Reaching Debt Limits

If an economy is growing, it is easy to add debt. The additional growth in future years provides money both to pay back the debt and to cover the additional interest. Promotions are common and layoffs are few, so a debt such as a mortgage can easily be repaid.

Figure 1. Author's image of an expanding economy.

Figure 1. Author’s image of an expanding economy.

The situation is fairly different if the economy is contracting. It is hard to find sufficient money for repaying the debt itself, not to mention the additional interest. Layoffs and business closings make repaying loans much more difficult.

Figure 2. Author's image of declining economy.

Figure 2. Author’s image of declining economy.

If an economy is in a steady state, with no growth, debt still causes a problem. While there is theoretically enough money to repay the debt, interest costs are a drag on the economy. Interest payments tend to move money from debtors (who tend to be less wealthy) to creditors (who tend to be more wealthy). If the economy is growing, growth provides at least some additional funds offset to this loss of funds to debtors. Without growth, interest payments (or fees instead of interest) are a drain on debtors. Changing from interest payments to fees does not materially affect the outcome.

Recently, the growth of most types of US debt has stalled (Figure 3, below). The major exception is governmental debt, which is still growing rapidly. The purpose of sequestration is to slightly slow this growth in US debt.

Figure 3. US debt, based on Federal Reserve Z1 data,

Figure 3. US debt, based on Federal Reserve Z1 data,

The growth in government debt occurs because of a mismatch between income and expenditures. There is a cutback in government revenue because high oil prices make some goods using oil unaffordable, causing a cutback in production, and hence employment. The government is affected because unemployed workers don’t pay much in taxes.  Government expenditures are still high because many unemployed workers are still collecting benefits.

What can we expect going forward? Will the debt situation get even worse?

I think we can expect that from here, the debt situation will deteriorate. One issue is rising oil prices. While there seems to be a large supply of oil available, it is at ever-higher cost of extraction, because of diminishing returns. (This is even true of tight oil, such as from the Bakken.) Furthermore, I recently showed that not only do high oil prices adversely affect government finances, they also adversely affect wages.1

Figure 4. US per capita non-governmental wages, in 2012 dollars. Non-governmental wages and population from Bureau of Economic Analysis; Adjusted to 2012 cost level using CPI-Urban from Bureau of Labor Statistics

Figure 4. US per capita non-governmental wages, in 2012 dollars. Non-governmental wages and population from Bureau of Economic Analysis; Adjusted to 2012 cost level using CPI-Urban from Bureau of Labor Statistics

If wages are low, the temptation is for governments to try to create more “spendable income” by increasing debt. This can’t really fix the situation, however. The real issue is increasingly high oil prices, which adversely affect both government finances and wages. Adding debt adds yet more interest payments, adding a further burden to wage earners, and creating a need for payback in the future, when wages are even lower.

Ultimately (which may not be very long from now), the debt system appears likely to collapse. The Quantitative Easing (QE) which a number of governments are now using to hold down interest rates and make more funds available to lend cannot continue forever. While there are claims that QE is a bridge to “when growth returns,” it is seriously doubtful that economic growth will ever return. Inexpensive oil is simply too essential to today’s economy. As oil prices rise, wages fall, and demand for oil is further constrained. Falling wages also reduce demand for debt, as payback becomes more difficult.

How Household Debt Adds to Spendable Income

One thing readers may have not thought about is that it is the increase in debt that adds to a person’s (or company’s) spendable income. For example, taking out a car loan allows a person to buy a car. Paying back the loan over a period of years tends to reduce spendable income. If, in the aggregate, the amount of debt outstanding starts decreasing each year, spendable income is actually reduced below the level of wages, because in total, the balance is being reduced.

If we add the increase in household debt (mortgages, credit cards, student loans, car loans, etc.) to wages, this is the pattern we see historically. (The increase has been adjusted for inflation using CPI-Urban):

Figure 5. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report.

Figure 5. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report. *2012 estimated based on partial year data.

The pattern is very much what we would expect, given what we know about recent debt patterns. The amount of debt rose rapidly in the early 2000s,  when interest rates were lowered and lending standards relaxed. Some people bought new homes. Home prices escalated, with the higher demand. Many homeowners were able to refinance at lower interest rates. In the process, homeowners were able to “pull out” funds that they could use for any purpose they liked–fixing up the house, buying a new car, or going on a vacation.

