2013: Beginning of Long-Term Recession?

We have been hearing a lot about escaping the fiscal cliff, but our problem isn’t solved. The fixes to date have been partial and temporary. There are many painful decisions ahead. Based on what I can see, the most likely outcome is that the US economy will enter a severe recession by the end of 2013.

My expectation is that credit markets are likely see increased defaults, as workers find their wages squeezed by higher Social Security taxes, and as government programs are cut back. Credit is likely to decrease in availability and become higher-priced. It is quite possible that credit problems will adversely affect the international trade system. Stock markets will tend to perform poorly. The Federal Reserve will try to intervene in credit markets, but if the US government is one of the defaulters (at least temporarily), it may not be able to completely fix the situation.

Less credit will tend to hold down prices of goods and services. Fewer people will be working, though, so even at reduced prices, many people will find discretionary items such as larger homes, new cars, and restaurant meals to be unaffordable. Thus, once the recession is in force, car sales are likely to drop, and prices of resale homes will again decline.

Oil prices may temporarily drop. This price decrease, together with a drop in credit availability, is likely to lead to a reduction in drilling in high-priced locations, such as US oil shale (tight oil) plays.

Other energy sources are also likely to be affected. Demand for electricity is likely to drop. Renewable energy investment is likely to decline because of less electricity demand and less credit availability. By 2014 and 2015, less government funding may also play a role.

This recession is likely be very long term. In fact, based on my view of the reasons for the recession, it may never be possible to exit from it completely.

I base the foregoing views on several observations:

1. High oil prices are a major cause of the United States Federal Government’s current financial problems. The financial difficulties occur because high oil prices tend to lead to unemployment, and high unemployment tends to lead to higher government expenditures and lower government revenue. This is especially true for oil importers.

Figure 1. US Government Income and Outlay, based on historical tables from the White House Office of Management and Budget (Table 1.1). *2012 is estimated. http://www.whitehouse.gov/omb/budget/Historicals

Figure 1. US Government Income and Outlay, based on historical tables from the White House Office of Management and Budget (Table 1.1). *2012 is estimated by OMB. http://www.whitehouse.gov/omb/budget/Historicals

2. The United States and world’s oil problems have not been solved. While there are new sources of oil, they tend to be sources of expensive oil, so they don’t solve the problem of high-priced oil. Furthermore, if our real economic problem is high-priced oil, and we have no way of permanently reducing oil prices, high oil prices can be expected to cause a long-term drag on economic growth.

3. A cutback in discretionary spending  is likely. US workers are already struggling with wages that are not rising as fast as GDP (Figure 2). Starting in January, 2013, US workers have the additional problem of rising Social Security taxes, and later this year, a likely cutback in government expenditures. The combination is likely to lead to a cutback in discretionary spending.

Figure 2. Wage Base (defined as sum of "Wage and Salary Disbursements" plus "Employer Contributions for Social Insurance" plus "Proprietors' Income" from Table 2.1. Personal Income and its Distribution)  as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

Figure 2. Wage Base (sum of “Wage and Salary Disbursements” plus “Employer Contributions for Social Insurance” plus “Proprietors’ Income” from Table 2.1. Personal Income and its Distribution) as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

4. The size of our current financial problems, both in terms of US government income/outgo imbalance and debt level, is extremely large.  If high oil prices present a permanent drag on the economy, we cannot expect economic growth to resume in a way that would fix these problems.

5. The financial symptoms that the US and many other oil importers are experiencing bear striking similarities to the problems that many civilizations experienced prior to collapse, based on my reading of Peter Turchin and Sergey Nefedov’s book Secular Cycles. According to this analysis of eight collapses over the last 2000 years, the collapses did not take place overnight. Instead, economies moved from an Expansion Phase, to a Stagflation Phase, to a Crisis Phase, to a Depression/Intercycle Phase. Timing varies, but typically totals around 300 years for the four phases combined.

It appears to me that the corresponding secular cycle for the US began in roughly 1800, with the ramp up of coal use. Later other modern fuels, including oil, were added. Since the 1970s, the US has mostly been experiencing the Stagflation Phase. The Crisis Phase appears to be not far away.

The Turkin analysis started with a model. This model was verified based on the experiences of  eight agricultural civilizations (beginning dates between 350 BCE and 1620 CE). While the situation is different today, there may be lessons that can be learned.

Below the fold, I discuss these observations further.

Issue 1. High oil prices tend to lead to government financial problems.

Food prices tend to rise at the same time as oil prices, partly because oil is used in the production of food (for example, plowing, irrigation, herbicides and insecticides, harvesting, transport to market). Also, because oil is in short supply, corn is now being grown for use as ethanol to be used as a gasoline-extender. Growing additional corn puts pressure on food prices, because it drives up the price of land and encourages farmers to put more land into corn production, and less into other crops.

The reason governments are affected by high oil and food prices is as follows. When oil and food prices rise, buyers cut back in discretionary spending, so as to have enough for “basics,” including food and commuting expenses. Workers are laid off in discretionary industries, such as vacation travel and restaurants. These laid off-workers pay less taxes, and sometimes default on loans. Governments are quickly drawn into these problems, for two reasons:

  1. Their tax revenue is lower, because of layoffs in discretionary sectors.
  2.  Their expenditures are higher, because of the need to pay more unemployment benefits, provide economic stimulus, and bail out banks.

Oil importers are especially affected, because they are also paying out funds to oil exporters. The countries with well-publicized financial problems (including several European countries, the United States, and Japan) tend to be major oil importers.

Oil exporters are not adversely affected to the same extent, because they have  additional revenue from higher prices on oil they are exporting. They may still be somewhat affected because of rising food prices, and the fact that higher oil revenues do not necessarily go to those buying food. A recent study shows that food shortages helped trigger the Arab Spring protests.

Part of the reason that the impact of high oil prices is as severe as it is, is because there are many follow-on effects. For example, if oil prices rise, the price of shipping goods of all types rises. If businesses are able to pass through these higher costs, discretionary income of buyers for other goods falls. If not, businesses find that their higher costs lead to lower profits. To bring profit margins back up to an acceptable level, businesses may lay off workers.

