the selling price for a home be? Would loans again be available for 80% or 90% of the value of the home, if a person wanted to buy a home (or sell his home to someone else)?

          It seems like it would be tricky to work out all of the details.

        • Allen says:

          The problem with Heinberg’s “solution” is that it punishes responsible people (savers and investors) and rewards irresponsible and reckless (debtors and spenders). It’s tempting to think there are simple “solutions”, but the consequence of many years of irresponsible and foolish behavior, accumulated and compounded, is pain and loss (and I can only hope economic pain and loss).

    • Lisa Schumaeir says:

      That won’t actually solve anything except for a short period. You assume that those who lost all the capital they loaned are just going to go back to lending…yeah right. Debt markets would be COMPLETELY CLOSED and therefore we’d have something 10x-100x worse than 2008 and much more long lasting. You’d also be throwing the middle class and some of the poor and obviously the rich (who I know everyone hates these days…foolishly) into a situation where a lot of their savings are gone.

      I’m not saying there is a better solution. Not at all. This solution just has a lot of problems with it too.

  5. Lisa Schumaeir says:

    I know the solution! Let’s start a few more government spending programs, be they more social safety nets, more government-military complex wars or aircraft orders, or more free handouts to people who entered the country illegally! This has worked out SOOOO well over the last few years. Let’s just double down on the stupidity!

  6. phil harris says:

    Compelling charts.
    They, and the sheer length of the build-up, indicate to me the astonishing utility of petroleum.
    (This was the trajectory of the Age of Petroleum?)
    ‘The more the better’, as long as this increasing use of petroleum every year did not bring about any prolonged shortage (indicated by a real relative price increase). It does not appear to have mattered much, except perhaps during the 1970s early 80s oil shocks, whether the oil was domestic or imported. ‘Debt’ was a very good bet as long as it led to more of this petroleum being used. ‘You’ just needed to find ways of using it, and I assume it enabled the famed levels of US labor productivity? Compare this US history with something similar currently in China and India where petroleum continues to help stoke their economies?
    Stiglitz seems to offer something like this view of debt, including the notion that ‘the recent party is over’; he calls the US and advanced countries the “victims of success”. I doubt though he recognizes this could be a permanent condition, eventually also bound to happen in Chindia, Bazil etc. Do you glean anything from his recent offering?

    • Ed Pell says:

      Stiglitz does not talk about a new energy source. He does not talk about over population. He is good on the idea that finance should be a small low cost function in society maybe 3% of profits would be in finance versus the current 40% of all profits. Clearly he says finance is not efficient. He is good in his area of expertise finance. Beyond that he is no wiser than you and I.

    • It amazes me that Stiglitz and others don’t realize that we live in a finite world. (I guess being a Nobel Laureate in economics isn’t all that helpful). While the growth model worked well for a long time, it can’t be expected to work indefinitely. He sees some pieces of the picture, but not the whole thing.

      I had read about some of the issue of falling farm employment, in the early part of the 20th century, and this being part of the problem at the time. I had thought about writing about that too, but the post was getting too long. The thought had occurred to me that the huge borrowing and employment effort of World War II was what got us out of the depression. If we had not figured out a way to handle the end or the war, we would have ended up exactly where we started.

      The other thought that occurred to me was that any excuse to borrow is in a sense helpful to GDP. A war in Iraq or Afghanistan increases GDP and reduces the unemployment rate. It also helps our massive defense industry. This is sad.

      • Iaato says:

        This graph of Bradford’s showing the relationship between agricultural population and energy consumption is now one of my favorite graphs. There is a very good inverse relationship between energy use and number of farmers. y=k/x We’re going to have to march ourselves back up that ski jump graph that we slid down over the past century. We’re going to need a lot more farmers, and even people who work will need household gardens. Employment will shift backwards from intensive corporate “knowledge economy” labor back to a more sustainable focus. Basic needs will require more labor without all of those energy slaves. And the Military Industrial Complex will have to contract and gain more efficiency. Maybe the resource wars can wait until we’re out of gas? Instead of a war, we need a farming initiative to get everyone back to gardening.

