There are many who believe that the use of energy is critical to the growth of the economy. In fact, I am among these people. The thing that is not as apparent is that growth in energy consumption is dependent on the growth of debt. Both energy and debt have characteristics that are close to “magic” with respect to the growth of the economy. Economic growth can only take place when growing debt (or a very close substitute, such as company stock) is available to enable the use of energy products.
The reason why debt is important is because energy products enable the creation of many kinds of capital goods, and these goods are often bought with debt. Commercial examples would include metal tools, factories, refineries, pipelines, electricity generation plants, electricity transmission lines, schools, hospitals, roads, gold coins, and commercial vehicles. Consumers also benefit because energy products allow the production of houses and apartments, automobiles, busses, and passenger trains. In a sense, the creation of these capital goods is one form of “energy profit” that is obtained from the consumption of energy.
The reason debt is needed is because while energy products can indeed produce a large “energy profit,” this energy profit is spread over many years in the future. In order to actually be able to obtain the benefit of this energy profit in a timeframe where the economy can use it, the financial system needs to bring forward some or all of the energy profit to an earlier timeframe. It is only when businesses can do this, that they have money to pay workers. This time shifting also allows businesses to earn a financial profit themselves. Governments indirectly benefit as well, because they can then tax the higher wages of workers and businesses, so that governmental services can be provided, including paved roads and good schools.
Debt and Other Promises
Clearly, if the economy were producing only items for current consumption–for example, if hunters and gatherers were only finding food to eat and sticks to burn, so that they could cook this food, then there would be no need for the time shifting function of debt. But there would likely still be a need for promises, such as, “If you will hunt for food, I will gather plant food and care for the children.” With the use of promises, it is possible to have division of labor and economies of scale. Promises allow a business to pay workers at the end of the month, instead of every day.
As an economy becomes more complex, its needs change. At first, central markets can be used to facilitate the exchange of goods. If one person brings more to the market than he takes home, a record of his credit balance can be kept on a clay tablet for use another day. This approach works as long as the credit can only be used at that particular market. If the credit balance is to be used elsewhere, or if the balance is to hold its value for a period of years, a different, more flexible approach is needed.
Over the years, economies have developed a wide range of debt and debt-like products. For the purpose of this discussion, I am including all of them as debt, broadly defined. One type is what we think of as “money.” Money is really a portable promise for a share of the future output of the economy. It can provide time shifting, if this money is held for a time before it is spent.
Another type of debt is a loan with a fixed term, such as a mortgage or car loan. Such a loan provides time shifting, allowing something to be paid for over a significant share of its life. Equity funding for a company is not really a loan, but it, too, allows time shifting. Those purchasing shares of stock do so with the expectation that they will be repaid in the future through price appreciation and dividends. It thus acts much like a loan, for the purpose of this discussion. There are many other types of promises regarding future funding that are closely related–for example, government loan guarantees, derivatives, ETFs, and government pension promises. All indirectly add to the willingness of people and businesses to spend money now–someone else has somehow made promises that remove uncertainty regarding future income flows or future payment obligations.
The Magic Things Debt Does
It is not immediately obvious how important debt is. In fact, neoclassical economists have tended to ignore the role of debt. I see several, almost magic, ways that debt helps the economy.
- Debt brings forward the date when an individual or company can afford to purchase capital goods. Without debt, the only way to afford such a purchase would be to save up the full price in advance. Using debt, a business can add a new machine to allow it to produce more goods before the business saves up money from its prior operations. A young person can afford to buy a house or car, long before he could save up funds for such a purchase. With the help of debt, the price of capital goods can be financed over much of their working life.
- Adding debt raises the prices of commodities. Commodities, such as lumber, iron, copper, and oil are what we use to make cars, houses, and factories. “Demand” for these commodities rises because more people and businesses can afford to buy capital goods that use these energy products. Often these capital goods also use energy products over their lifetime (for example, gasoline to operate a car), so there is a long-term impact on the demand for energy products, in addition to the demand associated with making the capital goods. Of course, with higher prices, it becomes profitable to extract oil and other energy resources from more marginal areas of production. More companies enter the field. As long as prices remain high, they are able to earn a profit.
- Adding debt stimulates the economy, almost like turning the heat up on a stove. When debt is added for any purpose–even starting a war–it starts a whole chain of purchases, each of which acts to stimulate the economy. If a young person takes out a loan to buy a car, the purchase of the car leads to the salesman having more money to buy goods for his family. The company selling the cars is able to make a bigger profit, which the business can reinvest or pay to shareholders as dividends. The purchase of the car leads to more demand for metals used to make the car, and thus tends to increase the number of mining jobs. Each new worker in turn is able to buy more goods and services, starting a beneficial cycle that gradually radiates out through the economy.
- Adding debt tends to lead to higher asset prices. Clearly, (from Item 2), adding debt can raise the price of commodities. Adding debt can also make it possible for more people to afford real estate and investments in the stock market. For example, Japan greatly ramped up its debt level between 1965 and 1989.
Figure 1. Annual growth in non-financial debt (in Yen), separated into private and government debt, based on Bank of International Settlements data.
During this time, a major price bubble occurred in land prices (Figure 2).
Figure 2. Land Prices in Japan. Figure from Of Two Minds by Charles Hugh Smith.
There is a reason why this bubble could occur. Because of the stimulating effect that debt had on the economy, more people had the wealth to buy real estate, especially if this too was sold on credit. Once private debt levels stopped rising rapidly, price levels crashed both for land and stock prices. TheBubbleBubble.com explains what happened: “By 1989, Japanese officials became increasingly concerned with the country’s growing asset bubbles and the Bank of Japan decided to tighten its monetary policy.” Doing so popped both the home and stock price bubbles.
- Adding debt adds to GDP. GDP is a measure of the goods and services produced during a period. Many of these goods and services are bought using debt, so it is not surprising that adding more debt tends to add more GDP. The amount of GDP added is less than the amount of debt added, even when inflation growth is considered as part of GDP.
