Two Views of our Current Economic and Energy Crisis

As the US heads toward debt default and continues with government shutdown, the underlying reason for the predicament is generally not clear to the American people or the world. The story that the press has generally been feeding us places the problem as basically a temporary one, caused by conflicts between the Democrats and Republicans.

It seems to me that the problem is much deeper. In this post, I summarize the two views, and provide reasons why the Predominant View is very far off the mark. We may be headed for a financial collapse that the Predominant View misses completely.

Predominant View of our Current Economic and Energy Predicament

The world economy under “normal” circumstances grows. Economic growth can sometimes slow a little, and then a little Keynesian stimulus is needed. Such stimulus would typically include deficit spending and low-interest rates. Perhaps it would include “Quantitative Easing” as well, since it tends to stimulate interest in buying assets of all kinds.

With the Predominant View, economic growth can continue indefinitely, without slowing down or stopping. In fact, the pursuit of economic growth becomes almost a national religion, with Ben Bernanke (probably succeeded by Janet Yellen) as its high priest. With unlimited economic growth, it is easy to have our current monetary system, since debt, and the repayment of debt, “works” well indefinitely. In fact, we can have pension plans, Social Security, and the many wonders that our financial system can deliver. We also can have more and better technological innovations, because there is always an abundance or the resources needed to make these innovations.

The late economist John Attarian describes this secular religion under the name “Economism” (Attarian 2005). According to him, under Economism, one’s life purpose is to attain affluence, so as to maximize access to consumer goods. With this belief, affluence is the universal solution to problems and grievances. Give people enough money, jobs, goods and services, and they will be happy and peaceable.

With this view, the big problem in the future is pollution, and in particular climate change caused by carbon dioxide and other gasses affecting the climate. Coal is viewed as particularly bad in this regard, oil is somewhat less bad, and natural gas better yet. Nuclear is a concern for a variety of reasons, including lack of a place for spent fuel.

To prevent/mitigate climate change, the view is that we must take steps to reduce fossil fuel usage over the next forty years. The view is that improved technology is likely to be helpful in this regard, because new technology will allow us to become increasingly efficient in our use of fossil fuels. “Renewables” can perhaps be ramped up greatly.

Birth rates can likely be reduced, through increased education of women. If there is a problem with a declining amount of resources per person, this problem can be mitigated by sharing what we have more equally. Perhaps job sharing can become more common, with each worker having part of a job.

Sustainable solutions are viewed as ones that use less fossil fuels. The “plan” is to have ever-increasing GDP per unit of energy consumption. The economy will become ever more service-oriented. People will learn to be happy with more services and fewer goods. We can move forward to a sustainable future.

With this view of the future, the economy is fundamentally fine. It will return to stronger growth in the near future, perhaps using less energy. The huge amount of stimulus currently being put into the economy through ultra low-interest rates and Quantitative Easing can be dropped back, without adverse results. With the Federal Reserve in charge, and with similar groups in charge in other countries, there is nothing to worry about.

Problems with government debt in the US, many parts of Europe, and Japan will somehow take care of themselves, if the various political parties would learn to get along better, and perhaps wait a bit for economic growth to resume on its own.

An Alternate View of our Economic and Energy Predicament

This story is very different from the Predominant View. Energy is critical to the growth of human civilization, because all types of goods and services require energy for their production. Once built infrastructure has been added, energy needs to be of the specific type used by this infrastructure.

In the world today, oil is the single largest source of energy. It is also the most versatile, and because of this, it is the most highly valued energy source. Extraction of oil has become problematic in the last decade, for two reasons: the quantity is not growing very rapidly, and the cost of extraction keeps rising. This rise in cost occurs because we extracted the easy-to-extract oil first. Now we have to move on to the more difficult (and expensive) to extract oil.

I have referred to the rising cost of oil extraction as an Investment Sinkhole Problem. We invest more and more dollars (and quantities of resources of various types), but the amount extracted barely increases world-wide. Economists would call the problem declining marginal returns on investment. When oil could be extracted cheaply, there was a huge gap between the cost of extraction and the value provided to society by this oil. Now, as the cost of extraction has risen, the difference between these two amounts becomes much smaller. If we were depending on this difference to help fuel economic growth, we are losing this benefit.

Viewed in terms of feedback loops, the huge amount of value added to society by oil over and above its cost of extraction used to lead to a positive feedback loop, favorably affecting economic growth. For example, (a) taxes on oil extraction would provide significant revenue, and (b) with low oil prices, roads could be built very cheaply. Both situations benefitted the economy.

Now at a higher cost of extraction, the value added to economies around the world is lower, leading to lower economic growth. At some point, not far away, the cost of extraction will exceed the value that this oil provides to society. At such a point, it will no longer make economic sense to extract oil. Adding more high-priced oil will lead to economic contraction, and quite likely, ultimately, collapse. Joseph Tainter in the Collapse of Complex Societies (1990) tells of many civilizations that reached declining marginal returns of investment and ultimately collapsed.

Oil and the Production Function

Figure 1. Graph of total, average, and marginal product, based on a quadratic production function, from Wikipedia.

Figure 1. Graph of total, average, and marginal product, based on a quadratic production function, from Wikipedia.

Economists talk about production functions describing how the economy works. In general,  a “production function” for the economy is of the form

Q = f (X1, X2, X3, . . . Xn)

where Q = Quantity of Output

and X1, X2, X3, . . . Xn are quantities of factor inputs, such as labor, capital, and land or raw materials.

Using the production factor approach, oil needs to be one of the Xi variables, because it is critical to the function of the economy. Oil is important for transportation, agriculture, as a lubricant, and as a raw material used in making many products such as medicines, fabrics, and asphalt. Substitutes for oil are very limited–mostly ethanol, which acts as an oil extender.

Figure 1 represents the situation where only one the of the inputs, in this case, oil, is allowed to vary. We are rapidly reaching the point where the cost of extracting oil is so high that in total, society is worse off, in terms of the total amount of goods produced by society. On Figure 1, we are reaching Stage 3.

The fact that we are reaching diminishing returns with oil is a major reason why world economic growth is slowing. It is also a major reason that many of the heavy oil consuming nations have been struggling with recession-like symptoms. These symptoms are mostly being covered up with deficit spending, ultra low-interest rates and Quantitative Easing. If this stimulus ever stops, there are likely to be huge problems.

Debt’s First Tie to Economic Growth

Debt is very much tied in with this story. GDP is a measure of how much is produced, whether or not debt is involved. Thus, if a new house or a new car is built, the value of the car is included in economic growth calculations, whether or not the house or car is bought 100% on credit.  Not only are we reaching limits on oil production (because the cost of extraction is becoming higher), but we are also reaching limits on debt, because economic growth is slowing.

Figure 2. Author's image of an expanding economy.

Figure 2. Author’s image of an expanding economy.

The fact that adding debt is easier in a growing economy than in a shrinking economy is obvious, if a person thinks about it.

If the economy is expanding rapidly, it is easy to add debt, because borrowing from the future always looks like it provides a benefit. In fact, it is possible to pay fairly high interest rates, in a growing economy, without profits being badly depressed. Businesses get the advantage of economies of scale, helping their profits and their ability to pay back debt. Reinhart and Rogoff (2008) unexpectedly stumbled across this phenomenon in examining eight centuries of financial crises. They reported, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”

Another situation where debt works well is if the economy is close to flat, but with debt, it is possible to add inexpensive fossil fuel energy. In this case, the value to society in terms of the work performed by the fossil fuels in far in excess of the cost of extracting the fossil fuel energy. This difference can feed back into the system, through cheap infrastructure, rising tax revenue, and even rising wages of workers, helping economic growth along. Thus, even though the economy was not growing at the time of the initial loans (these loans would be to potential consumers, to potential factory owners, and to potential extractors of the energy), the debt did in fact enable growth, by helping the huge difference between the cost of extraction and the value to society of the energy flow through to the economy.

Figure 3. Author's image of declining economy.

Figure 3. Author’s image of declining economy.

A shrinking economy can handle much less debt. Businesses, instead of seeing economies of scale, find that fixed costs are increasingly high compared to sales. Thus, their profits tend to shrink, even before debt service is added. Workers experience layoffs frequently, and often find that their new job pays less than their old job. This problem makes debt repayment difficult. If the economy is in fact reaching Stage 3 in Figure 1, because of diminishing returns with respect to oil, additional debt simply pushes the economy toward collapse more quickly.

Debt’s Further Tie to Economic Growth

There are two reasons why increasing debt is important for economic growth. First, increasing debt gives governments, businesses, and individuals increased spending power. For example, with a new auto loan or new home loan, a person is able to purchase an automobile or a home. This aspect or increasing debt is referred to as “increasing demand”–really the increased ability to afford goods.

If debt is declining, the situation is similar to the situation where few new loans are given–instead the old loans simply need to be paid off. If these are home and car loans, the number of cars and homes sold would likely drop back greatly.

A second aspect is just as important. The increased demand tends to lead to higher prices. For example, suppose mortgages for homes suddenly dried up. The amount a person could get for selling his house would likely drop. The same problem would happen if car loans disappeared–there would be many fewer buyers for cars (even used cars), and the value of cars would tend to drop. The value of commodities in general would likely drop as well, because there would be fewer cars made. The fact that fewer cars are made would feed back and affect steel prices, oil prices, and prices of other components of automobiles.