        In descent with decreasing energy surplus, we’ll also have to find some other measure of efficient use of production and consumption than GDP, which mostly measures “churn” in the economy.

        • I had forgotten that graph. With less energy, it looks like a lot of us will be farmers. This is the graph:

          Energy Consumption and Agricultural Population for 205 Countries, 2004

          • Iaato says:

            Without fossil fuels for a ski lift, we’re going to have trudge back up that hill towards “a lot more farmers” with skis in hand, heavy boots on, post-holing all the way, against the gravity of an imbalanced, dying empire with a lot of have nots and no low gain transportation infrastructure?

            Obama’s choices for leadership are starting to frighten me as we trend farther into fascism. It was bad enough when it was limited to Wall Street.

          • phil harris says:

            Gail & All
            Glad to read your thinking.
            I guess China will have changed postion quite a bit since this interesting Chart was made.
            If anybody is interested – here is something I wrote a few days ago on Ugo Bardi’s blog
            Regarding agriculture and fossil fuels and population.
            The British combined take-off of population and industry (pretty much the first ever to do so) took place before fossil fuel was used in agriculture. (By 1850, 22% of the population fed just about the rest – total population in England had trebled over 100 years to 1850). The 18thC ‘Agricultural Revolution’ was based on biological N-fixation. Of course it could not keep up with continuing rise in the British population,

            [SNIP N America was a bit different and I recommend page 219, ‘On the Great Plains: Agriculture and Environment’, Cunfer 2005; preview in googlebooks. The big American agricultural change to petroleum and petroleum-based fertilizer actually took place in the 1930s.]

            Footnote; currently about 5% of world natural gas (1-2% of world fossil energy) goes for nitrogen fertilizer (China still mostly uses coal to make urea). Most food in the world is still grown or consumed pretty much in situ: not much more than 12% of world primary grains supplies are traded across international borders, and partial ‘subsistence farming’ plays a role for not much under 50% of global population.
            My guess is that ‘the world’ could get by if consumption of fossil fuel per capita were 1/20th of US per capita consumption, or perhaps 1/10th of European levels.

            • It is interesting that the big change to petroleum and petroleum based fertilizers took place in the 1930s. We had huge employment problems them.

              Your quote is interesting about nitrogen fixing plants being important in England is interesting. There seems to be information that fossil fuels were used for other aspects of society, however, even if they weren’t used directly in agriculture. I am wondering if there might be some applications of energy in agriculture that you might be overlooking–metal plows, for example, that would not be possible without fossil fuels. These are some articles talking about early fossil fuels:

              I think that the amount of fossil fuels that a country could get by one is determined by interconnected systems, so is hard to determine. If the local system requires banks to be functioning, and electricity to be operating, then the system have sufficient fossil fuels to keep these operating–not for just making the fertilizer, and transporting it.

              My impression with China is that there is still a lot of human labor involved in growing crops.

            • schoff says:

              England in that period was a compact well watered little country with railroads and canals to move food and goods around before fossil fuel was used on the farm. In fact in 1851 the first Indian railroad line had been built by the British. Of the 22% engaged in agriculture many of them were children. It is difficult for me to imagine 22% of the kids between say 10 and 18 in your average suburb putting in 4-8 hours per day doing gardening, medium scale agriculture and firewood chopping – that will be quite a transition. I guess you could say the same about the adults. One wonders what kind of shape people might be in during this transition, let’s take a look at “recent” american history:

              There was a total work force of 47.5M with 9.5M in agriculture, lets call that 20% – in 1940. From the WW2 induction records (albiet 39-45) – 3.8M men failed their physicals and 11.4M men were inducted. 25% failure for a mix of volunteers and draftees. i’ve read many reports that this was due to malnutrition in the 30’s. I could see 20ish % being involved in ag, following a significant dieoff and wholesale abandonment of states like New Mexico, Arizona by their population – but only at steady state, post transition. A low energy world will be more Roman, not moving a material amount of food beyond 50 miles by wagon.

