Economic growth: How it works; how it fails; why wealth disparity occurs

Economists have put together models of how an economy works, but these models were developed years ago, when the world economy was far from limits. These models may have been reasonably adequate when they were developed, but there is increasing evidence that they don’t work in an economy that is reaching limits. For example, my most recent post, “Why ‘supply and demand’ doesn’t work for oil,” showed that when the world is facing the rising cost of oil extraction, “supply and demand” doesn’t work in the expected way.

In order to figure out what really does happen, we need to consider findings from a variety of different fields, including biology, physics, systems analysis, finance, and the study of past economic collapses. Since I started studying the situation in 2005, I have had the privilege of meeting many people who work in areas related to this problem.

My own background is in mathematics and actuarial science. Actuarial projections, such as those that underlie pensions and long term care policies, are one place where historical assumptions are not likely to be accurate, if an economy is reaching limits. Because of this connection to actuarial work, I have a particular interest in the problem.

How Other Species Grow 

We know that other species don’t amass wealth in the way humans do. However, the number of plants or animals of a given type can grow, at least within a range. Techniques that seem to be helpful for increasing the number of a given species include:

  • Natural selection. With natural selection, all species have more offspring than needed to reproduce the parent. A species is able to continuously adapt to the changing environment because the best-adapted offspring tend to live.
  • Cooperation. Individual cells within an organism cooperate in terms of the functions they perform. Cooperation also occurs among members of the same species, and among different species (symbiosis, parasites, hosts). In some cases, division of labor may occur (for example, bees, other social insects).
  • Use of tools. Animals frequently use tools. Sometimes items such as rocks or logs are used directly. At other times, animals craft tools with their forepaws or beaks.

All species have specific needs of various kinds, including energy needs, water needs, mineral needs, and lack of pollution. They are in constant competition with both other members of the same species and with members of other species to meet these needs. It is individuals who can out-compete others in the resource battle that survive. In some cases, animals find hierarchical behavior helpful in the competition for resources.

There are various feedbacks that regulate the growth of a biological system. For example, a person or animal eats, and later becomes hungry. Likewise, an animal drinks, and later becomes thirsty. Over the longer term, animals have a reserve of fat for times when food is scarce, and a small reserve of water. If they are not able to eat and drink within the required timeframe, they will die. Another feedback within the system regulates overuse of resources: if any kind of animal eats all of a type of plant or animal that it requires for food, it will not have food in the future.

Energy needs are one of the limiting factors, both for individual biological members of an ecosystem, and for the overall ecosystem. Energy systems need greater power (energy use per period of time) to out-compete one another. The Maximum Power Principle by Howard Odum says that biological systems will organize to increase power whenever system constraints allow.

Another way of viewing energy needs comes from the work of Ilya Prigogine, who studied how ordered structures, such as biological systems, can develop from disorder in a thermodynamically open system. Prigogine has called these ordered structures dissipative systems. These systems can temporarily exist as long as the system is held far from equilibrium by a continual flow of energy through the system. If the flow energy disappears, the biological system will die.

Using either Odum’s or Prigogine’s view, energy of the right type is essential for the growth of an overall ecosystem as well as for the continued health of its individual members.

How Humans Separated Themselves from Other Animals

Animals generally get energy from food. It stands to reason that if an animal has a unique way of obtaining additional energy to supplement the energy it gets from food, it will have an advantage over other animals. In fact, this approach seems to have been the secret to the growth of human populations.

Human population, plus the domesticated plants and animals of humans, now dominate the globe. Humans’ path toward population growth seems to have started when early members of the species learned how to burn biomass in a controlled way. The burning of biomass had many benefits, including being able to keep warm, cook food and ward off predators. Cooking food was especially beneficial, because it allowed humans to use a wider range of foodstuffs. It also allowed bodies of humans to more easily get nutrition from food that was eaten. As a result, stomachs, jaws, and teeth could become smaller, and brains could become bigger, enabling more intelligence. The use of cooked food began long enough ago that our bodies are now adapted to the use of some cooked food.

With the use of fire to burn biomass, humans could better “win” in the competition against other species, allowing the number of humans to increase. In this way, humans could, to some extent, circumvent natural selection. From the point of the individual who could live longer, or whose children could live to maturity, this was a benefit. Unfortunately, it had at least two drawbacks:

  1. While animal populations tended to become increasingly adapted to a changing environment through natural selection, humans tend not to become better adapted, because of the high survival rate that results from more adequate food supplies and better healthcare. Humans might eventually find themselves becoming less well adapted: more overweight, or having more physical disabilities, or having more of a tendency toward diabetes.
  2. Without a natural limit to population, the quantity of resources per person tends to decline over time. For example, such a tendency tends to lead to less farmland per person. This would be a problem if techniques remained the same. Thus, rising population tends to lead to constant pressure to raise output (more food per arable acre or technological advancements that allow the economy to “do more with less”).

How Humans Have Been Able to Meet the Challenge of Rising Population Relative to Resources

Humans were able to meet the challenge of rising population by taking the techniques many animals use, as described above, and raising them to new levels. The fact that humans figured out how to burn biomass, and later would learn to harness other kinds of energy, gave humans many capabilities that other animals did not have.

  • Co-operation with other humans became possible, through a variety of mechanisms (learning of language with our bigger brains, development of financial systems to facilitate trade). Even as hunter-gatherers, researchers have found that economies of scale (enabled by co-operation) allowed greater food gathering per hectare. Division of labor allowed some specialization, even in very early days (gathering, fishing, hunting).
  • Humans have been able to domesticate many kinds of plants and animals.  Generally, the relationship with other species is a symbiotic relationship–the animals gain the benefit of a steady food supply and protection from predators, so their population can increase. Chosen plants have little competition from “weeds,” thanks to the protection humans provide. As a result, they can flourish whether or not they would be competitive with other plants and predators in the wild.
  • Humans have been able to take the idea of making and using tools to an extreme level. Humans first started by using fire to sharpen rocks. With the sharpened rocks, they could make new devices such as boats, and they could make spears to help kill animals for food. Tools could be used for planting the seeds they wanted to grow, so they did not have to live with the mixture of plants nature provided. We don’t think of roads, pipelines, and lines for transmitting electricity as tools, but as a practical matter, they also provide functions similar to those of tools. The many chemicals humans use, such as herbicides, insecticides, and antibiotics, also act in way similar to tools. The many objects that humans create to make life “better” (houses, cars, dishwashers, prepared foods, cosmetics) might in some very broad sense be considered tools as well. Some tools might be considered “capital,” when used to create additional goods and services.
  • Humans created businesses and governments to enable better organization, including division of labor and hierarchical behavior. A single person can create a simple tool, just as an animal can. But there are economies of scale, such as when many devices of a particular kind can be made, or when some individuals learn specialized skills that enable them to perform particular tasks better. As mentioned previously, even in the days of hunter-gatherers, there were economies of scale, if a larger group of workers could be organized so that specialization could take place.
  • Financial systems and changing systems of laws and regulations provide additional structure to the system, telling businesses and customers how much of a given product is required at a given time, and at what prices. In animals, appetite and thirst determine how important obtaining food and water are at a given point in time. Financial systems provide a somewhat similar role for an economy, but the financial system doesn’t operate within as constrained a system as hunger and thirst. As a result, the financial system can give strange signals, including prices that at times fall below the cost of extraction.
  • Humans have tended to put resources of many kinds (arable land, land for homes and businesses, fresh water, mineral resources) under the control of governments. Governments then authorize particular individuals and business to use this land, under various arrangements (“ownership,” leases, or authorized temporary usage). Governments often collect taxes for use of the resources. The practice is in some ways similar to the use of territoriality by animals, but it can have the opposite result. With animals, territoriality is used to prevent crowding, and can act to prevent overuse of shared resources. With human economies, ownership or temporary use permits can lead to a government sanctioned way of depleting resources, and thus, over time, can lead to a higher cost of resource extraction.