Figure 3. United States increase in debt over five-year period, divided by increase in GDP (including inflation) in that five-year period. GDP from Bureau of Economic Analysis; debt is non-financial debt, from BIS compilation for all countries.
The general tendency is toward the need for an increasing amount of debt per dollar of GDP added. This is especially the case when oil prices are high. In the US, the ratio of non-financial debt to GDP added was almost down to 1:1 for a time, back when oil prices were less than $20 per barrel (in today’s dollars).
- Adding debt tends to increase wealth disparity. Adding debt tends to increasingly divide an economy into “haves” and “have-nots.” Many of the “haves” own the means of production, including an ever-increasing amount of capital goods, and thus can earn profits and dividends from these capital goods. Others are high-level officials in businesses and the government who earn high salaries. Interest payments also tend to transfer payments from the poor to the more wealthy. We might say that the common laborers are increasingly “frozen out” of the economy that otherwise is heating up. This shift started to take place in the United States about 1981.
Figure 4. Chart comparing income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Based on an analysis of IRS data, published in Forbes.
- Adding debt is something that governments can influence, either by lowering interest rates or by borrowing the money themselves. Actions by governments to reduce interest rates can be effective, because they lower monthly payments that borrowers need to make to take out a loan of a given amount. Thus, they tend to encourage more borrowing. In Figure 5, below, note that the decrease in interest rates in 1981 corresponds precisely with the rise in debt to GDP ratios is Figure 3 and the shift in income patterns in Figure 4.
Figure 5. Ten year treasury interest rates, based on St. Louis Fed data.
Figure 6 later in this post shows that changes in Quantitative Easing (QE) (which affects interest rates and the level of the US dollar relative to other currencies) also correspond to sharp changes in oil prices. Changes in the level of the dollar also affect demand for oil. See a recent post related to this issue.
What Goes Wrong as More Debt Is Added?
It is clear from the discussion so far that quite a few things go wrong. These are a few additional items:
1. There are limits to government manipulation of debt levels. First, interest rates eventually drop so low that they become negative in some countries. Negative interest rates tend to cause bank profitability to drop and lead to hoarding by those who planned to use savings for retirement.
Second, government borrowing doesn’t work as well at stimulating the economy as investments made by the private sector. A likely reason is that private sector investments are made when the borrower believes that the return on the investment will be high enough to pay back the debt with interest, and still make a profit. Government investments often do not meet this standard. Some reports indicate that Japan’s government has used borrowed money to fund bridges to nowhere and houses with no one home. China’s centrally directed economy seems to lead to similar over-borrowing problems. Chinese businesses also borrow to cover interest on prior loans.
2. Ratios of debt to GDP tend to rise, worrying government leaders. Debt is a way of accessing the benefits of Btus of energy, in advance of the time they are really available. As the amount of easy-to-extract oil depletes, the cost of oil extraction gradually rises. Unfortunately, the amount of “work” a barrel of oil can perform–for example, how far it can make a truck travel–doesn’t rise correspondingly. As a result, the higher price simply reflects increasing inefficiency of extraction, and thus the need to use a larger share of the economy’s output to extract oil. The amount of debt needed to keep GDP rising keeps growing, in part because oil is becoming higher priced to extract, and in part because goods that use oil in their production also tend to rise in cost. As a result, the ratio of debt to GDP tends to spiral upward.
3. Rising debt allows for a temporary false valuation of the benefit of energy products. The true value of oil and other energy products comes primarily from the Btus of energy they provide, such as how far a truck can be made to travel. Thus we would expect that the true value of energy products would remain relatively constant over time. If anything, the value of energy products will tend to rise by a small amount (say, 1% per year) as technology improvements lead to growing efficiency in their use.
What we think of as the magic hand of the economy determines a price for commodities at all times, based on “supply” and “demand.” This price clearly is not very close to the future energy profit that the energy products will actually provide, because it tends to vary widely over time. We don’t know what the true value of a barrel of oil to society is. If the true value is $100 per barrel (in today’s money), then back when oil prices were $10 or $20 per barrel (in today’s money), there would have been $80 to $90 (equal to $100 minus the actual price) of “energy profit” that could be pumped back into the economy as productivity gains for workers, interest on debt, and dividends on stock, tax revenue, and money for new investment. The economy could (and did) grow quickly. There was less need for added debt, because goods made with oil were cheap. Wages for workers could rise rapidly, as they did in the 1950 to 1968 period (Figure 4).
If prices approach the true value of oil (assumed to be $100 per barrel), the extra energy profit would pretty much disappear. The economy would increasingly become “hollowed out.” Productivity gains that lead to wage gains would mostly disappear. Businesses would find it hard to earn adequate profits, and would cut back on dividends. Some companies might need to borrow money in order to pay dividends. World economic growth would slow.
Prices can even temporarily overshoot their true value to the economy, then drop sharply back. This happens because prices are set by demand, and demand depends on a combination of wage levels and debt levels. Oil prices can be high for a while, if borrowing is temporarily high, and then fall back as it becomes clear that profitable investments are not really available if oil is at such a high price level.
4. Wages of non-elite workers tend to drop too low. Workers play a very special role in the economy: they both (a) provide the labor for the economy and (b) act as consumers for the economy. If workers aren’t earning enough, there is a problem with many of them not being able to buy the goods and services the economy produces. This is especially the case for purchases such as homes and cars, which are often bought using debt. Indirectly, this lack of ability to afford the output of the system puts a downward pressure on the price of commodities, particularly energy commodities. Prices may fall below the cost of production, or may not rise high enough.
Figure 6. World oil supply and prices based on EIA data.