            • phil harris says:

              Thanks again.
              I do not want to go on too much about agricultural history, and this is already too long, but there is a useful intro to the British Agricultural Revolution here.
              The reason I take the English example is that England is the largest of the British countries, the easiest to describe using historical data, and importantly with Scotland & Wales and parts of Ireland, was the first country to experience at the same time rapid industrial expansion (based mainly on coal and metallurgy) and rapid sustained population growth . Both expansions started gradually and unevenly. The maximum carrying capacity for population was similar until about 1750 to what it had been since Roman times, at just under 6M (England). Population during much of the intervening centuries had been a lot lower than that at times. The basics of subsistence agriculture had not changed much, and generated only a small percentage of sustainable surplus. This was reflected in the fact that most people were involved directly in food production. There was, nevertheless, fairly advanced metal and stone working and other trades, and increasingly the metal working for weapons and the need for timber (shipping as well as fuel) put severe constraints on these activities not only in British Isles but across all Western Europe. Coal was increasingly a substitute for wood as fuel. Canals were built. (Railways were much later and as a bulk haulage system only reached their peak more than a century later around the 1880s). Farming became increasingly mechanised, otherwise 22% of the population could not have fed the rest of the 18M people by 1850 (England), that is a total 3 times what had been the previous ‘carrying capacity’. (Many of these people were not well-fed; there were persistent food scarcities and food security was only achieved for the still fast-growing population from 1850 onwards by shipping in food, primarily grain from the rest of the world using industrial technology for transport.) The main ‘fuel’ for farm mechanisation was grown on the farms to feed horses. All cultivation and short-haul transport was also supplied by horses. The critical yearly Nitrogen fertilizer was also home grown using clover/grass swards – this was modern temperate organic agriculture. As one example, the area where I live was developed for highly productive intensive farming after 1780. Coal was produced locally for some small scale local industry to support the farming and a bit of domestic use, but was hauled by horse and cart until 1890, when it was superseded by better grade coal distributed by newly built local rail connections. Cultivation was done with horses until well within living memory.

              The next big change in British farming really only happened in my lifetime, when mechanised horse-power (petroleum) and synthetic fertilizer application were doubled during WWII. The third fundamental change was a doubling of cereal yield per acre between 1960 and 2000. Similar changes occurred unevenly across Europe, and in N America, thoough it has to be said in areas where water is not a constraint on yield – wheat yields are on average much lower in America.

              There are other parallels in North America. ‘Peak Horses’ on the Great Plains was in the 1920s (I refer again to Cunfer 2005). I have also an account of Oregon where critical metal working to support cattle ranges was enabled by coal hauled by mule train from rail heads until early 1900s. The big impact of mechanization and synthetic fertilizer happened mostly from 1920s onward. Displacement of farming populations followed a trend across the Western World. (In France, it was well after WWII before the still large peasant population was displaced. When I worked in Poland in the mid 1980s, there was still a large peasant population, and still some horses.)

              I think Stiglitz case for farm productivity is roughly right, but not the whole story. Your point that changes in agriculture and population were largely based on petroleum is substantially correct after 1920s. Without minimising the importance of petroleum, it is possible to see, however, that the ratio of agriculture to urban workers does not need to drop all the way back to Roman or Mediaeval ratios, even with highly constrained petroleum inputs. You might not even need to bring back all those horses! Britain unfortunately has too little arable land – we are about 4 persons per acre suitable for arable crops !


            • If I am reading what you wrote correctly, there were at least two things that helped get the ratio of farm workers down to 22%:

              1. Use of horses to plow.
              2. Use of clover/grass swards for fertilizer.
              3. (Possibly – I am guessing – metal plows the horses could pull.)