A related issue is that if the amount of debt starts to drop, the feedback loop is such that it tends to encourage more contraction, lower prices, and more debt default. (Like 2008!) Such debt defaults can cause banks and insurance companies to collapse, unless propped up by the government. Lower commodity prices can lead to a cutback of oil production. The expected feedbacks are especially bad if the economy is already reaching Stage 3, in Figure 1.

At this point, we have a great deal of oil extraction that is financed by debt. As we get to the more expensive oil, there will be more of this that can never be paid back. The tight oil extracted using fracking from shale formations is quite possibly of this type. The president of Shell Oil Company recently explained what a disappointment its investment in shale oil and gas had been (Financial Times).

Brazil is a step further toward bond defaults. It is trying to extract expensive oil from below a salt layer offshore. Brazil’s second largest oil company recently was not able to make its debt payment, and is now being liquidated (Bloomberg). The debt rating of its largest oil company, Petrobas, was recently downgraded (Financial Times).

A person cannot help but be concerned that if we start to see debt defaults, there will be  contagion as prices drop and banks and insurance companies fail. The government is already stimulating the economy using super-low interest rates, deficit spending, and Quantitative Easing. It would seem to be running out of ammunition to fix the situation, if another round of debt defaults start. Former Director of the US Office of Management and the Budget, David Stockman, has recently talked about this issue (King World News).

The Electricity Part of Our Predicament

Electricity can be produced in many different ways, at vastly different costs. When electricity costs are low, low electricity costs also contribute to economic growth, because the cost of generating the electricity is significantly lower than the benefit to the economy from the electricity. In this respect, electricity is very much like oil.

We can think of oil and electricity both as intermediate products, that are not exactly what we as consumers can use. What we want is transportation, or light from a light bulb, or our food cooked. Our salaries only go so far. Once the share of our salaries that must be spent on these intermediate products (electricity or oil) starts increasing, the share of our salaries that can go for the applications we really want must shrink. Similarly, if more of the world’s resources and manpower go to creating wind turbines and solar panels and nuclear plants, less is available to produce other things.

The shift toward renewables has several difficulties:

  1. Renewables  are an order of magnitude less efficient in producing electricity than the fossil fuels they replaced, when the energy cost of mitigating intermittency is included in the calculation  (Weissbach et al. 2013). EROI comparisons are distorted, because they do not reflect this cost.
  2. Renewables tend to use fossil fuels heavily at the beginning of their life cycle, so do not really reduce fossil fuel use unless at some point in the future, we greatly reduce the amount of renewables we produce (and perhaps not even then, if the intermittency cost is as high as indicated in Item 1).
  3. The shift toward renewables in electricity production acts very much like the push toward high-priced oil, in terms of pushing the economy toward Stage 3 of the production function (in Figure 1), only on a different axis than oil.
  4. The view that the economy is hurtling toward climate change is based on the view that the economy will in fact continue to grow and will continue to extract fossil fuels for the foreseeable future. If oil and debt are limits that we are hitting right now, we may very well encounter economic collapse in the near future. Such a collapse will likely cut fossil fuel use of all kinds very quickly, because of low prices and disruption to systems.
  5. If, in fact, we do hit collapse, renewables will not operate the electric grid without fossil fuels, because we need fossil fuels to keep transmission lines repaired, to create and transport replacement parts, and to allow customers to have jobs to pay for the electricity. Thus, without fossil fuels in the future, our investment in renewables is of  no long-term value. (And EROI estimates are vastly overstated.)

Government Tie to Collapse Issues

Governments are perhaps the most vulnerable part of the system, if collapse hits due to continuing high oil prices.

Governments are the ones charged with bailing out banks and providing benefits to unemployed workers, at the same time that their own tax revenue is down due to reduced employment. In fact, many of the governments of big oil consuming nations (US, most of Europe, and Japan) are in very vulnerable positions, because their debt levels are very high, and they keep adding more debt. At the same time, they are pulling out all of the stops to keep their economies from collapsing, including very low-interest rates and Quantitative Easing. Because they are already so stretched, it is doubtful that they could do another round of bailouts.

The US government shutdown and debt cap limit debate is indicative of very serious problems–more than a conflict between two political parties. With slowing economic growth, there is a huge gap between what has been promised and what the government can in fact afford. No government official wants to explain to voters how bad the situation really is. So we end up with gridlock. See my post from November 2012, Understanding Our Oil-Related Fiscal Cliff.

Conclusion

The Predominant View appears to fall very wide of the mark. Limits on oil and on other resources are a signal that Nature is really in charge, not humans. We can’t escape these limits. If we try to mitigate climate change by using more renewables, we hit a different kind of limit–high-priced electricity, and the problems it brings.

Potential collapse seems to be directly in front of us. The Republican solution of more oil drilling will lead us in the direction of collapse, just as will the Democratic solution of increased debt and more emphasis on low-carbon fuels, particularly for electricity. The limits are just on different axes of the production function.

Whether or not we humans would like to be in charge, Nature is, in fact, in charge. Nature determines timeframes. The timeframe could be very close. It is even possible that the current government shutdown/debt ceiling problems will ultimately lead to US collapse, and perhaps even world collapse.

The current Predominant View of our situation is one that puts humans, and in particular current governmental officials, in charge. Historically, governments have had close ties with religion, using religion to further their own purposes. Now, government and religion have almost been fused into one. Perhaps this close tie is the reason why it is so difficult to get a well-reasoned story about our current predicament from those in charge, and why so many people are willing to believe the story we are being told.

One thing that the Predominant View misses is the fact that we live in a finite world. This means that growth must at some point slow, and ultimately be reversed. The world operates in cycles; we can’t really change this. Nothing is permanent. The species that are dominant will change; humans may even lose their dominance. The climate changes, although perhaps not as fast as it is currently.

Another thing that the Predominant View misses is the fact that energy of the right kinds is absolutely essential for the functioning of the economy. The view that there will be a substitute is more “faith-based” than it is based on objective facts. The Predominant View also misses the point that the substitute needs to be cheap; high-priced energy is terribly bad for the economy–it can easily push the economy into Stage 3 of the production function. The fact that high-priced oil is likely to lead to a debt unwind is likely to make the situation worse than it otherwise would be.

A major debt unwind is likely to lead to low prices for oil and commodities of all types and significant job loss. This is analogous to the problem the 1930s Depression. The big difference is that in the 1930s Depression, job loss was associated with the falling price of food, as fossil fuels replaced human labor, bringing food production costs down, and leaving many unemployed. (Stiglitz 2010). In that scenario, there was still plenty more cheap fossil fuels in the ground. Therefore, more debt and stimulus programs could re-inflate the economy, because it could lead to more use of cheap fossil fuels in non-agricultural sectors of the economy.

We are now at the edge of a very different scenario. We are reaching debt default limits because we have extracted the easy to extract oil. Additional extraction can only be more expensive and thus push us further into Stage 3 of the production function, or more toward financial collapse.  As the economy naturally shrinks, there is no longer a way that more debt can re-inflate the system. Instead, the use of debt must reach a new, much lower equilibrium. Because of debt’s tie to banks, pension funds, insurance companies, and the rest of the financial system, this is a huge problem.

We can think that the growth of human systems, including the economy, will go on forever, but we are almost certainly kidding ourselves. At some point, when Nature decides, new species will dominate–perhaps plants that can use more CO2. The transition will be the transition Nature dictates.

We are kidding ourselves if we think that we can decide to slowly reduce oil and fossil fuel usage over the next 40 or more years. If oil prices drop to, say, $30 barrel because of debt defaults, oil production will drop very quickly–not based on some slow decline curve. Natural gas and coal prices will drop dramatically too, essentially putting an end to their production. Jobs will disappear with the lack of fossil fuels. Eighty or ninety percent of us will again need to work in manual food production without fossil fuels. Education, government, and services of all kinds will shrink rapidly.

Nature is deciding for us right now what is ahead. We likely will have little choice in the matter. If we do have a choice at all, it is likely to be in the direction of serious back-pedaling, in terms of population, and in terms of learning to live essentially without fossil fuels. The future is likely to be very different from the past.

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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388 Responses to Two Views of our Current Economic and Energy Crisis

  1. TheCarGuy says:

    For eight years (2001 to 2009) Republicans spent like drunken sailors when they where in control and tanked our economy with deregulation, wars, senior drug entitlements and tax cuts . Now they want to school the rest of us on how to manage the economy.

    “Reagan,” Vice President Dick Cheney famously declared in 2002, “proved deficits don’t matter.” Unless, that is, a Democrat is in the White House.

    http://crooksandliars.com/jon-perr/reagan-proved-deficits-dont-matter

    • I am convinced that politicians are very much tied in with what economists believe and write about.

      Any economist with common sense would know that saying, “We are going to hit limits not too far down the road,” would make certain that he would never get appointed to any position of any importance. There is a good chance that an academic paper would not even get published saying such a thing. In the scientific sphere, professors get research grants to study whatever the hot topic is–carbon capture and storage, no matter how expensive. This may happen in economics as well.