Physicist François Roddier has described individual human economies as another type of dissipative structure, not too different from biological systems, such as plants, animals, and ecosystems. If this is true, an adequate supply of energy is absolutely essential for the growth of the world economy.

We know that there is a very close tie between energy use and the growth of the world economy. Energy consumption has recently been dropping (Figure 1), suggesting that the world is heading into recession again. The Wall Street Journal indicates that a junk bond selloff also points in the direction of a likely recession in the not-too-distant future.

Figure 1. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

Figure 1. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

What Goes Wrong as Economic Growth Approaches Limits?

We know that in the past, many economies have collapsed. In fact, if Roddier is correct about economies being dissipative structures, then we know that economies cannot be expected to last forever. Economies will tend to run into energy limits, and these energy limits will ultimately bring them down.

The symptoms that occur when economies run into energy limits are not intuitively obvious. The following are some of the things that generally go wrong:

Item 1. A slowdown in economic growth.

Research by Turchin and Nefedov regarding historical collapses shows that growth tended to start in an economy when a group of people discovered a new energy-related resource. For example, a piece of land might be cleared to allow more arable land, or existing arable land might be irrigated. At first, these new resources allowed economies to grow rapidly for many years. Once the population grew to match the new carrying capacity of the land, economies tended to hit a period of “stagflation” for another period, say 50 or 60 years. Eventually “collapse” occurred, typically over a period of 20 or more years.

Today’s world economy seems to be following a similar pattern. The world started using coal in quantity in the early 1800s. This helped ramp up economic growth above a baseline of less than 1% per year. A second larger ramp up in economic growth occurred about the time of World War II, as oil began to be put to greater use (Figure 2).

Figure 2. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil's Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

Figure 2. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

Worldwide, the economic growth rate hit a high point in the 1950 to 1965 period, and since then has trended downward. Figure 2 indicates that in all periods analyzed, the increase in energy consumption accounts for the majority of economic growth.

Since 2001, when China joined the World Trade Organization, world economic growth has been supported by economic growth in China. This growth was made possible by China’s rapid growth in coal consumption (Figure 3).

Figure 3. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Figure 3. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

China’s growth in energy consumption, particularly coal consumption, is now slowing. Its economy is slowing at the same time, so its leadership in world economic growth is now being lost. There is no new major source of cheap energy coming online. This is a major reason why world economic growth is slowing.

Item 2. Increased use of debt, with less and less productivity of that debt in terms of increased goods and services produced.  

Another finding of Turchin and Nefedov is that the use of debt tended to increase in the stagflation period. Since growth was lower in this period, it is clear that the use of debt was becoming less productive.

If we look at the world situation today, we find a similar situation. More and more debt is being used, but that debt is becoming less productive in terms of the amount of GDP being provided. In fact, this pattern of falling productivity of debt seems to have been taking place since the early 1970s, when the price of oil rose above $20 per barrel (in 2014$). It is doubtful that that economic growth can occur if the price of oil is above $20 per barrel, without debt spiraling ever upward as a percentage of GDP. It is supplemental energy that allows the economy to function. If the price of energy is too high, it becomes unaffordable, and economic growth slows.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See author’s post on debt for explanation of methodology.

China has been using debt to fund its recent expansion. There is evidence that it, too, is encountering falling productivity of additional debt.

We mentioned that appetite controls how much an animal eats. Debt helps control demand for energy products, and in fact, for products of all kinds in the economy. Appetite is different from debt as a regulator of demand. For one thing, debt can be used for an almost unlimited number of purposes, whether or not these purposes have any real possibility of adding GDP to the economy. (This is especially true if interest rates are close to 0%, or even negative.) There are few controls on debt. Governments have discovered that in some instances, debt stimulates an economy. Because of this, governments have tended to be very liberal in encouraging growth in debt. Often, when a debtor is near default, this problem is hidden by extending the term of the loan and pretending that no problem exists.

With respect to biological organisms, energy is often stored up as fat and used later when there is a shortfall of energy. This is the opposite of the way financing for human “tools” generally works. Here financing is often obtained when a tool is put into operation, with the hope that the new tool will pay back its worth, plus interest, over the life of the tool. Much debt doesn’t even have such a purpose; sometimes it is used simply to make an expensive object easier to purchase, or to give a young person (perhaps with poor grades) an opportunity to attend college. When debt has such poor regulation, we cannot expect it to work as reliably as biological mechanisms in feeding back information regarding true “demand” through the price system.

Item 3. Increased disparity of wages; non-elite workers earning less.

Item 3 is another problem that Turchin and Nefedov encountered in reviewing economies that collapsed. One of the reasons for the increased disparity of wages is the increased need for hierarchical relationships if an economy wants to work around a shortfall in goods and services by adding new “tools”. Businesses and governments need to grow larger if they are to accommodate these more complex processes. In such a case, the natural tendency is for these organizations to become more hierarchical in nature. Also, if there is growth, followed by a temporary need to shrink back, the cutbacks are likely to come disproportionately from the lower ranks of workers, reinforcing the hierarchical structure.

Figure 5. Chart by Pavlina Tscherneva, in Reorienting Fiscal Policy, as reprinted by the Washington Post.

Figure 5. Chart by Pavlina Tscherneva, in Reorienting Fiscal Policy, as reprinted by the Washington Post.

Funding arrangements for the new “tools” to work around shortages add to the hierarchical behavior. Typically, businesses must expand to fund the development of the new tools. This expansion may be funded by debt, or by stock programs. Regardless of which approach is used for funding, the programs tend to funnel an increasing share of the wealth of the economy to the wealthier members of the economy. This happens because interest payments and dividend payments both go disproportionately to benefit those who are already high up on the wealth hierarchy.

Furthermore, the inherent problem of fewer resources per person is not really solved, so an increasingly large share of jobs become “service” jobs, using only a small quantity of energy products, but also providing little true benefit to the economy. The wages for these jobs are thus low. The addition of these low-paid jobs to the economy further reinforces the hierarchical nature of the system.

In a sense, what is happening is that the economy as a whole is growing very little in output of goods and services. An ever-larger share of the output is going to the wealthier members of the economy, because of increased hierarchical behavior and because of growth in debt and dividend payments. Non-elite members of the economy find their wages falling in inflation adjusted terms, because, in a sense, the productivity of their labor as leveraged by a falling amount of energy resources is gradually contracting, rather than increasing. It becomes increasingly difficult for the low-paid members of the economy to “pay the wages” of the high-paid members of the economy, so overall demand for goods and services tends to contract. As a result, the increasingly hierarchical behavior of the economy pushes the economy even more toward contraction.

Item 4. Increased difficulty in obtaining adequate funding for government programs.

Governments operate on the surpluses of an economy. As an economy finds itself in a squeeze (job loss, more workers with lower wages, fewer goods and services being produced), governments find themselves increasingly called upon to deal with these problems. Governments may need larger armies to try to obtain resources elsewhere, or they may be needed to build a public works project (like a dam, to get more water and hydroelectric power), or they may need to make transfer payments to displaced workers. Here again, Turchin and Nefedov found governmental funding to be one of the problems of economies reaching limits.

Energy products are unique in that their value to society can be quite different from their cost of extraction. A third value, which may be different from either of the first two values, is the selling price of the energy product. When the cost of producing energy products is low, the wide difference between the value to society and the cost of extraction can be used to fund government programs and to raise the wages of workers. In fact, this difference seems to be a primary reason why economic growth occurs. (This difference is not recognized by most economists.)

As the cost of extraction of energy products rises, the difference between the value to society and the cost of extraction falls, because the value to society is pretty close to fixed (except for changes taking place because of energy efficiency changes), based on how far a barrel of oil can move a truck or how many British thermal units of energy it can provide. As the cost of energy extraction rises, it becomes increasingly difficult to obtain enough tax revenue, either from taxing energy products directly, or from taxing wages. Wages tend to reflect the energy consumption required to support each job because supplemental energy acts to leverage the abilities of workers, and thus improves their productivity.