By 2008, the party was over. In fact, the amount that was added through debt started decreasing in 2006 and 2007, after the Fed Reserve raised interest rates, in an attempt to choke back inflation caused by high oil prices. I talk about this in Oil Supply Limits and the Continuing Financial Crisis, available here or here.

Increased Government Debt Can Also Add to Spendable Income

In Figure 5, we added the increase in household debt to wages, to get an estimate of spendable income, adjusted for debt. Theoretically, at least part of the increase in government debt might also be added to spendable income, since it is often used (in leu of increased taxes) for programs that benefit citizens. (Some of the increased debt is used for things like bailing out banks, which is of questionable value in raising the spendable income of individuals, so perhaps not all of the increase in government debt should be added in estimating spendable income. Also, increased interest costs related to higher debt amounts would tend to have a dampening effect on spending, if interest rates are not continually dropping, as they have been under QE.)

If we add the increase in government debt (all kinds, including state and local) to the amounts shown in Figure 5, this is what we get:

Figure 6. Amounts shown in Figure 5, plus change in government debt added to the sum of (wages plus increase in household debt). Non-Government debt from Federal Reserve Z1 report, adjusted to 2012 cost levels using CPI Urban. *2012 amounts estimated based on partial year values.

Figure 6. Amounts shown in Figure 5, plus change in government debt added to the sum of (wages plus increase in household debt). Non-Government debt from Federal Reserve Z1 report, with changes adjusted to 2012 cost levels using CPI Urban. *2012 amounts estimated based on partial year values.

How much did citizens really spend? The Bureau of Economic Analysis tells us that as well, as an item called Personal Consumption Expenditures. We sometimes hear that in the United States, personal consumption of goods and services makes up more than 70% of GDP. In fact, this percentage has been growing since about 1950.

Wages (excluding government wages) as a percentage of GDP and personal consumption as a percentage of GDP, both based on data of the US Bureau of Economic Analysis.

Figure 7. Wages (excluding government wages) as a percentage of GDP and personal consumption as a percentage of GDP, both based on data of the US Bureau of Economic Analysis. *2012 estimated based on partial year data.

Strangely enough, wages excluding governmental wages have been falling as a percentage of GDP during the same period. How can wages be falling at the same time personal consumption is rising? I think that a large part of the  answer may very well be “increasing debt.”

If we compare wages to personal consumption expenditures, we find that wages were about 2/3 of personal consumption expenditures at the beginning of the period graphed, but gradually fell to a lower and lower share of Personal Consumption Expenditures.3 If we add a line to Figure 6 showing 2/3 of personal consumption expenditures, the line comes out very close to where we might guess it would, if all of household debt increases, and part of government debt increases were acting to increase personal spending (Figure 8).

Figure 8. Same data shown on Figure 6, plus a line equal to to 2/3 of Personal Consumption as shown on BEA Report 2.4.5. also adjusted to a per capita and 2012 cost basis using CPI-Urban.

Figure 8. Same data shown on Figure 6, plus a line equal to 2/3 of Personal Consumption as shown on BEA Report 2.4.5. also adjusted to a per capita and 2012 cost basis using CPI-Urban.

While there are too many variables to make this comparison exact, it does indicate that the increases in debt levels are of the right order of magnitude to explain what would otherwise be a very strange anomaly.

I might mention, too, that part of the reason that Personal Consumption Expenditures can be rising as a percentage of GDP is the fact that investment has been falling, as businesses move their manufacturing offshore, and as other changes take place. According to the American Society of Civil Engineers, we are allowing bridges, roads, and dams to deteriorate, and not adequately maintaining electrical transmission infrastructure. We are reaching limits on how far we can allow investment to drop, however. In fact, the time is coming when we will need to increase investment, or face loss of some of the infrastructure we take for granted.

Figure 9. United States domestic investment compared to consumption of assets, as percentage of National Income. Based on US Bureau of Economic Analysis data.

Figure 9. United States domestic investment compared to consumption of assets, as percentage of National Income. Based on US Bureau of Economic Analysis Table 5.1.

Where Do Debt Limits Put Us

Even if all debt limits were to do is erase the beneficial impact of debt increases, based on Figure 8, it appears that spendable income (or Personal Consumption Expenditures) would decrease by about 23%, to bring it back to might be expected based on wages.