      • yt75 says:

        Yes …

        And the “irony” of the Reagan/Thatcher era, is that it is also more or less the “oil glut” period, for a big part due to Reagan adminsitration negociating increase prod with the Saudis, also “wrecking” the US domestic oil industry in the process :

        While Thatcher also “sold” most(or a lot) of UK oil during the same period :
        http://www.theoildrum.com/node/9936#comment-956275

        • The link you provide to a comment by Jon Callahan includes a comment at the end, from Wikipedia:

          “Throughout the 1980s revenue from the 90 per cent tax on North Sea oil extraction was used as a short-term funding source to balance the economy and pay the costs of reform.”

          Taxes on oil extraction have traditionally been very high. This is a big source of funding for governments. I think EROI studies miss this point. Not only do governments get the cheap oil to pave their roads and fuel their vehicles, but they also get a lot of taxes from the oil companies. Switching to renewables, and not noticing that the tax dollars are going the other direction, is a major problem.

          • Since 2008 when the UK switched from oil exporter to importer the loss of revenue has been matched with borrowing. As yet that loss in balance of payments and tax income has not been matched.

      • yt75 says:

        Also about academic papers on the subject, the results of the detail study launched by Tad Patzek, U of Texas and others are now available apparently :
        http://www.beg.utexas.edu/info/sloan_barnett.php
        (didn’t have time to read it yet)

        • All of these studies assume that debt availability will continue, interest rates will not be materially different, and that prices stay in a particular range. These sound like reasonable assumptions if you don’t realize that we are in a big debt bubble that holds up demand for a lot of kinds of things. Also, if you don’t realize that the unusually low interest rates we are experiencing are important in companies’ decisions to drill. If you take away these kinds of assumption, these estimates are just like other oil and gas reserves–they disappear, with new assumptions.

  2. Dr. Dunn says:

    Health Care is the largest growing expense of the American tax payer over the last 10 years, much more than the cost of oil. In 2010 America pasted the Affordable Care Act to control these costs. Republicans have spent the last 3 1/2 fighting the law to preserve large profits for insurance companies, doctors, drug companies and medical device manufacturers.

    Gail has readers looking in the wrong area of a troubled economy

    • I agree that health care is a big piece of the problem as well. The US healthcare system manages to produce higher costs for health care, with less good outcomes, than any of the other major developed countries. The high cost of health care is part of what makes us uncompetitive compared to other economies. But even if we were to fix healthcare, we would still have a major problem.

      Look at Europe and Japan: their health care costs are more like half of ours, and they still have problems.

      I couldn’t talk about all of the problems in this post. Healthcare is certainly one of the US problems.

      • BC says:

        US personal consumption expenditures (PCE) to the price of oil (all data at the links below are 2007 = 100):
        http://research.stlouisfed.org/fredgraph.png?g=nnm

        Wages and salaries to oil:
        http://research.stlouisfed.org/fredgraph.png?g=nnn

        PCE to household spending for “health (disease) care” (does not include what gov’t spends):
        http://research.stlouisfed.org/fredgraph.png?g=nno

        Wages to spending for “health care”:
        http://research.stlouisfed.org/fredgraph.png?g=nnp

        The pct. of PCE spent for “health care” (16.6%!!!):
        http://research.stlouisfed.org/fredgraph.png?g=nnq

        The pct. of wages for “health care” (26%!!!):
        http://research.stlouisfed.org/fredgraph.png?g=nns

        “Health care” spending per capita ($6,000!!!):
        http://research.stlouisfed.org/fredgraph.png?g=nnt

        “Health care” spending per household ($15,800!!!):
        http://research.stlouisfed.org/fredgraph.png?g=nnu

        What the US spends for a hyper-financialized, cartelized medical insurance system, a.ka. “health care”, is APPALLING AND UTTERLY UNSUSTAINABLE.

        Now the ACA is institutionalizing the hyper-financialization of “health care” and a MASSIVE transfer to medical insurers, hospital companies, pharma, and doctors via gov’t-mandated requirement for medical insurance for simply being alive. WE INSANE to put up with this!!!

        The US is spending more than three times as much as a share of wages and PCE for “health care” than we did in 1970. 50-65% of “health care” spending is on the sickest 5-10%, primarily from chronic conditions resulting from smoking, unhealthy diets and lifestyles, lack of exercise, chronic socioeconomic stressor, and aging with chronic conditions associated with the aforementioned factors. Are we three times more healthy? Three times sicker? Or are the medical insurance and “health care” industry’s revenues and profits healthier at everyone else’s expense?

        The US is spending 2 1/4 times more for oil as share of wages than we spent in 1970. It should be no surprise why the country has deindustrialized and financialized the economy and society. Now the hyper-financialization has resulted in unprecedented public and private debt to wages, production, and GDP.

        Moreover, agribusiness and processed food companies that produce the sugary, fatty, salty, and high-glycemic foods and beverages are similarly subsidized to produce the very substanaces that cause most of the chronic diseases that result in costly (and profitable) “health care” spending. We are subsidizing unhealthy diets and lifestyles, poor health, and then mandating insurance to subsidize the profitable costly spending for medical services virtually no one can afford.

        The “health care” system is quite literally bankrupting households, small businesses, and gov’t, and the few are benefitting at the expense of the rest of us.

        The gov’t of the US is literally subsidizing toxic “food” production, poor health, disease, and prohibitively costly “disease care” for its unsuspecting citizens. What a shameful disgrace.

        If there ever were industries in desperate need of DSIRUPTION by technological and process innovations to slash costs and increase quality and availability of services, the medical insurance and “health care” industries are at the top of the list.

        • I agree. I grew up with a father who was a doctor and a mother who was trained as a medical technologist (but she left work when I was born). I later did a lot of work as an actuary in medical malpractice and workers compensation, both of which have a lot to do with healthcare. My only brother is a doctor. I have also had a fair amount of experience taking elderly relatives to the doctor.

          The current medical system is integrated into the way people think right now. Elderly people plan their lives around their many doctor’s appointments and taking pills. If your loved one is in an assisted living center, the administrators will call you and tell you that the elderly person needs medical treatment for ________. Then it is up to you to take the elderly relative to an appropriate place, often an emergency room, for care. It gets to be an endless cycle of trips to doctors and emergency rooms. All of the care is “free” so no one pays any attention to costs. One emergency room doctor became familiar enough with an elderly aunt who lived with us that he would ask about the aunt’s cats when she came in.

      • Dr. Dunn says:

        Ms. Tverberg, your comment is the exact reason why we need health care reform and the Affordable Care Act. You should have never complained about it because it is a two thousand page law. You can’t fix one sixth of the American economy in a few blog pages.

        The same holds true for our energy industry. There isn’t a simple one blogger comment that going to replace what you call “cheap oil”. It’s going to take thousands of different small ideas to keep the American economic patient running. Oil is just a luxury transportation fuel. The world will turn without it and not collapse, just change.

        • timl2k11 says:

          That it is a 2000 page law, that we need so much bureaucracy, is part of the problem. Do you walk everywhere? Do you grow your own food with your own labor? If not oil is not a “luxury transportation fuel”. The world will turn without it, society on the other hand, not so much, not like today.

        • Jan Steinman says:

          Although I despise the theatrics that the Republican Party has turned it into, the ACA is not so much a health-care system solution as it is a subsidy to the health insurance industry, which in almost all other industrialized nations, simply doesn’t exist.

          A single-payer system appears to be at least twice as efficient, as those countries with single-payer systems spend about half as much on health care as the US does. (16% of GDP goes into health care in the US, compared with about 7% in Canada, Japan, Germany, etc.)

          We ignore this at our peril! Joseph Tainter warns about the overhead of a civilization becoming its downfall. Surely, that would include a grossly inefficient health-care system!

          It can be argued that all those insurance workers would be out of a job with a single-payer system. What’s wrong with getting rid of their jobs and simply continuing to pay them while they look for work? Fiscally, that wouldn’t be any worse than artificially keeping an unnecessary overhead function alive by decree! And imagine what all these talented and creative people could be doing otherwise!

          Finally, the perspective must change. Our health-care systems have simply become wealth-care systems. These systems must, in the long run, become illness-prevention systems.

          For example, in the US, cigarettes get taxed, and insurance company profits get taxed, and doctor’s salaries get taxed. So there is little incentive to reduce smoking. But Ontario, which directly pays for the additional health demands of smokers, tried to double the tax on cigarettes, seeing that in the best interest of citizens and government. Too bad cheap cigarettes flooded across the border, killing this attempt at cost-rationing behaviours with negative health impacts.

          • In a single payer system, it is also much easier to put together a single data-gathering system for all providers, and use it to gather data on what treatments do and do not work; what kinds of tests are necessary vs an unnecessary expense. (This also cuts out the need for many different computer systems for this purpose.) With a single computer system, one can also put cost controls on the system. No wonder doctors are not interested in such a system.

            • Jan Steinman says:

              “No wonder doctors are not interested in such a system.”

              I wasn’t here at the time, but my understanding from a CBC program is that the doctors fought it tooth and claw at the time it was being established.

              The got certain concessions (such as exclusion of dental, ugh) and managed to keep their private practices (instead of becoming government employees), but they almost killed Canada’s public health care in its infancy.

