Why we have a wage inequality problem

Wage inequality is a topic in elections around the world. What can be done to provide more income for those without jobs, and those with low wages?

Wage inequality is really a sign of a deeper problem; basically it reflects an economic system that is not growing rapidly enough to satisfy everyone. In a finite world, it is easy for an economy to grow rapidly at first. In the early days, there are enough resources, such as land, fresh water, and metals, for each person to get a reasonable-sized amount. Each would-be farmer can obtain as much land as he thinks he can work with; fresh water is readily available virtually for free; and goods made with metals, such as cars, are not expensive. There are many jobs available, and wages for most people are fairly similar.

As population grows, and as resources degrade, the situation changes. It is still possible to grow enough food, but it takes large farms, with expensive equipment (but very few actual workers) to produce that food. It is possible to produce enough water, but it takes high-tech equipment and a handful of workers who know how to use the high-tech equipment. Metals suddenly need to be lighter and stronger and have other characteristics for the high tech industry, thus requiring more advanced products. International trade becomes more important to be able to get the correct mix of materials for the advanced products needed to operate the high-tech economy.

With these changes, the economic system that previously provided many jobs for those with limited training (often providing on-the-job training, if necessary) gradually became a system that provides a relatively small number of high-paying jobs, together with many low-paying jobs. In the United States, the change started happening in 1981, and has gotten worse recently.

Figure 1. Chart comparing income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Based on an analysis IRS data, published in Forbes.

Figure 1. Chart comparing income gains by the top 10% to those of the bottom 90%, by economist Emmanuel Saez. Based on an analysis of IRS data; published in Forbes.

What Happens When an Economy Doesn’t Grow Rapidly Enough?

If an economy is growing rapidly enough, it is easy for everyone to get close to an adequate amount. The way I think of the problem is that as economic growth slows, the “overhead” grows disproportionately, taking an ever-larger share of the goods and services the economy produces. The ordinary worker (non-supervisory worker, without advanced degrees) tends to get left out. Figure 2 is my representation of the problem, if the current pattern continues into the future.

Figure 2. Authors' depiction of changes to workers share of output of economy, as costs keep rising for other portions of the economy keep rising.

Figure 2. Author’s depiction of changes to workers’ share of output of economy, if costs keep rising for other portions of the economy. (Chart is only intended to illustrate the problem; it is not based on a study of the relative amounts involved.)

The reason for the workers’ declining share of the total is that we live in a finite world. We are using renewable resources faster than they replenish and continue to use non-renewable resources. The workarounds to fix these problems take an increasing share of the total output of the economy, leaving less for what I have called “ordinary workers.” The problems we encounter include the following:

  • Pollution control. Pollution sinks are already full. Continuing to use non-renewable resources (including burning fossil fuels) adds increased pollution. Workarounds have costs, and these take an increasing share of the output of the economy.
  • Energy used in energy production. When we started extracting energy products, the cheapest, easiest-to-extract energy products were chosen first. The energy products that are left are higher-cost to extract, and thus require a larger share of the goods the economy produces for extraction.
  • Water, metals, and soil workarounds. These suffer from deteriorating quantity and quality, leading to the need for workarounds such as desalination plants, deeper mines, and more irrigated land. All of these take an increasingly large share of the output of the economy.
  • Interest and dividends. Capital goods tend to be purchased through debt or sales of stock. Either way, interest payments and dividends must be made, leaving less for workers.
  • Increasing hierarchy. Companies need to be larger in size to purchase and manage all of the capital goods needed to work around shortages. High pay for supervisors reduces funds available to pay lower-ranking employees.
  • Government funding and pensions. Government programs grow in size in good times, but are hard to cut back in hard times. Pensions, both government and private, are a particular problem because the number of elderly people tends to grow.

It should be no surprise that this type of continuing pattern of eroding wages for ordinary workers leads to great instability. If nothing else, workers become increasingly disillusioned and want to change or overthrow the government.

It might be noted that globalization also plays a role in this shift toward lower wages for ordinary workers. Part of the reason for globalization is simply to work around the problems listed above. For example, if pollution becomes more of a problem, globalization allows pollution to be shifted to countries that do not try to mitigate the problem. Globalization also allows businesses to work around the rising cost of oil production; production can be shifted to countries that instead emphasized coal in their energy mix, with much lower energy used in energy production. With increased globalization, people who are primarily selling the value of their own labor find that wages do not keep up with the rising cost of living.

Studies of Previous Economies that Experienced Declining Wages of Ordinary Workers

Researchers Peter Turchin and Surgey Nefedov analyzed eight civilizations that collapsed in detail, and recorded their findings in the book Secular Cycles. According to them, the typical economic growth pattern of civilizations that collapsed was similar to Figure 3, below. Before the civilizations began to collapse (Crisis Stage), they hit a period of Stagflation. During that period of Stagflation, wages of ordinary workers tended to fall. Eventually these lower wages led to the downfall of the system.

Figure 3. Shape of typical Secular Cycle, based on work of Peter Turkin and Sergey Nefedov in Secular Cycles.

Figure 3. Shape of typical Secular Cycle, based on work of Peter Turchin and Sergey Nefedov in Secular Cycles. Chart by Gail Tverberg.

In many instances, a growth cycle started when a group of individuals discovered a way that they could grow more food for their group. Perhaps they cleared trees from a large plot of land so that they could grow more food, or they found a way to irrigate an area that was dry, again leading to sufficient food for more people. A modern analogy would be discovering how to use fossil fuels to grow more food, thus allowing population to rise.