Energy selling prices may behave in a strange manner, as an economy increasingly reaches limits. Falling prices redistribute what gain is available, so that energy importers get more, while energy exporters get less. Of course, the problem we are now seeing is that oil exporting countries are having difficulty obtaining sufficient revenue for their programs.

Debt is different this time

This time truly is different. We should have learned from past experience that debt tends not to be very permanent; it often defaults. We should therefore expect huge periods of debt defaults, and we should expect to need frequent debt jubilees. Economist Michael Hudson reports that the structure of debt was very different in the past (Killing the Host or excerpt). In early times, he found that by far the major creditors were the temples and palaces of Bronze Age Mesopotamia, not private individuals acting on their own. Because of the top-down nature of the debt, it was easy for the temples and palaces to forgive debt and restore balance to the social structure.

Now, especially since World War II, there is a new belief in the permanency of debt, and about its suitability for funding insurance companies, banks, and pension plans. The rise in economic growth after World War II was important in this new belief in permanency, because without economic growth, it is extremely difficult to pay back debt with interest, unless debt is used for a truly productive purpose. (See also Figures 2 and 4, above)

FIgure 6. Ngram showing frequency of words over a period of years, by Google searches in books.

Figure 6. Ngram showing frequency of words over a period of years, by Google searches of a large number of books. Words searched from top to bottom are “economic growth, IRA, financial services, MBA, and pension plans.”

The Ngram chart above, showing the frequency of word searches for “economic growth, IRA (Individual Retirement Accounts), financial services, MBA (Master of Business Administration), and pension plans” indicates that economic growth was essentially a new concept after World War II. Once it became clear that the economy could grow, financial services began to grow, as did the training of MBAs. Pension plans grew at first, but once companies with pension programs found that it was difficult to keep them adequately funded, there was a shift to IRAs. With IRAs, employees are expected to fund their own retirements, generally using a combination of stock and debt purchases.

Now that debt is “reused” and integrated into the economy, it becomes much more difficult to forgive. We have a situation where insurance companies, banks, and pension plans are all tied together. They all depend on the current economic growth paradigm, including use of debt with interest, continued dividend plans, and rising stock market prices. We have a major problem if widespread debt defaults start.

Demographic Bubble

The other problem we are up against, making government funding even more difficult than it would otherwise be, is the retirement of the baby boomers, born soon after World War II. This by itself would be a problem for maintaining adequate government funding. When it is added to multiple other problems, including bailing out banks, insurance companies, and pension plans if there are debt defaults, the demographic bubble leaves us in much worse shape than economies that reached limits in the past.

Note that High Energy Prices Are Not on the List of Expected Problems

The idea that as we approach limits, we should expect ever-higher energy prices, is simply not true. It should be viewed as a superstition, or as an erroneous understanding of our current situation, based on a poor model of energy supply and demand. Turchin and Nefedov found evidence of spiking food prices, perhaps similar to the spiking we saw in energy prices as we approached the peak in prices in 2008. But with wages of non-elite workers falling too low, especially on an after-tax basis, it was hard for prices to continue to spike.

The idea that collapse can come from low prices, rather than high, is something that is not obvious, unless a person thinks through the situation carefully. Prices seem to be primarily influenced by two factors:

(1) Wages of non-elite workers. These wages are important because there is such a large number of them. If their wages are high enough, they buy homes, cars, and other products that are big users of commodities, both when they are made, and as they are operated.

(2) Increases or decreases in the amount of debt outstanding. If debt defaults start to rise, it is very easy for growth in the quantity of debt outstanding to slow, or even to fall. In such a case, low commodity prices, rather than high, become a problem. As economic growth slows, we should expect more debt defaults, not fewer. There is also a limit to how high Debt/GDP ratios can rise before many suspect that the world economy functions much like a Ponzi Scheme.

Mark Twain wrote, “It ain’t what you know that gets you in trouble. It’s what you know for sure, that just ain’t so.” This is especially a problem for academic researchers who depend on the precedents of past academic papers. A researcher may have come to a conclusion years ago, based on a narrow set of research that didn’t cover today’s conditions. The belief can get carried forward endlessly, even though it isn’t really true in today’s situation.

If we are going to figure out the real answer to how the economy operates, we need to look closely at indications from many areas of research. Such an approach can allow us to see the situation in a broader context and thus “weed out” firmly held beliefs that aren’t really true.

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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1,034 Responses to Economic growth: How it works; how it fails; why wealth disparity occurs

  1. Supertankers on cruise?

    Supertankers are now sailing around on the Ocean with nothing to do!

    – Something Strange Is Taking Place In The Middle Of The Atlantic Ocean: http://peakoil.com/consumption/something-strange-is-taking-place-in-the-middle-of-the-atlantic-ocean

    • Stilgar Wilcox says:

      At going lease rate of $110,000 a day for super tankers, if they hold the maximum 2 million barrels, than at 35 a barrel is worth 70 million, then even after sitting out at sea for 2 months the cost is only 6.6 million which subtracted from 70 million dollars is still 63.4 million US dollars.

      • “then even after sitting out at sea for 2 months the cost is only 6.6 million which subtracted from 70 million dollars is still 63.4 million US dollars.”

        I doubt they got the oil for free … Hopefully it didn’t cost them more than $20 / bbl

    • If supply and demand somehow could get back in balance again, we would still have all of the stored oil to contend with as well.

  2. Fast Eddy says:

    The goods-based economy swoons.

    The transportation sector just keeps getting worse. Even after today’s uptick, the Dow Jones Transportation Average is back where it was in April 2014, and down 18% from its peak a year ago. Within this transportation sector is freight, a gauge of the goods-based economy, which is having a rough time.

    In November, the number of freight shipments in North America plunged 5.1% from a year ago, according to the Cass Freight Index. It hit the worst level for any November since 2011.

    The index is based on $28 billion in freight transactions processed by Cass on behalf of its client base of “hundreds of large shippers,” Cass explains. It covers shipments, regardless of the mode of transportation, including shipments by truck and rail. It does not cover bulk commodities. Shippers include companies in consumer packaged goods, food, automotive, chemical, OEM, heavy equipment, and retail.

    This index of shipment volume has been lower year-over-year every month, with the exception of January and February, which makes for an increasingly awful looking year:

    http://wolfstreet.com/2015/12/15/freight-shipments-plummet-as-inventory-glut-bites/

    BAU is shutting down….

  3. Fast Eddy says:

    Meet The Foreign Criminals Using L.A. Real Estate To Launder Money & The Developers Who Help Them

    http://www.zerohedge.com/news/2015-12-16/meet-foreign-criminals-using-la-real-estate-launder-money-developers-who-help-them

    Whatever it takes…

  4. Stefeun says:

    More about Abengoa:
    “(…)
    The Ultimate Indictment

    It wasn’t just Mexico’s government that was seemingly caught unawares by Abengoa’s implosion. Only weeks before the company hit the wall, Standard & Poor’s upgraded its long-term rating on the company, saying it expected it to “execute various actions to reduce debt over 2015.” And the company’s auditor, Deloitte, didn’t express any alarm about Abengoa’s financial situation until November 13, just two weeks before the company announced that it was seeking preliminary protection from creditors.

    But there’s someone who didn’t miss Abengoa’s collapse: Pepe Baltá, a 17-year old secondary school student in Barcelona who chose Abengoa as his economics project last year! Baltá noticed serious flaws in the company’s accounting. “If it does not act soon, there is a strong risk Abengoa will go into bankruptcy,” he wrote in his 18-page paper, titled “Analytical Report on Abengoa, 2012 and 2013.”

