Our economic growth system is reaching limits in a strange way

Economic growth never seems to be as high as those making forecasts would like it to be. This is a record of recent forecasts by the International Monetary Fund:

Figure 1. World GDP Forecasts by the International Monetary Fund.

Figure 1. World GDP Forecasts by the International Monetary Fund.

Figure 2 shows world economic growth on  a different basis–a basis that appears to me to be very close to total world GDP, as measured in US dollars, without adjustment for inflation. On this  basis, world GDP (or Gross Planetary Product as the author calls it) does very poorly in 2015, nearly as bad as in 2009.

Figure 2. Gross Planet Product at current prices (trillions of dollars) by Peter A. G. van Bergeijk in Voxeu.

Figure 2. Gross Planet Product at current prices (trillions of dollars) by Peter A. G. van Bergeijk in Voxeu, based on IMF World Economic Outlook Database, October 2015.

The poor 2015 performance in Figure 2 reflects a combination of falling inflation rates, as a result of falling commodity prices, and a rising relativity of the US dollar to other currencies.

Clearly something is wrong, but virtually no one has figured out the problem.

The World Energy System Is Reaching Limits in a Strange Double Way

We are experiencing a world economy that seems to be reaching limits, but the symptoms are not what peak oil groups warned about. Instead of high prices and lack of supply, we are facing indirect problems brought on by our high consumption of energy products. In my view, we have a double pump problem.

Figure 3. Double gasoline pump from Torrence Collection of Auto Memorabilia.

Figure 3. Double gasoline pump from Torrence Collection of Auto Memorabilia.

We don’t just extract fossil fuels. Instead, whether we intend to or not, we get a lot of other things as well: rising debt, rising pollution, and a more complex economy.

The system acts as if whenever one pump dispenses the energy products we want, another pump disperses other products we don’t want. Let’s look at three of the big unwanted “co-products.”

1. Rising debt is an issue because fossil fuels give us things that would never have been possible, in the absence of fossil fuels. For example, thanks to fossil fuels, farmers can have such things as metal plows instead of wooden ones and barbed wire to separate their property from the property of others. Fossil fuels provide many more advanced capabilities as well, including tractors, fertilizer, pesticides, GPS systems to guide tractors, trucks to take food to market, modern roads, and refrigeration.

The benefits of fossil fuels are immense, but can only be experienced once fossil fuels are in use. Because of this, we have adapted our debt system to be a much greater part of the economy than it ever needed to be, prior to the use of fossil fuels. As the cost of fossil fuel extraction rises, ever more debt is required to place these fossil fuels in use. The Bank for International Settlements tells us that worldwide, between 2006 and 2014, the amount of oil and gas company bonds outstanding increased by an average of 15% per year, while syndicated bank loans to oil and gas companies increased by an average of 13% per year. Taken together, about $3 trillion of these types of loans to the oil and gas companies were outstanding at the end of 2014.

As the cost of fossil fuels rises, the cost of everything made using fossil fuels tends to rise as well. Cars, trucks, and homes become more expensive to build, especially if they are intended to be energy efficient. The cost of capital goods purchased by businesses rises as well, since these too are made with fossil fuels. Needless to say, the amount of debt to purchase all of these goods rises as well. Part of the reason for the increased debt is simply because it becomes more difficult for businesses and individuals to purchase needed goods out of cash flow.

As long as fossil fuel prices are rising (not just the cost of extraction), this rising debt doesn’t look like a huge problem. The rising fossil fuel prices push the general inflation rate higher. But once prices stop rising, and in fact start falling, the amount of debt outstanding suddenly seems much more onerous.

2. Rising pollution from fossil fuels is another issue as we use an increasing amount of fossil fuels. If only a tiny amount of fossil fuels is used, pollution tends not to be much of an issue. Air can remain safe for breathing and water can remain safe for drinking. Increasing CO2 pollution is not a significant issue.

Once we start using increasing amounts, pollution becomes a greater issue. Partly this is the case because natural sinks reach their saturation point. Another is the changing nature of technology as we move to more advanced techniques. Techniques such as deep sea drilling, hydraulic fracturing, and arctic drilling have pollution risks that less advanced techniques did not have.

3. A more complex economy is a less obvious co-product of the increasing use of fossil fuels. In a very simple economy, there is little need for big government and big business. If there are businesses, they can be run by a small number of individuals, with little investment in capital goods. A king, together with a handful of appointees, can operate the government if it does not provide much in the way of services such as paved roads, armies, and schools. International trade is not a huge necessity because workers can provide nearly all necessary goods and services with local materials.