As another example, prices of homes are likely to be adversely affected by high oil prices, because a family with inadequate discretionary income will forgo moving to a larger home, and may even default on a mortgage.

It should be noted that the impact of high oil prices doesn’t completely go away unless oil prices go down and stay down. Businesses can partly mitigate the impact of high oil prices by laying off workers in discretionary segments. Some businesses will fail completely, however. Replacement may be by an overseas company, with a lower cost structure that uses less oil. See my post on energy leveraging.

Workers generally must permanently adjust their budgets to higher food and oil prices. This is often difficult to do. The lack of jobs is a particular problem–something that workers cannot fix by themselves. Government programs can mitigate the job shortfall, by paying benefits to unemployed workers and by reducing interest rates, so that businesses can more easily make investments that will lead to more employment. These programs are costly, though, and are a major  cause of the current mismatch between government income and expense.

Issue 2. World oil problems have not been solved.

There have been a number of reports this years, such as one by the International Energy Agency, seeming to suggest that the world oil problem has been solved. These analyses are incomplete. They do not recognize that our real problem is a financial problem. Our economy (everything from interstate highways to electric transmission to Social Security programs) was put in place using cheap ($10 or $20 barrel) oil. Shifting to today’s high cost of oil (up near $100 barrel) causes severe economic dislocations. There is no more cheap oil to be found, however, because oil companies extracted the cheapest to extract oil first and now the “easy oil” is gone.

The impression one gets from reading the papers is that US oil production is having a huge impact on world oil production. If a person looks at the numbers, world oil production is close to flat. Rising US production makes up for falling European production, but doesn’t do a whole lot more.

Figure 3. World crude oil production, based on EIA data. *2012 estimated based on partial year data.

Figure 3. World crude oil production, based on EIA data. *2012 estimated based on partial year data.

The rise in United States oil production is indeed somewhat helpful, but we are still many years away from being “energy independent” and even farther from becoming “oil independent.” The real issue is high oil prices, and these are not being fixed.

Figure 4. US crude oil prices  (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.

Figure 4. US crude oil prices (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.

Our financial problems are here and now, in 2013. Promises of hoped-for higher oil production in several years at a still very high price don’t fix today’s financial problems. In fact, they will likely continue to contribute to financial problems in the future.

Issue 3. Declining wages and increased taxes can be expected to lead to a decline in discretionary spending.  

As indicated at the beginning of the post, wages (including earnings of  businesses owners considered as “proprietors,” but not including “transfer payments” such as Social Security and unemployment insurance) have not been growing as fast as GDP since 2000. Below is a repeat of Figure 2 shown at top of post.

Figure 2. Wage Base (defined as sum of "Wage and Salary Disbursements" plus "Employer Contributions for Social Insurance" plus "Proprietors' Income" from Table 2.1. Personal Income and its Distribution)  as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

Figure 2. Wage Base (sum of “Wage and Salary Disbursements” plus “Employer Contributions for Social Insurance” plus “Proprietors’ Income” from Table 2.1. Personal Income and its Distribution) as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

There seem to be several reasons behind this decline. One reason, already mentioned, is high oil prices leading to US layoffs, because of decreased discretionary expenditures.

Another reason for the decline is increased automation. Electricity can often be substituted for human labor, reducing costs, but also reducing jobs. Economists seem to term this change higher labor productivity. They also seem to believe that new jobs will appear from somewhere, but in practice, this is not happening. Instead, lack of jobs is part of what is leading to recessionary influences.

Another reason for the decline is increased competition from countries with lower labor costs and lower fuel costs. China joined the World Trade Organization in December 2001, and its manufacturing (and thus use of fuels) increased dramatically shortly thereafter.

Figure 5. China's energy consumption by source, based on BP's Statistical Review of World Energy data.

Figure 5. China’s energy consumption by source, based on BP’s Statistical Review of World Energy data.

Another reason is demographic. Baby boomers are reaching retirement age. This has already begun affecting the number of individuals who retire each year. In the future, the number of retirees can be expected to increase further.

In total, we see a very large drop in the percentage of US citizens with jobs, starting about 2000 (Figure 6). This is very close to the time that China ramped up its growth (Figure 5).

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census.  2012 is partial year estimate.

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. 2012 is partial year estimate.

In calendar years 2011 and 2012, workers’ contributions for Social Security funding were temporarily reduced by 2% of wages, as a way of stimulating the economy. As of January 1, 2013, this temporary reduction was removed. For a couple with combined wages of $100,000, take-home pay is thus being decreased by $2,000 per year. With less disposable income, workers can be expected to cut back somewhere–buying a larger home, buying a new car, or going out to eat.

So far, only a small amount of other tax increases have been put in place, and only a few cuts have been made. More tax increases or benefit cuts will be needed later this year to bring revenue and expense into better alignment. Any such change will tend to have a recessionary impact, because citizens’ discretionary incomes will be affected.

Issue 4. The spending gap and the amount of debt look too big to be fixable without excellent economic growth.

As noted above, wages have not been keeping up with GDP. The majority of federal taxes are based on wages, so in my comparisons,  I use wages, rather than GDP, as a base.

If we use the wage base from Figure 2, the amount of government outgo vs income (all levels, not just federal) is as follows:

Figure 7. US Government Spending (all levels) as percentage of Wage Base, as defined in Figure 2, above.

Figure 7. US Government Spending (all levels) as percentage of Wage Base, as defined in Figure 2, above, based on US Bureau of Economic Analysis data.

Based on Figure 7, the issue in recent years has been primarily rising expenditures. These higher expenditures would seem to be partly because of high-priced oil, but also because of other influences noted above that are leading to declining employment. The amount of the gap is close to 15% of wages–something that is very hard to fix. Even the current increase in Social Security taxes (“only” 2% of wages) will exert downward pressure on discretionary spending.