In fact, reaching debt limits is likely be a messy affair, with some type of change (such as increasing rising interest rates as QE fails, or the US dollar losing its reserve currency status, or huge changes in the Eurozone) leading to changes that affect governments and currencies around the world. It seems likely that trade might be disrupted. Some governments might be replaced, and the debt of prior governments repudiated by the new governments. It is not clear what would happen to personal and corporate debt. In many countries, reform governments have redistributed land and other property. In such a circumstance, neither prior land ownership nor prior debt would have much meaning.

In our current circumstances, we are reaching debt limits because of a specific resource limit — lack of inexpensive oil. Oil is used almost exclusively as a transportation fuel and  in many other applications as well (such as construction, farming, pharmaceutical manufacturing, and synthetic fabrics). Expensive oil is not really a substitute, and neither is intermittent electricity. We are reaching other limits as well. Perhaps the most pressing of these is availability of fresh water. Fresh water can be obtained by desalination, but expensive water is not really a substitute for cheap water, for the same reason that expensive oil is not really a substitute for cheap oil. See my post, Our Investment Sinkhole Problem.

The situation of reaching debt limits because of resource limits is a worrisome one, because it is hard to see a way to fix the situation. People often say that our debt problem arises because we have a financial system in which money is loaned into existence, and as a result, requires growth to pay back debt with interest.  I am not sure that this is really the problem.

We have been used to a financial system that “works” in a growing economy. In such a system, it makes sense to take out loans on new business ventures. In such a system,  money is also a store of value. In a shrinking economy, relationships change. Some loans will still “make sense,” but such loans will be a shrinking proportion of current loans, with long-term loans being especially vulnerable. Money will either need to “expire,” or a high rate of inflation will need to be expected, making interest rates on loans very high. In a shrinking economy, businesses will fail much more often, and workers will more often lose their (fossil fuel supported) jobs.

Some have suggested that new local currencies will fix our problems. I am doubtful this will be the case. The problem may well be that all currencies start being more local in nature. What we may lose is interchangeability based on trust.


[1] As background for those who have not read my post The Connection of Depressed Wages to High Oil Prices and Limits to Growth, wages recently have been depressed, in part because fewer people are working. Figure 4 above, showing “Per Capita Non-Government Wages,” provides a measure of how wages have changed. This is calculated by taking wages for all US residents, subtracting wages of government workers, and dividing by the total US population (not just the number working). The average wage calculated in this manner is than adjusted to the 2012 price level based on the CPI-Urban price index. Government workers have been omitted because I am trying to get at the base from which other funding comes. Government wages are ultimately paid by taxes on workers in private companies.

The thing that is striking about Figure 4 is that a similar pattern occurs in the 1973 to 1983 period as the 2002 to 2012 period. Oil prices were high in both periods. (Figure 10, below). In fact, the vast majority of wage growth has occurred when oil prices were $30 or less in 2012$.

Figure 3. Per capita non-government wages, calculated by dividing non-government wages from the Bureau of Economic Analysis by the US population, and then bringing to 2012$ using CPI-Urban price index, together with historical oil prices in 2012$, based on BP 2012 Statistical Review of World Energy data, updated with 2012 IEA Brent oil price data.

Figure 10. Per capita non-government wages, calculated by dividing non-government wages from the Bureau of Economic Analysis by the US population, and then bringing to 2012$ using CPI-Urban price index, together with historical oil prices in 2012$, based on BP 2012 Statistical Review of World Energy data, updated with 2012 EIA Brent oil price data.

There are several reasons why rising oil prices can be expected to reduce the number of people working, or the hours they work:

(a) Discretionary sector layoffs. Consumers find that the price of food (which uses oil in its production and transport) and of commuting is rising. Prices of other goods are also rising. This forces consumers to cut back on discretionary spending. Employees in discretionary sectors get laid off, because of these impacts.

(b) General layoffs. Even outside discretionary sectors, employees may be laid off, if the cost of goods rises indirectly because of a rise in oil price. Often this will be because of higher transport cost, but it could because of another use of oil, such as by construction equipment, or as a raw material. With higher costs of delivered products, companies find that demand falls, if they raise prices sufficiently to maintain profit margins. (This falling demand occurs because some consumers can no longer afford their products.) Businesses  find it necessary to scale back the size of their operations–lay off workers and close stores or other facilities. Alternatively, businesses can move operations to China or another low cost site of operation, to reduce costs, but this also leads to layoffs of US employees.

