Rentier Debt and the Collapse of Debt-Based Finance

At the Age of Limits conference near Artemis, Pennsylvania on May 25-28, I was asked to speak on rentier debt and the collapse of debt-based finance. This is a somewhat difficult subject, so I decided to talk about the subject more generally–how growing debt fits in with economic growth and growth of energy supplies, and how inability to keep increasing this debt makes any existing tendency toward collapse worse. In this post, I would like to share this presentation with readers.

Slide 1

Let’s start by talking first about a subject fairly far removed debt–the difference between the systems created by nature and systems created by humans. The reason why I bring this difference up is because if we were only dealing with natural systems, there would be no need for debt. It is only when we start dealing with man’s systems that debt becomes an issue.

Natural System vs. Humans’ Growth Based System

Slide 2 – Natural system vs humans’ system

We all know what the natural system looks like: the combination of birds, animals, trees, the sky, the many tiny organisms, the soil, rocks, and everything else in the world that is present without man’s intervention. Human systems represent things that humans make, such as trucks and roads, and cars, and buildings, and electrical transmission systems. In a way, all human systems are interconnected, so we can think of them as one big system, created by humans.

Slide 3. Natural systems don’t grow

Natural systems don’t expand in size over time. Individual plants and animals grow and mature, and in the process become larger. But then they die, their bodies decompose, and eventually different organisms grow. Rocks decompose and form soil. This soil erodes, but, in time, it is replaced with new soil through the erosion of rocks.

There can be an expansion in the number of one type of animal, but eventually these animals will tend to eat too many of their prey, and the number of predators will drop, to stay in line with the amount of their food source. There can be a shift in mix of types of plants and animals, but the change is in the mix, not a long term growth in the overall quantity of plant and animal life.

Natural systems don’t need any assistance from humans. They have been around for billions of years. There is no need to finance anything.

Outsmarting the Natural System

Slide 4. Human systems are very different

In the natural system, each type of plant or animal produces more offspring than is needed to replace itself. The normal order of the natural system is such that only the best adapted plants or animals relative to the particular surroundings will survive. Many of the offspring do not survive to maturity.

Humans, since the earliest times, have had difficulty with this arrangement. Humans, because of their intelligence, have found ways to outsmart at least part of the “survival of the fittest” arrangement that would keep our numbers similar to those of other primates, such as gorillas or chimpanzees–probably fewer than 1,000,000 humans in total in the whole world.

Well over 100,000 years ago, humans discovered the use of fire, and the fact that fire could be used in many ways–to cook food so that new types of food could be eaten, and so that more nutritional value could be extracted from food that was eaten, to keep warm, and to drive animals from one area to another, so that animals could be more easily killed and eaten. In the same time-frame, humans began using spears to better kill prey. About 35,000 to 45,000 years ago, humans learned to hunt with dogs, and thus increased the amount of prey they could kill.

This pattern of finding ways around natural limits has continued to this day. The use of farming, starting about 10,000 years ago, allowed a great expansion in population. The use of trade to import food from a distance further increased the number of humans who could live on the earth. There were numerous other discoveries, including burning peat moss, and the use of water power and wind power, before coal was brought into common use in the 18th century. In the 20th century, the petroleum use surpassed coal. There were also many other advances that helped humans avoid natural limits–for example, the discovery of antibiotics, and the widespread use of electricity.

At the bottom of Slide 4, I have represented the long-term pattern of growth by a line that gradually slopes more and more upward, as we move to later periods. Even in the earliest period, there was some upward slope, but this may have been offset by setbacks. The amount of growth gradually increased, but still was not particularly evident to those living at the time, because of inherent fluctuations. The greatest growth has come in the last 100 years.

Slide 5. Reasons human system is growth based

There are two basic reasons why human systems are growth based:

(1) Humans find ways to get around “survival of the fittest”.

(2) Entropy–Whatever humans build eventually falls apart. Humans have to keep to keep building more, just to stay even. Even advances like discovering antibiotics and herbicides have to keep being repeated, or nature finds ways around our advances.

The combination of these factors means that humans have been, and continue to be, on a constant growth tread-mill. There have been examples of small societies that have managed to keep populations flat for relatively long periods, and there have been many  societies that have collapsed while others have expanded.  The overall aggregate impact of human has been, however, has been one of gradual growth in numbers and material wealth.

Graphic Representation of Natural System and Humans’ System

Slide 6. Humans’ system started out as a tiny part of nature’s system.