A related issue is that compared to wages (using the same wage base as in Figure 2), debt of all kinds is extremely high.

Figure 8. US Debt as a Percentage of the Wage Base, where the Wage Base is as defined in Figure 2, and Federal Debt is from Treasury Direct, and other types of debt are from the Federal Reserve Z.1 report.

Figure 8. US Debt as a Percentage of the Wage Base, where the Wage Base is as defined in Figure 2, and Federal Debt is from Treasury Direct, and other types of debt are from the Federal Reserve Z.1 report.

Government debt is in now more than household debt of all kinds, including mortgage, credit card, auto, and student loans. It is close to two times the wage base used in this analysis.

One issue with paying down debt is that during the pay-down period, the government (or individual) reducing the debt “feels poorer,” because funds available for spending on goods and services needed today is lower. This happens because some current tax revenue, or some current wages, must be used to pay down debt, and thus is not available for today’s spending. This is a turn-around from the increasing debt situation experienced many times in the past. For example, part of the reason times seemed good in the 2002-2006 period was because people were able to refinance their homes and use the funds to buy a new car or add on a family room. If we are forced to pay down debt, we have the reverse effect.

Issue 5. Similarity to “Secular Cycles” of Peter Turchin and Sergey Nefedov.

Throughout the ages, many economies that have experienced long-term expansion. Eventually, they reached limits of some sort and collapsed. The book Secular Cycles by Peter Turchin and Sergey Nefedov takes an analytical approach to looking such past cycles.  They developed a fairly complex model of what they would expect over time, in terms of trends in wages, prices, population, income inequality, and other variables. They then examine historical records (relating to eight civilizations in four countries, with “start dates” between 350 BCE and 1620 CE) to see whether this predicted pattern was born out in practice. In general, the authors found good agreement with the predicted model.

Typically, civilizations analyzed were reaching upper limits in population growth because of limits on food availability, but sometimes limits on water or fuel also were important.  The model predicted four phases (expansion, stagflation, crisis, and depression/ intercycle). The typical length of the entire cycle was 300 years. The length of the various segments was fairly variable. The stagflation stage often lasted 50 or 60 years. The crisis stage tended to be shorter, more often in the 20 to 50 year range. There often was overlap between phases, with a civilization seeming to cycle back and forth between, say, expansion and stagflation.

In the model, there are various feedback loops. For example, as the number of workers rises relative to the amount of land, the price of land and food tends to rise. Jobs outside of agriculture do not rise proportionately, so wages of common workers tend to fall in inflation adjusted terms. With lower wages for common workers, nutrition declines. Eventually, the population becomes weakened, and population declines. There are also other players–the elite and the state itself.

Some characteristics of the four phases are as follows:

  1. Expansion phase (growth) – Increasing population, relatively low taxes, political stability, low grain prices, and high real (inflation-adjusted) wages.
  2. Stagflation phase (compression) – Slowing population growth, much heavier taxes needed to support a growing elite class, low but increasing political instability, rising grain prices, declining real wages for most workers, increasing indebtedness, and increasing urbanization.
  3. Crisis phase (state breakdown) – Population declining from the peak (typically by disease or by deaths from warfare), high income inequality, political instability increasing to a peak, high but very variable grain prices, high urbanization, tax system in a state of crisis, peasant uprisings.
  4. Depression/intercycle – Low population, attempts to restore state,  declining economic inequality, grain prices decreasing but variable.

It seems to me that the United States and much of the world are going through a cycle much as described by Turchin. The Growth Phase of our current cycle seems to have begun around 1800, with the rise of coal use. Stagflation in the United States seems to have started with the drop in US oil production in 1970. All of the government budget and debt problems now seem to suggest that we are reaching the Crisis Phase.

Obviously, there are differences from the civilizations modeled, because we now live in a much more integrated world. Furthermore, earlier societies did not depend on oil and other modern fuels the way we do today. We do not know how the current situation will play out, but the comparison is concerning.

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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158 Responses to 2013: Beginning of Long-Term Recession?

  1. Leo Smith says:

    Nothing to argue with there at all.

    You remain a tireless researcher and purveyor of an acute, and well thought out view.

    Inly two things will preserve any sort of ‘civilsatuon’

    – access to a different source of cheap energy
    – dramatic fall in population.

    Both are politically unacceptable right now.

    • Thanks! A commenter on Our Finite World introduced me to Secular Cycles. My general impression was that collapse cycles were tending to get shorter over time. Some early ones were as long as 100 years. The last one was 17 years.

      When I wrote about how long I thought it would take for the decline a couple of years ago, my guess was that it would take about 20 years. My reasoning was that most of the stuff we have accumulated today (clothing, cars, hoses, and “stuff” of all sorts that would help a transition) will be non-workable by the end of 20 years. Without the prop of accumulated stuff from the fossil fuel age, it would be difficult to have much of a civilization.

      • Great Article Gail! I wonder if the speed in which a civilization goes into overshoot as well as how far into overshoot (out stripping resource base) the civilization goes effects the length of the collapse cycle? I feel the unprecedented nature of industrial civilization may intensify the feedback loops of collapse leading to much faster collapse than previously seen in history. I guess we will find sooner or later.

        • My impression in looking at the eight collapse cycles discussed in Secular Cycles is that they were getting shorter and shorter. The last one was 17 years. The collapse of the Soviet Union was not included in the book. It seems like it took place over a much shorter time–less than 10 years.

          Now, everything is dependent on electricity, the Internet, GPS, electronic bank transactions, just-in-time inventory, and many other modern inventions. If we lose any of them, we don’t have a fallback. Even something as simple as bad hurricane damage could be a problem, if we don’t have the resources to repair the damage. These things will tend to shorten the time to collapse. The fact that eventually the economy of the whole world will collapse may stretch out the total time somewhat.

      • I have also thought along these lines of “how long will it take?”..we have so much “stuff”, how long will it take to wear it out, use it up?

        I like this article, clear, concise and easy to read.