(c) Government layoffs. Eventually the government tax base is reduced, because of a smaller proportion of the population paying taxes. Governments also find a need to pay our more in direct costs–such as more for unemployment insurance, and more for asphalt (an oil product) for paving roads. Governments also find themselves laying off workers.

The effects outlined above can be mitigated to some extent by changes such as moving closer to work and more fuel efficient cars. But experience seems to suggest that even more what happens is that the effects shift from sector to sector over time, as businesses “fix” their problems, leaving them to with wage-earners and governments.

The high price oil situation was mostly resolved in the early 1980s, because other relatively inexpensive oil was available to drill, bringing the price down again. (The new price, at $30 barrel, was still 50% higher than the $20 barrel price prior to the crisis, though.) The availability of new low-priced supplies seems much less likely now, because we extracted the inexpensive-to-extract oil first. We are now reaching diminishing returns. While there seems to be plenty of oil available, it is high-priced oil.  This is even true of the new “tight oil” supplies in the Bakken and several other areas.

[2] Government debt in this post refers to all types of government debt combined, including state and local debt. Within this debt, only debt classified as “Marketable” is included. As such, it does not include debt owed to the Social Security system (because contributions that were collected by the Social Security system were spent on something else, and are not available to pay Social Security recipients) or to other pre-funded government agencies. Such debt is a future liability, not affecting today’s spending, so I didn’t add it in. (The Federal Reserve Z1 report also does not include it.) There are, in fact, a huge number of government obligations that are not reflected, such as promises to bail out pension programs and FDIC coverage of bank accounts, because they are contingent in nature.  Such programs can be expected to add to the problems we would have, if our debt system should fail.

[3] We would not expect non-government wages to equal Personal Consumption Expenditures, since for one thing, wages of non-government employees leave out expenditures by government employees. They also leave out various derivative amounts, such as expenditures by entrepreneurs, and expenditures of amounts that would be classified as rents and dividends. Changes in savings rates would also play a role.

69 thoughts on “Reaching Debt Limits

  1. “Imagine a plot to undermine the government of the United States, to destroy much of its capacity to do the public’s business, and to sow distrust among the population. Imagine further that the plotters infiltrate Congress and state governments, reshape their districts to give them disproportionate influence in Washington, and use the media to spread big lies about the government. Finally, imagine they not only paralyze the government but are on the verge of dismantling pieces of it.

    Far-fetched? Perhaps. But take a look at what’s been happening in Washington and many state capitals since Tea Party fanatics gained effective control of the Republican Party, and you’d be forgiven if you see parallels.”
    Robert Reich

    Last year, the GOP in Florida thought they’d somehow win if they could make people stand in the heat and line up in front of their polling places for hours. They somehow figured that most would go home without voting, or blame it on Obama, and vote Romney. It did not work.
    Now the GOP thinks if they force the country into another recession by applying random spending cuts, people will somehow blame that on Obama, and vote GOP next year in November.
    Fortunately, the American voter isn’t that dull. Most people do know who passed the sequestration laws and why. Boehner will get the bill next year. We can only hope the country survives another year and a half of Republican ninja politics, without suffering permanent damage.

    America didn’t need a the Bush Republican war in Iraq, we even could have left Afghanistan sooner. American tax payers shouldn’t have to pay to protect a Carlyle Group ex employee elevated to a Afghan President to make sure that Caspian Sea pipeline is completed for profit for that group. The American people didn’t need a financial meltdown from Republican deregulation of to big to fail banks either, and we certainly didn’t need to bailout Wall Street. We really don’t need those Bush tax cuts for those billionaires. Because of the lack of equality, their isn’t anything in that Government measure for the middle class, and the American people certainly don’t need job loses and lay offs. Speaker Boehner promised he would help the country get back on it’s feet with a jobs promise in 2010. Now of course in 2013 Speaker Boehner’s comment to jobs is if lay offs are coming “so be it”. Americans don’t need a dysfunctional Government what we need is jobs, compromise, and a nation that we can be all proud of rebuilding after spending this nation into the mess we are in now. We need a congress and a senate that will work with a President like our forefathers imagined.

  2. Thanks for the article Gail. Debt limits are a big part of the greater convergence under way. I agree with Chris Martenson that things will happen at an accelerating rate, because humans and what we do, is all done at an exponential rate. Everything from resource consumption, to debts, pollution, population etc.