    “I have some accounting knowledge,” Baltá, now 18, told the Spanish daily El Mundo, “and Abengoa’s accounts did not seem to add up. There was a lot of debt and few active assets compared to fixed ones. The big surprise was that negative profits were being converted into positives. I didn’t understand how they could do that.” By Don Quijones, Raging Bull-Shit.”

    http://wolfstreet.com/2015/12/15/spains-biggest-bankruptcy-ever-hits-banks-mexico-brazil-descends-into-bitter-farce/

    The anecdote is quite funny, but what it means in reality is rather frightening, wether such ‘mistake’ is due to malice or to incompetence: we can expect many other companies -and why not banks?- to have severely fiddled accounts, that they won’t be able to hide for much longer…

    • It will be interesting to watch Abengoa in the months ahead. I understand that they got temporary financing that will take them through the election and year end, but probably not too much farther.

  5. Stefeun says:

    In this article they explain the FED rate hike happened under pressure of the banks and speculators.
    I don’t know if it’s the only reason, but at least it makes sense (especially after some MSM articles I read about same topic, and of which I understood nearly nothing).

    “The Fed’s New “Operation Twist”: Twisted Logic for Bank Profits at the Expense of the Real Economy”
    Posted on December 17, 2015 by Yves Smith
    “(…)
    Part of the reason they believe inflation will rise despite the increase in interest rates and other negative forces, is that they believe with lower unemployment, workers will achieve the bargaining power to raise their real wages. But in the current context of weak bargaining rights, globalization by US multinational corporations, and the continued weakness in the labor market domestically, worker real wages are likely to continue doing what they have done for decades now: remain relatively stagnant.

    These odd examples of twisted logic seem minor, though, compared to some of the more bizarre arguments made by Yellen and the Fed.

    In her statement and answers to questions after her remarks, Yellen said several times that the increase in interest rates is a strong sign of the Federal Reserve’s confidence in the strength of the American Economy. Because, after all, if the US economy were not doing well, then of course, the Fed would not be raising rates, right?

    Here is an example of the Fed trying to play the classic game of the “confidence fairy” – we will raise your confidence by pretending we are confident. But it is rather more like “whistling past the graveyard”: with the data out there for everyone to see, most are unlikely to be fooled. It is also a little like saying: we are going to get in our truck and run you over because we are confident that you are strong enough to take it.

    And here is, perhaps the strangest twisted logic of all: Yellen said that they want to raise rates now, because they are worried that if there is a downward shock to the economy, with interest rates at the zero bound they will have fewer tools (less ammunition) to counteract the shock.

    Doesn’t this sound like she is saying: we are going to create a downward shock, so later it is easier to counteract it?

    The final example is the argument that they want to raise rates pre-emptively now, before there is any clear sign of excessive inflation, because lags in monetary policy mean that if they wait they might be too late and then they will have to raise rates more abruptly and this will be even more disruptive.

    We must ask the question: who does more rapid increases disrupt? The answer is likely to be the speculative financial markets, and the banks who might find that the speculative positions they take have been mistaken. So here, in paying excessive concern for the financial speculative markets, the Fed is willing to raise interest rates before the labor market is really ready. (…)”

    http://www.nakedcapitalism.com/2015/12/the-feds-new-operation-twist-twisted-logic-for-bank-profits-at-the-expense-of-the-real-economy.html

    • I expect pension plans wanted rates higher as well. The need to be getting reasonable returns, if they are to ever make good on their promises.

      • Stilgar Wilcox says:

        “Here is an example of the Fed trying to play the classic game of the “confidence fairy” – we will raise your confidence by pretending we are confident.”

        That’s my take on it too, Stefeun.

        “The need to be getting reasonable returns, if they are to ever make good on their promises.”

        Gail, that brings up a good question: What is producing a good return on investment these days? Passbook savings – no. Stock markets stalled out at a lofty height – no. Real estate even on super wealthy properties is stalling out and 99%ers properties came back a bit from 2009 but stalled out some time ago – no. Bonds – some are defaulting – dangerous. Commodities – no. Precious metals – no.

        I’m wondering if the Fed realizes there’s no where to turn to get a return on investment, so they are doing the only thing they can to start the engine of return on investment by raising rates. They’ll have to do that .25% increase a bunch of times to make it worthwhile.

        • Stefeun says:

          Yes Stilgar,
          After the productive economy has stalled, it now looks like the rentier economy is stalling too.

          These rate hikes very much resemble electric shocks trying to restart the heart of a dieing patient who keeps on bleeding. Even if it works, it’ll be short-lived, as our real problem is we ran out of blood and are unable to stop the hemorrhage.

          • Stilgar Wilcox says:

            If you ever watch The Kaiser Report they talk about the rentier class and economy. I guess it had legs until the renters tapped out at rentier peak. Really a very interesting point in time as the options to do much else to the financial system are now very limited.

            This is a watch and wait to see what happens next period as we head for winter here in the northern hemisphere. Maintain liquidity and avoid get rich quick schemes, risky investments or big loans. Our neighbors (bless their naïve couragousness) went all in on a restaurant. Not even a franchise (which would at least be based on a proven formula) but their own concoction. Talk about bad timing, but they never asked for our opinions and I never talk to people about peak oil because, well, it’s America and we’re expected to always be positive. The blogs, that’s different. Not that I think we’re on the cusp of collapse just yet, but it could be a bad recession.

        • The catch is that raising interest rates doesn’t improve returns on investment–it simply skims off more of what is earned, to give to the rentier class (or perhaps to pension funds, nowadays). It leaves less to pay to workers, and less for reinvestment in plant and equipment. So it really isn’t helpful. The low interest rates were mostly an acknowledgement of the fact that returns were pretty bad.

          There isn’t anyplace where a person can get a good return on their money, today. I paid $4 a day to rent a car in Florida. Does anyone believe that the rental company is making money on a rate like that? I declined the insurance coverage, so they didn’t even get to make a profit on that.

          • Fast Eddy says:

            $4 … crazy…

            I rented a vehicle here in Europe and was surprised to be informed that you are not permitted to take some rental vehicles into a number of EU countries …. cars from mid-range to luxury are restricted from entering much of eastern Europe (insurance is voided…)

            Strange that the EU would invite gangster states into their little organization ….

            We’ve been in Berlin for a few days now — have not come across any refugees so far — where are you refugees??? I may drop by and have a coffee with Angela later this morning and ask her about this … if I can find the time before heading to Auschwitz…

            • Christopher says:

              If your path are crossing Sweden, you are welcome to visit me. I can show you some refugees (and cook you a dinner). The hotell down the street is turned into a refugee camp. If you walk in town in the middle of the day you will see a lot of migrants strolling around and playing with smart phones. They are unemployed and have nothing else to do.

              Berlin is too big. It’s cheaper and easier to put refugees in smaller places.

            • Fast Eddy says:

              Thanks – but we aren’t going to make it to the northern part of Europe — Poland — Hungary then back towards the west….

            • kesar0 says:

              FE, I can offer a site-seeing tour in Warsaw. Just PM me.

            • Fast Eddy says:

              Thanks – no plans for Warsaw — decided to see Krakow instead.

              Thoughts on Auschwitz….

              – when I see how humans are capable of acting towards each other — I am thinking 1. we should be exterminated 2. I am so happy I do not have any children because some very nasty behaviour will emerge when you have 7.5 B people and no food or energy

              – there were loads of wreaths at the foot of a wall where prisoners were shot — I wish I would have brought along a wreath to honour the many thousands of Palestinians who have been shot, tortured and imprisoned in Israel — no disrespect intended to those who suffered in this camp— just something to provoke a little thought….

              – I was also thinking about how many people the US has murdered and tortured in their wars to keep us living large…. and that if the Germans had won the War — Auschwitz would probably have been converted into a public housing estate and holocaust would just be another word in the dictionary….

            • ktos says:

              These gangster states have lower crime rate than western europe, not to mention the US.

            • Interesting point. I wonder if the problem has to do with lack of parts for repair, and a lack of knowledgeable service stations to do those repairs. Those reasons by themselves could be the reason for not allowing certain types of cars to be rented. Also, if cars are driven one way, there is a question of a traveler, coming the other way, would be available to drop them off.