The use of increasing amounts of fossil fuels changes the situation materially. Fossil fuels are what allow us to have metals in quantity–without fossil fuels, we need to cut down forests, use the trees to make charcoal, and use the charcoal to make small quantities of metals.

Once fossil fuels are available in quantity, they allow the economy to make modern capital goods, such as machines, oil drilling equipment, hydraulic dump trucks, farming equipment, and airplanes. Businesses need to be much larger to produce and own such equipment. International trade becomes much more important, because a much broader array of materials is needed to make and operate these devices. Education becomes ever more important, as devices become increasingly complex. Governments become larger, to deal with the additional services they now need to provide.

Increasing complexity has a downside. If an increasing share of the output of the economy is funneled into management pay, expenditures for capital goods, and other expenditures associated with an increasingly complex economy (including higher taxes, and more dividend and interest payments), less of the output of the economy is available for “ordinary” laborers–including those without advanced training or supervisory responsibilities.

As a result, pay for these workers is likely to fall relative to the rising cost of living. Some would-be workers may drop out of the labor force, because the benefits of working are too low compared to other costs, such as childcare and transportation costs. Ultimately, the low wages of these workers can be expected to start causing problems for the economic system as a whole, because these workers can no longer afford the output of the system. These workers reduce their purchases of houses and cars, both of which are produced using fossil fuels and other commodities.

Ultimately, the prices of commodities fall below their cost of production. This happens because there are so many of these ordinary laborers, and the lack of good wages for these workers tends to slow the “demand” side of the economic growth loop. This is the problem that we are now experiencing. Figure 4 below shows how the system would work, if increasing complexity were not interfering with economic growth.

Figure 4. How economic growth works, if increased complexity is not interfering.

Figure 4. How economic growth works, if increased complexity is not interfering.

Also see my post, How Economic Growth Fails.

The Two Pumps Are Really Energy and Entropy

Unlike the markings on the pump (gasoline and ethanol), the two pumps of our system are energy consumption and entropy. When we think we are getting energy consumption, we really get various forms of entropy as well.

The first pump, rising energy consumption, seems to be what makes the world economy grow.

Figure 4. World GDP in 2010$ compared (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014).

Figure 5. World GDP in 2010$ compared (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014).

This happens because the use of energy products allows businesses to leverage human labor, so that human labor can be more productive. A farmer with a stick as his only implement cannot produce much food, but a farmer with a tractor, gasoline, modern implements, hybrid seeds, irrigation, and access to modern roads can be very productive. This productivity would not be available without fossil fuels. Figure 4, shown earlier, describes how this increased productivity usually gets back into the system.

The second pump in Figure 3 is Entropy Production. Entropy is a measure of the disorder associated with the extraction and consumption of fossil fuels and other energy products. Entropy can be thought of as a loss of information. Once energy products are burned, we have a portion of GDP in the place of the energy products that have been consumed. This is why there is a high correlation between energy consumption and GDP. As energy products are burned, we also have an increasing pile of debt, increasing pollution (that our sinks become less and less able to handle), and increasing wealth disparity.

Figure 6. Chart by economist Emmanuel Saez based on an analysis IRS data, published in Forbes.

Figure 6. Difference in US income growth patterns of the top 10% versus the bottom 90%. Chart by economist Emmanuel Saez based on an analysis of IRS data, published in Forbes.

Beyond the three types of entropy I have mentioned, there are other related problems. For example, the current immigration problem is at least partly a problem associated with increased complexity and thus increased wealth disparity. Also, low oil prices are a sign of a loss of “information,” and thus also a sign of growing entropy.

Our Energy/Entropy System Operates on an Energy Flow Basis

I think of two different kinds of accounting systems:

  1. Accounting on a cash flow basis
  2. Accounting on an accrual basis, such as GAAP

With respect to energy, we burn fossil fuels in a given year, and we obtain output of renewable energy devices in a given year. We eat food that has generally been grown in the year we eat it. There is virtually no accrual aspect to the way the system works. This is very different from the accrual-basis financial statements prepared by most large companies that allow credit for investments before the benefit is actually in place.

When it comes to promises such as Social Security benefits, we are, in effect, promising retirees a share of energy production in future years. The promise is only worth something if the system continues to work well–in other words, if the financial system has not collapsed, pollution is not too great a problem, and marginalized workers are not revolting.

Governments can print money, but they can’t print resources. It is the resources, particularly energy resources, that we need to run the economy. In fact, we need per capita resources to be at least flat, or perhaps increasing.

Figure 7. World energy consumption per capita, based on BP Statistical Review of World Energy 2105 data. Year 2015 estimate and notes by G. Tverberg.