At first, population grew rapidly, and incomes tended to grow as  well, as the size of the group expanded to the carrying capacity of the improved land. Once the economy got close to the carrying capacity of the land, a period of Stagflation took place. There no longer was room for more farmers, unless plots of land were subdivided. Would-be farmers were forced to take lower-paying service jobs, or to become farmers’ helpers. In this changing world, debt levels rose, and food prices spiked.

To try to solve the many issues that arose, there was a need for more elite workers–what we today would call managers and high-level government officials. In some cases, a decision would be made to expand the army, in order to try to invade other countries to obtain more land to solve the problem of inadequate resources for a growing population. All of these changes led to a higher needed tax level and more high-level managers.

What tended to bring the system down was the growing wage inequality and the resulting low wages for ordinary workers. Governments needed ever-higher taxes to pay for their expanding services, but they had difficulty collecting sufficient tax revenue. If they raised taxes to an adequate level, workers found themselves without sufficient money for food. In their weakened state, workers became subject to epidemics. Governments with inadequate tax revenue tended to collapse.

Sometimes, rather than collapse, wars were fought. If the wars were successful, the resource shortage that ultimately led to low wages of workers could be addressed. If not, the end of the group might come through military defeat.

Today’s Fundamental Problem: The World Economy Can No Longer Grow Quickly

Because of our depleted resources and because of the world’s growing population, the only way that the world economy can now grow is in a strange way that assigns more and more output to various parts of “overhead” (Figure 2), leaving less for workers and for unemployed individuals who want to be workers.

Automation looks like it would be a solution since it can produce a large amount of goods, cheaply. It doesn’t really work, however, because it doesn’t provide enough employees who can purchase the output of the manufacturing system, so that demand and supply can stay in balance. In theory, companies that automate their operations could be taxed at a very high rate, so that governments could pay would-be workers, but this doesn’t work either. Companies have a choice regarding which country they operate in. If a tax is added, companies can simply move to a lower-tax rate jurisdiction, where no tax is required for automation.

The world is, in effect, reaching the end of the Stagflation period on Figure 3, and approaching the Crisis period on Figure 3. The catch is that the Crisis period is likely to be shorter and steeper than illustrated on Figure 3, because we live in a much more interconnected world, with more dependence on debt and world trade than in the past. Once the interconnected world economic system starts to fail, we are likely to see a rapid drop in the total amount of goods and services produced, worldwide. This will produce an even worse distribution problem–how does everyone get enough?

The low oil, natural gas, and coal prices we are now seeing may very well be the catalyst that brings the economy to the “Crisis Period” or collapse. Unless there is a rapid increase in prices, companies will cut back on fossil fuel production, as soon as 2016. With less fossil fuel production, the total quantity of goods and services (in other words, GDP) will drop. Most economists do not understand that there is a physics reason for this problem. The quantity of energy consumed needs to keep rising, or world GDP will decline. Technology gains and energy efficiency improvements provide some uplift to GDP growth, but this generally averages less than 1% per year.

Figure 4. 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 4. 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.

Are There Political Strategies to Solve Today’s Wage Inequality Problem?

Unfortunately, the answer is probably, “No.” While some strategies look like they might have promise, they risk the possibility of pushing the economy further toward financial collapse, or toward war, or toward a major reduction in international trade. Any of these outcomes could eventually bring down the system. There also doesn’t seem to be much time left.

Our basic problem is that the world economy is growing so slowly that the ordinary workers at the bottom of Figure 2 find themselves with less than an adequate quantity of goods and services. This problem seems to be getting worse rather than better, over time, making the problem a political issue.

These are a few strategies that have been mentioned on political sites for fixing the problem:

  1. Provide a basic income to all citizens. The intent of this strategy is to try to capture a larger share of the world’s goods and services by printing money (or borrowing money). This money would hopefully allow citizens to purchase a larger share of the goods and services available on the world market. If the pool of goods and services is pretty much fixed in total, more goods and services purchased by one country would mean fewer goods and services purchased by other citizens of other countries. I would expect that this strategy would not really work, because of changing currency relativities: the level of the currency of the country issuing the checks would tend to fall relative to the currencies of other countries. The basic problem is that it is possible to print currency, but not goods and services. There is also a possibility that printing checks for everyone will encourage less work on the part of citizens. If citizens do less work, the country as a whole will produce less. Such a change would leave the country worse off than before.
  2. Lower interest rates, even negative interest rates. With lower interest rates, the interest portion of the Interest and Dividend sector shown on Figure 2 can theoretically mostly disappear, leaving more money for wages on Figure 2 and thus tending to “fix” the wage problem this way. Low interest rates also tend to reduce dividends, because companies will choose to buy back part of their stock and issue very low interest rate debt instead. If interest rates become negative, the sector can completely disappear. The ultra-low interest rates will have negative ramifications elsewhere. Banks are likely to have a hard time earning an adequate income. Pension funds will find it impossible to pay people the pensions they have been promised, creating a different problem.
  3. Get jobs back from foreign countries through the use of tariffs. Some jobs might be easier to get back from foreign countries than others. For example, programming, call center operations, and computer tech support are all “service type” jobs that can be done from anywhere, and thus could be transferred back easily. In situations where new factories need to be built, and materials sourced from around the world, the transfer would be more difficult. Businesses will tend to automate operations, rather than hire locally. The countries that we try to get the business from may retaliate by refusing to sell needed devices (for example, computers) and needed raw materials (such as rare earth minerals). Or a collapse may occur in a country we try to get jobs back from, so fewer goods and services are produced worldwide.
  4. Keep out immigrants. The theory is, “If there aren’t enough jobs to go around, why give them to immigrants?” In a world with sagging GDP, job growth will be slow or may not occur at all. There may be a particular point in keeping out well-educated immigrants, if there aren’t enough jobs for college-educated people who already live in a country. Of course, Europe has been doing the opposite–taking in more immigrants, in the hope that they will provide young workers for countries that are rapidly aging. (Another approach to finding more workers would be to raise the retirement age–but such an approach is not politically popular.)
  5. Medicare for all. Medicare is the US healthcare plan for those over 65 or having a disability. It pays a substantial share of healthcare costs. The concern I have with “Medicare for all” is that because of the way the economy now functions, the total amount of goods and services that we can choose to purchase, for all kinds of goods and services in total, is almost a fixed sum. (Some people might say we are dealing with a zero-sum game.) If we make a choice to spend more on medical treatment, we are simultaneously making a choice that citizens will be less able to afford other things that might be worthwhile, such as apartments and transportation. The US healthcare system is already the most expensive in the world, as a percentage of GDP. We need to fix the overall system, not simply add more people to a system that is incredibly expensive.
  6. Free college education for all. As the situation stands today, 45% of recent college graduates are in jobs that do not require a college degree. This suggests that we are already producing far more college graduates than there are jobs for college graduates. If we provide “free college education for all,” this offer needs to be made in the context of entrance exams for a limited number of spaces available (reduced from current enrollment). Otherwise, we sink a huge share of our resources into our education system, to no great benefit for either the students or the overall system. We are back to the zero-sum game problem. If we spend a large share of our resources on college educations that don’t really lead to jobs that pay well, more people of all ages will find themselves unable to afford apartments and cars because of the higher tax levels required to fund the program.
  7. Renewables to replace fossil fuels. Despite the popularity of the idea, I don’t think that adding renewables provides any significant benefit, given the scenario we are facing. Renewables are made using fossil fuels, and they tend to have pollution problems of their own. They don’t extend the life of the electric grid, if we are facing collapse. At most, they might be helpful for a few people living off grid, if the electrical grid is no longer operating. If the economic system is on the edge of collapse already, fossil fuel use will drop quickly, with or without the use of renewables.