              As someone living close to the earth, I enjoy much better health care in Canada than I ever did in the US. I can call my doctor when his office opens and generally see him before noon. The horror stories you hear about “wait times” are all for elective procedures. Both routine medical care and life-threatening situations are dealt with promptly.

    • Ikonoclast says:

      In fact, Dr.Dunn, you and Gail are both right. Your positions are not mutually exclusive. It is true that affordable health care would reduce and control costs. It is also true that the world is finite and there are limits to growth.

      If a virus invades a human body and breeds out of control would you posit that the virus could breed to infinite numbers in a finite host body? Of course you would not. Either the immune system of the host will bring the virus numbers under control or the virus load will kill the host.

      Equally humans and the human economy cannot grow indefinitely on our host planet. There are many signs that we have indeed either reached the limits to growth or that we are very close to reaching it. The only question is how close are we to the limits? There is no question that there are limits. The truth of there being limits in a finite system is axiomatic.

    • jjhpor says:

      I think it is wrong to assume that the Rs are fighting the Affordable Care Act for reasons as simple as rewarding their friends or campaign contributors. To the far right government spending on social issues is wrong on a moral basis. They believe that helping the less fortunate is not a proper role of the government. They oppose social security, they oppose food aid, they oppose minimum wages. Helping their friends is secondary.

      • KingFish says:

        “To the far right government spending on social issues is wrong on a moral basis.”

        What kind of moral basis is leaving 50 million Americans without health care? That’s not moral. That’s selfish immoral behavior that Jesus would find disgusting.

    • dolph says:

      The Affordable Care Act does nothing to control costs. That this is true is based on a simple observation…if more people are insured, this means more demand, which must mean greater prices if there are no major increases in supply (and with energy limits real, it is doubtful if there will be increases in supply). So all you will get is more and more people chasing fewer and fewer available health care services. It should also be pointed out that the Affordable Care Act is not government insurance like Medicare, but a mandate to purchase private insurance. Again, this should result in higher costs, as private insurers will use every trick they can to pass on costs to the customer.

      While other developed nations have lower health care costs, they have been rising as well. The U.K.’s NHS is in disarray, for example. The only reason why the costs are better controlled is because government rations demand. Even then, they have not been able to control costs, as an expanding population of older and sicker people meets head on against a finite supply of drugs, health care workers, hospital beds, etc.

      It should also be pointed out that an emphasis on preventive care is sort of like efficiency: it is a temporary, not long term solution. Ultimately everybody will get some disease or another.

      There are two, and only two long term solutions to rising health care costs, both of which lie at opposite ends of the political spectrum. One is to allow a completely free market system in healthcare: for the government to get out completely, and allow market pricing at all levels for insurance, health care services etc. Costs would go down under such a scenario because there would be much less demand, but yes, illnesses would be more harmful for people.

      The other solution is a completely government controlled system of rationing, with hard limits on healthcare services delivered to the people who need them most (those with chronic illnesses, the elderly, etc.).

      It is instructive that in our politically dysfunctional age, neither option is on the table.

      • TheCarGuy says:

        “The Affordable Care Act deserves a solid “A” for including virtually every cost control idea anyone has come up with — limits on tax breaks for employer-sponsored health insurance, accountable care organizations, bundled payments, comparative effectiveness analysis, a commission to regulate payments, reforms in insurance design and much more. ”

        http://www.brookings.edu/research/opinions/2012/09/18-health-care-costs-aaron

      • MarkU says:

        The reason that the UK’s NHS is “in disarray” with rising costs is largely due to extensive privatisation. Large sections of formerly ‘in house’ services have been outsourced to private companies. It is the change towards the US model, where financial parasites have to have ‘a piece of the action’, which is mainly responsible for pushing up costs.

        Your argument that an emphasis on prevention is only a temporary solution as “ultimately everybody will get some disease or other” is absolute drivel. You might as well have said that taking any care of yoiur health is pointless because we all die eventually. Eating and drinking are also ‘temorary solutions’, this does not reduce their value.

        • HappyasLarry says:

          I am sorry to have to correct you Marku in your statement that the UK NHS is suffering from extensive privatisation. The fact is that is that this centrally controlled model of health care is unique in the world. The only country close tonthe UK model is North Korea. None of the ex-communist block has anything like it.
          It is the worst performing health service in western Europe. Even impoverished Spain does better. Life outcomes from cancer treatment are among the worst, as are infant deaths. This has been happening for decades and is nothing to do with recent changes. Anything has to be better than this mess.

        • Craig W. Crosby, Sr. says:

          The distortion I see in our (US) health care and apparently being copied in NHS is that it does give parasites the opportunity to feast on the ‘bounty.’ It creates a medical Mafia that has the ability to make an “offer you cannot refuse” in the form of health care. Buy it at our price or die / suffer!

          Craig

      • A rational approach (but probably not acceptable to most) would be to scale back services provided by health care greatly, and make those services available to only those who have a reasonable chance of productive life after the health care is provided. This may mean cutting off services (except palliative treatment) to the chronically ill, elderly, and disabled. Above some age, we may offer only palliative treatment.

        Part of our problem now is that we are (and can be expecting in the future) to be getting poor and poorer, so we are less and less able to take care of those who cannot take care of themselves. Our beliefs and customs have gradually migrated toward providing more and more care for those who cannot take care of themselves. (It has been the custom in many parts of the world to let children who are obviously disabled die. This is why there are so many foreign disabled children up for adoption in this country.) We somehow need to migrate back in the old direction, but this is not even an idea that most people can consider.

        • Jan Steinman says:

          That’s very brave, Gail, and will likely earn you personal attacks.

          It may well be the last luxury we want to give up, but compassion is looking more like a luxury of the past.

          • We can say that we are focusing our capacity for compassion where resource realities indicate greater overall benefit to social welfare. To the extent that resources are directed at extending life at a given stage of productivity and maturity, different factors and justifications will be considered. Yes, compassion as we currently recognize it must change. We can handle it, and we will become more thoughtful and arguably more compassionate for its confrontation.

        • Hickory says:

          We do need to realize that since we are broke, we can no longer afford to-
          1. Try to extend health care to all without heavy duty rationing of that care (highest benefit to cost equation). All other measures are really pissing in the wind.
          2. To be the worlds policeman, and throw Tomahawks around like they we a dime a dozen.
          3. To be frivolous with our personal purchasing power.
          4. To pretend that this golden age is some sort of God-given permanent scenario.

      • A rational approach (but probably not acceptable to most) would be to scale back services provided by health care greatly, and make those services available to only those who have a reasonable chance of productive life after the health care is provided. This may mean cutting off services (except palliative treatment) to the chronically ill, elderly, and disabled. Above some age, we may offer only palliative treatment.

        Part of our problem now is that we are (and can be expecting in the future) to be getting poor and poorer, so we are less and less able to take care of those who cannot take care of themselves. Our beliefs and customs have gradually migrated toward providing more and more care for those who cannot take care of themselves. (It has been the custom in many parts of the world to let children who are obviously disabled die. This is why there are so many foreign disabled children up for adoption in this country.) We somehow need to migrate back in the old direction, but this is not even an idea that most people can consider.

        • timl2k11 says:

          I am reminded of the pilot episode of Breaking Bad. If Walter’s chemotherapy and other treatments were covered he would have never “broke bad”. Instead he was forced to raise the money on his own (though at first he didn’t want to do anything about his cancer at all). Americans seem to want to have their cake and eat it to; coverage for everything and everyone but low premiums.
          BTW, has anyone seen a concise explanation of the “Affordable Care Act”? I have yet to run across one. People say it is either good or bad but only using the broadest generalities like “Everyone gets insurance” or on the other side “Get the government out of healthcare”.

          • Hi Tim,

            “Americans seem to want to have their cake and eat it to; coverage for everything and everyone but low premiums.”

            You called that correct. I sell health insurance for a living and I don’t even listen to them any more when they start complaining about cost or benefits. They almost all do it, don’t want to pay for it and expect it to pay for everything.

            “anyone seen a concise explanation of the “Affordable Care Act”?”

            Good luck, most of the people in the industry only know or understand the part they work with. The ACA changes and affects almost everyone in the industry(doctors, hospitals, insurance companies, drug companies, device manufacturers, insurance agents, etc.) There is so much going on behind the scenes. The public didn’t understand how the system worked in the past and aren’t going to understand most of what is going to change in the industry.

            I believe after a couple of years most people will be better off from the ACA. There will be some healthy higher income people who buy their own coverage that are going to have to pay more for coverage next year. Over time if the ACA contains costs (and it should)or they are no longer healthy and need to switch plans it will benefit them too. There are a lot of rules and laws to help contain costs in the ACA. A big one is that insurance companies are required to pay out a larger percentage of premiums in claims or return the money. This is going to help control costs. Also the plans that can be purchased are going to be standardized. Meaning it’s going to be easy to compare your benefit and cost between another insurance company. This is going to put a lot more pressure on them to lower premiums and costs. They will no longer be able to confuse people about what’s different in there plan compared to another company. Individuals who buy coverage will have an open enrollment each year and be able to switch plans no health questions asked. That was not true before. It’s going to be required by law to have coverage with a few exceptions. Low income individuals who aren’t offered coverage from their employer can get assistance from the federal government except those who are 133% below poverty and living in a state that their governor refused to except the expansion of Medicaid. There is no system for them or means for them get coverage they can afforded. That Medicaid program was going to be covered 100% by the feds for the first 3 years and 90% until 2020. People can still have their same doctors, hospital and insurance company if they wish. There will be no death panels like Gail suggested above.