Slide 6 shows my view of how very early humans fit in with the natural system, back in the days before man discovered fire and spears and learned how to hunt with dogs. Humans were part of the natural system, just like other animals. Their population was no doubt relatively low, and stayed low, perhaps varying with climate change and food availability.

Slide 7. Humans’ system grew to overwhelm nature’s system

Slide 7 shows my view of what humans’ system looks like now. It has grown in size, so that in many places it overwhelms the natural system. Humans’ system takes resources from nature, and sends its pollution back to nature. Thus it is tied to the natural system, whether we recognize the situation or not.

The Nature of Growth

Slide 8. World population growth

If we look at a graph of world population, we see that growth has been particularly evident in the last 100 or 200 years.

Slide 9. Nature of growth

It appears to me (based on GDP statistics of Angus Maddison for the last 2000 years) that prior to the use of fossil fuels, most of the growth was simply population growth, as humans were able to increase their food supply. It was not until fossil fuels were added that there was a big increase in standard of living.

Slide 10. Growth provides many benefits.

Economic growth of the type we have had since the growth in the use of fossil fuels provides many benefits. If the economy is growing fast enough, there is rising demand for homes, so home prices tend to rise. The prices of individual stocks rise, and there are more jobs available, some of which pay well. Governments find that the taxes that they collect rise, even without raising the tax rate. This helps governmental stability.

Slide 11. What is needed for a growth-based system?

How can humans’ system be made to grow? Clearly one thing that is needed is increasing amounts of materials from the natural world; another is a way of transforming these materials into goods and services that people want or need.

A less obvious thing that is needed is a way for people to be able to pay for the goods and services, in advance of the time that they earn the money to buy these things. This is where “rentiers” come into play. Rentiers provide the credit that allows people to buy goods and services that would normally require a large accumulation of wealth.

Debt was first used about 5,000 ago, back in the days of early agriculture, according to David Graeber’s Debt: The First 5,000 Years. At that time, large temples acted as purchasers and sellers of goods and services. People brought goods to the temple to sell, and also bought other goods. The temples kept running tabs. Those who bought more than they sold were in debt.

Rentiers and Debt

Slide 12. Who/ what are rentiers?

Rentiers are enablers of debt. They allow people to buy things that they couldn’t otherwise pay for. Rentiers include banks and other parts of the financial system.

There have been rentiers for 5,000 years, but the growth in rentiers has been greatest since World War II. The need for debt is greatest when one wants to increase the rate of growth.

Think of the United States after World War II. The world had come through the long economic depression, and things were finally looking better after World War II. The soldiers were coming home again, and would soon be unemployed. If only citizens could afford to buy new cars and new homes, there might be jobs for these returning soldiers.

Slide 13. Non-government debt growth after World War II.

Government debt had been ramped up prior to World War II (allowing it to buy tanks and airplanes and to employ more soldiers), and now was being paid down (not shown on Slide 13). If demand was to be kept up, and even raised, private citizens and businesses needed to be encouraged to go into debt, allowing citizens to buy things like cars, refrigerators, and new homes. Slide 13 shows that non-government debt was ramped up  after World War II. This stimulated the economy because it allowed more people to buy “big ticket” items, and helped ramp up job growth and energy use.

Slide 14. World Energy Consumption

If we look at a graph of world energy use (from my post, World Energy Consumption Since 1820 in Charts) we see that world energy consumption really began to rise after World War II–that is, the same time non-government debt was being added.

Slide 15. Per capita energy consumption since 1820

The growth in energy consumption since World War II is even larger on a per-capita basis. Most of this growth was in fossil fuels–in oil and natural gas, and, recently, in coal. Without fossil fuels, our per capita energy consumption in 2012 would be below that in 1820, and our lifestyles would be much different.

Slide 16. World population grew at the same time as non-governmental debt and energy.

Slide 16 shows that if a person looks at a graph of world population growth, there is a very distinct upward “bend” after World War II. This is precisely the time that energy use grew rapidly, and debt use grew rapidly.

How Debt Growth Works – And Eventually Doesn’t Work

Slide 17. How the debt-based system works

The basic way our financial system works is that when a person or business or government needs money, that money is loaned into existence. This allows a business to expand, or a person to afford to buy a car or home that he or she had not saved up money for.  What happens is that increasing debt allows demand to be higher than it would otherwise be, so that natural resources (including oil, gas, and coal) are extracted more rapidly than they otherwise would be. This allows what we measure as the “economic growth” rate to be higher than it would otherwise be.

There are a couple of catches with this system:

1. The money to repay the debt is not loaned into existence at the same time the principle is loaned into existence. As long as the economy is growing fast enough, this is not a problem, because economic growth allows future production to be enough higher than current production to pay back debt with interest. But if the economy ever slows down, there is a problem.