Conclusion

It would be really nice to “roll back” the world economy to a date back before population rose to its current high level, resources became as depleted as they are, and pollution became as big a problem as it is. Unfortunately, we can’t really do this.

We are now faced with the question of whether we can do anything to mitigate what may be a near-term crisis. At this point, it may be too late to make any changes at all, before the downward slide into collapse begins. The current low prices of fossil fuels make the current situation particularly worrisome, because the low prices could lead to lower fossil fuel production, and hence reduce world GDP because of the connection between energy consumption and GDP growth. Low oil prices could also push the world economy downward, due to increasing defaults on energy sector loans and adverse impacts on economies of oil exporters.

In my view, a major reason why fossil fuel prices are now low is because of the low wages of “ordinary workers.” If these wages were higher, workers around the globe could be buying more houses and cars, and indirectly raising demand for fossil fuels. Thus, low fossil fuel prices may be a sign that collapse is near.

One policy that might be helpful at this late date is increased focus on contraception. In fact, an argument could be made for more permissive abortion policies. Our problem is too little resources per capita–keeping the population count in the denominator as low as possible would be helpful.

On a temporary basis, it is also possible that new programs that lead to rising debt–whether or not these programs buy anything worthwhile–may be helpful in keeping the world economy from collapsing. This occurs because the economy is funded by a combination of wages and by growing debt. A shortfall in wages can be hidden by more debt, at least for a short time. Of course, this is not a long-term solution. It simply leads to a larger amount of debt that cannot be repaid when collapse does occur.

 

 

 

 

1,299 thoughts on “Why we have a wage inequality problem

    • Thanks Yoshua,
      Let me pick the very last sentence of the article:

      “Certainly with the monetary policies that we see, it makes sense to be watching how risks are moving around the financial system.”

      Everybody seems to know the music will stop soon. Now the game consists in holding the lowest possible level of RISK when it happens.
      What they didn’t factor in is the magnitude of the shock when SHTF…

      • Thanks for the link….

        ‘Ponzi lending? In China, 45% of new company debt is raised to pay interest on existing debt’

        I was aware that this was happening — but on this scale…. this is incredible…

        I like the accompanying photo…

          • The Peoples Bank of China is said to be switching from foreign “credit” reserves (U.S treasuries) to real reserves (gold), it seems that this is an indication that they are preparing for hyperinflation to clear off all debt.

            Those who own gold, the infrastructure, industries, real estate in populated cities and in the ghost cities and other tangible assets will be the winners after the coming wealth transfer… if there is future after this.

            • There will be NO winners in the coming reset, even China. If you are going to back a currency with gold then the economic system has to completely change from it’s current debt based growth model to just the opposite. Good luck feeding 7.2 humans because then fast Eddy’s scenario plays out.

              The US was taken off the gold standard because of it’s high debt levels but more so because we were trapped in an economic system that requires debt to continue growing and there wasn’t enough gold to fund that type of debt. The Chinese are great a copying others but fail miserably when it comes to thinking outside the box and more importantly, getting it right.

              When the mother of all resets occurs who knows what China will even look like on the map. 😉

            • The gold might just be to protect the wealth during the hyperinflation. After the reset the central banks might return to gold standard for a short moment to install confidence and then return to fiat currency again after some time.

              They might of course try to continue to inflate the debt bubble until it pops in a unorderly manner.

            • Then if your scenario plays out then there is NO incentive for anyone especially China to give up it’s gold. Because as you stated and I have said many, many times before and History says it’s true……”that all gold backed currencies turn to Fiat currency and Fiat currency becomes worthless paper in the end”.

              Humans have a propensity for returning to it’s own vomit much like dogs. We keep doing the same stupid stuff expecting different results. This time is different because we are all in the same lifeboat and our environment is collapsing around us.