The reason that wages of the less educated, non-managerial workers tend to lag behind is related to the issue of diminishing returns. A workaround is a more “complex” society, with bigger businesses, bigger government, more capital goods, and more debt. In some cases, manufacturing is shifted to parts of the world with lower wages. Non-elite workers increasingly find themselves with too small a share of the output of the economy. Figure 7 shows some influences that tend to lead to too low wages for non-elite workers.
Figure 7. Illustration by author of why an economy that doesn’t grow leads to falling wages for workers. All amounts are guess-timates, to show a general principle.
When wages for a large share of workers drop too low, there is a problem with workers not having enough money to buy goods like cars and houses. The economy tends to contract. This is a different form of too low Energy Return on Energy Invested (EROEI) than most people think of. In my view, low return on human labor is the most important type of EROEI. Falling wages of a large share of workers can lead to economic collapse, because there are not enough buyers for the output of the system.
5. Eventually, debt defaults become a problem. As the world becomes more divided into “haves” and “have-nots,” falling ability to repay a debt becomes more of a problem. To some extent, this happens at the individual level, with auto loans, student debt, and mortgages. If commodity prices fall or stay too low, it happens to commodity producers, including oil producers. It also happens to countries, especially to those who are dependent on commodity exports.
The rise in the cost of oil extraction is another factor. As the cost of extraction begins to exceed the benefit of oil to the economy (assumed above to be $100 per barrel), the energy profit from oil is no longer sufficient to allow the economy to grow as in the past. Without economic growth, it becomes much harder to repay debt with interest.
Figure 8. In a period of economic decline (Scenario 2), the amount a debtor has left over after repaying debt plus interest is disproportionately large, leaving the debtor with inadequate funds for paying other expenses. In a period of economic growth (Scenario 1), the overall growth in incomes tends to compensate for the need to pay back the debt with interest.
6. At some point, we reach peak debt. The economy acts like a pump. As long as there are sufficient energy profits coming through the system (based on $100 per barrel minus the actual oil price, in our example), wages can rise and corporate profits can rise. Asset prices can rise, and energy prices can stay high. Once these energy profits start falling back, wages stagnate and business profits decline. Businesses cut back on borrowing, because they see fewer profitable opportunities for investment. Individuals cut back on borrowing, because with their lower wages, it becomes more difficult to buy a house or car. Governments try to fight declining demand for debt, but eventually reach limits of the economy’s tolerance for negative interest rates.
Once debt begins contracting, the contraction tends to bring down commodity prices. This is a huge problem for commodity producers, because they need prices that are high enough to cover their cost of production. Ultimately, falling debt, together with falling wages, and lack of energy profit have the potential to bring down the system.
Conclusion
The situation we are facing today is one in which growing debt has been holding up oil prices and other commodity prices for a long time. We are now reaching limits on this process, as evidenced by growing wealth disparity, low commodity prices, and the frantic actions of government leaders around the world regarding slow economic growth and the need for more stimulus. These issues are becoming major ones in the upcoming US political election.
Those studying oil issues from an EROEI perspective tend to miss the connection with debt, because EROEI analysis strips out timing differences. In my view, debt is essential to oil extraction, because it brings forward an estimate of the value of the oil and other energy products, so that businesses of all kinds can make use of the “energy profit” in paying their employees and in paying their taxes. Most people don’t think of the issue this way.
In this article, I suggest a different way of thinking about the limit we are reaching–oil prices can’t rise above some price limit without adversely affecting the economy. It is the savings below this limit that aid productivity growth and government funding. Perhaps researchers should be examining this price limit approach more carefully. This is not the same approach as EROEI analysis, but has the advantage of having fewer “boundary issues.” It also offers a check for reasonableness of EROEI indications developed through conventional analysis. If an energy product needs a government subsidy, it is doubtful that that energy product is really providing an energy profit.
When things get serious you have to lie – Junker
http://www.zerohedge.com/news/2016-05-04/central-bank-war-savers-big-lie-beneath
“Actually, that’s a bald faced lie. The household savings rate in the eurozone has been declining ever since the inception of the single currency. And that long-term erosion has not slowed one wit since Draghi issued his “whatever it takes” ukase in August 2012.”
I am planning on being available to answer questions this Saturday evening between 7:00pm and 9:00 pm Eastern Daylight Time in a “Redditt AMA” session sponsored by the Collapse section of Redditt. As I understand it, the format is simply written questions and responses. This is my first experience with this.
Thanks Gail for your time to be available for our inquiries. Hope to be there along other regulars….should be “fun”…
In law there is a concept called promisory note; forcing a little, every economic relationship is a promisory note; i promise to work for thirty days, you promise to pay me every thirty days defines employee-boss relationship.
Debt is close enough to a promisory note, but what happens when corelated obligations are not met? Default. And default rates right now are soaring, especially in the energy sector. at every level of the sector. And, most unfortunately, a major crisis in this sector has the potential to drag the whole economy with it, because the world economy is now immensly interconnected both vertically and horizontally.
IMO a lot of resources are to stay in the ground. Since we claimed all low hanging fruits, we are now forced to use a ladder. But going up and down eats so many resources that in the end a good portion of the fruits remain in the tree, unless you cut it, and that is improbable, at best, because if you cut it, you kill yourself. In other words, diminishing returns and low wages of the 99% is killing demand so fast, that the offer will die eventually.
Just look at the oil glut and the fight for extra storage capacity, you just know that oil industry will come to an abrupt halt sooner than later and probably only the conventional oil and gas will be still extracted until that too will halt, cause there will not be any more BUYERS.
That what a lot of people don’t get: you need to have money to buy. And when you are not having a way to get them, either by ever higher wages or by taking debt, you don’t buy anymore, restricting your expenses to basics: food, clothing, heating, cable tv maybe. Economy – a nice pile of ruins and trash, cause you can’t eat iphones!
And all of these because of a guy called Watt?!!!
I’m going to take this to an extreme logical conclusion:
Assume finance goes completely offline.
No further capex on oil exploration, production or refining is possible.