            • Fast Eddy says:

              Maybe they have a lower crime rate because the cops take bribes to let people go who commit crimes.

              I lived in Indonesia for 7 years — I know for a fact that I could get off of pretty much any criminal charge by paying off the cops.

              The only difference between a foreigner and local is that a foreigner will be asked for more money than a local to walk on a crime

              Cops in countries like Indonesia, Bulgaria, Romania, Philippines are not there to help you — they are themselves gangsters — they are there to extort money from people for the most part.

              In fact the last thing you want to do in these places if you are a victim of a crime is go to the cops… they will generally not help you — or if they do they will want to be paid.

            • From what little I know of China, I could believe that that could happen there as well. There seems to be an awfully lot of bribery going on there, and some public officials are very wealthy–apparently for what they earn under the table.

            • Fast Eddy says:

              I have a friend in Shanghai who was drunk and disorderly and shoved a cop …. he was jailed for a couple of months over this — eventually he paid money to someone and was released and the record of the incident put in the bin.

              China police corruption would be nothing like say Indonesia…. but it is still pervasive … particularly at the higher levels where it is entrenched… kinda like how the real corruption in the US is at the big money levels…

              A Macau casino magnate got into a spat with his sister and she revealed how Macau casinos launder large volumes of corruption cash http://www.bloomberg.com/bw/magazine/content/11_07/b4215026347701.htm

              Interesting how this has really slowed of late — Macau casino profits have collapsed this year….

              Profits at Macau’s 6 biggest casino operators fall 40% – FT.com
              http://www.ft.com/cms/s/0/668a56ae-463c-11e5-b3b2-1672f710807b.htmlTDk6Q

            • MM says:

              Are you crazy ? You let thousands of unregistered foreigners in and then you bring them straight into your capital city ??? Even if germany is bananas on this topic, they do not want to self-destruct.
              The refugees are mostly brought to midsize towns, many of them in eastern Germany. Maybe you can find some at the main railway station in Berlin, but I doubt that anyone that can pay a ticket to berlin is then stranded in the station.

            • Fast Eddy says:

              I’ll keep an eye out for the gypsies…

            • Christopher says:

              MM, here in Sweden the migrants are initially put in smaller towns. After some years many move to the migrant gettoes in the bigger cities. I guess that’s similar to the german strategy. The big city dwellers can feel good about helping migrants. But at the same time the migrants are placed in smaller counties which have to take a lot of the excess cost of the migrants. The former nazi-party and nowdays not-nazi but migrant critical party, “the sweden democrats” get a lot of votes in these counties. In the end the “good” city dwellers don’t even have to see the migrants. At least if they avoid the subway.

            • el mar says:

              The other day you asked : Why all the refugees, now?
              it is because we do not really have an army here in Germany.
              As soon as collapse plays out, all the refugees get green hats an a gun.
              They will help the state “to collect” and fight against the native inhabitants.
              We Germans are to weak and to peaceful for this job.

    • Artleads says:

      Beautifully reasoned, but wrong on this point:

      ” But it is rather more like “whistling past the graveyard”: with the data out there for everyone to see, most are unlikely to be fooled.”

      NOBODY understands anything. Mainstream society is run intensively and nearly exclusively on misinformation, mystification, obfuscation and dumb-ification of the 99%. That program is so successful that nobody even thinks to question it. The people on this blog are very rare exceptions, and their not knowing it is further testimony to the extreme dissonance and disconnectedness of society.

      I am very much like most people in my understanding of the economic system. Even after hanging out here for moths, I understand nearly nothing about the subject. Talk about banks and interest rates is genuinely like an unknown language to me.

      Based on what I gather from Gail and others (more by osmosis than anything) is that raising interest rates is a means–just as you say–to create a false optimism which might be better not created. I gather, though, that the complexity of the subject makes certainty unlikely. (And I’m unlikely to understand this even if it’s explained better than this.)

      What I’m saying is that it might be better for the 99% to hear only one-liners at a time–irrefutable truths that can be supported by a long series of other one-liners over long periods. Call it spoon feeding. We are so far from understanding elaborate explanations that it makes matters worse, makes us more despairing to hear them. We think the issue is only for highly knowledgeable people with high degrees. We give up and and retreat. What could be better is to keep us marginally informed about one small edge of the very top surface of the subject, the way we were taught to spoon up hot soup.

      You are much clearer than most, although with great command of information. Maybe that’s why I’m telling you this…

      • Stefeun says:

        Thank you Artleads,
        but none of that is my reasoning, I only copied & pasted a part of the linked article.

        My impression is that the rate hike was forced by lobbying, aiming to boost short-term profits of a few, with total contempt for the longer term consequences or the impact on real economy, US and abroad.
        I wonder if such a small increase, and planned smooth ramp-up to follow, is sufficient to trigger an avalanche of defaults. We’ll see soon enough, and as you say there are many parameters we don’t know anything about.

        • xabier says:

          Regarding the rate-rise, I’m inclined to support any interpretation that implies very short-term perspectives on the part of the Fed et al and those whose interests it embodies.

          UHNW people are extremely short-term in all their activities, and the general good will certainly play no part at all in their calculations.

          All they wish to be assured of is that they will have more next year than this, and the only thing that might alarm them is the thought of serious personal loss and a decline in status, (and maybe having to mix more with common people) not the consequences of their actions on society or the economy as a whole. They lead very insulated lives (but don’t we all wish for the means to escape unpleasant people and things?)

          I know people in this category who were first-class mathematicians at university, have made fortunes from scratch, but when discussing general historical/economic/social issues are either uninformed or even indifferent (and on occasion just plain too scared to think about some things). All their energy goes into money-making.

          Which is not to say that they are psychopaths or even sociopaths (although I have met them, too): if you think how you love your favourite child or relation, that is how they regard their accumulated wealth: it almost has personality. This conditions everything they think or do. Society can go hang (but then, many poorer people think like that too, they just have no influence….)

  6. zentao says:

    Great article.

    There are some great papers on this topic from an IEEE symposium back in the mid 90’s. You can download them (after paying) here:

    http://ieeexplore.ieee.org/xpl/mostRecentIssue.jsp?punumber=4302&isnumber=12374

    The Leduc paper “Knowledge and sustainability: can the planet survive human cognition?” is particularly interesting…Jantsch’s book “The Self-Organizing Universe: Scientific and Human Implications of the Emerging Paradigm of Evolution” also has good material linking a number of aspects that you touch in this article.

  7. MM says:

    Here is “chinese buildup” article suggesting that the chinese will be able to handle a transition to carbon free before 2050:
    http://www.telegraph.co.uk/finance/economics/12052582/Even-if-the-global-warming-scare-were-a-hoax-we-would-still-need-it.html
    It sounds reasonable but there are still some bumps in the road for that. It is clear that the chinese command economy can do this: “become a world leader in low Carb tech”
    If we see that coming to reality, there even is a slight possibility that a WWII scenario for carbon free can come. It is difficult but the manufacturing base for that I think exists…

    • MJ says:

      The manufacturing base requires fossil fuels to operate, which means low carbon tech requires it to be built and function.

      • MM says:

        Yes, but a peak means less resources, not zero. Zero is true only if EROEI is too low, current level ist at about 10:1. That is enough for plenty of these things. We need to BUILD them because that will help the economy (mostly consumer confidence).
        That does not mean that we will OPERATE them in the end….

        • “a peak means less resources, not zero”

          THis is where you have been listening to Peak Oilers too much. Reaching limits means a break in the system. It is not clear that we can get resources out at all after peak–not that we can get the other 50% out later, regardless of what the EROEI is.