2. The process of increasing extraction of natural resources through the use of increased debt doesn’t work indefinitely, because at some point resource extraction starts getting constrained, and pollution becomes more of a problem.

Slide 18. Our debt-based system depends on growth

Slide 18 illustrates the way that a growing economy helps to make repaying debt easier. With a growing economy, the size of the “economic pie” grows pretty much every year. This growth means that even if a fixed amount of debt plus interest needs to be paid back, relative to the growing base, it is less of a problem. It is easy to see this situation for a government, but a similar situation exists for individuals. If the economy is growing, on average, people will find themselves getting promotions and will find new jobs available when they lose old ones, so that, for example, repaying home loans tends not to be a problem.

Clearly, the reverse is true if the economy is shrinking. Even if the economy shows zero growth these is a problem, because there is not enough to growth to cover the interest. If interest rates are lowered to almost zero (do very low interest rates sound at all familiar?), the inability to cover the additional cost relating to paying back interest, but even this becomes burdensome.

It might also be pointed out that with a flat or shrinking economy, it becomes more and more difficult to pay for promised social programs, such as social security retirement programs and unemployment programs. These programs become a larger portion of a stable or shrinking pie, and thus become harder and harder to fund. European countries (which have been very generous with their social programs) are having particular difficulty with these problems now, as well as difficulty with repaying their debt.

Slide 20. Humans’ system can’t keep growing forever

The reason why growth in resource extraction cannot continue forever is related to Figure 20, whch I also showed earlier. At some point, resource extraction becomes constrained. Higher demand for oil tends to lead primarily to higher prices for oil, rather than to much more oil actually coming out of the ground. Pollution of various kinds, including carbon dioxide pollution, becomes more and more of a problem.

Everything I can see says we started reaching the point where oil resources became restrained about 2004 – 2005, when oil prices started going up, and oil extraction did not rise by much. Since that time, world oil extraction has grown very slowly, constraining economic growth. The 2008-2009 recession seems to me to be very much associated with this constriction, as are the debt problems we are now seeing around the world, especially in Europe.

Slide 21. Slowdown occurs when oil prices rise

The reason why an economic slowdown occurs when oil prices rise relates to the fact that oil is used for necessities–growing food and for commuting to work. A rise in oil prices does not result in a rise in families’ incomes, especially in oil importing countries, which is what the United States and most of Europe are. A family will tend to cut back on discretionary spending, such as going out to restaurants, or buying a new car, or buying a more expensive home.

As a result, there will be layoffs in discretionary industries–for example, restaurants, car manufacture, and home building. People in these industries will be laid off from work. Some of those laid off from work will default on loans. Value of homes will tend to fall, as few people are in the market for a move-up home. Government spending on unemployment claims will increase, at the same time that tax revenue drops (or flattens) because fewer workers are employed. Governments find themselves in increasingly distressed financial condition, because they cannot afford to pay promised benefits, and their debt burden gets higher and higher. If this all sounds like the economic news of the last few years, in both Europe and the United States, it shouldn’t be too surprising, given the high price of oil, and our the dependence of our economies on oil.

Problems with the Rentier Debt System

Slide 22. Issues of the debt-based system

The biggest issue with our debt-based system is the system tends to collapse, once adequate growth to sustain the whole system occurs. We appear to be rapidly approaching this point. It will also collapse at a closely related point-—when the amount of debt becomes so high that the governments cannot afford to pay the interest on debt, and keep up other programs.

Another issue is that as the economic condition of people in oil importing counties is reduced, governments of these countries find themselves less able to collect taxes, at the same time they would like to stimulate the economy. Promised retirement programs also become harder to fund. This means that the governments of oil-importing economies will find themselves under increasing tendency to collapse, as high oil prices lead to recessionary tendencies.

Another issue of the rentier debt system is that too much money is transferred to the finance system and to those collecting interest (as opposed to paying interest). People at the bottom of the economic order find themselves barely able to make ends meet, and borrow to try to cover necessities. The interest rates these individuals are charged are far higher than the interest rates paid by borrowers who are deemed more “credit-worth”, such as governments.

Another issue is that as the price of oil rises, too much money is transferred to countries involved with oil extraction, at the expense of oil-importing countries. This transfer of funds to oil exporting nations tends to depress the economies of oil importing nations. There are theoretical ways that the funds of oil exporting nations might be recycled, but increasingly, these countries find that they need these funds to pacify the demands of their own populations, so that recycling occurs less.

What Is Ahead?