Oil production falls at around seven percent per annum, taking all economic activity down with it, because people expect things to get worse.
Now, because finance – credit – is offline, and because of the massive inventories of oil and other commodities, the consumption of petroleum products falls faster than their production, leading to Hill’s modelled price declines.
However, debt remains in place, except where relief is sought via the legal system, hence debt continues to increase at a near exponential rate.
The result is zero wage rates, zero employment, and infinite debt.
The debt is cancelled because there is no possibility of recovery without this.
At that point, government creates and spends some money, and the cycle repeats.
The government collapses. Electricity goes offline, and all debt is cancelled.
debt isn’t cancelled–it becomes unpayable
no matter—invest your money here folks:
http://www.planetaryresources.com/#home-intro
That is an excellent explanation of what happens when we get the much discussed ‘debt jubilee’
It’s probably not what most proponents of a debt jubilee are expecting
Thanks for your comment. I especially like your analogy of needing to use a ladder after we claimed all of the low-hanging fruit, and the fact that we must go up and down the ladder eats so many resources that in the end, a good many resources remain on the tree.
I didn’t write the article so don’t shoot me – it’s from Zero Hedge. Sounds a bit premature, but if my prediction of oil price going up to the $60-80 a barrel range occurs in the 2nd half of 2016 then the fracking will resume, no doubt. Where there’s a buck, people chase it.
http://www.zerohedge.com/news/2016-05-03/its-about-get-crazy-again-north-dakota-official-exalts-oil-boom-coming-back-rush
It’s About To Get Crazy Again – North Dakota Official Exalts Oil Boom “Is Coming Back With A Rush”
It’s not a matter of if- it’s about to happen and there’s no stopping it. Oil prices are on the rebound finally. Oil reached its highest level it’s seen in the last 6 months just yesterday. It’s the light at the end of the tunnel we’ve all been waiting for. Get your resumes out, get your work gear out, things are about to get crazy again.
With oil prices climbing higher and higher we are about to see the oil patch fire back up. Drilling crews are going to kick it into high gear. Many companies will be entering back into the Bakken looking to make up lost time. Thousands of workers will be needed in every part of the oilfield.
OilJobFinder.com notes that according to Helms he’s projecting Williston will support 40,000 permanent oil jobs. This will put the towns population over 80,000. Right now estimates are Williston has about 30,000 residents. It’s time to make room for an in-flux of 50,000 workers. We are going to see Williston explode in population growth.
It is amazing how optimistic the oil industry can remain. The oil service companies have temporarily cut their rates, so that they can get at least some revenue. With these low rate, and prices that seem to be moving a little higher, it looks like, “Happy Days are here again.”
I’m trying to get my county to save money, and spend it only on what is most strategic and low energy.
Sorry. Meant to put this comment somewhere else.
” It is the savings below this limit that aid productivity growth and government funding. ”
Seems as though all but the most essential expenditures (and there has been no rational debate as to what these should be) must be foregone if the government is to have some level of funding to manage agreed-to essentials? And there might be widely different versions of productivity and growth?
What happens is that eventually governments collapse, when funding falls too low.
The magic hand is what works out all of the equations; it is not up to economists and their view of what productivity and growth might be. Perhaps legislators try to work out details of what programs the government can afford. When there is not enough energy profit to go around, this becomes evident in many ways at once: too many debt defaults; too little profit for companies; too low wages for workers.
http://www.zerohedge.com/news/2016-05-03/massive-fire-burns-gateway-town-albertas-oilsands-30000-evacuated
Massive fire burns at Gateway Town in Alberta’s oilsands, as 30,000 evacuated. Now that messy stuff is on fire? It already wasn’t making money and now this?!
It’s the surrounding forests that are on fire, not the oil/tar sands.
But this spring has been early, about three weeks, unsettlingly so, and the weather has been unseasonably warm lately. I’m not blaming it on climate change as eastern Canada has seen the opposite end, but it definitely causes one to pause and consider what things will be like in the future.
Was it the end of last year or beginning of this, that two rainforest started to burn and catched fire really well due dryness. One in USA and another in Tasmania. Global food storages has been going down for years as population growth is +80million a yar and same year crop losses in main grain producing areas. If the monsuun rains fail this year in Asia, half of the Asia would be soon starving.
Good to hear it’s not the oil on fire – that would have been hard to stop.
The fire has nothing to do with the oil sands which are located far away.
Over the past several year there have been many lighting related fires in this area.
A record high temperature in Alberta was reached yesterday which broke a 119 year old record for Calgary.
Many have been relating this to a trend in warming. However, look at this way… 119 years ago, it was also this hot. 🙂
A bit of polishing for my comment above: It isn’t just the surrounding forests that are burning. Much of Fort McMurray is burning too. There has been a large evacuation as well. As of early this morning, the city is no longer on fire, but a good deal of it was burning yesterday and over-night. Here’s the link: http://www.cbc.ca/news/canada/edmonton/wildfire-rages-in-fort-mcmurray-as-evacuees-settle-in-edmonton-1.3565573
The dry conditions that led to the fire are predicted to be more common, and are now more common, for our area, and much of the world. That was the sobering lesson I took away from a college level course in climate change and another in water issues, completed a couple months back. It is something that I spend a lot of time thinking about while I’m enjoying gardening two weeks earlier than I normally do.
So no, now is not the time for the public or their elected officials or anyone else to ask for a moratorium on mentioning global warming, as Fort McMurray burns to the ground. There has never been a better time to point at this preventable misery and use it as a prime example of what not to do when faced with an existential nightmare. Everyone knows that Fort McMurray should never have been built in the first place.
If we deal honestly and productively with this incontrovertible fact, and horrific event, maybe we’ll never build another one.
http://www.huffingtonpost.com/scott-thill/stop-running-away-from-gl_b_9851672.html
Now all we need to worry about is the toxic waste, air pollution, ect that is not only destroying the environment, but causing illness among the local native peoples. But they, of course, don’t count because they are on the fringe…..