          • MM says:

            I personally am ambivalent of your claim.
            Afterr reading your texts I could fall into “no growth, no BAU”
            On the other hand when we look at some data (commodities, oil price, wages) There is no growth but there is still BAU.
            I fall from one to the other as soon as I read new articles about it every time…
            I would say, I am a “doomer light” as in “BAU light” person. I think that many people will work very hard should the problems increase. 7 Billion working together can achieve a lot.. A lot of chaos and a lot of transition.
            Trump is sturdy enough to steer that 😉

    • I don’t think the financial system can handle a transfer to carbon free, regardless of the rest of the system. China clearly has a huge pollution problem right now. For that reason alone, it needs to do something different.

      • MM says:

        As of Kevin Anderson we must reduce CO2 by 7% a year.
        As of Ugo Bardi we must create renewables at 6% a year
        As of the financial system, we must pay our dept not creating more and not producing too much “waste” products to pay the debt
        As of the resource base we are on a plateau and can not increase production.
        Sounds like we must get rid of fat fast (as Steve Ludlum writes in his article)
        This year it is maybe 30% possible. Next year it might only be 25% possible. The following years: ?

        • Getting rid of fat is getting rid of jobs. This is not an easy sell. It becomes impossible to fund governments and repay debt. This is simply an argument for crashing the system.

          • MM says:

            The Job issue has not yet been tried.
            How many Billions have been spent on fracking? If that money was taken away from these companies and given to build electric railways or public trabsport by tram in every
            City of the US or Buld a global reaching direct current line etc, many Jobs could appear as in the fracking bubble many Jobs appeared. Some people say that the “low unimployment rate” as of Yellen is due to the fracking industry. Fracking also is the wrong strategy as now they are engaged in a price war with the saudis. They should keep it in the ground until the saudis run out.
            I admit that to create NEW Jobs in that industry some people have to be trained and that is the most costly.
            For the koombaya aspect of the transition I found a good video that we could hand out to everybody who believes that a green future will show up tomorrow.:
            Vaclav Smil on the energy revolution

            it is very good and I like the aspect that if we cut energy use by half we would only end up in the 60’s level.
            Yes Gail, I know that would crash the economy anyway, but the If the economy crashes in all possible scenarios, why not choose this one 🙂

            • in the 60s, the planet carried around 3 bn people, they used 3 bn people’s worth of energy, and from that the y expected continual growth and everything that went with that.
              we now have 7 bn—rising to 9 bn.
              if you go back to 60s living rate, then you have 7-9bn trying to eke out a living on the material that previously supported 3bn—therefore the standard of living would be cut by half—and eventually two thirds.
              that would—i promise you–lead to violent revolution, even thought it would be inevitable

            • Thanks for the link. I’m afraid I don’t have time to watch an almost-two-hour video right now, but I have read several of Vaclav Smil’s books, and he is very level-headed. He doesn’t understand the problem with the economy collapsing, but otherwise, he understands pretty well how slowly transitions can really take place. Too bad things can’t hold together with less energy–or at least, that is what it looks like to me.

            • MM says:

              End of More: If they followed their words in COP21 harsh laws about that shoul be in the making right now, to bring us down to that state.
              Not yet ? ok, lets sing a koomaya first.
              The 60s maybe means per capita energy usage, that should be possible, but I do not know what the per capita usage was in the 60 (the era of these big cars in the US).
              Maybe Gail has a diagram about that?

            • Artleads says:

              I think Gail previously pointed out that the energy supply that served the 3 bn in the 60s is now depleted. So 7 bn people going back to 60’s level consumption on less that was available then is a tall order. OTOH, we collectively know much more now than then. We are better able to see the world as a single, potentially cooperative, entity now than then.

              Holding the system together under these circumstances would be challenging though not impossible. It would require more rationality than ever previously witnessed, and also unprecedented levels of concentration.

              Gail has also mentioned the need to trace (energy?) resources back–see where things come from. This takes a lot of concentration and study. It also is so complex and so subject to human will and insight that it would be more art than science.

              One example: I find cardboard boxes very useful. I’m guessing it can be made from landfill paper. That would involve digging it up, using small, well aimed energy sources in addition to muscle, rewarding the workers who do it (this could be the supply of food and shelter from public sources). There would need to be machinery to press and shape the material. The machinery exists now, but would need energy to run and repair. But the Cuban kept American cars running for over 50 years, despite an embargo and no access to factories that make spare parts…

              I would like to have toothbrushes, but not necessarily toothpaste. Paper would not be bleached and so would be brown. Food would be sold without packaging and distributed in those cardboard boxes. Brown toilet paper would be nice to have, as opposed to none. A gift economy would be part of the mix. Small units of self rule–tribes, teams–would be more efficient to manage. Undoubtedly, 90% of what gets manufactured now could be discarded while still holding the system together. More women police. More variety in age and type, more bottom up governance…

        • Fast Eddy says:

          We definitely must burn more oil, coal and gas asap… otherwise we will collapse

  8. dolph911 says:

    The Fed is trapped, just like everyone else. They don’t want asset price to collapse too much, but they don’t want the economy to overheat either. What they desire is smooth functioning of the matrix.

    By raising just a little bit, they give themselves some leeway. If the economy collapses, they can say, we didn’t raise rates too much, and now we can lower them again. If the economy doesn’t collapse, they can raise a little bit more. Rinse and repeat, to infinity. The rope was too loose so they tightened up a bit, and if the rope becomes taut they can loosen.

    That is the game, as far as the eye can see. Minute changes to everything, infinite repetition. And doesn’t that mirror what’s happening to our own lives.

    There are no great projects, no great movements left in the world. Just buying and selling of BS, everybody trying to gain a little advantage over somebody else. Just the repetition of microprocesses until we’re all gone.

    • Stilgar Wilcox says:

      “The Fed is trapped, just like everyone else.”

      True enough. The trouble though is when things reach the point in which return on investment is no longer to be found (without getting extremely lucky), the super wealthy need a recession to remove assets from people’s panicked grip to generate the next updraft of investment return. Real estate and stocks need to recalibrate down then they can jump in for the next bump up. Even if the bumps up are smaller due to diminishing returns those that have the bucks to do it and time it right will make money off of the beleaguered masses.

      • InAlaska says:

        OK, Fellow Doomers, Friends and Family. The low oil prices were supposed to drive the frackers out of business, but it hasn’t. The Fed tightening was supposed to cause the stockmarket to implode, but it hasn’t. The Greek emergency were supposed to cause Europe to self-destruct, but it hasn’t. The Refugee Crisis was supposed to become a real crisis, but hasn’t. So, I ask us all collectively: Where is the damn collapse?
        Doomer Stock Answer: Its only 2 years away? I think that when our cherished assumptions are challenged, in order to be rigorous, we should re-examine those assumptions. What are we missing?

        • doomphd says:

          Per Fast Eddy (who is traveling but should speak for himself) it’s because the PTB or the Elders, owners of the Fed, etc. are doing whatever it takes to maintain BAU, working in the background with their invisible market hands.

          Which is a plausible explanation, but hard to prove.

        • MM says:

          That is a good question. I want to try to say it in Gail’s words.
          Cheap energy allows for an ever more complex society. As the society costs for the complexity increases, the more resources go into this area and the less is available for new productivity. Less productiviy in the end means that the general pie of the economy shrinks and that the debt will become too expensive.
          I could also argue, the Fed wants inflation at 2% but it isnt. Draghi wants the euro at 2% but it isnt.
          The thing with greater productivity is that a society can also allow for more problems to pile up when the resources are there (more refugees, more bombing in syria). Currently it looks like there is no problem and there are plenty of articles in the media that claim “There is no problem”. They all have only one aim: increase customer spending because that really is down due to debt.
          The question that is unanswered is how long can THIS economy work when there is no expansion. It is clear that it can not work but we do not know how long it takes for problems to show up as it has never been tried on global scale as it is being done at the moment. My personal view is that the only way out of this is a new cycle with renewables in WWII scale. I bet they will try this next. Even if it means hunderets of genIV reactors.
          If the consumption engine does not start in less than 6 months, new problems will kick in.
          One thing a pekoiler needs is patience as the global economy is really really huge and changes only “trickle down” but they trickle down already on all corners of the economy.