            • One can understand why so many wealthy Chinese are dropping money into foreign property and other assets…

              If I owned a company that was borrowing to pay interest on previous debts — I would be borrowing as much cash as was possible… and getting it out of the country any way possible.

              Of course what these people do not understand is that when China goes (or Japan or any other country that is a key participant in BAU) everything goes…

              Their over-priced properties in Vancouver, and London and Sydney and New York …. will be worth zero.

              There is not hedging this situation

      • I’m in rome😎 Looks like China is pushing the last part of outside of the envelope

        C

  1. Dear Finite Worlders

    Bingo! Some really interesting stuff this morning in The Organized Mind by Daniel Levitin. Page 287 and following in the English language paperback.

    Punchline:
    ‘If the job requires adaptability and complex learning, independence and initiative, or high motivation, internals would be expected to perform better.’
    ‘When the job requires complacence and strict adherence to protocols, the externals would perform better.’

    Now, most of us probably think that the coming challenges are going to reward the internals, because of that ‘adaptability and complex learning’ part. So let’s look at the definitions and the science more closely.

    ‘But there is a critical point about differences between individuals that exerts arguably more influence on worker productivity than any other. The factor is locus of control, a fancy name for how people view their autonomy and agency in the world. People with an internal locus of control believe that they are responsible for (or at least can influence) their own fates and life outcomes. They may or may not feel they are leaders, but they feel that they are essentially in charge of their lives. Those with an external locus of control see themselves as relatively powerless pawns in some game played by others; they believe that other people, environmental forces, the weather, malevolent gods, the alignment of celestial bodies—basically any and all external events—exert more influence on their lives than they themselves do.

    Locus of control turns out to be a significant moderating variable in a trifecta of life expectancy, life satisfaction, and work productivity.

    Successful students tend to be internals. Women who are internals favor thin fashion models, while externals favor heavier models. Externals tend to believe gambling myths, and believe that if they need money, gambling can provide it.

    Locus of control appears to be a stable internal trait that is not significantly affected by experiences.’

    As evidence of the ‘stable trait’, some small businesses which were destroyed in a hurricane were studied. They were restudied three years later. Some of the businesses had re-opened and thrived, some had declined or vanished. Those owners who were internals and had succeeded had become even more strongly internal. Those owners who were internals and had not succeeded were still internal. Those owners who were externals and had succeeded still attributed their success to luck or God or something external. Those owners who were externals and whose businesses were failing were even more strongly external.

    The locus of control construct is measurable with standard psychological tests.’

    If internal locus of control is so great, why don’t all businesses hire these people? Because many businesses have many jobs which require that people just follow the rules. Putting an internally focused person in a ‘follow the rules’ job is asking for trouble. They will start trying to improve it…not what the management wants.

    In my opinion, the defining challenges of the next few decades are likely to include adapting to very different circumstances and require complex learning. Which means that if you are looking for your 150 Strong group, you need to look for some leadership which is characterized by internal locus of control. You still need some people who can follow directions…you don’t want 150 people, all of whom are following their own agenda. But you don’t want to become part of a group of 150 which is rudderless and waiting for some external event to save them all (Jim Jones clan? those expecting to be whisked up to heaven? anyone still waiting for the Mayan apocalypse?)

    As for personal advice (I don’t think that I can be sued for malpractice on this, since no jury could be convinced that I was of sound mind and body), it seems to me that if you are an external, you need to attach yourself to some group with good internal leadership. Realize that externals ‘experience more stress and are prone to depression.’

    If you are internal, you will need some followers and compatible internal colleagues and skill in managing differences of opinion between strong willed individuals.

    In all cases, I think, being able to grasp reality will be a plus, as well as all the other adaptive processes that Levitin describes in his book.

    Don Stewart

    • Don,
      It seems to me, intuitively, that a “good” group should comprise the whole set of psychological profiles, and in suitable proportions. It also depends on the group’s environment and its evolution along time, which tells what will be required from the group in real time.

      Having no idea of what it could resemble to, I googled “optimal distribution of psychological traits in a small group”, and got quite a lot of results, among which this Google Quest to Build the Perfect Team (by Charles Duhigg, Feb.25, 2016):

      http://www.nytimes.com/2016/02/28/magazine/what-google-learned-from-its-quest-to-build-the-perfect-team.html?_r=0

      It’s quite a big piece, that I didn’t read yet (but I will!), and also seems to be a good place to start from, as it provides lots of info. Albeit not Permaculture or Survivalist oriented, I’m afraid.

      • Stefeun
        Decades ago I was in an exercise with the group I managed. It was about ‘valuing diversity’. We had a consultant come in and test people on several dimensions. They were more complicated than the internal vs. external, but the same sorts of ideas. Then the consultant divided people according to their traits…all the hard nosed leaders in one group…all the meek people waiting to be told what to do in another group, etc.

        All the groups were given the same challenging task. They had 20 minutes or so to come up with a solution. The meek group never got anything done, as you would expect. The hard nosed leaders almost got into a fist fight and had to be calmed down. They didn’t come up with anything either, but at least we prevented bloodshed.

        Then the consultant divided the people into balanced teams, with some leaders and some followers, etc. Another challenging problem to be addressed. Peace, harmony, and solutions were forthcoming!

        I think that the people who learned the most were the hard chargers. They learned that they needed followers. I think the followers always understood that they needed leaders.