    • Mark Bahner says:

      “Nothing to argue with there at all.”

      I predict that, within 1-3 decades, world GDP will consistently be growing at more than 7 percent per year.

      Needless to say, there’s plenty here I can argue with. 😉


      • Jan Steinman says:

        Yet another future prediction based on past performance. Yawn. Nothing to see here, folks. Move along.

        Based on my growth rate from 0 to 16, I should be nearly 22 feet tall by now. What went wrong with that linear regression prediction?

      • Interesting link! The graphs we see usually show such a short time span that people don’t realize how low growth was prior to fossil fuels, how much it ramped up with fossil fuels, and how much growth has recently backed off, relative to what we would have expected, if the rate of growth in fossil fuel use had contined.

        • Mark Bahner says:

          If fossil fuels are what create wealth, how do you explain East Germany versus West Germany, or North Korea versus South Korea?

          Why is Japan wealthier than Russia? Why does Israel have a higher per-capita GDP than Iraq, Iran, or Libya?

          Why do Luxembourg, Singapore and Hong Kong have such high per-capita GDPs?

          • You need the whole system. That is why in my article Why Malthus Got his Forecast Wrong, I talk about it taking the combination of fossil fuels and non governmental debt to ramp up the US economy after World War II. A system that includes fossil fuel is necessary to get the energy needed for manufacturing or services of any kind, but it is not sufficient on its own. In the case of West Germany, they are mostly hanging on the shirt tales of others. That is why they have been so interested in wind and solar. West Germany has benefited by the way the Euro is constructed–keeps German products cheaper than they rightfully should be, thanks to Greece, Portugal, Spain, etc. pulling the Euro down. Long term, its prospects are less good.

            Obviously, the fuel by itself isn’t enough, just like farmland isn’t enough for crops. You need seed for crops. You need the investment in infrastructure for fuel. It really helps to have debt to ramp up consumers’ ability to buy as well. It also helps to have Western capitalist laws–land ownership etc. Not that capitalism is ideal. It does help with converting fossil fuels to finished products, though.

  2. ravinathan says:

    Terrific analysis Gail. As an actuary, how would you advise pension funds to invest during this period of stagflation and early crisis? If I understand you correctly, the forecast is for volatility in commodity prices – inflation followed by falling demand with resulting price collapse. It appears that a pension crisis is already baked in.

    • I am not sure I have a good answer on investing for pension funds. You are right–a crisis for pensions is baked into the cake. The question is what will least lose value over time. Unless a person really knows, I suppose diversification is as good a choice as any.

  3. JD in VaBeach says:

    Gail: Your lucid analyses are really the backbone of my ongoing education in this extraordinary experience we are living through now.

    As Ravinathan infers above, pension obligations, especially for States and cities, are really a timebomb. Default is inevitable. What happens when the first responder segment of our society decides not to respond because their union contracts are being voided. It is certainly not out of the question, even in the short term. Chaos.

    But the probability lies (I’m just guessing) with hyper-inflation as the government strategy to keep the game going for another generation or so. Fix benefits and debt and hyper-inflate currency and let the federal government take all of the state/local obligations.

    When I worked in Turkey in the nineties the Lira was 50,000/1 USD. The Turkish lira then inflated to 2 million lira per dollar by 2005. Then they knocked off the last six zeros and came out with “new” lira. No reason we can’t/won’t do the same. I guess I should get those dollars out of my mattress.

    All beside the point in the long term, though, eh?

    • Difficult to know what to do. If TIPs are truly inflation (and deflation) protected, they would seem to be a solution. Of course, if the government hits a debt limit, that is a problem too.

    • I am not sure the government can keep the game going for another generation or two. Our current system is built on international trade–it is hard to make anything that is at all high tech, without international trade. If international trade goes downhill, there is a definite problem. Also, there is a question of central governments disappearing, and only local governments taking over. Think of the Former Soviet Union and the Former Yugoslavia. Will these new small countries be able to set up international trading agreements? Will it become very cumbersome to ship goods across many tiny countries?

    • “What happens when the first responder segment of our society decides not to respond because their union contracts are being voided. It is certainly not out of the question, even in the short term. Chaos.”

      You misunderstand those in the healthcare profession. The ones that succeed mostly do so because they have the will to heal to begin with.

      In a collapse the health care workers will be responding whether they’re paid or not.

  4. John Dunn says:

    “For a couple with combined wages of $100,000, take-home pay is thus being decreased by $2,000 per year.”
    Interestingly, today here in the UK, certain Child Benefit changes, are beginning to affect similar middle income families, to the tune of similar decreases in income.
    I’ve been pondering something of late that, I would appreciate further ‘brain crunching’ on. I’ve been wondering about something called the Pareto Principle, or its more simple cousin, the 80 /20 rule. Stated very briefly, the 80/20 rule suggests that 80% of the consequences, are derived from 20% of the root causes.
    It’s very evident, that reduced income equates to less disposable income. This is a given. However, reducing the income of the lower paid by (say), 4%, might result in them attempting to reduce their various outgoings, food, heating etc, by a similar 4%. However, some items of expenditure, that might be considered discretionary, and often ‘middle income’ expenditures, will, (possibly due to the 80/20 rule), be affected far more severely?
    (Just a couple of examples) : If someone (middle income), loses 4% of their income, they don’t go 4% less to the gym, or watch 4% less Sky TV, they will probably cancel their subscription totally (a 100% cut). Similarly, do they take the family to Sunday Lunch at their local pub/restaurant 4% less, or change to a different (less spending), weekend habit with the family?
    Thus, if sufficient numbers of median to high earners kill off 100%, of some of their higher end consumer purchases and services, in response to a (say), 4% decrease in their income, that might have a bigger (accelerating), economic effect.?
    Whatever, 2013 is going to be a very bumpy ride. Watch out below!

    • Leo Smith says:

      Hi fellow UK er!
      Yes, and in fact the UK is LEADING the way in various fields. The interview with John Lewis (upmarket quality supermarket and purveyor of quality consumer goods) on Sky News today featured some interesting facts
      – 25% of purchases now made online.
      – a flight to quality for people with lower disposable incomes. Stuff has to be better, last longer.