Figure 7. World energy consumption per capita, based on BP Statistical Review of World Energy 2105 data. Year 2015 estimate and notes by G. Tverberg.

Printing money is an attempt to get a larger share of the world’s resources for the population of a given country. Printing money usually doesn’t work very well, because if a country prints a lot of money, the currency of that country is likely to fall relative to currencies of other countries.

What Causes the System to Fail? Too Little Energy, or Too Much Entropy?

In an interconnected system, it is sometimes hard to understand what causes the system to fail. Is it too little production of energy products, or too much entropy associated with these energy products? Astrophysicist Francois Roddier tells me that he thinks it is too much entropy that causes the system to fail, and I tend to agree with him. (See also “Pourquoi les économies stagnant et les civilizations sʼeffondrent”  by Roddier in Économie de l’après-croissance.) The rising amount of debt, pollution, and income inequality tend to bring the system down, long before “running out” of energy products becomes a problem. In fact, the low commodity prices we are now experiencing appear to be part of the entropy problem as well.

Can Renewable Energy Be a Solution?

As far as I can see, renewable energy, unless it is very cheap (like hydroelectric dams were many years ago), absolutely does not work as a solution to our energy problems. The basic issue is that the energy system works on a flow year basis. To match energy-in versus energy-out, we need to analyze each year separately. For example, we need to match energy going into making offshore wind turbines against energy coming out of offshore wind turbines, for each calendar year (say 2016). To keep the net energy flow positive, there needs to be an extremely slow ramp-up of high-cost renewable energy.

In a way, high-cost renewable energy is very close to entropy-only energy. Because of the high front-end energy consumption and the slow speed at which it is paid back, high-priced renewable energy generates very little energy, net of energy going into its production. (In some instances, renewable energy may actually be an energy sink.) Instead, renewable energy generates lots of entropy-related products, including increased debt and increased taxes to pay for subsidies. It also adds to the complexity of the system, because of the variable nature of its output. Perhaps renewable energy is less bad at generating pollution, or maybe the pollution is simply of a different type. Ultimately, it is a problem, just as any other type of supplemental energy is.

One problem with so-called renewable energy is that it can’t be expected to outlast the system as a whole, unless it is part of some off-grid system with backup batteries and an inverter. Even then, the lifetime of the whole system is limited to the lifetime of the shortest-lived necessary component: solar panels, battery backup, inverter, and the device the user is trying to run with the system, such as a water pump.

There are currently many stresses on our economic system. We can’t be certain that the system will last very long. When the system starts collapsing, it is likely to take grid-connected electricity systems with it.

What Is the Connection to Energy Returned on Energy Invested (EROEI)?

If a person believes that energy is a one pump system (the left pump in Figure 3), then a person’s big concern is “running out.” If a person wants to maximize the benefit of energy resources, he will choose energy resources with as high an EROEI as possible. In other words, he will try to get as much energy out per unit of energy in as possible. For example, one estimate gives EROEI of 100 to 1 for hydroelectric, 80 to 1 for coal, and much lower ratios for other fuels. Thus, a mix that is heavy in hydroelectric and coal will stretch energy supplies as far as possible.

Another place where EROEI is important is in determining “net” energy, that is, energy net of the energy going into making it.

As I mentioned above, energy per capita needs to be at least level to keep the economy from collapsing. In fact, net energy per capita probably needs to be slightly increasing to keep the economy growing sufficiently, if “net” energy is adjusted for all of the effects that simultaneously impact the energy needs of the economy, apart from energy used in producing “normal” goods and services. (Most people are not aware of the economy’s growing need for energy supplies. For an explanation regarding why this is true, see my recent post The Physics of Energy and the Economy.)

In theory, EROEI analyses might be helpful in determining how much gross energy is necessary to produce the desired amount of net energy. In practice, there are many pieces that go into determining the total quantity of net energy required to keep the economy expanding, making the calculation difficult to perform. These include:

  1. The extent to which population is rising.
  2. The extent to which globalization is taking place, and with it, access to other, higher EROEI, energy supplies.
  3. The extent to which the economy is getting more efficient in its use of energy.
  4. The extent to which EROEI is falling for various fuels (on a calendar year basis).
  5. The extent to which average EROEI is falling, because the mix of fuel is changing to become less polluting.
  6.  The extent to which it is taking more energy to extract other resources, such as fresh water and metals.
  7. The extent to which it is taking more energy to make pollution-control devices, and workarounds for problems with energy.

Looking at Figure 5, it is not obvious that there is a need for a big adjustment, one way or another, to produce net energy from gross energy. Of course, this may be an artifact of the way GDP is measured. High-priced metals and water are treated as part of GDP, as is the cost of pollution control devices. People’s general standard of living may not be rising, but now they are paying for clean air and water, something they didn’t need to pay for before. It looks like GDP is increasing, but there is little true benefit from the higher GDP.