        Don Stewart

        • Just on the subject of learning from a group, I’ll mention that I discovered that when given tasks everybody wants a margin – eg a wall that should take a week to build expands to a week and a day. The trouble with that is compound interest tends to apply, so the job of management here is to hunt down the margins and make sure they don’t overlap and that they are fair. Just sayin’

    • Thanks Don. This speaks to the challenge of the moment. I live in a place where the 300 strong are exceptionally independent–perhaps mostly internals. Getting them to pull together in the same direction is much like herding cats. But they like what they like and can come together in certain (disconnected) spheres simply by some mysterious convergence of interests and views. The founders some 40 years back did indeed sit, reflect and plan. Very well. And it has served satisfactorily up till now. But those founders are fading away…

      I’ll copy this post to a friend in town.

  2. Mainstream news outlets are already starting to use the phrase “economic collapse” to describe what is going on in some areas of our world right now.

    For many Americans this may seem a bit strange, but the truth is that the worldwide economic slowdown that began during the second half of last year is starting to get a lot worse.

    In this article, we are going to examine evidence of this from South America, Europe, Asia and North America. Once we are done, it should be obvious that there is absolutely no reason to be optimistic about the direction of the global economy right now. The warnings of so many prominent experts are now becoming a reality, and what we have witnessed so far are just the early chapters of a crushing economic crisis that will affect every man, woman and child in the entire world
    http://macarthur.charismanews.com/opinion/56399-why-world-leaders-are-starting-to-panic
    onomic chaos is erupting literally all over the planet, and global leaders are starting to panic.

    Economic chaos is erupting literally all over the planet, and global leaders are starting to panic
    Unfortunately, they have had seven years to try to fix things since the last global recession, and they didn’t get the job done. Anyone who believes that by some miracle they will be able to pull us out of the fire this time and that everything will somehow be OK is simply engaged in wishful thinking.

    • Fits in nicely with all the hastily arranged banking meetings around the world this week.
      Perhaps another “Lehman Moment” unfolding. ???

      • Hopefully, the thought that “It’s Only Money” is comforting.
        The next morning, everyone has a sore head, the place gets cleaned up, and for a year or two it is back to BAU.
        The coming money collapse, unfortunately, is our last chance to get things right before the stabilisers are taken off and the big problems have to be faced.

  3. “The Fed Sends A Frightening Letter To JPMorgan, Corporate Media Yawns”
    http://www.zerohedge.com/news/2016-04-15/fed-sends-frightening-letter-jpmorgan-corporate-media-yawns

    Yesterday the Federal Reserve released a 19-page letter that it and the FDIC had issued to Jamie Dimon, the Chairman and CEO of JPMorgan Chase, on April 12 as a result of its failure to present a credible plan for winding itself down if the bank failed. The letter carried frightening passages and large blocks of redacted material in critical areas, instilling in any careful reader a sense of panic about the U.S. financial system.

    At the top of page 11, the Federal regulators reveal that they have “identified a deficiency” in JPMorgan’s wind-down plan which if not properly addressed could “pose serious adverse effects to the financial stability of the United States.” Why didn’t JPMorgan’s Board of Directors or its legions of lawyers catch this?

    It’s important to parse the phrasing of that sentence. The Federal regulators didn’t say JPMorgan could pose a threat to its shareholders or Wall Street or the markets. It said the potential threat was to “the financial stability of the United States.”

    That statement should strike fear into even the likes of presidential candidate Hillary Clinton who has been tilting at the shadows in shadow banks while buying into the Paul Krugman nonsense that “Dodd-Frank Financial Reform Is Working” when it comes to the behemoth banks on Wall Street.

  4. Good to see there is thinking of how to better use median-strips, etc., within the US’s 4 million miles of “public roadway.” Re Irrigation: They overlook the fact that swales alone could bring on a notable increase of vegetation. And are they considering sewage from neighboring places? I’ve seen where forest-like growth emerges from sewage ponds. And sequestering carbon is just one of many uses for the vegetation. There could be firewood, along with more, even food.

    http://www.planetizen.com/node/85640/using-highway-medians-carbon-sequestration

    • It’s been hinted at here on FW that some changes which could soften the impact of collapse are quite doable and consistent with BAU pre collapse. Using median strips to grow trees seems like one of them. So if the “excuse” is to comply with the Paris accords (which I don’t take too seriously) that at least won’t do any harm to our air. And it could also be quite useful post collapse. The same kind of thing applies to creating dense pedestrian-oriented urban cores. Good economic strategy under BAU, and good post collapse strategy where walking will be mandated. The same goes for community building, etc..

      There is something disingenuous about this strategy, however. I believe that the post-collapse projects can’t keep pace with destruction by BAU as it cannibalizes more and more of its host environment. So projects like the median strip greening, which we might find ridiculous in itself are fueled by deluded people. But what’s the harm of getting a free ride from whatever it is they think they are doing?

  5. If only for the superb medieval representation of Turchin and Nefedov’s cycle,
    here’s a translation of the latest post by François Roddier:

    90 – Economic cycles

    April 15, 2016 General
    The second law of thermodynamics, also called “principle of Carnot,” says that one can not sustainably produce mechanical energy other than by transformation cycles extracting heat from a hot source and driving some of it towards a cold source.

    By nature, a dissipative structure continuously produces mechanical energy in order to dissipate it. This implies that it must perform transformations cycles. So to dissipate solar energy, the Earth’s atmosphere produces cyclones and anticyclones, but also cycles as the water cycle. The chemical elements are constantly recycled through cycles such as carbon, nitrogen or phosphorus. Finally life itself exists only through cycles in which the plants are eaten by small animals which in turn are eaten by larger animals, which waste feed bacteria and produces fertilizers to plants.