            I truly believe 99% of Americans have no idea what the ACA is going to mean to them. They only know what side of the political fence they stand on and have made up their mind.

          • I have also heard that the reason why we have so many malpractice claims is because so many people cannot afford the cost of additional care if a doctor makes a mistake, unless they sue for it.

            Sorry, I haven’t been following the Affordable Care Act. I know that our local newspaper has pointed out that many of the major healthcare providers in town are not involved in the Exchanges at all. The Blue Cross/Blue Shield Exchange in Atlanta contains about half as many doctors as other local Blue Cross/Blue Shield plans.

        • dashui says:

          I think this is already happening. I saw that 90% of Down’s syndrome fetuses are being aborted in the US. China and Israel are also actively aborting handicapped fetuses.
          I have a coworker who kept his retarded girl. There is a photo on the company website of her getting middle school prom queen. Very lovely but I’m not sure what kind of future she will have as her parents age, best scenario is a ward of the state.

    • RT says:

      Dr. Dunn,

      Your analyzing Gail’s writing and moving the argument to US health costs is like arguing about what color to paint the deck chairs on the Titanic. You missed the point. The world economies are waging a battle against Mother Nature… and she always wins.

      We are currently engaged in a world energy crisis/war with other like minded nations using the mindset of last man standing wins.

      Regards,
      RT

  3. Jp says:

    Hi Gail,
    Great arguments which I find it difficult to fault. Love your blog.
    3 questions
    1)Generally agree with your deflationary thesis, but think you are using the wrong denominator. How can priceless scarce assets like food and oil can drop in value in a sustained manner against confetti currency which can and will be produced in unlimited quantities by desperate governments? How can deflation in fiat currency terms possibly be sustained?

    2)Any thoughts on time frames? Any cogent reasons why BAU cannot stumble on for another 5, 10, 15 years before the SHTF? It is impossible to time loss of confidence in BAU, but what about hard physical limits?

    3)Any thoughts on the relative viability of Australia in a post peak world? They have a continent worth of natural resources to share between 20 million people. Not sure about energy or food independence though.

    Would value your thoughts

    • 1. I don’t think I said the price of food would drop. I was talking about oil, coal, natural gas, uranium, and other fuels. These are intermediaries, that hopefully will produce energy of the desired type. The debt related demand for these would drop dramatically, putting the price way down. Many people would be out of jobs. This is pretty much what happened in late 2008. These companies would also need debt to finance their operations, and might not be able to get it. I wrote a post about the situation in November 2008 on The Oil Drum. Impact of Credit Crisis on the Energy Industry – Where Are We Now? I know I was surprised when I wrote it how widespread the effects were.

      One thing I wrote was:

      According to Merrill Lynch, the average junk bond yield is now greater than 20%. A recent Wall Street Journal article says, “The junk bond market has closed the door.” The article indicates that in November, no new junk bonds were issued. It also indicates that about half of US corporations have below-investment-grade credit, and thus are being locked out of the market. It seems likely that quite a number of these companies are in the energy field.

      I also noted that the price of uranium had dropped in half.

      If there is a financial crisis, the price of food could very well be high, especially if lack of oil interferes with growing food. There is also a possibility that there is some sort of disconnect in the financial system–banks limiting withdrawals, so it is hard to buy much, no matter what the price.

      2. I have been surprised at how long we have stumbled along so far. Government officials seems to have more rabbits in their hats than I expected. I suppose that it is possible that the US can get past this governmental debt crisis, and maybe even the new two or three governmental debt crises. Herbert Stein’s Law says, “If something can’t go on forever, it will stop.” It is on this basis that it seems like it has to stop in a fairly short time period. With stretching, maybe it could be five years.

      3. One thing I worry about is how interconnected the world is. If a person wants to make a computer, it takes highly purified minerals from many countries. It is not possible today for Australia or any other country to make a computer on its own. This is probably true for a lot of other high-tech goods, like LED light bulbs. If there are a lot of debt problems, or trade problems (perhaps related to debt defaults) this could mean that the crisis will spread pretty much everywhere. I think that there is also an issue with banks being interconnected by securities and lending. And of course, standard practices, like the use of pension plans will exist everywhere. This leads me to believe that it won’t take too long for the crisis to spread worldwide.

      • Joy says:

        “I have been surprised at how long we have stumbled along so far.”

        Yes Gail, you have been fear mongering now for a couple of years as the economy improves from the financial collapes of 2008. United States oil production is increasing at 20% annual rate for the last three years and employment increasing for the last 4 years. The stock market at record highs and the national debt rate decreasing. The housing market has pretty much recovered and foreclosers at a 5 year low.

        Soon or later Gail you will come out of your bunker and see the sun shine on everyones solar panels.

        May your negitive mindset RIP

        • Lindon says:

          Joy, Gail is NOT fear-mongering. She is laying out the facts. Your statement “The housing market has pretty much recovered…” is absurd. There is an article on CNBC titled “Housing Market: From Recovery to Bubble–Already?” — along with about a million others that directly contradict your fantasy statement. Before advising others to come out of their bunkers, you should first pull your head out of the sand, it seems to me.

          • KingFish says:

            Realtor’s across the nation are complaining of low inventories of homes to sell. Home prices are risings. New construction at 5 year highs.

            Open your eyes to the newspaper Real Estate section

            • It is not individual citizens buying the homes; it is commercial investors buying them up to rent, with the idea that perhaps home prices will rise as well. This is the latest bubble. When investors discover that interest rates rise, or that renters aren’t too steady in paying their rent, or that home prices are falling again, they will be “out the door.”

          • Lindon says:

            KingFish says: “Realtor’s across the nation are complaining of low inventories of homes to sell.”

            Really, KingFish? I’m in the process of buying a home in the Portland, Oregon area market, and there is a glut of still foreclosed and short-sold homes to choose from. Isn’t it true that a large percent of the home purchases since 2008 crash have been by investors scooping up foreclosures and short-sales at bargain-basement prices and putting them up for rent? The number of first-time home buyers are at a historic low, probably because the majority of young people don’t even have (full time) jobs. Of course, KingFish, if you get your “facts” from Fox News and the like, you’ll only see the rosy picture that they are painting for you and other low-info types. You know, they tell you just what you want to believe. Try independent thinking and research, you might learn the truth.

          • Craig W. Crosby, Sr. says:

            Most of what needs to be said has been. I would like to add, though, that the new construction is not single family homes but rather commercial apartments. Most folks no longer qualify for loans, absent a very large down payment. And, the market is being manipulated by withholding forclosed properties from the market in order to produce an artificial limit in supply.

            But, of course, my dear Pangloss (Joy), all is well in this, the best of all possible worlds.

            Craig

        • Quantitative Easing is indeed helping, boosting investment into all kinds of things that otherwise would likely not be economic (like US oil production). QE is pumping up the stock market, and is encouraging institutional investors to buy up homes to rent out, thus inflating the US housing prices. The employment percentage is increasing thanks to more part time jobs and fewer in the workforce.

          Open up your eyes, and see what is really going on!

        • Ikonoclast says:

          The economic recovery since 2008 is only a recovery for the rich in the USA. The middle class and the poor are not recovering. There is plenty of data which bears this out.

          The financialisation of the economy is the first stage of catabolism. Catabolism in this context means a system feeding on itself. Real production is slowing and will soon go in reverse. Financialisation allows “wealth” to be transferred from the weak and poor up to the rich. “Wealth” equals the right to consume. So as the pie shrinks the right to to eat more of it transfers up to the rich. This is just another example of an unsustainable trend.

          The priveleged few get an unrealistic view. Because they are getting more they think the whole system is healthy. They don’t realise the base of the system is collapsing slowly but surely beneath them. In a slow motion collapse, the top most towers fall last but their fall is still certain.

          • BC says:

            Ikonoclast, precisely correct. Well said.

            In the US, private “health care” spending, total debt service, and gov’t spending (including elder transfers) combines for an equivalent of over 50% of reported GDP and 75% of private GDP, i.e., total reported GDP less gov’t spending. Public and private “health care” spending alone is 17-18% of GDP and an equivalent of 26% of private GDP!!!

            Further, the annual increase in total debt service flowing to the banking system alone exceeds the annual growth of nominal GDP, i.e., the financial services sector is a net drag on value-added output. Growth of gov’t spending for a decade has been driven by imperial war spending, and food stamps since ’08.

            The US economy is in an appallingly perverse situation in which US GDP does not grow unless we are at war, increasingly ill, and households go deeper into debt at interest. Yet, most economists laud the growth of US “health care” spending as an indication of how affluent we are to be able to spend so much on “health care”.

          • Unfortunately, hierarchical behavior seems to be the way nature handles “Not enough to go around.” This happens in primates and in many other large animals. The alternative is that all would starve. It is admittedly a bad way to handle things, but if a person wants to have survivors, and wants them to be “above average” in some sense, then hierarchical behavior works.