The one big take-away I have from Figure 7 is simply that if our goal is to get net energy to rise sufficiently, the best way to do this is to make certain that gross energy production rises sufficiently. World leaders were successful in doing this since 2001, through their globalization efforts. Of course, the new energy we got was mostly coal–bad from the points of view of pollution and workers’ wages in developed countries, but good from some other perspectives: low direct debt requirement, low complexity requirement, and high EROEI.

Figure 8. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Figure 8. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

One issue with EROEI calculations is that they disregard timing, and thus are not on an energy flow-year basis. Ignoring timing also means the calculations give little information regarding the likely debt build-up associated with an energy product.


If a person doesn’t understand what the problem is, it is easy to come to the wrong conclusion. Part of our problem is that we need a growing amount of net energy, per capita, to keep the economy from collapsing. Part of our problem is that entropy problems such as rising debt, increased pollution, and increasing complexity tend to bring the system down, even when we seem to have plenty of energy supplies. These are the two big problems we are facing that few people recognize.

Another part of our problem is that it is necessary for common laborers to have good-paying jobs, and in fact rising pay, if the economy is to continue to grow. As much as we would like everyone to have advanced training (and training that changes with each new innovation), the productivity of workers does not rise sufficiently to justify the high cost of giving advanced education to a large share of the population. Instead, we must deal with the fact that the world’s economy needs large numbers of workers with relatively little training. In fact, we need rising pay for these workers, because there are so many of them, and they are the ones who keep the “demand” part of the commodity price cycle high enough.

Robots may be very efficient at producing goods and services, but they cannot recycle the earnings of the system. In theory, businesses could pay very high taxes on the output of automated systems, so that governments could create make-work projects to hire all of the unemployed workers. In practice, the idea is impractical–the businesses would simply move to an area with lower taxes.

Growth now is slowing because of all of the entropy issues involved. People in China cannot stand any more pollution. Too many laborers in developed countries are being marginalized by globalization and by competition with ever-more intelligent machines that can replace much of the function of humans. None of this would be a problem, except that we have a huge amount of debt that needs to be repaid with interest, and we need commodity prices to rise high enough to encourage production. If these problems are not fixed, the whole system will collapse, even though there seems to be a surplus of energy products.

This entry was posted in Financial Implications and tagged , , , , by Gail Tverberg. Bookmark the permalink.

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.

1,136 thoughts on “Our economic growth system is reaching limits in a strange way

  1. Dear Finite Worlders
    A video series on 18th century cooking. If you are serious about collapse, or just hard times, much here to contemplate….Don Stewart

      • Don’t fret, a homemade solar cooker will service (sarcasm).
        Even on cold Winter Days

        • Why sarcasm? A solor cooker can not only cook food, it can dehydrate and also purify water well enough to drink. No fuel needed to reach pasteurization at about 150 degrees. No need to boil, so it saves fuel.

          • I know someone who as tried unsuccessfully to introduce solar stoves. The problem — if you go inside to do other housework while to meal is cooking, someone will steal the food and the stove.

          • Very sure post BAU there will be plenty of folks making and using those homemade solar cookers, just like they are today (sarcasm). Sure, I know of “one” also.
            Please, get real….

          • A solor cooker can not only cook food, it can dehydrate and also purify water well enough to drink.

            Unfortunately, solar thermal is not something you can count on where the sun don’t shine for much of the winter… this is our first sunny spell since November!

        • That solar oven looks pretty handy, definitely better than indoor cooking with an open fire, and also better than running out of wood altogether.

          I guess the only real concern is, how long does that clear plastic sheet last? How to replace it once it goes brittle and foggy, post-BAU? Otherwise, it is just a crutch to help get through the first few years, like solar panels.

          • My cooker has a glass lid, so it should last pretty long. I can bake bread, purify water, dehydrate food I grow and cook basically anything. I just can’t fry things in it, but other than that, it’s awesome. Obviously, it doesn’t work well on cloudy days, but hey, I live in the Pacific Northwest and know aobut clouds, and while it doesn’t reach 350 on those days, it does heat up somewhat if there’s any break in the cloud cover. AND, if I really need to use it after BAU on cloudy days, I can use another heat source to heat something up relavively briefly and then put it in the cooker. The cooker at this point (even with the cloud cover) will act as a crock pot–takes longer, but will do the job. Again, laugh all you want, Vince, but I’ll have drinkable water and cooked food with little or no fuel if I need it. I’ll also be able to preserve through dehydration any food I am able to grow. For those interested, I have an American Sun Oven.