Slide 23. Some possible impacts of defaults

We have already talked about some of impacts that are already occurring–financial systems under stress, with some countries appearing to be near default. The question is what may happen next.

If there are defaults in one or two countries–say Greece and Spain–the financial problems seem likely to  spread to banks in other parts of the world, through derivatives and through banks carrying debt relating to the defaulting countries. There also seem to be any number of countries in weak condition–for example, Egypt–and the problems of these countries may worsen as well.

Another likely outcome would seem to be that new loans will become less available.  If a particular country has recently defaulted and seems to have no way of paying for new oil imports, they may have difficulty getting loans. But even those not directly involved with defaults may find it much more difficult to get loans, because the financial condition of banks will be worse, and some banks may fail. A reduction in available loans will tend to lead to economic contraction, and make any tendency toward collapse worse.

We can speculate on all kinds of other things that happen. I will not elaborate on the Items shown on Slide 23, except to say that cheap oil has enabled a lot of what we have today–an international trade system that allows the formation of large countries, and that allows large countries to interact to a much greater extent than a few hundred years ago. There would seem to be a possibility that most of the advances of the last few hundred years will disappear as the availability of cheap oil disappears.

Can we solve our problems by getting rid of rentier debt?

Unfortunately, no. We are now reaching resource limits, primarily in oil, but also in other resources, such as fresh water, and also with respect to pollution. Humans were on a growth trajectory to reach these limits, with or without rentier debt. Rentier debt allowed us to reach these limits faster than we might otherwise have reached them.

Now that the bubble has been inflated, and we seem to be near collapse, getting rid of rentier debt won’t really “fix” the situation. It is basically too late. The future direction would seem to be contraction, and this will almost certainly eliminate most rentier debt.  Our task now would seem to be to deal with all of the dislocations that occur when defaults occur and to develop new financial system(s) that can handle continued contraction.

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.
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129 Responses to Rentier Debt and the Collapse of Debt-Based Finance

  1. Leo Smith says:

    good stuff..but from a philosophical point – one detail.

    Human beings are natural and what they do is natural and is no different from other species. NO SPECIES IS EVER IN BALANCE. That is a curious myth propounded by those who have not studied ecosystems. The reality is that populations of any species will expand into ecological niches, and, if they destroy it, crash back to a low level. Locusts are perhaps the most commonly recognized example, but its the same for all. Mathematical modelling of food/browser/predator relationships shows that the so called balance is in fact a chaotic strange attractor with massive fluctuation levels.

    Man is doing what any dumb species does: breeding to the limits of its food supply and when it has exceeded it and the possibility of future supply will crash back to about one tenth of the level.

    Since a large part of its food supply depends on energy, it will be an energy crisis that starts the process.

    You and I will be unlikely to see its end.

    • timl2k11 says:

      Very true, I often think that the human population as a whole behaves not at all differently then a bacterial colony in a petri dish (they use all the available “food” then die off).

    • funglestrumpet says:

      I agree about the energy supply triggering the collapse, but disagree as to its timing. I think that we are on the brink now. I can’t see a way of coming back from the brink, even with the development of gas extraction by the process of fracking, because we need energy in liquid form for transport and agriculture etc. There just isn’t the time available to build up the gas infrastructure before the ungazi hits the fan.

    • Jan Steinman says:

      I think there is a fundamental difference between what most other species do and what humans have done.

      When a non-human species reaches resource limits, it tends to crash until resources recover.

      The difference is that humans have become dependent on non-renewable resources that will not recover form tens of millions of years. Due to our clever exploitation of these resources, we are further into overshoot than most other species ever get.

      I agree with you in general that the difference between humans and other species tend to be one of degree, rather than some absolute. But the degree to which we have gone beyond a chaotic cycle that roughly repeats itself is incredible. Unlike the hare and lynx, humans will probably never regain their current peak, because the systems humans have depleted will not recover, at least not in the time span of the usual lifetime of a species.

    • I agree that any species expands to fill available niches. We have just done better than most species in expanding and taking over new niches. We assume we will continue to find new ways around limits, but this is looking less and less likely.

      I think you are right that energy crisis will start the process of a crash. But the energy crisis may look more like a financial crisis, because the financial system is so tightly tied in with the energy system.

      • Jan Steinman says:

        “the energy crisis may look more like a financial crisis, because the financial system is so tightly tied in with the energy system.”

        When all you have is a hammer, the whole world looks like a nail.

        I’ve been exploring a theory that the Great Depression had energetic underpinnings, but all you see in the history books are financial reasons.