The so called tar sands will enable Joe six pack and company (rich CALIFORNIA bimbos)
To drive their pickups or sports car on the freeways for a few more precious years.
How wise….
https://m.youtube.com/watch?v=jiNgiPkF0TY
What goes around comes around….
https://m.youtube.com/watch?v=sjfBCuXo2Rg
I don’t expect tar/oil sands development to increase again for at least a couple of years, probably more. The current situation has exposed the cash-flow issues of unconventional oil operations even when prices are strong. Investors will be very cautious when oil prices rise. The local environment and the native population are getting a much needed reprieve.
Got to watch…whatever it takes!
https://m.youtube.com/watch?v=UAlSskuIWHE
BAU lives!
Come on now….how many decades has it been that the scientific community been out front and center about all this and us sheeple just been going with the flo!
NOT COOL….PLEASE….what goes around comes around….that is just the way it is Bro…grow up.
“What goes around comes around….”
Vince,
So are you saying that the people this city are getting what they deserve because they my have worked in an industry ( or a city) where they have no control over the policies and decisions made by the corporate elite.? How could a familyies who lose their home and all possessions equate to some sort of circular punishment for living in an area where Oil Sands are mined ? Really ?????
So, Veggie are you implying we are simply mindless creatures that have no control over our lives and we are tossed along by the Fates? If that is so, I stand by my statement,
What goes around comes around…..
Mindless?…no. Many are there in order to find gainful employment both within and outside the oil industry.
While the livelihoods of the majority of people in that city may directly depend on oil, there are many thousands who do not. Farming, food supply, medical, and education workers are in this disaster. To suggest that this disaster is some fitting payback and that these people and their children should suffer total loss is a bit sick IMHO.
Your logic suggest that everyone (and their families as well as supporting systems like medical and schooling) who work in town supported by a local open strip mine, nuclear plant, fishery, beef slaughter house, corporate farm, or anything damaging to the environment should be burned by some reverse act of fate.
Not cool !
You must be quilty of something!
We are all prisoners of BAU and will taken down….
https://m.youtube.com/watch?v=mEosb2zCqQY
Best to take it like here.
These Guys don’t have a friggin clue…..
Hedge Funds Under Attack as Steve Cohen Says Talent Is Thin
http://www.bloomberg.com/news/articles/2016-05-03/hedge-funds-under-attack-as-cohen-says-skilled-people-are-scarce
Steve Cohen, the billionaire trader whose former hedge fund had racked up average annual returns of 30 percent before pleading guilty to securities fraud three years ago, became the latest critic of the business, saying he’s astounded by its shortage of skilled people.
“Frankly, I’m blown away by the lack of talent,” Cohen said at the Milken Institute Global Conference in Beverly Hills, California, on Monday. “It’s not easy to find great people. We whittle down the funnel to maybe 2 to 4 percent of the candidates we’re interested in. Talent is really thin.
Cohen’s comments come after billionaire Warren Buffett said over the weekend that large investors should be frustrated with the fees they pay hedge funds, which fail to match the returns of index funds. Daniel Loeb, founder of hedge fund Third Point, said last week that industry performance this year was “catastrophic” and that funds were in the early stages of a “washout.”
Cohen said at the conference one of his biggest worries last year was that his firm might become the victim of an indiscriminate market selloff as other funds endured troubles and reduced risk. He said his worst fears were realized in February when his firm lost 8 percent. Global stocks fell about 1 percent that month.
Cohen said most people at his Stamford, Connecticut-based firm are not very good at timing when to invest or exit markets, though they are adept at picking stocks. He said external hires account for 20 percent of headcount at Point72, which prefers to groom analysts and money managers internally.
No doubt better luck having this fella running things
https://m.youtube.com/watch?v=bZCtec7k-pE
Now, that’s TALENT
When there are very few investments that really produce adequate returns, people need to be really talented (or lucky) to get desired returns.
Wonderful analysis! Than you Gail.
Glad you liked it. This is a fairly difficult post. I expect that many people, coming from a mainstream view, wouldn’t understand it at all.
Debt existed well before fossil energy sources. I agree that the huge growth allowed by coal and oil has been fuelled by debt, til the point that the financial economy has overcome its initial intent. But there have been economic systems running with lower debt availability, meanwhile fossil energy allowed for industrial deployment (for instance, the Soviet Unión).
So I do not completely agree that it is debt the key factor in our economic development; I would say rather the contrary: the incredible potential unveiled by the fossil energy sources allowed for an enormous increase of the debt capabilities
U.S energy expenditures as share of GDP started to climb after the U.S reached peak oil.
http://www.instituteforenergyresearch.org/images/energy-expenditures-percent-GDP.jpg
Energy expenditures climbed to 14 percent in the 80’s, about the same time as the elite and non-elite wages diverged. It was also the time when the U.S started its deindustrialization and Japan started to boom.
The non-elite wages then stagnated and held the oil prices low for almost two decades.
Then China joined the WTO and the energy expenditures started to climb again and caused a financial crisis in 2008 after conventional oil peaked in 2005.
http://gregor.us/wp-content/uploads/2010/07/United-States-Energy-Expenditures-as-a-Percent-of-GDP-1999-2008.jpg
After the financial crisis the Fed started the QE program which created the shale revolution. Today the U.S shale producers need higher oil prices to survive.
A reindustrialization of the U.S would lead to rising non-elite wages and would also lead to more debt creation to households who now could afford to take on more debt.
The question is of course: when will shale oil peak ?
Perhaps the Fed and Wall Street will just keep the shale oil producers alive with more debt and hedges ?
US shale oil HAS peaked
30/3/2016
US shale oil peak in 2015
http://crudeoilpeak.info/us-shale-oil-peak-in-2015
Was the limit not 5%?