      • Yes, a lot, but country people – and eg the bakers of London – used faggots of twigs, wood from specially pollarded tree plantations, dead and fallen wood, furze from the local heath and common land, etc, for their baking.

        They did not acquire firing wood from good felled timber which was too valuable to be employed that way and in any case belonged to the landowner, Faggots of bundled wood burn better anyway.

        Bread, pies, etc were baked only once a week, not every day. Bread when the oven was hottest, pies when it was cooling. This was often communal, at least two households sharing an oven, so a further saving on fuel.

        Only the richest and the aristocracy had the privilege of nice fresh bread every day.

        As late as the mid-19th century peasants in Germany (and I am sure everywhere else!) spent much of their spare time the whole summer gathering such wood and dragging it home. I;m sure we could find ‘wood-dragging folk songs’ if we looked hard enough…..

        What did for the system was population growth from improved nutrition and hygiene: high faggot prices essentially lay at the root of the settlement of America by Northern Europeans from 1600 onwards: letters home always say ‘Hey, you won’t believe how cheap it is here compared to London!’

        • xabiar – you are a font of fascinating info!

          Interesting that these people worked out how to efficiently make use of a very limited resource to cook food…

          Obviously these ideas evolved over time and were passed along and improved upon… incremental steps along the learning curve…

          Again we see how it is virtually impossible to go backwards… we would not know of the subtleties such as how to conserve our limited wood supply by baking bread and pies at different times …

          When we bake we buy ingredients at the ship then turn on the oven… or we go to the bakery…

          When BAU stops — we’ll be long dead before we are able to learn how to live in a world without energy…

          And even if we could learn fast enough — we’d burn through our last remaining energy source (wood) in very short order…

          • “But if God so clothes the grass of the field, which today is alive and tomorrow is thrown into the oven, will he not much more clothe you, O you of little faith.”

            While there is not enough organic matter to provide cooking fuel for 7 billion people wood isn’t the only thing you can burn. As for solar cookers most people will live in small communities so there will always be plenty of eyes on the pot.

            • You can burn cow dung…. but there won’t be any cows once 7.4 billion starving people get through with them…

              Sofa cushions will also burn well… furniture… plastic bags….

              What else did you have in mind?

    • They just have to lower the standard in prison, maybe a daily beating? To align supply with demand. (of prisoners)

    • Re inflation:
      Obviously none of this deflation finds it way out to consumer prices of necessary goods.

      Hyperinflation: doesn’t that happen just before the currency dies? Accompanied by at least civil war.

      • Or maybe the country simply collapses…

        There was no hyperinflation in the US during the Lehman crisis…. without central bank intervention the sell orders on computers would have been triggered by the tens of thousands… and the global economy would have completely collapsed in less than a second. Literally.

        And we’d have skipped the hyperinflation stage of the collapse

        This is not Weimar Germany….

  2. High in the mountains of Veracruz, Mexico, a small cooperative is “farming carbon” — practicing agriculture in a way that fights climate change while simultaneously meeting human needs.

    Although these practices are used by millions of people around the world in some way, people in Western nations are largely unfamiliar with them, and there is little coordinated support to encourage farmers to adopt them.

    But if supported, implemented and developed on a global scale in conjunction with a massive reduction in fossil fuel emissions, these “carbon farming” practices — a suite of crops and practices that sequester carbon while simultaneously meeting human needs — could play a critical role in preventing catastrophic climate change by removing carbon from the atmosphere and safely storing it in soils and perennial vegetation……..


    • Joe – welcome.

      In honour of your post let’s sing the national anthem of Delusistan:

      • Fast Eddy, wonder if statistics are available in regard to the ratio of industrial chemical rape farming compared to all types of organic green farming?
        Let’s all write Archer, Midland, Daniels and urge them to support carbon green farming based on those Indians!
        Oh, best not of ADM will certainly visit them folks and force them to adopt GMO based farming…ugh! What a world.

        • I already posted that info — 98%+ of all ag land is farmed using industrial methods…

          And a large portion of the ag land that is not farmed using petrochemicals is pasture land …

          A very tiny proportion of global ag land is actually used for organic farming…

          I couldn’t find data on how much of that is reliant on electric pumps for irrigation … but no doubt almost all of it is….

          • And let’s not forget that the industrial farming has depleted essential aquifers and poisoned the water with fertiliser and pesticide run-off: for instance 50% of the water in the region of Spain I considered moving to for a last stand. I like to have the figures for all the major food-producers.

            • No need for concern, put in a few swales and everything will be back as before…
              Now, who will dig those sealed? Yes, them Indians…white people can’t possibly be expect to perform that….only on the laptop.