      The rise of the Internet balances the death of the shopping mall.

      Overall this represents a far lower energy solution for a similar lifestyle for those still employed.

      In the 90’s I’d think nothing of using the car to drive ten miles there and ten miles back if I had run out of coffee. Today we at best shop once a week. Its cheaper to buy the coffee at twice the price from the local shop, than fill up the car again. we do less than a quarter of the road miles we used to. I spend more on heating oil than on car diesel.
      There is a lot of unnecessary fat in the UK economy. WE can it seems drop GDP and energy use by maybe a factor of 2 and still be reasonably civilised.

      That won’t stave off the problems indefinitely, but it does delay things. As do local solutions to local problems – as transport costs go up some does expensive out of season or imported food. Another cost saving.

      Rapid change that gives little time to adapt is always more destructive than reasonably gradual change. A generation that grows up in a low energy lifestyle is better adapted than its parents. Many kids today are not even bothering to learn to drive. If politics and misguided enthusiasms can be replaced by rational objective analysis, the market itself will self optimise its way to whatever solutions work.

      However at the moment governments are the problem, not the solution. They tend to be funded by and lobbied by the status quo and that means imposing barriers in the way of genuine innovation and tilting the playing field in favour of fashionable but less viable innovation.

      Governments didn’t fund the rollout of the Internet. It works. It saves trees, its saves fuel and it saves money overall. Government is meddling in energy though, and that’s stifling the real solutions.

      • John Dunn says:

        Hi Leo : You are right on many fronts.
        What I find interesting is that the US and the UK are different animals, but their approach to economic survival, has many parallels. On a broader note, we here, all observe current events, looking for the turning point, the indicators of collapse, the trigger to a change in thinking. But we are accustomed to expect ‘instant’, when many planetary changes occur at a more ‘glacial’ pace. It can be a little unnerving, considering we each, only have the ringside seat booked for about 70 years.
        Many years ago, I found the simple statement, “as above so below”, to be a very valuable thinking tool, when trying to understand certain ‘big’, hard to grasp, events.
        e.g. ~ If you take a large pan of boiling water off the heat, it often continues to boil for a few seconds as it gets residual heat from the base of the aluminium pan.
        In just the same way, global growth will continue to bubble for a few more years from the residual heat of cheap oil, and the remnants of lingering credit. It will give some folk, the illusion of continued growth for a while, but it would be foolish to ignore the fact that major changes are ahead. The 250 years of growth that humanity has enjoyed, (gorged on?), is now looking for its reverse gear. It’s just a matter of time.
        Take Care.

        • The big question is how quickly this reversing will unfold, and will we be prepared enough to make serious changes in how we relate to things we have come to take for granted? Some people say that in 50 years we are down to pre-industrial times. I doubt it will go that fast – although in some parts of the population it will (more poor people). Furthermore its always a question of when the poor population becomes so big that a tipping point into chaos happens – or whether we are able to adapt people in a way to not expect more. Some like to play with these scenarios and I often feel many take the chaos route too easily (probably because it has more “special effects”). John Greer seems to think it will be a slow trawl down of “small” crisis after another but people adapts to the new rules of the game as we go that way. What do you think?

      • This is a very good and important point that a lot of people realise eventually. In general I have always tried to group my trips into one a week instead of driving to the post office to pick up a package every day I get a note in the post (here in Norway we dont get packaged delivered to the door like in USA). Recently my wife bought some pants for half the price of new (it was rather cheap), but since my belly has obviously grown a bit these past years, we need to swap them. So she took another trip to the shop to swap them as I was at work – they didnt have the pants in my size – but they did have them at another store in the centre of town pretty close to where I work. Hm, ok its a 20 minute walk there, and 20 minutes back – or I could drive – pay toll road tax + parking… you see where this is going. It just cost too much to “save half the price” that I said to my wife on the phone – “just get your money back”. I think a lot of people simply dont think about these things in the midst of it, energy has been so cheap that we dont count it into the price of things – or indeed the time you spend doing silly things like this.

        In general, whenever I need to do something I think about the time and energy involved in travelling as an extra cost. In many cases that cost alone makes the whole point of the trip pointless if you do something to e.g. “save money” – I save more by simply not doing it at all. 🙂 – I guess it makes you more lazy, although I have always enjoyed staying at home tinkering with my hobbies. I mean people drive miles to get to the gym to work out when they could just run around a couple of blocks where they live to get the same effect.

        In the extreme example I often say: “You can learn more about Egypt in a single google search session than you do travelling down there and sitting on the pyramids.” 🙂 – And once you get past the “been there done that – facebook mentality”, you are really down to the core of it – “why on earth are you on the top of a pyramid in egypt?”

  5. In many ways our situation is unprecedented, the scale of collapse from a one-time-only lack of fossil fuels is quantitatively and qualitatively different from past downturns. In the past when forests were decimated for fuel, homes, ceramics, and warships, or soils degraded so much crops failed, etc., there were literally “greener pastures” elsewhere. I still can’t imagine how fast or how long the last phase will take, when we go from 7.2 billion down to a wood-based energy carrying capacity of 1/2 to 3 billion people. Too many factors I guess for anyone to know, too many local and regional variations. Yet impossible to not wonder about and try to calculate…thanks Gail for your excellent analysis.

    • Jan Steinman says:

      “I still can’t imagine how fast or how long the last phase will take, when we go from 7.2 billion down to a wood-based energy carrying capacity of 1/2 to 3 billion people.”

      The question is, will there be any wood left?

      I expect long before population crashes, the earth around cities will be stripped bare.

      • It is already happening in Greece- “During the year 2012, the authorities seized a total of 13,088 tonnes of wood cut illegally, 425 vehicles which transported them and 426 tools used for this purpose,”
        I see Dr Zhivago pulling down fence boards.
        I hate to say this but living here in the Heart of the Redwoods maybe the place to be.