    Among all dissipative structures on Earth, those that dissipate the most energy are by far the human societies. The science that studies how human societies dissipate energy is called economics. Is generally attributed to a French, Clément Juglar, the first evidence of economic cycles to which he attributed a period of about 8 years. In the early twentieth century, Kondratiev has highlighted longer cycles of the order of half a century.

    In this blog, I’m myself talking about the four seasons of the economy (articles # 72 and 73), each season would be about a generation. It then leads to cycles having a period of about a century. In their book entitled “Secular cycles (1)” Turchin and Nefedov highlight historical cycles of even longer periods, about 400 years (see the list of these cycles the bottom of this post). For each of them, Turchin and Nefedov clearly identify four phases to which they give folowing names: the expansion phase, stagflation, crisis and depression.

    The Secular Cycles by Turchin and Nefedov

    It appears natural to identify economic cycles to cycles of dissipative structures.The Danish physicist Per Bak has shown that they oscillate around a critical point. The different parts of the same structure oscillate at different frequencies. It is therefore all an oscillation spectrum whose magnitude is even greater, as they are spread over a longer period of time.

    In my presentation at the Shift Project (2), I identified the economic cycles to Carnot cycles described by the traditional variables P, V, T, but for which P represents the Gibbs-potential I called economic potential, measuring what economists usually call the “demand”. The variable V represents the “volume” of production (quantity of manufactured goods). Finally, the T measurement variable that I called the “temperature” of the economy (see article # 49), and that we can identify with what economists call “supply”.

    At any given time, the state of an economic unit may be represented by a point in space (P, V, T). In my previous post, I showed that all the points lie on a surface described by an equation of state of the economy. I showed the analogy between this equation of state and the condensable fluids. I deduced that, as a fluid, an economy can be condensed into two distinct phases that I have identified as an economy for rich people, and another economy for poor people. I have shown that the two economies are dissociated from each other within a certain area shown in dark in the figure.

    The figure below is the same as the one in previous post, but rotated 90 ° clockwise. The three coordinate axes are still P, T, V now referred to their economic appellation of demand, supply and production. Economic production is an extensive quantity, it is now reported on a vertical axis according to two variables that are intensive supply (backwards) and demand (to the left). The curves called “isothermal” are the lines along which the offer remains constant.

    Economic output, according to supply and demand (Falaise de Sénèque = Seneca Cliff)

    The circuit is an arbitrary economic cycle around the critical point C. Projected into the production design / application, its area represents the energy dissipated during a cycle. Thereof being positive, the rotation necessarily takes place in the direction of clockwise. By analogy with the fluid, the part of the cycle part of the dark area was represented by a ‘cool “condensation, here a vertical line segment.

    This dark area is in a vertical plane. It seems natural to identify it to a collapsing zone economy, zone called “Seneca Cliff” by Ugo Bardi (3). In this zone of instability, production collapses vertically, regardless of the offer (temperature) and regardless of demand (pressure). We have seen (previous post) that, within this area, the economy separates into two phases, one for poor people and another one for rich people, with no interactions between them. The collapse of output is then interpreted by the fact that poor people can not buy what is produced by rich people. Gradually the whole population gets impoverished.

    The economic cycle of the figure can be followed and performed as follows. If one starts from the foot of the cliff, economic output starts to go through a minimum. This part of the cycle is characterized by a shortage of material goods and a growing demand. It is clearly identifiable to the depression phase of Turchin and Nefedov.

    Then arrive on the left side of the cycle during which economic output starts rising. This part is characterized by low wealth inequalities and an almost total absence of unemployment. The offer aims to meet the demand and the production increases. Peace and well-being extend, so that the population tends to grow. This is the so-called expansion phase of Turchin and Nefedov.

    Once satisfied, the demand tends to decline but, due to investments, the offer continues. We arrive in the hot zone of the luxury economy. This area follows laws that are close to those of perfect gases. The offer there holds the request in the same way that the temperature maintains the pressure in a boiler. Rich people are becoming more numerous, but gradually the production stagnates and unemployment rises. This is Turchin and Nefedov’s stagflation phase.

    Then we arrive at the edge of the Seneca cliff top where economic output collapses. Companies go bankrupt, populations are rising and governments are overthrown. This is the Turchin and Nefedov crisis phase.

    Similar to Sisyphus, civilizations bear the burden of production along their economic ascension to the top of the cliff, from where they see the fruits of their labor crumble. At the foot of the cliff, new civilizations take over.

    (1) P. Turchin, S. Nefedov, Secular cycles, Princeton (2009).
    (2) See the video of the article # 75 and the text published in Res-Systemica, vol. 14, Article 01 (September 2015).
    See: http://www.theoildrum.com/node/8317 (Bardi’s Seneca Cliff)

    For information, here is the list of the cycles described in the book of Turchin and Nefedov with the related period:

    The Plantagenet cycle (1150-1485)
    The Tudor-Stuart cycle (1485-1730)
    The capétien cycle (1150-1450)
    The Valois cycle (1450-1660)
    Rome: The cycle of the republic (350-30 BC.)
    Rome: The cycle of the principate (30 av JC-285.)
    Russia: Moscow cycle (1460-1620)
    Russia: The Romanov cycle (1620-1922)

    • Isn’t in interesting that most of the official gov Russian communication uses the specific phrase “energy carriers” – very seldom you hear about some magical over arching concepts of “energy” as is used in the west. This to me reveals different conceptual thinking and culture. Now for the next step where to look for some practical application of the above claim? Well, they are building the second undersea gas interconnect to Germany, they chipped Austria out to participate with them on their “south stream” pipeline as well, and lastly there is this citadel project of Syria to block any gulfies attempts on exporting to Eurasia via pipe system. Apart from that there is whole another subject of domestic gen3+/4 nuclear industries incl. fuel chain, ..