              The issue we are up against now is we really don’t have spare land to graze all of the needed horses on. We likely will end up with hand labor, for that reason. If we had a lower population, it would be easier to get the % in agriculture lower. But you are right, paying attention to nitrogen needs could be helpful.

          • St. Roy says:

            50 million farmers by mid 21st century is what R. Heinberg predicted in 2006. And that will probably represent >20% of the US population that will almost surely decline from the present number.


            • schoff says:

              Land for 50 million farmers, that will be difficult, and I’m not sure where the loans he mentions will be originating at. But as the adjacent homes to yours are abandoned, it could be possible to assemble bits and pieces. But if you are in a large city in Texas, New Mexico, Arizona, etc. you will have to emigrate to a place that has enough water – there was no Indian tribe of 6.4M farming in the dallas-fort-worth metroplex historically.

            • I was just looking at this FAO hunger map. It is striking how hunger is centered around the equator, with those nearing the poles doing better. The Texas, New Mexico, Arizona area is close to Mexico, which is one of the countries currently with hunger (but not at a high level–it is ones closer to the equator with a high level). Based on the map, it would seem to be the area a person would expect to shift into the hunger zone.

            • phil harris says:

              Sorry to come back so late to this discussion, but Gail has raised several points, some of which arise from points that I made.
              Firstly, I also understand that a lot of hand labor is still used in farming in China, and in communities where this is the case can be amazingly productive of primary production in terms of ‘calories per acre’, which is mostly grain. They will be using though synthetic N fertilizer these days – often less in some cases per ton of final crop than we get from high yielding fields in W Europe or in the Corn Belt in USA. Such communities, however, often still consume the majority of primary calories they produce; up to 80% in some cases. They will be ‘feeding’ urban populatons from as little as 20% of their main production, although they often produce high added-value fish and pigs or horicultural products (fewer calories but much more cash) which mostly are sold to towns.
              Almost all so-called subsistence farming seems to need to find the means to buy at least some goods and services not produced on the farm. Small craft manufacture has traditionally been a source of tools. (In Britain the modern shaped full metal plow was invented in 1763 and superceded a Dutch metal-plated wooden plow. – Iron-tipped plows seem to go back to pre-history. In America the invention is independently claimed for 1797.) The British Agricultural Revolution though seems to have depended critically (Liebig law of the minimum?) on the potential for sustainable higher yields per acre, after the soil N had been increased by rotation with nitrogen-fixing crops – in England soil N is calculated to have trebled in some places. An increasing market for more intensive agricultural production encouraged new investment that brought more land in to production, or to put it another way this new opportunity for creating more ‘yield’, made possible a more ‘market-oriented’ system, beyond anything seen in the old agrarian systems where for example in some other parts of Europe, vast populations of serfs still served enormous estates. In the UK, ‘surplus’ population in the countryside transferred, or in some cases was transferred, to the cities, or indeed emigrated. Desperate times for many if not most. Even though with new methods, there was a ceiling to what could be produced at that time, per acre or per agricultural worker, and the UK had to turn to large imports for the rapidly rising population.
              NB Heavy horses for commerce and agriculture and land drainage work seem to have been imported to Britain from Holland in early 17thC, but I do not pretend to fully understand the economics of horses being substitued for human labor, They enabled though more timely cultivation and (later on) harvest, that required armies of workers to achieve the same, given short weather windows. New ‘apps’ for increasing the productivity of horses appeared pretty frequently until the 20thC.