        I think all we’ve really got is a screwdriver, and every financial crisis is missing the energy screw that holds everything together.

        • I agree. It is starting to look more and more like energy is tied in with every financial crisis. I think if we look back far enough, soil erosion is involved as well in many. Without soil, it is very hard to grow food.Reply

      • Killian says:

        I am fascinated at the failure to recognize the systemic nature of the collapse underway. “It’s energy”, “It’s climate”, “It’s economics” are all equally skewed thinking. The latter, most of all. Economics is nothing more than a philosophical extension of ecosystem services. None can see the full picture until they stop seeing the pieces and start seeing the whole.

        energy prices > higher food prices > hunger > energy expended to end hunger > more energy

        climate changes > higher food prices > hunger > more energy to grow replacement food > energy prices

        What’s the real difference between these two? Nothing.

        • The issue is that we are reaching limits in many ways. Oops!

          • permoccupy says:

            I bed to differ. the issue is really that our problem-solving is bifurcated. Can’t do sustainability that way. By the same token, if you do sustainability, you don’t need to worry about all this stuff nearly as much. Most of what is discussed can’t be part of the future.

    • brundlesmith says:

      I completely agree with your ideas, save one exception. Whereas most species are held in check by predators, disease, and other factors, we have not. The result is that there are upper and lower population “bounds” in nature in which species typically exist. These limits are typically not exceeded, and species extinction rates are low. We are different. With unchecked growth, we are now taking out multitudes of other species. Our ecological role now has now changed to be the purveyor of the current mass extinction, equalled only in geological time. Only, we are intelligent enough to understand that we have an ethical choice in the matter.

      • Leo Smith says:

        “Whereas most species are held in check by predators, disease, and other factors, we have not.”

        Rubbish. We are held in check by disease..and our predators are very SMALL ones. Viruses and bacteria.

        We found a fossil energy niche, stripped it clean, expanded like anything and will die back. It really is that simple.

        If we don’t voluntarily limit our procreation people will simply have shorter less pleasant lives.

        Who knows but that the existing aboriginal hunter gatherer populations are not whats left of some massively older civilization that has vanished without trace?

        Given a low enough population density and a few flints and sticks, the stone age is not particularly hard to undertake.

        Man has also teetered on the edge of extinction before…

        http://en.wikipedia.org/wiki/Mitochondrial_Eve

        • davekimble2 says:

          The human population is also held in check by lack of food, especially in poor countries. We could theoretically share more, of course, but that doesn’t seem to be in our genes. Looking at aboriginal populations we see a genetic predisposition to share with a tribe of up to 150 or so, but not 7 billion. Once the local tribe gets too large, a sense of “us” and “them” develops, and we quite happily try to kill “them”, even though some of “us” will die in the process. If that is not a population control I don’t know what is.

          • compass rose says:

            Bearing in mind of course that billions of humans alive today are alive as a direct result of the Green Revolution, which turned oil into carbohydrates into people.
            “Sharing” is all well and good in a rainbow unicorn system. But Leo is right: humans found the fossil energy niche, and are in the process of stripping it clean. The downturn there will be reflected in a downturn of human numbers that resulted from the stripping.
            In the many years I worked in the Land Grant colleges of agriculture (on the then-new sustainability side), I got to meet many of the researchers whose work contributed to the Green Revolution. The eye opener for me was how many of them had witnessed starvation during their time abroad fighting in World War Two, particularly the starvation of children. They returned committed to feeding the masses, took agricultural degrees on the GI Bill, and devoted their lives to the vision of having food to give children in memory of those they watched starve.
            The oil economy and the carbohydrate food economy are one and the same thing. The unraveling will be painful. Nature and evolution revolve around population ecology, not around individual or cultural whims.

  2. timl2k11 says:

    Excellent summary of where we our global society stands. Thank you for providing the pertinent facts in a very concise manner. The facts you discuss are something pretty much every one on earth needs to clue themselves in on. I never see a discussion of any of these basics on the news, on financial websites, by analysts, etc. I think people what to remain blissfully ignorant in general.

    • davekimble2 says:

      > I never see a discussion of any of these basics on the news, on financial websites, by analysts, etc.

      Not in the mainstream media anyway, but there have been lots of discussions elsewhere on this since the ground-breaking Limits To Growth report.
      What I don’t see anywhere is discussion about what happens in the inevitable collapse. Yes of course banking is going to collapse, of course Peak Fossils is going to make it impossible for civilisation to rebuild (rebuilding takes energy). There are going to be more wars as the strong fight to keep their position of advantage. But what is the best thing to do to steer a way through it ? Taking the story as far as this article does is just going over old ground.