Why Low Oil Prices Haven’t Helped The Economy
11/4/2016
http://oilprice.com/Energy/Energy-General/Why-Low-Oil-Prices-Havent-Helped-The-Economy.html
Thanks! I see that US net imports of crude oil and oil products are up in both January and February for the first time. http://www.eia.gov/dnav/pet/pet_move_neti_a_ep00_IMN_mbblpd_m.htm At his point, the change is mostly inside the error band of monthly variation, but the general trend should help take the pressure off the rest of the world that declining US net imports had been creating.
Looking only at crude gives a slightly misleading impression of the timing of the net import change. Overall production didn’t start dropping enough to affect imports until Jan-Feb. 2016.
Australia joins club deflation, cuts cash rate.
The Reserve Bank of Australia on Tuesday cut the cash rate to a record low of 1.75 per cent in a bid to head off falling prices and an economic downturn.
The cash rate is now easily at its lowest level under the current system of monetary policy setting.
The cut, the first in a year, came less than a week after a shock drop in core inflation to well below the central bank’s 2 per cent to 3 per cent target band.
In a statement on today’s monetary policy decision, the central bank noted:
Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.
Expect more cuts in the months ahead…What, China pipe dream is crumbling and you didn’t expect any fallout. Although we ain’t seen nothing yet. Australia is nowhere near a recession yet, let alone crashing. But when it happens, you will be able to see the implosion from space. The country is so up the creek without a paddle…
Dear Gail
I have a somewhat different take on debt.
Debt requires the deferment of current consumption in return for a promise to pay in the future. For example, if I have a hundred dollars my default action is to spend it. But suppose I meet you and you tell me of your wonderful idea for starting a new business which will make lots of money over a period of years. So I loan you the hundred dollars, and get from you a promise to repay me with interest or dividends. You will invest in capital equipment and training workers and all that sort of stuff, but the vacation that I had intended to take does not happen.
What has happened is that I have chosen between a promise of future consumption and present consumption. My hundred dollars would have been spent in any event, but by our actions you and I are investing the money differently than I had intended.
A bank loan is different in that the bank creates the money which is loaned out of thin air. However, in order to get the loan, I typically have to put up collateral. My default option is to sell the collateral and use the proceeds to consume something. But by pledging the collateral, I postpone the current consumption so that I can get the money to invest in a new business opportunity. I could, theoretically, have sold the collateral and used the proceeds to invest in the new business opportunity. But if I can persuade the bank to let me keep control of the collateral while also getting the money to start the new business, I have expanded my empire. I now have control over the collated plus the new business.
Some business owners use the business as collateral to allow them to increase current consumption. For example, there is considerable distress in the midwestern farm world right at the moment because of low prices for commodity crops and also for beef. Some expect a wave of bankruptcies to rival the 1980s. While there are some farmers who may have taken on a lot of debt to acquire a farm, many of the farmers simply discovered that banks were willing to loan them money and thus they could increase their standard of living. Now, of course, ownership may pass to the bank and the farmers will be penniless. The trade-off here, for the farmer, was never really about ‘debt for seeds’, it was really about ‘debt for a winter vacation’. Many farmers will discover the downside of leverage.
I suggest that you take a look at this article:
https://www.project-syndicate.org/commentary/us-trade-deficit-low-domestic-saving-by-stephen-s–roach-2016-04
‘Total US saving – the sum total of the saving of families, businesses, and the government sector – amounted to just 2.6% of national income in the fourth quarter of 2015. That is a 0.6-percentage-point drop from a year earlier and less than half the 6.3% average that prevailed during the final three decades of the twentieth century.
Any basic economics course stresses the ironclad accounting identity that saving must equal investment at each and every point in time. Without saving, investing in the future is all but impossible.’
The article shows how global savings must equal global investment. But the deck chairs can be moved around. The US, by virtue of owning the reserve currency, can run trade deficits with practically every country in the world.
Debt can be used to facilitate more investment, globally. If the people of the world decide that they are willing to cut consumption and invest in promising capital projects, then the POTENTIAL for future returns on those capital investments exists. However, the investments may also turn out to be mal-investments and the savers of the world may have just lost their money and with it the possibility of some consumption. Many people now perceive shale oil and gas to have been a gigantic mal-investment.
Whether the investments will turn out to be mal-investments is heavily dependent on future availability of energy (or exergy) and the efficiency with which the economy extracts useful work from raw energy. You prefer EROEI measures, but I believe that a better way to gauge the probability of future useful work from energy is through thermodynamic modeling. Or people may come up with other methods of gauging the future of energy and work. For example, the dream of decoupling.
So while it is true that growth requires debt in the sense of deferred consumption, it is also true that people will not be willing to defer consumption unless they believe that the future will include an economic environment which will reward the savings and investment. In my opinion, the willingness to defer consumption to reap future benefits is the key…and the outlook for energy and useful work is a key to the perception of the future.
Energy and useful work are not the only key to expectations for the future. For example, the extraordinarily high savings rate in China was probably just a mistake, as much of the investment out-ran the headlights of the global ability to consume all that production. Both Stephen Roach and the ordinary Chinese people may very well be mistakenly projecting past experience into the future, and it may be true that present investments are unlikely to be rewarded. (Some exceptions might include water control earthworks which will yield increased crops for thousands of years.) Taking a look at thermodynamic models of energy (exergy) are a prerequisite to making good investment decisions, in my opinion.
Don Stewart
Dear Readers
I suggest reading this exchange:
http://peakoil.com/forums/viewtopic.php?f=1&t=72540
If you look at the pie charts, you see that an awful lot of oil consumption is accounted for by ‘light vehicles’. Now, in the United States, that means a lot of people are driving vehicles and are not producing anything while they are driving. It is pure consumption.