        • Fast Eddy says:

          I’ve posted previously that men like Michael Burry were observing a similar position as early as 2005 — and had Big Shorts on the market…

          He could not believe it did not unravel…. but it stayed suspended in animation for nearly 3 years…

          This time is very different from 05 though…. we are seeing the layoffs and bankruptcies start…

          I don’t see how this continues for 3 more years…. something will give … unless the Fed has another macro magic trick…. which I very much doubt….

          Time to trot out that law re: collapse can take longer than you expect….

        • “What are we missing?”

          It seems you expect things to happen instantly. Everything takes time. The Frackers are just running out of hedge. The Fed just tightened how many hours ago? The actual tightening of reverse twist for up to $1 trillion won’t even start until January / February. The Refugee Crisis is really in its early stages; there are potentially tens of millions of people in countries that are very close to collapse yet to come, such as Yemen.

          I guess for those of you who thought the world would end in 2015, yes, your timing is off. 2016, maybe, maybe not. Personally, I think it is more like a steep staircase down then a sudden plunge. I think people underestimate the will of the people to give things up to maintain status quo, and the will of the bankers, politicians, and military to hold things together.

          • MM says:

            If a lot of money disappeared over night, when 7 billion simply continue to work as if there was no problem the next day, BAU could ignite again if it did not last too long. I think, if they can solve a crash in less than 7 days, nothing big will happen.
            After that time, I bet people will get a bit nervous…

            • “I think, if they can solve a crash in less than 7 days, nothing big will happen.”

              A 4 day long weekend would be preferable. I agree, after a week without money, especially if it is a week without gasoline, electricity, phones and Internet access, things start to fall apart really fast. Especially in dense urban areas.

          • Stilgar Wilcox says:

            Yeah Matt, another year comes and goes without collapse. I personally think it will be palpable to just about everybody and not just peak oil bloggers when the final precipice is close at hand. Like you stated, people will give things up to maintain status quo. So even on an individual level adjustments are being made.

            • Fast Eddy says:

              Or perhaps it will just strike out of the blue…

              Very few people anticipated the calamity that was 2008…

            • “Or perhaps it will just strike out of the blue…”

              From my perspective, the true moment of crisis in 2008 was not Bear Stearns or AIG. The masses were mostly not too aware of that. The big moment was when all the cameras were watching, and Congress voted no on the first bailout package. That week or so from the no vote until the bailout passed, the malls were empty. The streets had hardly any traffic. This is 4000 miles away from New York and Washington DC, in Canada, and everything went from hustle and bustle to nearly a ghost town overnight.

              I suppose for many, that seemed like out of the blue; the politicians did not do what everyone expected, and suddenly there was panic.

            • daddio7 says:

              I remember 2008. Here in north Florida it was just another year, business as usual. The economy is forestry and agriculture, tourist, medical care, government and social programs. Roads were crowded as was Walmart. Can’t tell about malls because I never set foot in one.

            • Creedon says:

              According to B.W. Hill, we will be close to collapse when we see the oil companies going bankrupt. We are still a few years from this. I would guess about 3. The next step of real collapse will manifest as oil shortages and a failure of the dollar. The way that it looks right now oil is going to have to go quite a bit lower to bring about bankruptcy of the larger oil companies, maybe down to 15 or 20 dollars a barrel. Right now the oil companies are barely even nervous. Is there a lot of ignorance in our society about what is taking place? Yes.

          • InAlaska says:

            Matthew,
            “It seems you expect things to happen instantly. Everything takes time.”
            You’re a bit newer to OFW than myself or Fast E. I’ve been on this site for 5 years now or perhaps longer…and collapse is always just two more years away. So, I ask again, when do we admit to ourselves that something is not right with the collapse thesis and go back t the drawing board? Why, just a couple of years ago I remember Fast Eddy posting that this whole mess couldn’t go on another 6 months. Well…?

            • At this point, the start of the collapse is less than 2 years away. It is definitely already here, for folks in Syria. It is also hitting people at the bottom of the wage distribution in the US as well.

          • InAlaska says:

            Matthew,

            “I think people underestimate the will of the people to give things up to maintain status quo, and the will of the bankers, politicians, and military to hold things together.”

            I think you are right about that.

        • Less than 2 years now. We need to keep our fingers crossed.

        • xyz44 says:

          “The Refugee Crisis was supposed to become a real crisis, but hasn’t. ”
          Tell that to the millions in tents from Syria.For mullions collapse has occured

          This is how I define collapse.

          No goods to buy and or no money to buy them with.
          Social unrest overwhelms authorities
          Safety nets for basic needs fail.

          Before this occurs there will obviously be war. Just like has already occurred in Syria.
          War is a lot like collapse only central authority is maintained.
          It delays collapse – potentially a long time.

          “What are we missing?:
          Nothing. Those who have called for collapse within two years for instance may simply be mistaken. I personally think that the chance of avoiding collapse within a time frame of one hundred years to be so incredibly small as to be nonexistent. We are out of time relative to our population. Two minutes to midnight.
          A reasonable approach ( I think) is to take a spread of possibilities.

          Collapse will occur in the next month
          Collapse will occur in the next year
          Collapse will occur in the next ten years.
          Collapse will occur during my children’s life
          Collapse will occur in my grand children’s life.

          Each of those timelines entails different appropriate actions. Personally I would think it foolish to extend timelines longer than above. Others would think those timelines too short or perhaps some too long. No one knows. People take their best guess and act accordingly. Its exceeding hard to predict the future in this situation. Is clear to me that change is coming but I could be mistaken I have been mistaken many times in my life.

          In Alaska do you believe collapse will not occur ever? Curious where you stand.

          • InAlaska says:

            xyz44

            “In Alaska do you believe collapse will not occur ever? Curious where you stand.”

            Oh, I’m a full-on doomster, believe me. I’ve got all the preps on a nice doomstead up here in the North with low human density and with the 5 G’s: gold, gas, guns, grain and groceries.

            I started out thinking in 2006 that I only had a little time to prepare, but now its 9 years later and I’ve cycled through all the gas and groceries more than a few times. The grains are getting stale…and so I wonder…what am I missing?

            It gets a little ridiculous to continue repeating that collapse is just around the corner. “Two more years!” Of course, all civilizations have collapsed. It doesn’t take a genius to figure out that this one will, too. If you say anything long enough its bound to come true eventually. But perhaps we have either the proximal or distal causes of collapse wrong. Perhaps our civilization is more robust than we think it is, less corrupted, more ingenious. Perhaps we won’t even see our collapse coming because it will come from a corner that we haven’t anticipates. Maybe it wont be peak oil, or peak debt, or peak entropy, or climate change, or, or, or. Perhaps it will come out of a clear blue sky, as it were. One thing is certain, I am turning from a vigorous middle-aged man into a less vigorous older man waiting for it to happen, and I guess that’s a good thing.

            • xyz44 says:

              “The grains are getting stale”
              Mine are holding up although only 5 years old (late to the party). eating barley as we speak with olive oil and kale, YUm!
              “and so I wonder…what am I missing?”
              You are missing the the paradox of the doomster which is one of the very few win win paradigms on the planet!

              Doom- Win! Your a doomster!
              No Doom- Win! you get to enjoy the wonderful wonderful fossil fuel life!

              Wheres the problem?
              Loosen up – Take a few breaths- cook up some of those stale grains with whatever road kill is on the road and be happy. Life is good! I take that back ;life is great!

              I believe that understanding impermanence deeply is the key to happiness. Im still working on it and I have my ups and downs but I have become more and more happy. I appreciate the moment more. I still get caught up in my personal neurosis sometimes but at least I have discarded the collective neurosis. Liberation!