        • Jan Steinman says:

          “living here in the Heart of the Redwoods maybe the place to be.”

          Yes, I think the Pacific Northwest from Juneau to Arcata may be one of the best places on the planet in coming years — if you can stay away from the population centres, and if the fuel runs out quickly enough to significantly reduce the ability of those population centres to rape the surrounding terrain.

          I wrote a prize-winning prediction short story that said that not a tree remained within 50 miles of New York City.

    • Jb says:


      “the scale of collapse from a one-time-only lack of fossil fuels is quantitatively and qualitatively different from past downturns”

      My thoughts exactly. There is no comparison. Never in all of human history have we been able to create the kinds of surpluses that we have as a result of replacing muscle labor with fossil fuels.

      • Jan Steinman says:

        “There is no comparison. Never in all of human history…”

        And yet, it is trivial to simulate our situation. Put a packet of yeast in a jug of sugar water. Soon, there’s lots of CO2 produced, then you start noticing a sludge at the bottom. The sludge are the dead bodies.

        If you can keep adding small amounts of sugar before they eat it all, some of the yeast cells will survive. But if they all die during the “energy pulse,” it won’t matter if you add sugar later — except that opportunistic moulds and bacteria will come upon it.

        And even if you keep adding sugar, at some point, the alcohol level goes beyond what the yeast can tolerate — they are poisoned by their own waste products. Sound familiar?

        Garrett Hardin put it this way: “Given an infinite source of energy, population growth still produces an inescapable problem. The problem of the acquisition of energy is replaced by the problem of its dissipation.”

        That’s why I laugh at all the proponents of this or that energy “fix,” like nuclear, or whatever. At some point, if our energy source is rich enough, we end up being poisoned by our waste products.

        The more humans I get to know, the more they seem just exactly like yeast.

      • I am afraid both of you are right. But I didn’t want to scare new readers to death.

  6. Mike says:

    I can think of another reason why the wage base hasn’t “grown” as quickly as GDP and I’m surprised it didn’t occur to you, since the subject has been raised many times here. The US GDP figure is grossly manipulated and is almost certainly not a true reflection of the real situation. It could be (and may likely be) that wages have done better (relative to GDP) than the graph suggests. This may be why the decline isn’t quite so obvious as some think it should be (though, of course, it is obvious to many).

    • Isn’t the general though that the GDP is manipulated to make it look better than it really is, including the measurement of peoples wealth or purchasing power? I have read some things about low inflation calculation tricks like “substitution” where if you cant afford beef – you buy chicken – and since chicken is half the price per energy you get out of it your income has actually risen! I seem to recall silly things like a 40″ TV a year after with the same price as the 40″ model the year before is actually worth more because the new model has more features – hence buying the latest model actually makes you “richer”?!?!?

    • I know that there is funniness in the inflation adjustment. Here I am not using inflation-adjusted numbers. I am comparing (wages not adjusted for inflation) to (GDP not adjusted for inflation).

      There are no doubt other funny things, like continually pumping up debt to get more “growth”.

      • Tony says:

        John, those are two tricks used in the US calculation. Some are used in other nations too, but not all.

        Gail, inflation adjustment is one side of the coin, certainly, and figures not adjusted for inflation is a good way of trying to get some comparable figures. But there are adjustments within the gross GDP calculation, too, so the wages base to GDP ratio is still likely not an accurate reflection of reality.

      • Bill Simpson says:

        Debt creation made a lot of people very rich, without doing much good in some cases. Now that the election is over, you might find the article by Matt Taibbi in Rolling Stone entitled, ‘Greed and Debt: the True Story of Mitt Romney and Bain Capital’ of some interest. As I was reading it, suddenly it occurred to me that these guys could destroy capitalism by creating non-productive debt for the sole purpose of enriching themselves. It made me wonder how much of the huge increase in business debt created during the last 25 years, was created for that reason, instead of to build productive investments? Wouldn’t that be something. The capitalists destroy capitalism with the help of the tax code they helped write.

  7. BC says:

    Excellent work, Gail.

    See David Hackett Fischer’s “The Great Wave”, if you have not read it. His “Price Revolution” is transitioning into a so-called “Revolutionary Crisis” era in the decades ahead that will likely be global in scale.

    US real GDP per capita is where it was in ’05-’06, whereas the trend rate since ’00 is at just 32% of the long-term average of 2.1%. The US has lost 16% growth from real GDP per capita since ’00, with the trend since ’07-’08 being negative.

    If one examines the trajectory of US real GDP per capita since the founding of the US, real GDP per capita accelerated to a super-exponential rate following the peak of US domestic crude oil production and the onset of deindustrialization and financialization of the economy and society at that time. The associated log-limit bound from the unsustainable super-exponential growth rate of the past 40-45 years implies an eventual collapse of real GDP per capita of 50% (at what price inflation one cannot know), if not more were undershoot to occur; a similar collapse per capita of gov’t spending, private investment, asset prices, pension payouts, and incomes are to be expected.

    Regressing the trend rates of real GDP per capita, one can infer that the trend rate of real GDP will decelerate to 0% hereafter, and real GDP per capita will contract further basis ’08.

    Wages adjusted for reported CPI for the bottom 50-80% of workers are back to the levels of the late 1950s to mid-to late 1960s. Were the trend deceleration to continue, real wages for the bottom 50-80% will fall to the level of the 1930s-50s by ’25-’30, i.e., no growth in real wages for 75-100 years; now that’s “stagnation”.

    The trend of accelerating automation by the Fortune 25-300 firms in the years ahead will exacerbate falling real wages and loss of purchasing power by the bottom 80-90%, as tens of millions of workers will lose purchasing power from paid employment and suffer further from “austerity” and lack of gov’t income support.

    One simply cannot closely examine the math and emerging trends and be justifiably optimistic.

  8. “This is not the End. It is not even the Beginning of the End. It is the End of the Beginning.”-Winston Churchill.