    I question why you say that debt is theoretically repayable? If I borrow $10 at 10% then a year later I need to repay $11, and since money can only come from debt (excepting the 3% that is notes/coins) I have to say that there is $1 unpayable. This scenario applies to stable and shrinking economies. Growing economies grow their debts at equal or greater rates then the average interest cost. A stable economy must still have increasing debts, because the portion used to pay interest will be a drain on the economy.
    GDP = Money x velocity, if you reduce money by paying interest, to have a stable economy velocity must increase, which can’t happen indefinatly. Govt borrowing (in the absence of private sector borrowing) is vital to the health of the economy, without an ever increasing money supply, velocity must increase to compensate. Governments can talk all they like about reducing deficits, but unless the private sector takes on the additional debt, govts will have to.
    A couple of years ago I did an approximate count of Global MZM/M3 and global debts, and I think that global debts were about 3x more then the monetary aggregates. Which is not suprising to me, though I could have missed something.

    I often hear that QE cannot go on forever, but I have yet to hear the convincing theory as to why not. It is inflationary no doubt. Citizens can still get poorer if the National production is not increasing in line with population growth, and money secures less and less goods. Yet I don’t see the mechanisim by which QE must end. Interest rates can go infinitly lower, ie 0.01% is an order of magnitude lower then 0.1%. Since money is imaginary, and infinite, I think QE failing somehow is the last thing to happen.

    The real limits to private sector debt is ‘money good collateral’, in developed countries nearly every asset is encumbered. Africa still has a lot of unencumbered assets and this is IMO one of the few things keeping the financial system afloat, that and a few other places, Russia is one I think. I’m not sure how to apply this to govt debt, as the collatoral is taxes, but when the main purchaser of govt debts is the Central Bank, then collatoral ceases to become an issue.

    Since all money is created as debt, and creating money leads to inflation, it is impossible to inflate away debts. However if you divide the economy in half between public and private, then it is possible for the private sector to inflate away the debts of the public or vice versa. Govt’s cannot inflate away their own debts.

    Sorry for the long comment I prefer them shorter, I’m unable to condense it much more then that.

    • There are going to be some situations when debt is repayable. If debt is used for an investment, and that investment is fruitful, it will be possible to earn enough to repay the debt. In general there will be more fruitful investments when an economy is growing than when an economy is shrinking. I am looking at the debt from a goods and services point of view. The investment will provide enough goods or services to repay the debt, in terms of what equivalent goods and services were borrowed, plus an equivalent amount of goods and services to cover interest. Exactly how that is handled in the financial system is not of as great as a concern. Admittedly, if the system requires more debt for buyers to purchase the goods that are made by the process, and this debt is not available, this is a problem. But if the amount of goods produced is growing more rapidly than the interest rate, then the growing debt is not a problem. The time when growing debt is a problem in a shrinking economy, when fewer goods and services in total are available, or even in a steady-state economy or very slowly growing economy–growing more slowly than the interest rate.

      Regarding the government needing to keep borrowing, if the private sector does not, isn’t that the requirement necessary only if the economy is not to shrink? Not shrinking is a nice thought, but in the real world, isn’t there really a need for the economy to shrink sometimes, as when our share of world resources is shrinking, as it is now? In that case, debt should decline, in line with the smaller resources. It admittedly will make the downslope worse, but that is the flip side of increasing debt on the way up accelerating the upslope. I suppose I should have talked about this issue, specifically. GDP is a gross measure, where rising debt helps it, and declining debt badly hurts it.

      Regarding QE limits, I don’t see .01% interest as being an order of magnitude better than .10% interest rate. The interest rate has relevance from the point of view a borrower, say, agreeing to purchase a house based on a mortgage that is 3.5% for a 30-year loan. A 0.09% decrease is not going to make much difference in the borrower’s decision-making.

      It seems like there are a couple of limits on QE. One is asset bubbles that develop, in stock markets, bond markets, and land. The asset bubble in land can interfere with agriculture. I suppose there is the possibility of some of the bubble going over to commodities, and affecting the general public. Once the bubble bursts, there is a new set of dislocations.

      Another limit is what the other players in the international financial system will put up with. At some point other players will discover that the countries doing the QE really aren’t producing as much goods and services in the past, because of the declining resources they are obtaining on the world markets. The trust that underpins the current system will start eroding. Printing money doesn’t really fix this. If trade slows down, there could be hyperinflation with respect to the cost of goods that are imported.