      Simply, the west has been increasingly outsourcing the energy question (importance placed only on renewables in electricity), while others take it more closely to the chest, and it’s definitely not only diverse export-import strategy thing.

    • Therea is an interesting book about that by Edward R Dewy, it’s called “cycles – the science of prediction”. It contains plenty of data of different industries and verifies that there exist cycles.
      I am afraid though that these models do not really apply in our world where central banks spent billions and manipulate the market and it also does not include the dreivatives markets where derivatives are the levers to maintain equilibrium in an unstable situation (in theory). I think the economy today alters itself so fast that it is impossible to make predictions based on these cycles. The only thing we know for shure is that energy is key to all. The energy cycle thus was never detected as the energy has been increasing for all time of human civilisation. If you look at an oscilation as the image of a cycling process, you can also have a dampening effect and the sine wave degrades to zero after some swings. For the main energy system to our society, as far as we know today, there will be no upswing again after the first downswing. Except we manage fusion or some other miracle of very large scale what seems very unlikely.

      • MM,
        I tend to agree: cycles may exist, but I’m not sure they apply to our fast-changeing and entirely new situation.

    • “Is generally attributed to a French, Clément Juglar, the first evidence of economic cycles to which he attributed a period of about 8 years. In the early twentieth century, Kondratiev has highlighted longer cycles of the order of half a century.”

      This sounds more like they simply re-discovered the 7 and 50-year cycles of ancient Israel from ~3500 years ago, which in turn may have already been discovered by the Sumerians ~6000 years ago.

    • I am not sure I understood 100% of this.

      Clearly, the idea a person often hears, “We pay each other’s wages,” only works if wages are relatively equal. If we have doctors making 20 times what poor workers are making (plus the cost of lots of support staff and equipment), even mandating that poor people buy health insurance does no good. The poor cannot afford to pay the wages of the rich, even if an insurance policy spreads the high cost equally. It is still way too high. The system has to collapse. Growing disparity in wages takes place as the economy becomes relatively more complex, as it tries to fight resource shortages. I see the resource shortages (not enough more energy to dissipate) as bringing the system down.

      On the other hand, when little supplemental energy is used by the economy, and everyone is trying to obtain the simplest living as a farmer or merchant, there are plenty of jobs for everyone (assuming that there are enough resources for everyone to have land to farm, and water for that land). Wages are relatively equal. It is the availability of resources (including land to farm, and the sun’s energy) that makes growth possible.

      • Gail,
        I won’t pretend I fully understood how an equation of state, akin to that of ideal gases, applies to the economy, either.

        You say: ” I see the resource shortages (not enough more energy to dissipate) as bringing the system down.” That was my opinion too, but I had to change my mind a little bit. It’s a matter of fact that without sufficient energy supply growth the economy collapses. But during the stall phase (ie energy supply not growing fast enough), it seems that other phenomena are taking place, mainly due to overcapacity: the outputs of the system can no longer be absorbed, and we’re suffocating under our overproduction and its wastes. At some point, adding more energy as input doesn’t have any effect, if the system is blocked at its other end.
        I’m afraid the issue is eventually more entropic than energetic.

        • Stefeun and Gail
          I don’t claim to understand it fully, either. However, let me throw in a couple of things to think about.

          Relative to the ‘stall speed’. Suppose, just for the sake of argument, that BW Hill’s model of the oil industry is correct. Since few people understand it, Wall Street will continue to pour money into the oil industry. But since one of the problems identified by Hill’s model is that people cannot earn enough money using oil products to pay for the cost of extracting, processing, and distributing the oil, the industry will suffer from overcapacity. In a ‘free’ economy, Wall Street would subsidize the oil companies and the consumers who are able to buy oil products below cost. Now Hill thinks that governments will intervene and strip other assets to keep the oil ball rolling. In either case, the wealthy will be subsidizing the guy driving a pickup truck. Wealth will be disappearing. It will disappear slowly during the stall phase, but rapidly if investors actually figure out what is going on.

          If we look at the preceding paragraph, we find that there are at least two important items:
          *Ignorance on the part of investors
          *Gross inequities in the distribution of wealth
          In an ideal gas, all the molecules are pretty much the same. They can have different temperatures, but things average out. Those sorts of assumptions don’t apply to the world in 2016.

          The second observation came from Bill Clinton about 2 or 3 years ago. He was talking a little off the cuff about energy. He said that ‘the rich countries can afford to simply buy all the farmland in the poor countries to grow biodiesel crops to keep their cars running and let the people in the poor countries starve’. His scenario has subsequently played out in several poor countries. This phenomenon is, again, facilitated by the gross inequities in distribution of wealth.

          Clinton said that if Obama asked his advice, he would tell him to ‘close all the dumps’. If people can’t generate trash, then they have to fundamentally change their way of living. I found that a fascinating comment, and marveled at his willingness to state such a thing out loud while his wife was getting ready to run for President. But nobody followed up with any questions, so I am not sure exactly what he had in mind.

          So, the ability to continue dumping trash is another key element in the ‘stall speed phase’.

          Don Stewart

      • “If we have doctors making 20 times what poor workers are making plus lots of support staff, even mandating that poor people buy health insurance does no good. The poor cannot afford to pay the wages of the rich, even if an insurance policy spreads the high cost equally.”

        The good news is, the robots will help level that out, too. The experiences of hundreds of doctors can be shared with a vast number of robots, and anything new they learn is shared amongst them as well.

        Just a matter of figuring out how to keep people employed – as subsistence farmers / emergency services & military reserves / lifelong students / consumers, while the robots do most of the work. And figuring out how to get the currency units from the producers to the consumers so they can buy stuff, without the producers becoming discouraged and quit.