We can try to rationalize some of that consumption as ‘but they have to get to work’. Which is true, and is the kind of thing that James Kunstler has railed about for years…the insanity of suburbia. If you combine the observations about the precarious nature of the dollar as a reserve currency, with the thermodynamic models which indicate that we can no longer afford the waste associated with using an ICE to get to work or play, and the notion that perhaps some people can actually produce useful products without that heavy reliance on light vehicles, then you come out with some ideas about how the world might get turned on its head. With some survivors and some victims. You also begin to grasp the magnitude of the mal-investment that Kunstler has been writing about until people are sick of hearing it.
Don Stewart
transport is the consumption of energy for the express purpose of consuming still more energy
that applies whether youre driving a food truck, tractor or just commuting to work or even on holiday by plane.
put in suburban transport systems and you might stretch the problem into the future a bit, but it won’t go away.
Eventually our use of wheels will cease.
Shanks’s Pony for us all……
Thanks a lot, Don. This way of writing is something I can understand (somewhat). Still a bit long, but that’s more my problem than yours perhaps. (Although I think most lay people are “impressionistic” and need more the feeling, the trend lines, the poetic essence than they need the facts. Best wishes.
Artleads
In his book The Organized Mind, Daniel Levitin is describing ‘What To Teach Our Children’. He recounts the science that ‘conclusively … we remember things better, and longer, if we discover them ourselves rather than being told them explicitly’.
‘This is the basis for the flipped classroom described by physics professor Eric Mazuir in his book Peer Instruction. Mazur doesn’t lecture in his classes at Harvard. Instead, he asks the students difficult questions, based on their homework reading, that require them to pull together sources of information to solve a problem. Mazur doesn’t give them the answer; instead, he asks the students to break off into small groups and discuss the problem among themselves. Eventually, nearly everyone in the class gets the answer right, and the concepts stick with them because they had to reason their own way to the answer.’
I think of discovering the truth as a triangulation problem. Given multiple points of reference, can we intuit and then test a truth which is greater than that contained in any single point of reference? I have sometimes written in that style. Many people, I think, find it infuriating.
Mazur has the advantage that he controls something the Harvard students want…a passing grade in Physics. Therefore, no matter what they may think or how reluctant they are to be a guinea pig in his experiments, they have to go along. A commenter on the Internet simply doesn’t have the same control. People on the Internet are more like the children who are the target audience for Square Bob Sponge Pants…short attention spans. I (or any other author) controls nothing that most people want.
If what we authors have to offer is the satisfaction of figuring something out….I haven’t figured out how to provide that.
Don Stewart
The fact that you are lending money to someone else puts you in competition with the bank. The bank certainly would have the ability to give the potential investor money, created out of thin air. You, for some reason, have chosen to reduce your own spending to do this. If you look at the interest rates charged in Europe and Japan, you will not even ask that this person return your money with positive interest. Instead, this person can return 98% of it, or whatever, and call it “good enough.” I hope you like this person very well. The reason that such low interest rates are being offered is because few businesses can find investments with a positive return. Investing in something that doesn’t really yield a good return in considered OK in today’s markets.
I am not sure whether collateral is needed now. I receive spam phone calls, offering to lend my business (whatever it is) $250,000, with no fixed payback period, and no collateral. I think businesses are trying to lend money to anyone who can breathe.
With respect to savings, one definition I ran across is this:
I can understand how buying newly issued stock or newly-issued bonds would support business investment. But what does paying off a home mortgage do to further investment? It doesn’t get a new MacDonald’s built, or even a new house built. Buying a house with debt would seem to do a lot more to further investment in houses. Buying stock using debt would even seem to work for the purpose of giving the business money it can spend on capital goods.
I think that there is a reason why we are being told to “spend, spend, spend.” Investment no longer works well. If you spend, spend, spend, there is at least a chance that the business will have enough revenue to generate reasonable profits to use for whatever purposes the business chooses, including reinvestment.
Gail
Stephen Roach is beginning from the standpoint of the global economy…not from the position of the individual. For the individual, it is truly miraculous that the bank can create some digital money and they can buy a car with it. But looked at from the perspective of the global economy, someone has to postpone their own consumption so that the borrower can get an actual car, not a digital car. The ‘someone’ may be a collection of people, some postponing a lot of consumption and some postponing only a little, using old fashioned piggy banks. But, as Roach says, there are accounting identities involved.
I’m not going to try to write an Economics 101 treatise here. My main point is that expectations about the future heavily influence the willingness of people to postpone consumption in return for the promise of repayment with interest and dividends at some future point. Expectations about energy play a large role…but are certainly not the only thing. What we see when we look at corporate behavior is that corporations have cut way back on investments which can only pay off in a prosperous future. The result is that all the bank reserves that are created by the Central Banks are not finding their way into real investments by people who borrow from commercial banks or sell stocks or bonds to build real investment. And, currently, those who have invested in schemes such as shale oil and gas are losing their money.
This is not to argue that money is irrelevant. It is simply to argue that physical developments (depletion of resources, new discoveries, new processes, social cohesion or disintegration, etc.) are more likely to be the drivers of the ship than any purely monetary phenomenon. Which does not mean that really dumb monetary policy cannot screw things up. But, as we have seen in Japan for decades and now all of the OECD countries, permissive monetary policies don’t do much to change the physical factors.
Nobody doubts that what we have is a cart and a horse. But it is necessary to get the horse before the cart…not vice versa.
Don Stewart
Dear Gail and All
See Bill Gross’ article for a discussion of some of the issues:
http://www.zerohedge.com/news/2016-05-04/why-bill-gross-thinks-helicopter-money-imminent-politicians-bankers-will-choose-fly-
I will oversimplify his argument:
*Physical factors have stalled real growth (e.g., robots)
*Stalling real growth brings social disintegration
*Social disintegration carries huge costs
*Money can ease the social costs but not change the underlying physical factors (moving the deck chairs around)
*The politicians and Central Bankers will choose to print and distribute money to ease the social costs (the deck chairs will be moved)
*The price will be paid through inflation, which means that savings will evaporate (the Titanic is going to sink, but all the economicl classes will get the same shot at the few lifeboats)
On the latter point, I just received the financial report for my pension plan. On the surface, it all looks good. Because the government a couple of years ago permitted the plans to use historical, rather than current or expected, returns. But as an appendix, they also report what things look like if current returns are used. With that assumption, the plan has about half the assets that it needs to pay projected benefits.