  3. The oil producers in the U.S have hedges against a fall in the oil price. Another way to look at it is that the banks are subsidizing the oil production. It would be interesting to know exactly how much the oil producers receive per barrel, but since the whole derivatives business is secret I guess that we will never know.

    • I just read about hedges… it isn’t actually all that secret. Still learning….

  4. Rising Global Debt and the Deflation Threat

    Years of deficit spending and near-zero interest rates have led to massive borrowing but little growth.

    Franklin D. Roosevelt’s March 1933 inaugural line “that the only thing we have to fear is fear itself” was inspiring, but wrong. There was plenty to fear, not least the deflation that then gripped the nation.

    Today we’re in a new age of anxiety, with voters opting for anti-establishment outsiders like Donald Trump and Bernie Sanders. Americans are not experiencing deflation, but there are some early symptoms. More important, the potential cause is apparent.

    Among symptoms, dollar prices of oil and many other commodities have slumped; the U.S. consumer-price index hardly budged in 2015. The European Central Bank and central banks in Japan, Switzerland, Denmark and Sweden are now charging commercial banks interest on their reserve deposits (negative interest rates) to try to stimulate lending.

    The decline in energy prices is appropriately celebrated, but the big question is whether the Federal Reserve and other central banks can arrest a slide into a general deflationary malaise. Here is a possible reason why they can’t: Years of government “stimulus” spending are working against them.

    Irving Fisher, a prominent monetary economist in the 1920s and ’30s, explained how deflation could result from an abnormal buildup of debt. A debt bubble, he wrote ( Econometrica, 1933) ultimately would burst “through the alarm of either debtors or creditors or both.” Debt will be liquidated by the distress sales of assets, the contraction of bank deposits as bank loans are paid off, and the slowing down of monetary velocity (the turnover from account to account that modulates the effective supply of money).

    With falling prices come plummeting profits that force employee layoffs. The resulting pessimism and loss of confidence leads to “hoarding and slowing down still more of velocity of [monetary] circulation.” The effective money supply contracts, hence deflation. In Fisher’s view, that’s why the American economy sank into Depression in the early 1930s. (Why it stayed depressed for a decade is another story.)

    When global stock markets crashed in 2008, Fed Chairman Ben Bernanke was determined not to repeat a mistake made in 1929. After that crash the Fed failed to create enough money to compensate for the sudden loss of bank liquidity and a deflationary contraction of the money stock. And so Mr. Bernanke in December 2008 lowered the Fed’s interest-rate target to an upper bound of a quarter of a percentage point and a lower bound of zero. There it stayed until the quarter point increase in December 2015.

    Unfortunately, Congress also passed, at President Obama’s urging, a massive and highly politicized $831 billion “stimulus” bill a few months later. The spending did not lead to much if any growth, but it was followed by a string of trillion-dollar-plus deficits. Federal debt, a bit over $10 trillion in 2009, has ballooned to more than $18 trillion.

    In other words, while Mr. Bernanke and Ms. Yellen were trying to prevent deflation, the federal government was engineering its cause, excessive debt. And the Fed abetted the process by purchasing trillions of dollars of government paper, aka quantitative easing.

    Near-zero interest rates also have encouraged consumers and business to releverage. Cars are now financed with low or no-interest five-year loans. With the 2008 housing debacle forgotten, easier mortgage terms have made a comeback. Corporations also couldn’t let cheap money go to waste, so they have piled up debts to buy back their own stock. Such “investment” produces no economic growth, but it has to be paid back nonetheless.

    Amid the Great Recession, many worried that the entire economy of the U.S., or even the world, would be “deleveraged.” Instead, we have a new world-wide debt bubble. “The billions of taxpayer dollars that have been spent on bailing out the banks,” Aaran Fronda recently wrote in London’s World Finance magazine, “combined with huge amounts of quantitative easing and reducing interest rates to rock-bottom levels resulted in advanced economies holding the highest public debt-to-GDP ratios that had ever been seen.”

    Global debt of all types grew by $57 trillion from 2007 to 2014 to a total of $199 trillion, the McKinsey Global Institute reported in February last year. That’s 286% of global GDP compared with 269% in 2007. The current ratio is above 300%. The big boost came from governments. The debt load, McKinsey noted, “poses new risks to financial stability and may undermine global economic growth.”

    The Fed says it wants to “reflate” to the tune of 2% annual inflation—which would let the U.S. Treasury, among others, work off its debt with cheaper dollars. But the Fed isn’t getting the inflation it wants and the deflation risk persists. Its desperation can be deduced from Ms. Yellen’s suggestion that she would consider negative rates. “Helicopter money”—with the Fed bypassing the banks and somehow funneling money directly to consumer accounts—is even being discussed in the press.