            • Good way of putting the situation:

              Doom- Win! Your a doomster!
              No Doom- Win! you get to enjoy the wonderful wonderful fossil fuel life!

              I can understand the frustration, though, if you really were trying to prepare for a transition, and it didn’t come and didn’t come.

            • Fast Eddy says:

              What amazes me are those who can’t wait for the collapse… and are so disappointed when it doesn’t come when they expect….

              That is madness.

            • InAlaska says:

              xyz44
              Well said and best wishes to you.

            • Fast Eddy says:

              I reckon collapse is close when you see governments dumping massive stimulus onto the global economy — and it is no longer responds…

              That is what is happening now …. that is why I see collapse coming in the very near term

            • Yorchichan says:

              @FE
              What amazes me are those who can’t wait for the collapse… and are so disappointed when it doesn’t come when they expect….

              That is madness.

              Not really. Some people are so sick of the ongoing destruction of the living planet by industrial civilization that they want it to end whatever the personal cost. Even for humans, the longer industrial civilization goes on the greater the misery will be when it collapses.

            • Fast Eddy says:

              And you think collapse will solve that?

              7.5B people live on this planet — they are fed only because we have fossil fuels — collapse = the end of that system of feeding people…

              What might 7.5B people do when collapse hits — and they are hungry and cold?

              > would then not burn everything that is available including any trees, toxic cushions, treated wood etc… — in an effort to keep warm and cook rats and dogs and whatever else they can find to eat

              > would they not kill every animal they can find for food — every cow, pig, dog, deer, bear, horse, elephant ….. heck even rats will quickly make it to the extinct species list! — if you look at past famines people ate people…

              > and what about the 4000 spent fuel ponds that MUST remain cooled using high-tech systems and facilities — it won’t be so good for the environment when those explode releasing radioactivity into the atmosphere for many decades (centuries?)

              We are a 1000 miles past the point of no return. Collapse now means total destruction of the environment.

              It also means I die.

              Burn baby burn. Drill baby drill. Those are the only options that make any sense

            • Yorchichan says:

              @FE
              I agree that in the short term collapse will hasten the demise of larger animals and plants by orders of magnitude. But the sooner the collapse the greater the chance of anything surviving. (Parts of Amazonia? The jungles of Irian Jaya you have visited?)

            • Fast Eddy says:

              I don’t see that as an option — jungle men don’t do well on radioactivity any more than I do….

              That said – I am a borderline nihilist ….. so to be quite honest … I don’t care what happens once I am gone …. if it means the jungle man’s demise so that I get another 10 years… then sayonara jungle man…. I have one life only …. and I would like it to be as long and comfortable as possible…

              Before passing judgment on the selfishness of the above — ayone putting their hand up to starve and die now to save the jungle man?

          • For Syrians, collapse has already occurred. The country is one with depleting oil supply. This is part of the problem leading to collapse.

        • Tim Groves says:

          We are missing factors x, y, and z. To paraphrase Donald Rumsfeld, besides the known knowns that we are well aware of, there are also the known unknowns that we are aware must exist but we aren’t aware of what they are, the unknown knowns that we are not aware we are aware of, and finally the unknown unknowns that we are not even aware that we are not aware of—which include things we think are so that aren’t so. Factor that lot in and even the best projections of doom are apt to be premature.

          But still, like a chronically sick elderly person or a rusty old car that still creaks along, the current economic system is operating now with considerable difficulty, requires constant maintenance and is impractical to repair or to upgrade. The amount of tinkering required to keep it running is increasing over time. When it starts to fail catastrophically, I expect we will all know pretty quickly because the global internet will be one of the first things to go down.

          • InAlaska says:

            Yes, I can’t argue with you on that and yet as the great Neil Young once wrote:

            “this old world keeps spinning round
            It’s a wonder tall trees ain’t layin’ down
            There comes a time, there comes a time
            There comes a time, there comes a time”

    • You may be right on that. Banks and pension funds are having a terrible time with today’s low rates.

  9. Fast Eddy says:

    An attempt to explain why they raised rates:

    We see the Fed’s growing desperation in their decision to raise rates now, despite forecasts that have been darkening during the past four years:

    They did not raise rates because the economy has improved; they did so because it has not improved.

    They act now, fearing that the recession will arrive before they can raise rates enough to give them the monetary ammo to fight it. So the Fed governors have begun the gradual process of raising the fed funds rate in tiny increments to 3.3%, which would restore a more normal relationship between the fed funds rate and GDP.

    Good luck with that.

    Jacking up rates will slow both domestic consumption and exports; raising rates while other central banks are lowering might send the US dollar into orbit. Worse, large parts of the US economy are already slowing (e.g., exporters and manufacturers), as are the economies of key trading partners, such as the oil exporters (including Canada) and many emerging nations, especially the big ones: China and Brazil.

    http://wolfstreet.com/2015/12/17/fed-is-raising-rates-for-the-opposite-reasons-they-claim/

    Note that a rise in interest rates triggered 2008 https://en.wikipedia.org/wiki/Subprime_mortgage_crisis

    The Fed surely knew that was going to cause a major problem —- yet they did it anyway….

    And they are doing it again — knowing full that loads of foreign entities are holding USD denominated debt …. which will be even more expensive to service…

    Knowing full well that an increase in rates always slows growth — and that would seem to be the last thing they want now….

    So why raise rates?

    Perhaps they have an agenda that we are not aware of — or perhaps they feel for some reason they have no choice…

    • InAlaska says:

      FE,
      I think you’ve got it figured correctly. They need to raise rates now, so they can lower them again later when the really need to. And it just might work. All sorts of doomers came out of the woodwork when the Fed ended QE-3 and Operation Twist a few years back hollering that this was going to crack the machine, but it didn’t. So, now here we are again, and if they do it slowly, it might just work. But its not about a hidden agenda. Its about desperation.

    • It is very strange. A rise in rates causes the value of bonds currently on the books of companies (such as insurance companies) to fall. If they sell these bonds before maturity, they get less money for them. The price of stocks also tends to fall, in part because bonds now become a more favorable alternative. If interest rates for purchasing real estate go up, the value of agricultural land, commercial real estate, and homes tends to fall.

      Somehow, the money used to pay interest has to come out of other spending. In recent years, we have only seen the stimulus effect of lower interest rates. These lower interest rates helped compensate for higher oil prices and higher metal prices.

      We have had a long period of falling rates–essentially since 1981. We don’t know how much the rise in asset prices is from falling interest rates, and we don’t know how much we will lose as interest rates go up again.

    • Creedon says:

      Perhaps we are a society in denial. We are ignorant. Maybe we the ‘marginalized,’ are the ones that know what is going on and are ignored.

  10. Fast Eddy says:

    Bone-Chilling “Plateau” in Apartment Boom Resurfaces, Smartest Money Bails Out
    by Wolf Richter • December 17, 2015
    Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditPrint this pageEmail this to someone
    Last time a “plateau” was declared, the market crashed.

    Legendary real-estate bottom-and-top picker Sam Zell, chairman of apartment mega-landlord Equity Residential, got on Bloomberg TV and said, “There is a high probability that we are looking at a recession in the next 12 months.”

    This is not even a remote possibility in the Fed’s miserably slow-growth forecasts it issued yesterday. But Zell was once again having a will of his own. He offered a laundry list of reasons: Multinationals are announcing mass-layoffs; global trade is deteriorating; China’s economy might be spiraling down; and “the strong dollar” is hitting US production.

    But he said this only after he’d unloaded a ton of commercial real estate: in total 23,262 apartments in five states. The deal was announced at the end of October. Another 4,728 apartments are to be dumped next year.

    As his firm pocketed the $5.4 billion it got from Starwood Capital Group for these units, Zell said: With “pricing currently available in the commercial real estate market, it is very hard not to be a seller.”

    http://wolfstreet.com/2015/12/17/bone-chilling-term-plateau-in-apartment-boom-resurfaces-smartest-money-bails-out/

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