    “Permanent Recession”. Your mastery of uderstatement remains unmatched. 🙂 You are like 95% certain homo sapiens is heading for a massive Die Off event if not extinction, and you refer to this as a “permanent recession”? lol.
    Anyhow, you and the other Finite Worlders should check out Monsta’s latest Energy article, Peak Coal. Charts and graphs galore to warm the hearts of actuaries and physicists alike.



    • Thanks! People have a hard enough time with this subject, so I figure that some toning down is necessary. A person who understands it can see how bad things really are.

      I figure that other sites that copy the post will change the title, anyhow.

      • I think the “GTFO of Dodge NOW, or you are gonna DIE” approach is more apropos right now. JMHO. 🙂

          • Joe Clarkson says:

            To decent agricultural land far away from large cities, preferably in the sub-tropics or mild temperate region where climate change is not expected to dramatically change rainfall patterns. I’m in Hawaii, but the coastal Pacific Northwest of the USA would also be a good choice. Some locations in Argentina and New Zealand would be worth exploring also.

          • Jan Steinman says:

            I sorta agree with Joe Clarkson, but “far away from large cities” sorta limits your options in a slow-crash scenario.

            “Away from cities” can be accomplished by means other than distance. We chose a moat, so we can still interact with cities without excessive transportation costs, and yet will be isolated from those on foot if the excrement gets applied to the ventilator.

            While a moat is great to avoid roving hoards of hungry zombies, it has advantages in a slow crash scenario, as well. Island residents are typically mutually-dependent, much more willing to buy your organic farm goods than to pay to take a ferry to Mall*Wart and its ilk.

            In a near-term fast-crash scenario, isolation may be good. But what if it takes 20 years? What if, as seems to be happening now, each year is just barely perceptibly worse than the year before? I’m not sure isolation and boiling frogs make great bed fellows.

            • I agree on the isolation having its down-side. As far as I can see, people in the past were quite interdependent. Clothing fibre wasn’t necessarily provided by the same one as food, and replacement parts for wells were’t necessarily made by well-owners. States stood by with reserves of grain in years of bad weather, or perhaps it would be possible to buy from someone at a distance.

              I know I visited one potential group sustainability site that was about 12 miles from the nearest town. That struck me as a long ways to walk, to get the most basic of needs. I read about one that was over 20 miles from the nearest town. That one seemed to be producing only a small part of its own food, and was supporting itself with people who had income from other sources, such as writing for publication. It didn’t seem like a good model to me.

      • “I figure that other sites that copy the post will change the title, anyhow”-Gail

        In this case, I elected to make the change, and retitled your article, “The End of the Beginning” and added a Punchy Graphic for the slider and Synopsis.. 🙂

        Wakes up the readers. LOL.



    • BTW Gail, are you familiar with the work of C.S. “Buzz” Holling & Lance Gunderson and Panarchy Theory? You might want to read up on this if you are not familiar with it. I did one article on this theory


      and you can find out a lot more if you visit the Resilience Science website at



      • Thanks for reminding me of Panarchy theory. I remember reading about it a few years ago, but had kind of forgotten about it. It does seem to have very significant similarities to Turchin and Nefedof’s Secular Cycles. Panarchy theory is much more general, and doesn’t seem to have a particular time line attached. Secular Cycles doesn’t really have a timeline attached, except by observation. The authors observe that population increase tends to be much faster in Muslim countries, because of the ability (of the rich) to have multiple wives. This shortens the length of cycles. I’m not sure the shorter cycle bodes well for oil-producing Muslim countries.

      • The 4 Stage Cycle theme appears to be quite universal and fractal in its occurrence. The Strauss & Howe “4th Turning” material demonstrates a similar cycle over the generational lifespan for people, and the monetary systems they use as well, around 80 years there.

        I like Holling and Gunderson’s descriptions most because they are more universal and time independent.

        IMHO here, we are looking at a much longer cycle, probably running on the order of around 5000-10,000 years, beginning with the transition to Ag.


  9. robindatta says:

    The decline was locked in with the uS Hubbert’s petroleum peak in 1970. Its manifesting was delayed by the final oil hurrahs, Alaskan North Slope and Cantarrel, and of crucial importance, abandonment of the gold standard that permitted making and exchanging unlimited amounts of world reserve currency (green pieces of paper with pictures of dead presidents, and more recently magnetised particles on rusty discs). These items could be exchanged freely for barrels of black gold, debt be damned. Growth was bought.

    • It seems like we have been working very hard at getting growth for a very long time. Countries that are newer to the “energy game” have been getting the recent growth.

  10. Jan Steinman says:

    I think food-producing land is going to be one of the few things that holds value in the future.

    Now if we can just hold on to ours… we could use some help!

    • You are probably right. I am not sure whether pension funds can invest in food-producing land, though.

      One think I worry about is how tax rates will trend. If they are too high, even owning land will be a problem. Another issue is whether a new government will simply redistribute land in a new way. This has happened a lot in the past.

      • Which brings up the question again of what long term investment has the most value with the prospects of the future? I have been pondering a lot about this. Some say that gold and silver will be the new currency or at least valuable as a resource although with dying industry due to energy shortages I cant see what they need all that silver and gold for in manufacturing? And what stops a government from confiscating all gold in the case of it becoming currency again? I guess its the same with land as you mention here.

        I know someone said that real and good hand tools will be the gold of the future. I guess power tools will have less of a future though. 🙂

        • Jan Steinman says:

          “what long term investment has the most value with the prospects of the future?”

          Something that will feed, clothe, and/or heat you — or provide you with employment in a low-energy future.

          I’d say productive farmland — not just hayfields! Or, perhaps if you’re not too interested in farming and would prefer a passive investment, firewood land near cold cities. Or perhaps a site for a business that does low-energy value-added food or energy.

          I just wish I could convince others of this. Most people are too wrapped up in “business as usual,” or they want to know the “rate of return” for an investment in farmland. Last I checked, being able to eat was rather priceless!