  4. TheBookKeeper says:

    The cost of fuel is only about 25% of the cost of transportation(other expenses- insurance, repairs, license and lease or capital investment). Which means doubling the cost of gasoline only adds less than 2 % to the cost of living over the last 10 years.

    • ChangeCanBeGood says:

      Or you could buy an electric car and say “I don’t need oil for transportation”

      • Not if you are out of a job–the likely outcome of this kind of crisis.

        • Joy says:

          If your complaining about not having a job. Try buying an American car and bringing the jobs back home local. It’s not about how much you spend, it’s about where you spend. Americans are their own worst enemy.

    • Ikonoclast says:

      This kind of economic or bookkeeping thinking fails in empirical reality due to Liebig’s Law of the minimum. It is not just the cost of a commodity that matters. Scarcity matters too in the long run. First, there is the zone you mention, where price goes up but the commodity is still available in sufficient quantities for all serious commercial uses. Frivolous and wasteful use will be curtailed due to the higher prices but serious commercial uses will still obtain sufficient product albeit at the expense of slight increases to the overall cost of living.

      Then there is the zone of serious scarcity. This is where the commodity becomes so scarce and the price gets so high that critical parts of the wheels of commerce and industry start to grind to a halt. Indeed, at this point scarcity becomes a far more important feature of the situation than price. This is the zone where a commodity sometimes cannot be obtained at any price.

      We can imagine a situation where rich people might be willing to pay exhorbitant prices for gasoline. But if the government has declared a civil emergency and reserved supplies for essential services, national guard, homeland security and the armed forces then said rich people will have no chance of fuelling up their Maybach Landaulet. All delivery services will also be suspended due to lack of fuel. They will huddle in their gated community wondering how they are are going to restock their Sub-Zero PRO 48 refrigerator. Just then the gated community back up power generators will die. So now they have no heating, no air-con, no transport and no internet. Welcome to the future.

    • We use quite a bit more oil than just gasoline, and amounts “recycle” through the system several times. I think economists have missed the point that oil prices affect consumers and businesses in may different ways, all at once. I mention in the article the connection with debt. If debt is affected, there is also a connection with home prices. I am sure you have seen my comment on other posts, research by James Hamilton shows that 10 out of 11 recessions since World War II were associated with oil price spikes.

      • Dan Delara says:

        50% of all the oil used in America is for gasoline with 20 % more used for diesel and 10% of jet fuel. Oil is just a luxury of today’s fast transportation which you live in fear of losing. Oil has never been cheap when you include the cost of air pollution and climate change. Life after oil transportation will be better. Change will be good.

        • Life after oil will be the same as life after fossil fuels. 80% or 90% of us will work in manual agriculture. There probably will be a lot fewer of us. Whether this will be better will be subject to a range of opinions.

  5. Judy says:

    Thanks Gail, that was very clear and understandable. It sounds like you think that Thursday signals a big change in the US economy, whether or not an agreement is reached on the debt ceiling.

    I’m not an economist, but an engineer. I can’t quite shake the idea that this ‘money’ that we are talking about, this mountain of debt, is all just figures on a computer. It is fiat, it is imaginary, like a religion. It controls our lives because we have chosen to let it. It is a method of rich controlling poor, and of ensuring unfair distribution of resources. Intuitively it seems such a bad thing, yet the fear of losing it is so great. If all debt and savings were wiped out tomorrow, who would be the winners and losers? And without money we still have the shirt on our back, the factories still stand, people still breath and the sun still shines in the sky. There may not be alternatives to oil, but there must be alternatives or solutions to the money issue. It is a man created system. Can you see any options, even if they are a longshot?

    • StopTheLies says:

      Until the Doomers stop the fear mongering and causes people to hide their money in their mattress, the Fed will be able to print all the money it wants without the fear of inflation.

      “Americans Increasingly Turning Against GOP” http://www.huffingtonpost.com/2013/10/14/republicans-shutdown-poll_n_4098496.html

      • Printing money the current way inflates asset prices, like homes, farms, commercial property, and stocks.

        • Dan Delara says:

          Gail, you clearly didn’t understand the comment you are replying too. If the Fed prints and you have put the fear of god into the public. Then everyone puts the printed money in their mattress and it will not cause inflation of assets.

          What the Fed is counting on is after the pile of cash in your mattress keeps you up at night because there is so much of it. Then you lose your fears and start to spend it. The last one to spend their cash will pay an inflated value until the Fed tightens to control inflation. This is macro economics 1.0. Try it some time.

    • dooomerdad says:

      are you being sarcastic?

      • KingFish says:

        No, this is really Gail economic view. I know, I can’t believe it either. She has been calling for an financial economic collapse anytime soon for the last two of years. She says she doesn’t pay any attention politics. I’m guessing she will be surprised when she finds out it was a self infected political collapse by the TP

    • Ikonoclast says:

      Judy, I tend to agree with you on this point and to diverge from Gail’s views (but only partly). Money is notional, not real. Ultimately, only real quantities of matter and energy actually count. Eventually excess debt will be dealt with by default. Just as fiat money and debt money (there is an important technical difference) can be created ex nihilo, out of nothing, so can fiat money and debt money be instantly destroyed and annulled by default. Of course, matter and energy do not behave in that way in this universe. The Law of Conservation of Matter/Energy tells us that.

      Debt default means creditors don’t get their money. This means that they lose the opportunity of future consumption. Massive debt default will essentially be a re-balancing of the books that will reflect the reality that therewill be much less stuff available to consume in future.

      Where Gail is right, in an important sense, is that this debt default rebalancing process is messy and inefficient and creates many further disruptions and conflicts in addition to the problems created by the real material shortages. If humans were rational, logical creatures, we could manage the notional part of the crisis (money and debt) much better and thus squeeze the best possible remaining outcomes out of a very dire real (material and energetic) situation. However, we are not rational, logical creatures especially when faced with grave threats to our well-being and even existence.

      Hence, all sorts of irrational behaviours will occur worsening the situation. The current US government behaviour is case in point. Where people do not realise the real base or fundamental cause of our oncoming crisis (resource shortages and limits to growth) they operate with all sorts of false theories about cause and effect. When they act on these false theories they usually make a bad situation worse. Some of the approaches are like prescribing leeching or bleeding for a person with critically low blood pressure.

      • With debt defaults, part of the problem is that banks and insurance companies fail, unless somehow governments can somehow prop them up.

        If this doesn’t work, then there are real problems. Businesses can’t pay workers; individuals can’t get their money out.

        Very often, withdrawals are capped at some low level per day or week. This causes problems as well.

        Most businesses are financed by debt. Getting replacement debt can become a huge problem. Even if a business itself is not financed by debt, it is likely that some of its suppliers are financed by debt. The ability to produce goods is governed by Liebig’s Law of the Minimum, so pieces of the system start falling apart pretty quickly, without access to debt. You may have seen my comment I made elsewhere. Back in late 2008, I reported in a post on The Oil Drum,

        “According to Merrill Lynch, the average junk bond yield is now greater than 20%. A recent Wall Street Journal article says, “The junk bond market has closed the door.” The article indicates that in November, no new junk bonds were issued. It also indicates that about half of US corporations have below-investment-grade credit, and thus are being locked out of the market. It seems likely that quite a number of these companies are in the energy field.”

        A long time ago, I participated in conference calls with API CEO Red Cavaney. One of the things he emphasized was the dependence of producers on supply chains. Even if a particular producer could line up enough debt for himself, the fact that each producer relied on other service providers who could not obtain debt had the potential to bring down the whole chain.

        • Jan Steinman says:

          “With debt defaults, part of the problem is that banks and insurance companies fail…”

          But haven’t they been stealth-recapitalized by reclassifying depositors as investors, Cyprus-style?

          Isn’t such a plan already in place and legislated, that given another 2008 event, the depositors will be the ones sporting the new haircut?

          It seems to me that, lacking inflation, the mattress is the best place to keep one’s cash these days.

    • The losers would be all of us, because money is what holds the system together. We may have factories, but they take raw materials from around the world. High tech goods, like computers, especially need goods from around the world. It takes money–not barter–to get all those raw materials. If there were only occasional needs, perhaps US wheat could be swapped for Saudi oil. But it is a lot more than that. Every factory today needs computers. We don’t make computers in the US any more. Getting computers would likely be a problem.

      Another connection is the need for debt. A large share of businesses depend on debt to finance their operations. Even if a particular business doesn’t depend on debt, the suppliers to that business depend on debt. I made a comment to someone else that when I did some investigation about the credit situation in late 2008, I wrote the following in a post on The Oil Drum:

      According to Merrill Lynch, the average junk bond yield is now greater than 20%. A recent Wall Street Journal article says, “The junk bond market has closed the door.” The article indicates that in November, no new junk bonds were issued. It also indicates that about half of US corporations have below-investment-grade credit, and thus are being locked out of the market. It seems likely that quite a number of these companies are in the energy field.

      I might also mention that money is sort of helpful for paying people. How long would you work without pay?

      A big part of the debt problem now is that much more has been promised than can ever be paid. If Greece wanted to buy a huge quantity of a product from you, would you sell it to them? If they had just defaulted on other orders, and wanted to buy more, would you sell them more on credit? This is the problem. It is our inability to actually provide something of value in return to back up our promises.