            • phil harris says:

              Hunger maps.
              Northern Europe was desperately poor in food in pre-industrial times, even with all that biomass for smelting Iron ore in Sweden. The history of that country is dire. They invaded more productive Poland in order to get control of grain, and in doing so, effectively destroyed the productive capacity of much of the Northern European Plain (the peasant population) in the process. There is an essay by Janken Myrdal “Food, War and Crisis” in “Rethinking Environmental History”, Eds, Alf Hornborg et al 2007. Incidentally, wood and grass in Sweden et al grow at about half the yearly rate that they do in more favored locations; New Zealand for example. There are ‘goldilocks’ zones, such as the sustainable river fed systems in the Yangtze basin, and these filled up with people more than 2000 years ago.

      • mikkel says:

        “It amazes me that Stiglitz and others don’t realize that we live in a finite world. ”

        Actually Stiglitz does recognize that we live in a finite world. This is why he is one of only three modern economists that I actually respect, the others being Keynes (which if you read what he ACTUALLY thought is extremely good in looking at systems) and Steve Keen (who accurately proclaims that he is a real Keynesian).

        Basically Stiglitz argues that resource extraction rates should be below the function of technological progress and population growth. Ironically it appears his made up numbers seem to justify insane extraction rates, but at least he realizes this fact.

        Of course that was in 1974, now he is explicitly arguing that focus on GDP and pursuing growth for growth’s sake is a fools errand. He even states, “Any good measure of how well we are doing must also take account of sustainability. Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of our environment.”

        I’ve read elsewhere that he thinks the net worth of most industrial countries is negative due to its externalities and so therefore we should completely reassess resources consumption. Anyway he doesn’t totally get out of all economic idiocies but he identifies most of the issues on the nose.

        • Iaato says:

          Economists’ theoretical arguments appear to be convenient and opportunistic; responding to novel circumstances with altered values that enhance their access to resources. But competitive growth models are on their way out, and economists are dinosaurs.

          “We will chase the old goats out of power”. . . . Adbusters is the group that started #OWS. Who says OWS doesn’t have an agenda?

  7. Gail, very thorough and well-written essay – as usual.

    I agree that the near-term outlook is ominous. With the political deadlock in Washington over relatively minor issues, I can’t see any way that our political leaders will come together to attack such an enormous problem and try to fix it – that’s assuming there IS a solution.

    It appears that the most probable outcome is total failure of the global, national, and local economic systems, and thereby, civilization itself.

    That being said, what can a person do to prepare? Buy gold? Reading many of the current financial advisers, it seems that gold is the only way to survive. That begs the question, “Can you eat gold?”

    The prudent person would be doing everything he or she can to prepare for the worst possible outcome, learning how to grow one’s own food, securing a water supply, and building a local community on whom one can rely in times of need. IMHO, that’s a good plan in any situation.

    • Regarding gold, I wrote a post in August called Don’t Count on Gold in a Downturn. It is definitely better than nothing, but as an everyday way of transacting business, it doesn’t work very well. It doesn’t come in small enough quantities (unless someone issues notes, backed by the gold), people can’t tell for certain that the gold is what you say it is (coins are better than bars in this regard), and there is not enough for everyone to have some for their everyday needs.

      It is hard to see a successful way for 7 billion people to continue without fossil fuels, but perhaps some smaller number can be successful, living different lifestyles in different parts of the world. I don’t have all of the answers on how that can be done. People are likely to be most successful where fresh water is fairly plentiful and people know how to do gardening/farming with plants and animals adapted to the area, People have figured out a variety of forms of money over the ages. Perhaps additional new forms can be developed–but probably more for local use than international use.

      • St. Roy says:

        Hi Gail:
        I live in a small coastal town in Mexico. Thinking about what to use for barter when my money no longer has value, I decided on stainless steel screws. Small, useful, impossible to counterfeit and as nearly as durable as gold. Regular screws rust fast here. I plan on trading SS screws for food when the going gets rough. Fisherman and farmers both have a need for my medium of exchange.

        • Interesting idea! I know the Big Island in Hawaii didn’t have metal, so never had screws or nails or posts and pans. There are some things that very much come in handy!