      Of course, if the interest rate ever does go up, despite quantitative easing, both the government and private parties will need to start paying higher interest rates immediately, causing cash flow problems. Asset bubbles will deflate at the same time, causing a big problem.

      I am not sure unencumbered assets for collateral is a limit. The financial system seems to have debt layered upon debt layered upon debt. People without jobs are encouraged to go back to school and get student loans to do so. If wages, which are in some sense at the bottom of the triangle I showed in this post, are shrinking, shouldn’t private sector debt shrink as well? Wage-earners can’t be expected to by as many goods in the future, so businesses don’t need to be growing much to service their needs. The limit involved is really the loss of wages, not the lack of unencumbered assets.

      • Thanks for the reply Gail. I’ll think on it. I have realised I had a false premise that interest was a drain on the money supply, only principal repayments deplete the money supply.

      • Gail and all, the cumulative imputed compounding interest on US total credit market debt owed today to (effectively infinite) term is now an equivalent of reported private GDP. All wages, profits, production, and gov’t receipts are now claimed by, and pledged (promised) to, the owners, i.e., the top 0.1-1% of US households, of the debt in perpetuity, either directly or via collateralized equity proxies of various kinds.

        The top 0.1-1% own the private banks that own the Fed; therefore, the top 0.1-1% own virtually all claims from the issuance of private debt-money.

        The next 9% below the top 1% own subordinated financial claims on the claims of the top 0.1-1% on the wages of the bottom 90-99%, profits, and gov’t receipts.

        The bottom 90% effectively own nothing (and cannot own in net wealth terms) but rather borrow private debt-money to circulate for subsistence after debt service (“rentier tax”) and taxes. The circulation of the private debt-money has collapsed since ’00 and ’08, owing to the EXTREME wealth and income hoarding and concentration to the top 1-10%, HUGE debt-money overhang, and slow or no growth of bank lending, employment, wages, and production per capita.

        The hoarding of $40 trillion in financial wealth (debt-money claims and equity proxies) by the top 0.1-1% (own 40% of financial wealth and receive 20% of US income) to top 10% (85% of wealth and 45% of income) at plunging velocity, along with the associated compounding debt-money interest claims on wages, profits, and gov’t receipts, means that the bottom 90% of society is starved for private investment, production, and wage income. The top 1-10% demand returns to their hoarded capital of 7-10% in perpetuity while labor returns at best are 2% (labor force growth plus capital replacement), and sustainable resource services throughput from existing labor and capital stock probably negative per capita given Peak Oil and overshoot.

        It is an incredibly bizarre irony that there is so much “debt-money” per capita and per GDP but so heavily concentrated to the top 1-10% via digital debt-money credits and equity proxies at hopelessly slow velocity among the bottom 90%.

        It is a simple mathematical reality that real economic activity per capita cannot grow hereafter, which implies gov’t receipts and spending will decline per capita. The only way out is deflation of debt-money claims (and associated equity values) of the top 0.1-1% to 10% on the labor, profits, and gov’t receipts of the bottom 90%.

        But even then it will likely mean the end of the system as we know it, including a systemic collapse, the end of the rule by the rentier-financier oligarchs and their Power Elite benefactors, and a mass-social loss of confidence in major economic, financial, and political institutions, social unrest, economic privation, and the risk of gov’t reaction and violence. The Fourth Turning r-evolution is due this decade.

        • It seems like you very well may be right about this. Certainly the interest amounts associated with all of the debt are amazing, even if the interest rate is very low.

          Where do you get more information on this, including the concentration of who owns the wealth? I think the one place there may be overstatement has to do with pension plans. They are very big, but the recipients of these pensions only receive a relatively small amount each. Banks may also suggest an over-concentration for the same reason. All the bank itself gets is the wages and other expenses paid out of the interest, and the profits they earn from the interest. Quite a bit of it is passed on to account-holders, who in many cases are small.

    • Yes, I did see that. I think that Wall Street probably would have come out well with a shale bubble, regardless of whether the result was a fairly long term event or quickly led to a collapse in prices. So Wall Street had reason to pump up prices, regardless of the outcome. Perhaps they would come out even better in the case of price collapse, which is of course what happened. I am not sure there was necessarily an intent of harm. Perhaps Wall Streeter’s didn’t realize how easily over-production could occur.