          Lots of unknowns makes life interesting, no? I do think life is going to get simpler, meaning more people are going to be more concerned with needs that are lower on Maslow’s Hierarchy — food, shelter, heat.

          • Since the beginning of agriculture, grinding grain has been an important need. Unfortunately, to feed everyone, we are going to have to keep this up.

          • Timothy says:

            If we continue with agriculture as we have in the past, all we will do is leave a desert in our wake. Permaculture is the ONLY viable form of obtaining substance from the land.

          • Timothy says:

            Sorry, that was supposed to be sustenance not substance.

          • Jan Steinman says:

            Timothy, I think we are in heated agreement!

            But I was addressing John’s question about investment, rather than sustainability.

            I think productive farmland will be in demand no matter the methods used to make it productive. But of course, productive land that is managed using Permaculture should be even more valuable than land that is managed in conventional ways.

          • Timothy says:

            Jan, I have never been in a heated agreement with someone before 😉

            Actually, I was responding to Gail’s comment about grain. I just like to use every opportunity I can to throw Permaculture out there.

          • Jan Steinman says:

            Timothy, I’ve been investigating perennial grain. Lower yield, but much less labour and more importantly, much less energy!

            I would like to try polycropping C4 perennial wheat in our hayfields. There was a great article about it in Acres recently. The wheat comes up first, you harvest the seed heads, then the C3 grasses come up, and you process them for hay. Lather, rinse, repeat. 🙂

          • Timothy says:

            I have barely any understanding of what you are talking about, but it sounds lovely.

            My wife and I have a 5th of an acre lot and are practicing permaculture techniques. It is a long process as we have just gotten the fruit trees in and have a couple more to plant this spring. The ground cover is the next project. So far I am working with Borage and Comfrey.

            We have strawberries, blueberries, raspberries, blackberries, cherries, cherry plumbs, plumbs, apples, peaches, pears, almond and this spring we are putting in hazelnuts. We jar all of our surplus vegetables as well as drying fruits. I am most interested now in discovering and acquiring as many perennial vegetables as possible to make the project as self-sustaining as possible.

            I got some Chuffa seeds for this spring that I am excited to try out. It is a perennial ground nut.


        • I think silver will be more practical than gold as a currency in the future. If we retain the possibility of making paper currency, I suppose that gold could work as well. Or maybe we make a new paper currency, expressed as equivalents to barrels of oil. Of course, these certificates would have to decline in number as oil availability goes down.

          If you can hold onto land, and have all of the things needed to work it (especially sufficient water), land is probably the best long-term investment.

    • In all previous eras, food producing land was the ONLY source of wealth, along with the serfs who worked it under their lord.
      Russia ran the serf system until the 1860s, America ran the slave system till the 1860s. Basically the same thing. In historical timescale, a blink of an eye ago.
      that was how things were. If you wanted more energy output, choices were limited. you could breed more serfs, buy more animals or buy more slaves. As long as they converted minimal food energy input into the maximum muscle energy output, the result was more profit for the landowner, who could then use that profit to build a bigger castle and pay for a bigger army to defend it—and eventually–go out and steal someone else’s land/serfs/castle/city etc.
      That’s how cities and nations and empires grew, by resource wars. The Romans expanded outwards by fighting resource wars, looting Europe and Africa to feed the grandeur of Rome. Rome’s energy source was the grain of north Africa (thus Romans could have their bread and circuses) We Brits looted Africa and India for the same reason. Americans just looted the ’empty’ lands of the continent as the nation expanded westward, but the result was the same, colossal wealth for a few, poverty for the rest. WW2 was a resource war, Oilwars now are resource wars. Oil skewed the resource picture for 2 centuries, after it’s gone, we will revert to land wars again. Man fights over resources in order to stay alive, land is the ultimate resource from which all wealth is drawn, so it follows that we will fight over land as we have always done

      • Our history books don’t give this kind of bird’s eye view, but I am afraid it is close to right.

        Some outside energy got used all along in this process, first by burning trees and other biomass, with some energy from wind, water and peat moss before fossil fuels. To the extent that the combination of the outside energy added, plus the human and animal energy used, produced a surplus beyond food, goods and services of other types could be added, for those able to afford them. Jobs outside agriculture were also enabled by this process.

        • It has been suggested that civilisation cannot hold together with energy sources that give a return of under 10:1
          What that means is that below 10:1 we just kill animals and harvest grains, but there isn’t enough surplus energy in the system to build the infrastructure necessary for cities.
          Coal gave us a return of 50:1, Oil 100:1. Those energy sources are dropping back towards 20: 1 or below. Tight oils are well below 10:1, or 5:1
          Our crunch will come when all energy sources drop below 10;1. After that, civilisation is over.

          • You are right sort of–but I think the situation might be worse than what you say. Our civilization is adapted to whatever EROEI underlies an oil cost in the $20 barrel range. The recent run-up to the $100 barrel range has not been incorporated into the current way of adaptation, because it was so large and occurred so quickly. Instead, the high oil prices are leading to government financial distress. The economy is telling us, in effect, “The current adaptation doesn’t work. You need a different one.” It is not clear to me how an economy moves backward to a lower EROEI balance. An economy can adapt, as more energy sources are added, it is a whole lot harder to try to cut back. At one point, for example,we knew how to transport goods by horses and by street car. The street cars are long gone, and there are not enough horses now. So we cannot go back by that route. It is not clear that there are any techno-solutions that will fix our problem. So it is a matter of getting over a huge discontinuity.

            To make matters worse, what we are running into is higher and nigher price of extraction, which is equivalent in some sense to lower and lower EROEI. So we are not guaranteed that once we get adapted, the situation will stabilize at the new level.

        • And our dependence on wood for energy in the past was a pretty damaging one even in the short time when we using it seriously in a growing population as you will see in this video by Richard Alley:

          I cant imagine what our planet will look like after 50 years of wood as primary energy source again with 6 billion people on the planet.

          The whole “How to talk to an Ostrich” series of videos are very good imo.

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