    Ironically, voters are turning toward a developer, Donald Trump, who never met a highly leveraged project he didn’t like. As for Bernie Sanders, his wishes are simple: more federal spending and borrowing on welfare programs. Should we be worried about any of this?


    • Debt isn’t the real issue, because it always can by paid off by printed currency. The real issue is capability of our civilization to increase primary energy consumption rate.

      • Suppose this debt can be paid off by printed currency. Can goods and services actually go with the printed currency? For example, can the debt still provide pensions to the elderly?

        And where do you expect new debt is going to come from, if someone wants to buy a car, or sell their house, or build a factory? Is a new debt system going to suddenly arise, after the previous one was wiped out?

  5. Best of luck up there with the humanure project. It all sounds so wonderful….

    BAU … we’ll all miss you so when you go…

  6. Re Collapse … and how it could happen in stages with some going first and other following …

    Just thinking about that… and I do not buy that scenario…

    Lehman was one single piece… when it was let go the entire global economy stopped — it literally stopped… and if the central banks had not stepped in …. we would not be here today…

    One… single… piece….

    Take a look around — the central banks are sticking fingers into holes in dams continuously … no significant entity has been allowed to fail …

    Running a failing corporation? No problemo — just tap into some ZIRP cash made available by the Fed…

    Need to keep cars moving off the lots — no problemo — 10yr ZIRP loans save the day…

    These are bail outs on a stupendous scale…

    Nothing can be allowed to fail – everything is too big to fail….

    Once the central banks run out of fingers — something will trigger the deluge — and once it starts and there is a realization that the central banks cannot ride to the rescue…

    This rotten house is going to collapse — and it will be fast… lightening fast…

    • FE,
      I agree with the step by step decline scenario.
      But the first step will be soooo high, that I don’t care about the size of the following ones; as a pizza, I’ll never have to climb them down anyway.

    • I think we live in a “too big to fail” society.
      The educational pipeline for new workers is more concerned with quotas than proper training, so students aren’t allowed to fail either.

      In a way, modern global industrial capitalism is more rigid than centrally planned dictatorships. I forgot where I read this, but someone made the statement, somewhere on the internet, that American society is very ‘rigid’. The flexibility that that is reported on in Reuters articles and is widely re-reported is only happening on the margins. Flexibility in sectors of the economy that depend on discretionary spending is celebrated by journalists in Reuters articles every day. Innovations in the sectors of the economy that depend on discretionary spending are used to make generalizations about the entire economy with phrases such as the “Uberization of Everything”. This is, of course, propaganda from the Top Twenty Percent. They are a very self-congratulating. We are not flexible in our use of resources or population size. (outside of war, any form of population control is frowned upon.)

      • all societies cannot help but become rigid when their sources of energy are delivered to them, rather than to chase after it, as we are evolved to do,

        humankind devised this energy delivery system, which, once established, necessitated building permanent housing

        what we have now is just a derivative of that. ALL our energy needs are delivered to order, so we have had to build cities, roads, armies, hospitals and whatnot in order to consume the available energy input (Once we knew that coal oil and gas were available, we could not just leave it in situ.)
        Thus our transport and city infrastructure now defines what we have become. That has locked us into our current phase of rigid behaviour.
        We cannot simply up and leave all that behind and become nomad and “flexible” once more, because there is nowhere to be nomadic in.
        We filled all the space.
        We are faced with sealevel rise. Sure, that’s happened before, but 000s of years ago, people simply moved imperceptibly over centuries.
        Now we are faced with the rigidity of millions living in cities, incapable of moving, demanding that (energy consuming) sea defences are constructed.(the ultimate futility of “delivered energy”.)

        Ultimately of course the sea will win, and millions will die before rigidity turns to flexibility again.
        Then there will be fewer of us, and flexibility will be our normality.

      • We are not flexible in our use of resources or population size.

        Worth repeating!

        Resilience and efficiency seem to be opposed. We pride ourselves on how efficient we’ve become, without considering how brittle that makes us. This is an artifact of a high-energy environment, according to Panarchy Theory. In a low-energy environment, resilience must dominate.

        And that’s a bitter pill for US industry, which has worked for many decades to optimize efficiency over resilience.

        • Right Jan,
          Résilience is what we’d like egotistically for our system/lives/genes/…,
          It’s never been a priority of Evolution.

          Rather the opposite, actually, new species must appear, and wipe out the too old ones, so that the complex system can continually adjust to new environmental conditions.