  3. The central banks are running the economy as if it’s a perpetual motion machine, but it’s not.

    The world is overpopulated, birth rates have declined, and death rates are set to rise (by aging alone, let alone bankruptcy of the industrial healthcare system). Moreover, the fuel for the economy is becoming harder to find and more expensive.

    This is why QE cannot continue forever and will fail. QE simply drives up the price of fuel and other speculative assets. No work is actually being done by creating digital money.

    Once the debt is defaulted upon, further digital money creation would simply create runaway hyperinflation.

    Remember…humans long ago outsourced our work to the fossil fuels. In the modern world, humans do far less work than they did in the past, but the illusion is that they are doing more work, because we have the fossil fuel slaves working for us.

    There’s not much we can do but make individual decisions that serve us best. Personally speaking, I have decided to in fact work less, reduce consumption, and let the remaining fossil fuel slaves do their thing.

    You can prepare, and yes I suppose I do prepare in my own way, but generally speaking preparation is futile because if you survive the zombie apocalypse, you will live to old age when another zombie apocalypse hits, and by then you will be demented and will be discarded. Not exactly a victory.

    • You are right about QE, and also about humans outsourcing our work to fossil fuels. I have called fossil fuels energy employees, rather than slaves. The union for the oil energy employees has recently demanded an increase in wages. A business can try to pass through the increase in costs, but the increase in costs is likely to result in falling demand. So businesses have various options to try to keep their profits up:
      1. Save costs by automating
      2. Save costs by outsourcing labor and energy costs to China, India, etc.
      3. Scale back the size of the operation, because of lower demand at higher prices

      Any of these options ends up with fewer jobs for people.

      People will have to make their own decision regarding how much preparation is appropriate. I don’t think the situation is as simple as, “Use more electricity instead of oil,” or “Buy a car that gets better mileage.” (Although such a car might be a good choice, if you can afford it.) Some people find comfort in religion. Others draw near to friends and family.

      Historically, life expectancies have been very short. According to this article, the average life expectancy was 24 years in 1796 (just before coal use scaled up). By 1900, it was 48 years. Many of us have already lived past these ages, and have had the benefit of pretty good lives–warm homes, enough to eat, clothes to wear. Perhaps we should spend a little more time being thankful for what we have.

      • Gail

        You are right to point out how fortunate we are and have been.

        If we allow worries about a future (this century) -or imminent – ‘collapse’ to overshadow that, we might as well call it a day now.

        I’m struck by how our ancestors, working slowly by hand in far more difficult conditions, individually did so much, and over quite long time-frames – like the great cathedrals and so on.

        In the time we have, we should try to emulate them.

  4. Gail
    You are right about this being a slice of a very big and very long story. I don’t necessarily agree with quite a bit of what you wrote about debt limits. Nevertheless, why don’t you break these long dense lengthly complex discussions down into more manageable bite chunks to enable them to be explored and discussed more easily and help your readers to understand more clearly and easily.The time and effort to reply and engage in a discourse in detail on some of these complex essays is simply too great, which of course is a loss for everyone.

    • I struggle with knowing how much to put together into one post.

      I have some readers who have been following my writings for a long time, and can understand a fair amount of new material. I have other readers who are completely new. At the same time, I am learning as I go along. Even if I have discussed a subject before, I seem to discover new nuances and new connections as I do research for a new article. I always put together far too many graphs to use in a single article. I end up saving some for another article.

      One of my goals is to get the major areas covered, if for no other reason than that I understand the story from start to end. It is also hard to write a book, if there are “chunks” of the story I don’t quite understand.

  5. there is a very clear cut and simple reason why our current debt-economy will collapse
    when we started deep mining of coal with the use of steam engines (to pump the water out) it was found that the colossal amount of energy extracted supplied enough ‘excess’ to finance the next coalmine. (or any other enterprise linked to mining and engineering)
    Therefore money could always be borrowed (invested) on the certainty of even more energy being produced from every new mine (and of course oilwells later on)
    so energy became the collateral for our debts.
    while numerous securities may be offered for ‘investment’ ultimateky that security has its basis in the production and conversion of energy to manufacture to goods necessary to sustain our commercial infrastructure.
    as long as energy was cheap, this worked fine. Unfortunately energy isnt cheap any more, and the ponzi scheme we created around it is collapsing

    • That is a good way of putting it.