        Maybe everyone will become living advertisements, and spend a portion of the day watching ads, in order to get paid by the corporations who are competing for market share, so the people can buy the stuff from the corporations.

  6. For those who can’t wait for collapse — have a watch of what is happening in Venezuela … and keep in mind – Venezuela has not collapsed… there is electricity and fuel….

    You might also pull up some documentaries on what life was like in various communist countries under the USSR….

    Again – nowhere near collapse….

    • I’m not sure there is a direct collapse relation in that, plus comparing Venezuela with the industrialized ring around USSR block is quite amusing idea anyway..

      The USSR block clearly underwent tremendous expansionary cycle: factories, housing, powerplants, schools, sciences, hospitals, .. The difference from the up cycle in the west was the timing/duration and the prioritization of segments which were propped up directively. So specifically, the 1970s were still expansionary in the East (increasing relative per capita wealth), while the west was already resting on different stagnation subcycle etc.

      The most important aspect of the USSR block falling apart was simply the west was willing, able to borrow and create more credit fraudulently in upfront fashion, so the appearances of relative success (plus different priorities on consumables-trinkets among other aspects) basically made that strong visible contrast of the mid-late 1980s, as if clear cut winner-looser comparison. The USSR was quite aware of it, that’s why the attempted turn around mid 1980s with Gorbi to steer it into some form of mixed economy, however this was badly prepared maneuver and managed (herculean task anyway) into disaster. And it only rushed the early capitulation in the race, i.e. “oops, from now lets be all fraudulent credit capitalists”..

      But we can witness as of now/recently, there is again divergence taking place, propensity to insular and regional trade cooperative strategies.

    • collapse is averted only so long as there is a means of shifting energy in one form or another as a way of maintaining some kind of commerce—ie profit.
      China is putting (cheap) energy into goods (both as fuel and muscle power), and shipping them out to places where energy is expensive (USA-Europe)
      It may look different, but the motive is exactly the same as driving a full tank of petrol over the Bolivian border and selling it at a more expensive price.
      Think of it as rebalancing. When the economies of China and the USA are no longer able to effect this exchange, collapse will be inevitable

      • Basically, you claim that China won’t be able to “create” their backup export market aka the “silkway project” – well I do agree it’s doubtful in term of scale and capacity 1:1 replacement, but the bottom line is we don’t now yet the future. So, it seems to me like around ~300AD announcing it’s evidently ALL going downhill, while completely rejecting the ~1000yrs future for the Byzantine offshoot stemming from the dying original western core. Perhaps we are into something of quasi analogue situation ahead now..

        • I highly recommend ‘The Accursed Mountains. Journeys in Albania’ by Robert Carver, for ample material on Communism, what came after, and the resurgence of tribalism and blood-feuds. Extremely entertaining and instructive.

  7. Circling the drain now peeps. BRICS are getting crushed… 😛

    Brazil: Economic collapse worse than feared

    Amid political chaos, Brazil’s economic collapse is worse than its government once believed.
    In the midst of rising calls to impeach President Dilma Rousseff, Brazil’s central bank announced Thursday that it now expects the country’s economy to shrink 3.5% this year.
    That’s worse than the central bank’s previous estimate for a 1.9% contraction. The darker forecast matches what the International Monetary Fund projected for Brazil — Latin America’s largest country — and what many independent economists have suspected.

    Elsewhere in South America…

    Venezuela is on the brink of complete economic collapse

    The only question now is whether Venezuela’s government or economy will completely collapse first.
    The key word there is “completely.” Both are well into their death throes. Indeed, Venezuela’s ruling party just lost congressional elections that gave the opposition a veto-proof majority, and it’s hard to see that getting any better for them any time soon — or ever.
    Incumbents, after all, don’t tend to do too well when, according to the International Monetary Fund, their economy shrinks 10 percent one year, an additional 6 percent the next, and inflation explodes to 720 percent. It’s no wonder, then, that markets expect Venezuela to default on its debt in the very near future. The country is basically bankrupt.

    Now, back to watching “Dancing With The Tarts!”

  8. Dear Finite Worlders
    I have recently been quoting David Levitin, author of The Organized Mind. One of the enemies he identifies is distraction. I have also connected Levitin’s work to that of Sherry Turkle. I have linked both to the distractive qualities of social media.

    Here is an excellent article outlining the strategies being pursued in the social media companies:
    View at Medium.com

    You will find some suggestions you may not have thought of. For example, why is Google interested in self-driving cars?…….

    Answer: to free up more time for you to watch ads.

    Don Stewart

    • The ‘human’ being (I use that term relatively) desired by our system and its masters is incapable of doing anything, but is prey to infinite and unquenchable desires – to be satisfied by pressing a button.

      Physically weak, mentally highly suggestible, immersed in a culture of lies and delusion.

      It’s astonishing that this is what we have come to.

      I’m inclined to think fondly of the wild barbarian from the steppes: set on murder, rape and theft, ( ‘To kill your enemy, to take his horses and treasure, to take his wife and daughters, is his not the good life?!’ as the Mongol famously said), but at least capable of: assessing reality, formulating plans, executing them, managing a horse and weapons in the real world, and…..eventually….becoming civilized.

      Note, when a barbarian said he was going to kill you and take what you have and bed your wife, he spoke the truth and was not lying.

      • Xabier,
        Isn’t it striking that most of what we describe as humane are feelings and behaviours that are shared by all animal species (albeit at various degrees),
        and what we describe as inhumane is mostly the fact of H.Sapiens only?

        NB: my cat likes to play with mice before killing them, but he’s not capable of empathy.
        We are. We have no excuse.

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