          Ultimately, résilience can be seen as a form of sclerosis. When it’s about genes and long enough timeframes, it doesn’t matter, but when it’s memes in a HFT world, who knows?

          • Rather the opposite, actually, new species must appear, and wipe out the too old ones, so that the complex system can continually adjust to new environmental conditions.

            I think you’re making my argument for me.

            It’s inefficient to spend so much time and energy making lots of new species. But it is resilient, with lots of overlap, duplicated effort, and shared resource utilization.

            There exists a “sweet spot” in the resilience — efficiency continuum, also called the “maximum power point” by HT Odum. This is the point at which the energetic expense of capital is balanced by the energetic efficiency of operations.

            • Thanks Jan,
              There are still some points I’ve hard time to wrap my mind around.
              I’ll check the HT Odum’s text, and maybe compare with the Ulanowicz’ paper about entropy’s duality, that Gail presented a couple of articles ago.
              There seems to be a regulatory function, a drawback feature with embedded negative feedback loops, which I’m not able to clearly grasp (yet).

            • It seems to me that resilience is one of the big areas where ecosystems and human economies differ. Ecosystems have built in redundancy, with many types of plants and animals, so that adaptation to change is fairly easy. Human economies are optimized to use particular types of supplemental energy. Once the “cost” of producing that supplemental energy rises, the system is likely subject to collapse, because eventually the rising cost leaves the rest of the economy with too little energy to continue. There is no lower-energy alternative way of continuing, because of the way the system is designed.

            • Good point Gail, agreed.

              Our goal is to yield Max profit ASAP, whatever happées tomorrow, while Nature’s Target is to survive in the long term (rather: what hasn’t respected this rule is no longer with us).

            • Also, we depend on a depleting supplies of fossil fuels and metals to operate our economy, while ecosystems generally only depend on the sun and water. Ours is necessarily a temporary system, while ecosystems can be much longer-lasting. Even “renewables” use depleting supplies, but of different things. For example, renewables and electric cars tend to be heavy users of copper, and our supplies of high quality copper ores are limited.

              It is a myth that recycling can be done in a very energy-efficient manner. In fact, a lot of material is lost in recycling, and the amount of energy used in recycling tends to rise rapidly, as a person tries to recollect a larger portion of the material that is recycled. Metals that have been used are almost as effectively lost as fossil fuels that have been burned, because the disbursed metals cannot be regathered, without a huge expenditure of energy.

            • our supplies of high quality copper ores are limited.

              I can’t put my finger on a reference, but I recall reading that one-third of all copper is in use, one-third is still in the ground, and one-third is in landfills.

              I think Simon Michaux pointed out that the percentage of copper in landfills is currently higher that the percentage of copper in the newest mines.

              We’ve picked the low-hanging fruit, folks!

            • Jan, you say:
              “I think Simon Michaux pointed out that the percentage of copper in landfills is currently higher that the percentage of copper in the newest mines.”

              Is this statement valid for more than Copper?
              If so, could be that, for example, the % of nutrients in garbage is higher than that in newly processed refined food.

              Would it also apply on the cultural level?

      • I agree–the economy becomes quite inflexible. When it comes to universities, they seem to have quotas–how many papers professors are expected to publish, what percentage of students are expected to pass. The universities want to do well compared to other universities. They want a certain percentage of students to graduate, so they appear to performing their function. If standards need to be lowered for that to happen, that seems to be OK. As long as enough papers get published.

  7. It took me a while to figure out what Gail was trying to communicate by using entropy to describe our economic problems. At first, I thought she was talking about declining EROI.. but then I realized that was wrong since she started describing taxes and debt reduce the amount of energy available in the economy.

    I think she is talking about flows. Right now, as I am typing this, in aggregate, humans are using more energy than ever. On a given day, we use X amount of energy, or we are paid x amount of money. However, we use that energy very quickly, or we spend most of that money by the end of the day, leaving very little surplus energy for discretionary use. In the past, I think, money and energy moved through the economy more slowly, which may seem like a bad thing, but there were less people to share energy and money (economic surplus) with.Most importantly, there was less entropy in the economy, so there were less taxes and debt to take money and energy out of the economy.

    Is my understanding correct?

    • To clarify what I meant to say , that in the past, there was less energy and money available and both of those things moved through the economy more slowly , which may seem like a bad thing, but there were less people to share energy and money (economic surplus) with.
      As population growth and increased both energy use and entropy increased. More energy was used more quickly as the entire economy grew, which meant entropy happened more quickly.

    • Yes, you are right.

      EROI is not my issue, especially when it means EROI on fossil fuel resources. Declining return on human labor invested (another kind of EROI) is more of my issue.

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