      • Judy says:

        Thanks for your replies. Gail, I work every day without pay and will do for the rest of my life no doubt. Bringing up children, doing housework and cooking a meal for my family goes on all the time and I don’t receive a penny for it. In a financial collapse my business would fold anyway, my clients would be penniless and you can’t advise people on energy efficiency if there is no energy to be efficient with 🙂

        Would I stop working? No, because I would be out foraging for food, making nettle soup for my elderly neighbours, and trying to cultivate every patch of green land within walking distance and teaching my community to do the same. People are not going to just sit there and die. If your town is at risk of flooding, everyone pitches in with the sandbags – who wouldn’t work to help?

        During the war in Britain, we had factories designed to make one thing, which had to be engineered to make something completely different, for instance a lipstick factory making ammunition shells perhaps. This took human ingenuity and a mentality of not letting anything go to waste. Our engineers used to be trained to engineer things, to make machines run without the correct parts and some of these old timers are still around and I am lucky to have trained with them. You will find all the materials required at your scrap yard, rubbish tip or else rob them from redundant factories and machines. Now nobody is going to go to that effort for a factory that makes hair-straighteners or bow ties, but maybe for one that makes wind turbines, or medicines or spare parts. This was something we excelled at during the war and it is emergency situations like that that bring out the best in people. So maybe some of the electrical equipment may get ripped out in favour of solid mechanical moving parts ( the analogy of going back to a clockwork watch rather than a digital one), but a lack of new computers will not be our downfall.

        30% of food is wasted at present, so we could definitely live on a lot less if resources are prioritised correctly and shared fairly. The US has enough land to feed itself, the UK has always relied on our neighbours to help feed us, so our problems may be different. In the UK most major cities are built on a river or at a port, with plenty of canals, trains and transport routes. Transport and water look like more of an issue in the US.

        Personally what is demoralising is the leadership or lack of it. I can’t see any solution coming out of your political system – any chance of a military coup in the US? In the UK our military leaders seem to have their heads screwed on. They are certainly aware of the implications of financial collapse and Peak Oil and are preparing for a different kind of military role. I would feel happier with strategists in charge rather than politicians. I’m not saying it would be rosy, but a military coup is a very real prospect where the government are making such a hash of things.

        I just don’t think that people stand by doing nothing while the world collapses around them. I’m not going to, and I doubt the military are going to.

        • Landbeyond says:

          Judy, during the war Britain still had an empire, and a lot of resources, including oil, coming into the country, especially from the US once they entered they war. All the re-engineering and human ingenuity in the world will not be enough without basic resources, especially with a much larger population and now an infrastructure much more dependent on oil for almost everything, including food.
          I know it’s hard to get one’s head round, but comparisons with WW2 are of limited validity.

          • Judy says:

            It is not comparisons I am interested in, but I definitely think we have a lot to learn from history. During WW2 our oil consumption was miniscule in comparison to now, so it is interesting to see how people lived and survived. Supplies were short because convoys were attacked and ships and men were diverted to the war. I find it interesting to see how the Uk government of the day prevented protests and how they taxed the wealthy to improve equality. There are good bits and bad with all history, but if it can give us tips and pointers to help our descent to a low energy lifestyle then why not? I don’t plan on looking back as far as Medieval times though 😉

            I think we have a lot of resources laying around us at present and the US still produces enough oil to supply 60% of its needs, so it’s not like there will be nothing to work with for a while at least. I’m sure becoming a scrap merchant is going to be the most lucrative career after collapse. Food was a big worry during the war and is going to be even more of an issue this time round.

            • It all depends on what supply chains are in place, and what they depend upon. They are quite different now than in the 1940s.

              If the price of oil drops to $30 barrel, the US won’t be producing much oil at all, at least not for very long. Producing oil depends on keeping the price up high enough so that it makes sense to extract it.

        • Grey says:

          I think you will be very (negatively) surprised at the behavior of your neighbors when things fall apart – this isn’t the old America any more – the culture is rotten, the populace are helpless, selfish, clueless, morons who are going to be angry/terrified and will totally lose it. Cannibalism is almost a given. Pull your head out of … Well … You know, and brace for impact.

          • Judy says:

            Grey, I don’t live in America. I live in the UK and I am out talking to neighbours and people in my town every day, so I know them pretty well.

            I think we have several advantages in the UK. That is not to say things will be easier, but we are a lot less addicted to oil for a start. A whole year’s worth of oil consumption in the UK, would only last a month for the US. (The EIA states US petroleum consumption for 2012 as 18,554 thousand barrels a day, whereas the UK consumption is 1,502 thousand barrels a day) We still have bad debt problems and a financial collapse has global implications, so we are not immune.

            My study of how people respond in emergency situations didn’t look at people in the UK though, because we just don’t experience those sorts of events. (For instance the last power cut I experienced was 1987 with the Great Storm, with less than 20 casualties). But if you look at the example of Hurricane Katrina where government help didn’t arrive in time, people were helping each other. People who had boats were out rescuing their neighbours. This week Cyclone Phailin hit India and the people are out clearing the debris themselves, not for money, but for their communities.

            There are many examples of people working together in large groups to try to achieve something. The simplest and most common example is probably football supporters, who are all in harmony supporting their team. More dramatic was the civil rights movement, which got people who were often complete strangers and had little in common to work together for a cause and give their time for free. Then there are the group protests that topple leaders, they are not clueless or helpless.

            Then look at charity – aren’t the US the most generous at giving for diaster relief? This isn’t the act of selfish people. And if you think that people won’t give anything once they are poor then you are wrong, because India and Bangledesh were among some of the poorer countries offering aid for the Katrina victims.

            “…the populace are helpless, selfish, clueless, morons…” I’m sure the aristocrats said something similar shortly before the French revolution and it didn’t end well for them.

          • newyorker says:

            I’m inclined to agree with you. Things will not be pretty here in nyc when the wheels come off. All the ‘diversity’ that tptb are celebrating does have a downside in that it corrodes social cohesion and cooperation in the face of an emergency.

            So where you live is important. Loyalty and cooperation will go tribal quickly. I’m betting the best outcomes, which will still be dismal, will be worked out in rural, heavily white northern states.

        • Women definitely have more experience working without being paid. In fact, I am not being paid for what I write on this blog. I don’t have advertisements up and I don’t have a “contribute” button.

          Debt is the thing that is behind most factories today, or changes and expansions to factories. If the availability of new debt disappears, the ability to do the transformations you talk about significantly lessons. Even if a business has debt for itself, if its supplier do not have debt to keep up their operations, it becomes a problem.

          The complexity of the things we make is much greater today (lipstick and clothes are manufactured overseas today–we manufacture foods with all kinds of fancy additives). Simpler types of manufacturing may indeed go back to old-fashioned pre-computer controls, but no one will be making high-tech goods, like replacement parts for wind turbines and LED bulbs and new computers.

          In the 1940s, we were able to greatly ramp up fossil fuel use, at little cost of extraction. We lack this ability today.

          I agree that the US is in much better shape with respect to total agricultural land availability, compared to Eurasia. Central and South America are in pretty good shape as well. The challenges will be making a transition to any new system, including buying up land from existing owners, teaching new owners what to do, and providing security to new owners. Government is going to need to shrink back considerably, because we cannot afford our current level of government (and neither can the UK, or any of the other developed countries). If a country has depended on a free-market system, instituting a different method of planning and distribution will require major changes. We almost need to go to a totalitarian regime.

          • Don Stewart says:

            Dear Gail
            I would like to suggest a few thoughts provoked by the ‘totalitarian regime’ comment.

            E.O. Wilson’s book The Social Conquest of Earth gives us, I think, lots of food for thought. I summarize a few points:
            1. Species which he labels ‘eusocial’ have come to dominate the Earth in the last couple of hundred million years. These species include the ants and termites and some insects and also humans. Eusocial species are able to cooperate for the common good, and across generations.
            2. The cooperation is tribal for humans and genetic for bees. For example, all the other castes in a beehive are genetically identical to the queeen, but epigenetic factors have made them workers or warriors or whatever. Humans tend to form tribes, which guard against inbreeding and so remain genetically diverse.
            3. Cooperation never completely stamps out individual competition. The great cultural stories we have inherited reflect the inescapable tension between individual interests and tribal interests.
            4. War between tribes has been the curse of humanity.

            Now a few comments from me as we look forward to resource shortages.
            A. Homo Economicus is a very poor model for thinking about using our Eusocial gifts to face the problems we will encounter. We need the more realistic model which Wilson describes.
            B. Efficiency is mostly about individual selection and group selection, not about saving the planet. If I am able to secure the necessities of life while expending less energy, then I probably have a selective advantage in the emerging environment. The same would be true for my tribe. Trying to get all the tribes in the world to pursue efficiency and simply not using the savings for some other endeavor is probably impossible. At least, there is little in human history to support such an endeavor.
            C. Tribes have had leadership. Toby Hemenway thinks, based on his researches, that hunter-gatherer and horticultural societies tended to have leaders who led informally, based on their evident gifts. It was the surplus created by agriculture that led to kings and nobles. As I listen to Toby talk, I think it is true that he sees a devolution toward horticulture as a good thing for us. By removing the surplus from backbreaking agriculture, we also eliminate the surplus which feeds a tribal hierarchy. (This sounds like the Tea Party, doesn’t it?)
            D. It is hard for me to visualize any global leader who could lead us back to horticulture. For one thing, his own generals would assasinate him. But E.O. Wilson concludes his book with this statement:

            ‘Scientific knowledge and technology double every one to two decades….So now I will confess my own blind faith. Earth, by the twenty-second century, can be turned, if we so wish, into a permanent paradise for human beings…’

            So people much wiser than I have widely varying views of what is possible with the raw material that Evolution has dealt us and what science and technology have added to extend our capabilities.
            E. My conclusion is that each individual and tribe needs to pursue energy (and resources in general) efficiency as a matter of individual and group selection. But everyday and in everyway we also need to seek out social opportunities. Our genetic inheritance gave us circuits which reward us strongly when we engage in socially productive enterprises. If we devolve into ‘every man for himself’, then we will become less than human.
            F. Take Anarchism pretty seriously.