      We will be back in balance when the food and fuel the Human population needs is met by photosynthesis in the locality. Take it from there.

      • Jan Steinman says:

        “But what is the best thing to do to steer a way through it?”

        Grow food! Follow Permaculture: “catch and store energy.” And we aren’t talking batteries here — more like catch and store the products of photosynthesis.

      • simon says:

        Dave, other writers/bloggers who are energy-depletion aware and who try to identify possible ways of going through the ongoing/upcoming simplification/bottleneck are Dmitry Orlov (ClubOrlov.com), John Michael Greer (thearchdruidreport.blogspot.com), George Mobus (questioneverything.typepad.com). There are many others but the latest posts from these 3 are relevant to your question. JMG’s latest advises to, individually, collapse now to avoid the rush (HA), through building resilience, self-sufficiency…permaculture is definitely in there somewhere.

        • davekimble2 says:

          Indeed there are writers looking forward. None though use data and charts the same painstaking way that Gail does, and so to me they come across as less convincing. What I would like to see is the problem being given the actuarial treatment. Where future choices occur, one would need to assign probabilities for each choice, and pursue each of them to their logical conclusion. A set of multi-branched futures would thus be laid out, with their assigned probabilities, so that we could see the future landscape more clearly, and make better decisions.

      • compass rose says:

        “The best thing to do to steer a way through it”?????

        My dear man, what makes you think that YOU out of seven billion should be entitled to so pilot your survival?

        • Debt Ridden says:

          Who says entitlement has anything to do with it? It’ll be a matter of good fortune, and we can only hope that Amundsen was right in saying that fortune is nothing more than being prepared.

  3. Don Millman says:

    I am not sure that the distinction between rentier debt and other debt is a valid one. By definition, rentiers do not work; they collect interest from debt (or possibly dividends from stocks). In 1900 the rentier class was in the U.S. far larger than it is now. Nevertheless, this large class of rentiers did not hinder economic growth.

    Note that the projects that rentiers tend to invest in are just as productive as any other kind of debt. If, perchance, there is not going to be any more real economic growth at all, then the returns to rentiers is sure to decline. On the other hand, the return to all investors and creditors will also decline.

    In 2012, the rentier class is relatively small compared to 1900. I do not see it as a big problem. A much much bigger problem is the entitlement class, especially those who have been promised generous pensions.

    • I have not really researched the rentier class, as such, so I was not intending to make much of a distinction.

      I was taking rentier debt as including debt created through financial institutions as well as through bond markets. Modern pension programs are funded by debt through bond markets in particular, so a person could argue that the rentier class has grown as the population collecting pensions has grown.

      Also, in many ways it is the banks, and the high paid employees of banks, that are enriching themselves through increased debt.

  4. Before George W Bush left office, he gave the GOP and it’s one percent the gift that just keeps on giving. He changed the cup from being half full to half empty after 8 years of “deficits don’t matter”, deregulation and unregulated cowboy spending that turned into the worst financial crisis in human history.

    The American economy doesn’t have debt or oil crisis. These are problems that can be fixed with leadership and education. Today’s American crisis is a confidence problem of the 99% who have been thrown under the bus by Republican deregulation, neocon wars and its attempt to drown the government in debt to kill social programs. That’s right, the one percent want to pay for there past wars that protected their wealth with your hard earned Medicare and Social Security funds. Believe me, Saddam Hussein had no interest in attacking me and my little wealth. What we see today is more about the powerful gaining and keeping control.

    Don’t believe for one minutes that what happen to the world economy in 2008 wasn’t intentional. It’s poorly regulated and unregulated rentier debt that’s is the problem. Which helps keeps the 1% in power. A well managed and regulated economy works for all citizens. Unregulated shoot em up leadership is where we are now.

    • I think leaders are at this point getting close to desperate, trying to keep the appearance of continued growth going. So as long as more governmental debt is possible, leaders will spend more than they take in. They will also do whatever they can to try to keep the stock market going up. I don’t see a way that a “well managed and regulated economy” will work to save us now–we have too many basic underlying problems.

      I don’t think what happened to the world economy in 2008 was “intentional”. It may have been close to inevitable, based on the huge amount of debt that was built up. The contraction caused by high oil prices made certain that it happened, because there was way too much debt relative to the underlying possibility of repaying the debt.