      I think one of the points too is that the extra energy came with relatively small upfront investment. Now we are looking at oil and gas production with huge upfront costs. We are also talking about renewables with huge up-front costs. If we get a payback, it is after quite a few years. Ramping up takes huge investment, because of the lag between investment and return.

  6. I often read your artcles and you are excellent at outlining the problems. Sometimes they can be rather depressing :-). For every myriad problem there must be a myriad solutions.

    “Expensive oil is not really a substitute, and neither is intermittent electricity” – Agreed.

    Many countries in Europe are experiencing 20+% (yearly average) in renewable source integration to their electricity grids, with many countries targeting 40% (yearly average) renewables integration to electrical grid by 2020. Heres a recent news story from Denmark about how the Danes have baned oil and gas heaters in new buildings and are planning on outright ban in existing buildings ( Here is a rewind to how the plan was first negotiated way back in March 2012 ( In line with every major European study “extending current (energy) policies implies greater electrification and efficiency measures”. Here is an example of a revolutionary new “smart” electric heater ( (I have no affiliation). Denmark aims to reduce the gross energy consumption by 12% in 2020 compared to 2006, to increase the renewable energy accounts to at least 35% in 2020, to increase wind power capacity so that 50% of electricity consumption is covered by wind in 2020.

    Just to take this as one isolated “solution”, surely we can all target specific solutions to the impending energy crisis, which is in part fueling the continueing financial crisis. The U.S. may become the world’s largest oil producer of EXPENSIVE oil ( by 2020. Is this a “solution” the U.S. should choose to apply. Perhaps its all part of a two-step dance around the table :-).

    As Jared Diamond says; “there are many often subtle environmental factors that make some societies more fragile than others and many of those factors are not well understood…. people often ask me ‘Jared what’s the most important thing we can do about the world’s environmental problems?’… And my answer is the most important thing we need to do is to forget about any single thing, that is the most important thing we need to do. Instead there are a dozen things, any of which could do us in and we’ve got to get them all right. Because if we solve 11 (of the problems) and fail to solve the 12th – we’re in trouble. For example if we solve our problems of water and soil and population, but don’t solve our problems of toxics – then we’re in trouble.”

    Perhaps your book could take on some of the big problems, or perhaps a series of volumes to avoid leaving out the 12th and most important solution :-).
    Best Regards,

    • Thanks for your comments.

      European countries are doing so poorly that I sometimes questions their solutions, unless they can truly show that they can compete in a world market with the resulting cost structure. I do agree, though, that the Quantum heating system sounds like a breakthrough, if it can use energy when it is generated and store the heat until it is needed. At certain times of the year, this could help cut back on the mismatch between supply and demand, and keep from having to ramp fossil fuel powered stations up and down so much. It seems like hot water heaters working on the same principle would be even more helpful, since they would work year-around. (Of course, in many places, solar thermal would be better yet for hot water.)

      Regarding the many issues we are facing, I am reminded of one of the earliest posts I wrote. Our World Is Finite: Is This a Problem? (It was also published on The Oil Drum as a Guest Post.) In it, I pointed out that managing to avoid one limit can exacerbate problems with hitting other limits.

      I think that the issue is related to “Liebig’s Law of the Minimum”. There are many needs of a plant for nutrients. If it is missing any one of them, it can severely impair the growth of the plant. Even if we get around the shortage issue, there is still the pollution issue.

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  9. another facet of our debt problem which doesn’t figure highly in our discussion of it, is the pensions debt.
    We pay into pension schemes whether national or private, on the assumption that we will have payouts for life.These payouts are in effect debts incurred on our future, invested in enterprises which themselves are dependent on uninterrupted supplies of cheap energy. As that goes into decline, so will our pensions

    • You are right. There is a huge amount of obligations (if not debt) related to pensions and to guarantees like FDIC insurance. Social Security in not funded, except by unmarketable government securities relating to money which was collected as contributions, but has already spent. There is a lot of money in pension plans, by government agencies and by private companies that depends on securities that they own actually having value. The same is true for 401(k) plans.

      I have told people, “You really don’t want to put away the maximum amount your employer permits in a 401(k) plan. You may never get the money back.” I can sort of see putting away the amount that is employer-matched, especially if you expect to collect soon. But going much beyond that shows an awfully lot of faith that our current system will hold together. I would pay down debt with those funds if that is an option–then at least you can sleep well.

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