            Don Stewart

            • Thanks! I have run across this idea before with ants.

              It seems that insect groups that are eusocial have much higher populations than other insects.

              There is another idea that another reader e-mailed me about that is related. John Michael Greer has a post up, called, The One Option Left. If the profit motive will no longer work to induce co-operation, perhaps religion needs to play a larger role. That is what held tribes together in the middle ages, during difficult times.

              I think Nature is behind all religions. The fact that different groups fight with each other is part of the plan to keep world population down–it is the opposite side of the cohesiveness that keeps groups together.

    • p01 says:

      There are no other monetary options. Emitting money as debt was the only way to keep the religion of industrialism alive. Hard currencies are incompatible with profit, while simply printing money and distributing them in order to create demand does not provide incentive to continue producing.
      Debt was the ONLY method for the yeast to force themselves to consume the last of the sugars in a furious froth, when they could not do it all by themselves with the old paradigm. The religious writings of proto-economists, then proto-futurists led to the formation of the high priesthood of economics and Sci-Fi-esque discourse, quite possibly the biggest popular delusion and madness of crowds ever, far surpassing any mass delusion that I’m aware of. The fact that scientists and engineers have completely ignored high school arithmetic and a few fundamental laws of nature (possibly only the most fundamental one, the causal relationship between food availability and the numbers of individuals in any one species), focusing instead on religious models of increasing complexity which only insured faster capital destruction (both natural and imaginary=money), also helped attaining the absolute peak in everything, and insured the consumption of absolutely everything that could have possibly be consumed. When it crashes, you can be sure that it could have not gone a single minute, a barrel burned, or a gram of ore refined longer. It will also be fast, and hard (because of finance). And completely irreversible, because of loss of complexity.
      I’m also an engineer, BTW. Schooled in the high temple of industrial religion, except I’ve had the “fortune” of seeing both religious denominations of the Church, and came to realize none holds an answer, because they are both incapable of seeing the problem, as all religions do.

  6. dashui says:

    It seems that many of these early comments are written by the same person under different names.

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  8. Student says:

    Of course we live in a finite world with real world resource constraints. However your underlying premise to all your dire economic predictions continues to be that the US government is in fact revenue constrained and about to run out of money.

    I would like to challenge you to explain to your readers the actual mechanism (or process) by which the US government or any other government who are sovereign issuers of their own currency (except Europe) “borrows” money and which organisations actually creates US currency.

    I am very much looking forward to hearing your explanation.

    • Where did you get the idea that I said that the US government is revenue constrained, and about to run out of money? A government can print money, but they can’t print cheap energy resources. It is the fact that energy resources are becoming increasingly difficult to extract that is the problem. We have to put more and more resources into extracting oil. One estimate is that the cost (in resources) of oil extraction is increasing by 7% per year. Metals (copper, silver, lead, etc.) are now in a more dilute form, so it takes more energy to separate them from the waste material that surrounds them.

      Our economy was built using debt–something that requires economic growth to work, at least on the scale we are doing it. When we have to pour more and more resources into extracting energy products and metals, this sets up feedback loops that lead to economic contraction, and these feedback loops tend to bring the debt-based system down.

      To save the system, the government needs to print cheap energy resources, not money. If there were a lot of cheap oil available, it would feed back through the system, in many ways. The government could tax it highly, to fix its deficit problems, for example.

      I am sorry this subject is so difficult.

      • KingFish says:

        “Our economy was built using debt–something that requires economic growth to work, at least on the scale we are doing it.”

        Here is your mistake in economic thinking Gail. Only people who make bad business decisions need economic growth to help make their borrowing successful. A wise borrowing business that invest in an adventure with profitable returns doesn’t need economic growth. Poorly planned adventures somethings get bailed out by growth and other just fail from just poor business planning.

        • Grey says:

          When it all falls apart, exactly what business ventures will be “successful”? Even bullet manufactures are going to be in trouble when the currency loses all value … I could go on, but am getting tired of explains the obvious to the Hopium-addicted. Don’t know how Gail does it. Good luck – if you don’t wise up, you will really need it!

          • p01 says:

            Actually, the currency will completely disappear, not lose value. If you think someone is going to put thousand of dollars on your checking account, and they’ll stay there when thousand of trillions are MIA, you’re dreaming. And with the incredible complexity of the new bills which just came out, it’s practically guaranteed there will be absolutely NO money, and NO way to print more and distribute, even if someone wanted to.
            The past 5 years of levitation have insured total annihilation, and the new hyper-complex bills have insured the loss of the ability to print currency. Maybe in 2008 there was still a chance, but it’s game over now.

          • p01 says:

            On second thought, maybe coins could still be furiously minted and distributed if their manufacturing supply chains are not completely broken, but this will make the initial deflation so devastating that it’s probably irrelevant whether they do it or not.

        • Debt is very much related to time-shifting. Time-shifting works very well in a growing economy–very badly in a shrinking economy. A lot of debt is not really for investment–it is for a private citizen to own a car or a home. If the individual loses his job and can only find a lower paying one, it will be much harder to pay back the loan. Government debt is somewhat similar. Paying back debt with a shrinking tax base is no fun.

          Businesses benefit from economies of scale in a growing economy; they suffer from dis-economies of shrinking markets in a shrinking economy.

      • I think you should find a softer wall to bang your head against Gail, people see oil as oil, copper as copper or whatever. It is impossible to put over the point that it’s the cost of getting hold of it that is the problem, and ‘technology’ isn’t going to solve our future difficulties, because energy creates technology, technology doesn’t create energy.
        As to debt, our society is built on it, because debt is taken on in the promise of future prosperity. That applies to you or me, or governments.
        Unfortunately future prosperity is entirely dependent on constantly increasing availability of energy in the form of coal oil or gas. We have to burn more of it at a faster and faster rate to stay ahead of our game.

        • Maybe I need some protective head gear. I am having a hard time keeping up with the comments.

          People seem to think that if our money system fails, we can just put together a different one. Our monetary system is based on growth, and it really did more or less match reality, for a while, at the time the economy was growing.

          Putting together a new system, based on shrinkage, will be very difficult. A business cannot count on having a market for its products for very long, regardless of how it structures the business. Instead of reaching economies of scale, the business will have a constant struggle against diseconomies of lack of scale. Money will be worth less, the longer it is held (taxed for the privilege of putting it in a bank, or not spending it). Perhaps it is just constant inflation that is a problem.

          Or perhaps the population drops down quickly to a supportable level without fossil fuels. Then and at least one doesn’t have to deal with long-term shrinkage.

  9. dooomerdad says:

    Hi Gail, long time, first time here. A topic I would like to hear more about if you have time is alternative energy “breeders”. I think you have basically said in the past that you can not sustainably build more solar panels using solar panels (e. g.). Can you expand?

    • The first problem with solar panels is that they make only intermittent electricity. You can do very little with intermittent electricity, unless you can connect it up with fossil fuel back-up or with batteries. Either of those takes fossil fuels. Even with this backup, all you have electricity. You can’t build roads with electricity (you need asphalt or concrete, and for those you need fossil fuels.) If you want to transport the solar panel anywhere, or if you want to transport the raw materials to the factory, you will need oil. (In occasional places, there are electric trains, but you would still need fossil fuels to build the trains and the rails for the trains.) You also need fossil fuels to build electricity transmission lines, and to keep them repaired.

      A second problem with solar panels is that there is such a tiny amount of them. They amount to only 0.17% of energy consumption worldwide. Scaling them up to a point where they would take over all of the functions provided by fossil fuels cannot possibly happen in any reasonable time.

      A third problem with solar panels is that “renewable” is really equivalent to “all of the resource investment is up front.” This may sound good, until you realize the practicality of the situation. The cost in resources of the solar panels is higher than for the equivalent generation from coal, but for the solar panels, all of the costs are up front, instead of being spread over the life of the generation. This means that somehow, the full cost of these panels and installation must be financed. This also means that the resources used to make these panels must be dug out of the ground, heated to very high temperatures, and transported using resources that could be used elsewhere. Thus, when they are made, they compete for coal and oil with other uses for these resources. We cannot scale them up, without conflict with other fossil fuel uses, today.

      In theory, by about the year 3000, perhaps we could figure out how to use electricity to perform all of the energy functions that fossil fuels now perform, and maybe we could get solar panels scaled up enough. But the prospects are so far away, and the financing so ridiculous, that it seems doubtful that it can happen.

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