      • I think leaders of today are more concerned about their own personal wealth and power than their constituents well being. There is plenty of wealth in this country. They just don’t want to pay for their services supplied by the government. A lot of the stock market is undervalued because of the cash demands and confidence destruction of the 2008 financial crisis. The companies are making record profits and getting more powerful basically controlling government. America could have built a transportation system today twice as energy efficient if we where well managed and regulated. Again, just another self make crisis for more oil profits. You don’t have to go very far here in Southern California to realize $4 a gallon gas isn’t slowing anyone down and/or stopping mortgage payments.
        It’s just too much for me to believe that those smart CEO bankers didn’t see the crisis coming when they where selling mortgages that reset at higher interest rate after a few years based on unlimited home appreciation . Sure it was inevitable with the lack of regulation in the mortgage market place, so clearly intentional. As long as the United States is the ultimate military power it can print all the money it wants .It’s part of the perks of being a superpower. It just might mean some price adjustments on some things (inflation).
        We are still far from collapse. But, there are a lot more people today not living the American dream here in America.

  5. robindatta says:

    Excellent post, even if heretical to economists in their economic mists. Thank you!
    Fire enabled the cooking of grains that were otherwise indigestible, and without that digestibility much of agriculture would be pointless.
    Clothing allowed humans to survive outside tropical climates, overcoming a significant constraint on population.

    • Good point about clothing. There are a whole lot of “inventions,” some very early on, that have allowed man to expand his range and use more of the natural resources in the world.

  6. Pingback: reddebt.co.cc » Blog Archive » Rentier Debt and the Collapse of Debt-Based Finance | Our Finite …

  7. justnobody says:

    I like the blog. It is the only place where the current situation is analysed using more the one field. Your analysis includes a bit of everything such as economy, biology, anthropology and much more. I am getting tired of those web site that see this crises as a economical crises only. Fixing the political and economical system and everything will be alright again,I am very fed up with these web sites and so call specialist.

    • Year are right: “Fixing” our economic problems by tweaking the system seems to be a popular topic. I don’t think people are willing to see that our problems go much deeper.

  8. Paul says:

    Gail says we can’t just get rid of the debt, but we can, and it has already been done at least once in the history of the USA, and many times by other nations during previous half dozen centuries. The debt of the Confederacy was abrogated by Section 4 of the 14th Amendment. That section provides that federal government wont pay and forbids any individual State to pay this debt. Since the States of the Confederacy were back in the Union when this Amendment was ratified, it applied most particularly to them.
    As a matter of fact, our federal government will never pay off the debt. To attempt to do so would cause a breakdown of our society. There just isn’t enough money in cash to pay, and of course, it can’t be borrowed by a government that is behaving so insanely. But it can be abrogated, provided a suitable political pretext is constructed (note the word pretext is particularly approprate here. It is the text that comes before some action).
    I do not have a pretext that I can suggest. I do not advocate abrogation. But I predict that it will happen before we have fully withdrawn our troops from Afghanistan.

    • donsailorman says:

      Throughout history the commonest way for governments to repudiate debt was through inflation. I think that will happen with all major currencies over the next twenty years. When push comes to shove, rapidly increasing rates of inflation are much more likely than is debt deflation. In all of history, debt deflations are rare; inflations are frequent.

      • I am sure that the government would like inflation, if it can engineer it.

        This time around, the inflation approach doesn’t seem to be working as well, though. It seems like engineering inflation becomes more and more difficult, if people’s buying power is tied to the availability of increasing amounts of debt, and there are increasing debt defaults. It is also difficult to raise workers salaries, so as to be better able to handle the debt.

        • donsailorman says:

          Neither the U.S. Federal Reserve system nor the U.S. Congress has made a major effort to create inflation. On the contrary, the Fed has announced and approximately achieved a rate of inflation as measured by the Consumer Price Index of 2% per year.

          Here is how to create an inflation rate of 5% to 10% per year:
          1. Have the U.S. government run a deficit of two trillion dollars per year.
          2. Have the Fed purchase the two trilion dollar deficit with quantitative easing (printing money) with long-term debt.

          Note that some months ago Paul Krugman advocated that the Fed should announce, and then go on to achieve a 5% annual rate of inflation goal for each of the next five years. That policy would work to boost nominal GDP growth up to acound 5% and perhaps somewhat higher. At the same time, real GDP might be declining, but because of the inflation the real burden of debts would be declining.

          • Jan Steinman says:

            The Fed has… achieved a rate of inflation as measured by the Consumer Price Index of 2% per year.”

            But doesn’t the CPI exclude energy and food, because those prices are “too volatile?”

            That’s sorta like declaring that people are not getting older by excluding their age from the statistics that are gathered.

            I suspect anyone who buys food or gasoline would laugh at such figures. Perhaps digital cameras and big-screen TVs have not inflated, but last I checked, you can’t eat those.