  8. Bicycle Dave says:

    Hi Gail,

    I’d be interested in your thoughts regarding US national “investments” (i.e. more debt) in what appear to be three of the hottest topics of the day:

    – With the death of Steve Jobs much of the media is beating the drum for more investment in the kind of “bold innovation” exemplified by the IPhone. The argument in favor of this POV points to the size of the industry, amount of employment, and exports to the rest of the world. I’m a skeptic. I would argue that the basic functions of the internet, PC, and cell phone do actually make a positive contribution to a more efficient use of resources (justification for this POV omitted here). But, as much as I like my PDA smart phone, ever smaller PCs, and faster internet, it is hard to see how these embellishments are going to be valuable in a more resource constrained future or how they can even be sustained. Is this really a wise emphasis for more national investment (debt)? I can think of a lot of low-tech technology that may be valuable in the future.

    – Infrastructure building and repair – roadways, airports, bridges, parking structures, etc. This POV argues that “modern” infrastructure is a necessary prerequisite for a robust economy. I’d argue that an energy constrained future will not value the kind of infrastructure in vogue today. Clean air/water, local food, motor-less transportation, passive heating/cooling, etc seem to be more important in the future. What do you see as the consequences of either investing in or neglecting our traditional infrastructure?

    – High tech alternative energy investments. Wind farms, bio fuels, massive solar arrays, nuclear, etc will all require huge investments (debt) to maintain any semblance of BAU. I’d argue for much simpler local energy networks based upon (and limited to) local energy resources. This is a much longer discussion but one that is getting a bit more exposure in the medial. Do you see a way to preserve a very basic supply of electricity and transportation energy (liquid fuel, electricity, NG, etc)?

    I’m not convinced that adopting the alternative approaches would automatically tank employment and the economy. There is a heck of a lot of productive work that could be done in a “Power Down” scenario.

    • I agree with you that it is hard to see that these kinds of investments are going to get us very far, for the long run. We would have to maintain a high level of international trade, to keep them up. There might be some pieces that would be helpful–keeping basic repairs done on our roadways, bridges, electricity transmission system, and pipelines, for example, but these are not the “sexy” things that fun to write about.

      I don’t see that high tech alternative energy investments will keep our electrical system operating any longer than it would otherwise. In fact, I am quite worried that they will have the opposite impact. When our electricity system was developed, many towns had their own hydroelectric electricity supply. If these were kept in good repair, this could theoretically provide a very small amount of electricity per capita–perhaps enough for a couple lights for each home, if not a whole lot more. The big difficulty would be keeping the transmission system in good repair.

      It seems to me what we need to be developing is combinations of seeds that would be appropriate for different parts of the country and that would provide a reasonable diet for people living in the areas. We might also need seeds of nitrogen fixers as well, and a system for getting composted human and animal waste products and food scraps back to the land. We would need to figure out low energy (or no fossil fuel energy) ways farming could be done, perhaps using animal labor. Availability of water supply without fossil fuels would seem to be a high priority as well. We need to be thinking through how fresh water supplies can be made safe if human and animal wastes are being recycled–perhaps using boiled water or water made into beer or wine. Adequacy of fuel supplies for boiling water and other essential needs would be one issue that would need to be addressed.

      I don’t really expect any of this to happen though. It would require too radical change in thinking. Also, there is not the financial payback that our current system requires.

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  10. Jean-Luc says:

    Great article.

    The problem is that no politicians would acknowledge this is the end of growth. This would not go well. Right now this is not 100% sure yet. I’m not sure if you have heard about Rossi E-Cat ( a Cold Fusion device developed in Italy.

    If we cannot find alternatives to oil and gas, I expect the economy to be on of a (hopefully slow) downward trend for several years (decades) and commodity and stock markets highly volatile with commodity in a long term upward trend and stocks in a long term downward trend.

    Once the end of growth is accepted as a fact, I suppose stock markets, commodity futures, bank borrowing will be a thing of the past. I’m not sure what kind of system we’ll come to.

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