            • donsailorman says:

              The 2% rate of growth in the U.S. Consumer Price Index includes both energy and food prices. The concept that you refer to is called “core inflation,” but it is not the index the Fed uses for measuring inflation.

              The Consumer Price Index is probably not the best index for measuring how much inflation exists. In my opinion and that of many (probably most) economists, the Gross National Product deflator provides a better measure of inflation. For historical and political reasons, the Fed uses the CPI number and is likely to continue to do so. Why? Well, for one thing, cost-of-living adjustments in Social Security benefits are based on the CPI.

              John Williams over at shadostats.com claims that the CPI greatly understates the true rate of inflation. I think he is essentially correct, but unfortunately his methodology is secret, and he has never explained how he gets from U.S. government numbers to his numbers.

          • Jan Steinman says:

            So Don, are you saying that if the cost of gas doubles and the cost of food doubles, but the value of your house falls 50%, inflation is, on average, zero?

            • donsailorman says:

              If you do not like the U.S. government numbers for inflation, then go over to shadowstats.com and use the numbers that John Williams does. I’m inclined to believe that his numbers are better than the Government numbers, but I cannot prove this opinion to be true.

    • It is pretty clear that much of the debt that is in place can never be paid back.

      I have not studied what happened with previous debt jubilees. There are clearly many organizations that depend on debt being paid back, as promised–for example, insurance companies, banks, and pensions plans. Canceling debt has very definite social repercussions. Should a person who has paid 5% down on a house get possession of the house, without paying anything more? Should people who have paid into pension plans automatically lose their pensions, even if they have paid in for many years? Should insurance policies all become worthless? What would debt jubilees do to banks, and to international trade?

      I don’t know what the problems have been with jubilee in the past. We have so much more debt now, and its character is so interwoven through society, that getting rid of it (or perhaps more accurately, debt evaporating, without our doing anything further) is likely to cause huge dislocations.

    • Stu Kautsch says:

      Paul,
      Gail’s question was not whether we can get rid of the debt, but whether we can solve our problems by getting rid of the debt. To that, her answer is ‘no’ and she’s right because it does not solve the underlying problems like resource constraints (not to mention cultural barriers to a steady-state or even shrinking economy.)
      The example you give is fascinating, but it is still only government or other public debt. To do even this much, the central government would have to be willing to totally smash the power of the banks (since so much of their balance sheets is public debt). Whether this could happen without a revolution is not clear, since the banks’ power is so tremendous.
      It *could* create the money necessary to pay off its own debt (by directly creating the money instead of borrowing it from the Federal Reserve), but of course it would first have to smash the power of the banks (who are very jealous of the ownership they have of the monetary system).
      In the long run, it does not matter because smashing the banks does not bring back any of the quality fossil fuels or ores which are gone forever.

      Gail,
      Very nicely organized! There *are* others trying to make these links but most fail to find a “flow” which will lead the reader along without confusion. This talk would definitely be worth repeating.

      • The talks were each 90 minutes, including discussion. This is more time than most organizers ever consider giving anyone. With this much time, it was possible to go through a lot of subjects together–it makes kind of a long post, though.

      • Paul says:

        IMHO, it is a given that we will have no growth because of resource
        depletion. There will be shrinkage for a while, perhaps collapse to a
        very small economy followed by a modest recovery, but never again
        sustained growth. I think debt abrogation will be part of the future,
        whether we plan for it or not. Gail does say that canceling debt won’t
        do any good. My post was a response that, IMO, canceling debt won’t do
        any extra harm either. In support of no extra harm, I cite an instance
        where we’ve done a debt cancellation in the past and the harm that it
        might have caused then was so minimal that it is totally forgotten now.

  9. robindatta says:

    Wile E. Coyote is off the cliff: all that remains is to feel around with the big toe for ground and then to look down: http://m.financialsense.com/financial-sense-newshour/guest-expert/2012/06/08/simon-a-mikhailovich/financial-derivatives-the-ticking-time-bomb

  10. Larry Shultz says:

    My read is that real home prices do not rise over long periods of time.

    • You might be right. But over short periods of time, if there is a real economic “boom”, prices seem to go up.

      • john c green jr says:

        Larry’s correct that housing does not appreciate over long periods of time at least in Amsterdam which with 600+ years of residential real estate pricing has the longest continuous records for any city. Prices for commercial real estate in New Amsterdam have been even worse in the past century. Commercial office space was 30% cheaper in 1999 than 1899. http://economics.mit.edu/files/5887

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