My 401k currently has a guaranteed minimum benefit which is twice the value of the assets.
So, I would say that, if I am typical, the promises which have been made are woefully underfunded. And if Gross is right that the next choice by politicians is inflation, then the promises will become even more woefully underfunded in terms of real dollars. In short, we are broke!
Gross thinks that printing money can ameliorate some of the social problems, but he does not think it can change the physical conditions.
Don Stewart
The economy runs on a combination of (a) what is spent for today, plus its (b) expectation of what will be spent in the future.
Your decision regarding whether to spend money now or save money for the future depends on (a) the urgency of your current needs and (b) your perception of what money will be worth in the future.
As long as the economy is expanding rapidly, it makes sense to forgo current consumption for pieces of paper that say you will get even more in the future, because the economy will be growing, and you will get a piece of that growing economy.
Once the economy hits stall speed, the dynamics change. The expected return on your money is close to zero, or even negative, because diminishing returns lead to a huge number of projects not really having very good profit possibility. Also, if you stop and think things through, there is a very high probability that the paper documents you receive as payment forgoing current expenditure will not be worth the paper that they are printed on. They are simply promises that are contingent on BAU continuing.
Thus, the position of the horse and cart change.
If you want to read about the kinds of investments that are being made today, there is an article in today’s Wall Street Journal called Soft Power: China Backs Egypt’s New $45 Billion Capital.
As you will recall, Egypt is in dreadful financial condition, having lost its oil exports to depletion and having allowed its population to inflate to 90 million. The development is to be located in the desert, 30 miles east of Cairo, and is to include mixed income housing for seven million people. According to the article:
Gail
I think that the underlying horse/ cart relationship has always been about the physical world rather than the monetary world. But it is certainly true that perceptions of the future of the physical world are clouded and can easily lead to individual mistakes as well as ‘the madness of crowds’. The Mississippi Bubble burst when people figured out that it was not going to be easy to extract money from North America (unlike simply stealing gold from the Aztecs or the Inca). But during the time the Bubble was inflating, many people were under the illusion that money was driving the ship. In the final analysis, it was the physics.
Don Stewart
Don, Gail,
Adding a few words here because of Don’s last sentence “…many people under the illusion that money was driving the ship. In the finale analysis, it was the physics”.
As for the money, I very much like this definition by Frederick Soddy:
“Money is the nothing you get in return for something, before you can get anything”.
From: http://www.golemxiv.co.uk/2013/08/illogical-economics-guest-post-by-hawkeye/
(see also links at bottom of the page in the endnotes)
Then, of course, one must throw in the TIME variable, because it’s all about borrowing from the future, doing in the now what we think will be necessary later.
We therefore have to run things according to a model of the future reality, ie budget according to what we think the value(s) of parameter(s) will be say 1 year later. Of course they’re never 100% in-line with expectations ; some adjustments must be made to take the gaps into account, unless their accumulation may lead to disruptions, at least in periods when the general trend is downwards, as it is today. NB: general trend boils down to the evolution of available energy per capita.
My gut feeling* is that the latter is often preferred because hey one must eat every day, and the difference is only one more line -of debt- on the balance-sheet, who cares?
Eventually, business is running according to a modelized reality which is disconnected from real reality, separately and on its own, until the wake-up call.
*: and the supersize of the derivatives world?
So, it seems to me that a very important parameter to determine wether a setup will work or not is the general trend in the medium/long term, which in the horse/cart analogy could be represented by the slope of the path, maybe coupled with an always increasing weight of the cart (accumulation of the entropy we cannot get rid of).
Thinking out loud, sorry if boring.
Right. We need something to be pushing the economy upward. That something (debt/energy) can push the cart along, even with growing entropy. At some point, we lose the push, and there is no push on the cart any more. It becomes more difficult to go anywhere. (This is a little difficult to make work, because downhill is usually pulled by gravity.)
Gail
Zero-deposit mortgages -more or less – are back in Britain. And at 5.5 times combined salaries.
Spend, spend, spend, indeed!
Wow! I believe that in China, ratios to salaries are even higher, especially in big cities.
I know that most people tend to fixate on the current headline low interest rates, but it seems to me that the _average_ interest paid on debt is approaching ten percent pa in the US economy. Think of the debt everyone creates when they use a credit card. What is the rate on that debt? Even if I use a credit card and pay the purchase cost back in full within a month, although I do not pay interest, somebody does.
Thanks, Gail. I’m not sure about some content, but that may be because I prefer numbers when working with this stuff.
Also, I tend to see debt going to infinity – and beyond 😉
There is diminishing returns with respect to investments. It is hard to borrow money without a profitable investment. This brings business debt to zero. There aren’t many workers without business investment.
The question then is how much government debt you can create. Japan has tried to stretch the limit on this. China has a different sort of system, so it can stretch the limits as well. The key to debt falling has to do with the profitability of investments. Can you see profitability increasing, as we increasingly battle diminishing returns (become less and less efficient)?
I *think* my point was that debt (and credit – in a fiat system these are two sides of the same coin – pardon the pun) does not have the same limitation as, in particular, crude oil. Hence if people are prepared to give you stuff for IOU’s (I Promise to Pay … )
the process can continue indefinitely.
Unfortunately, our Central Bankers are pretty much stamping around in a minefield trying to find the limits while not destroying their owners – the big banks. Of course, this is destroying things like pension funds and people on fixed interest income, and history suggests that when governments get more than 180% of GDP in debt, things fall apart.
So, yes, it doesn’t work, or more precisely, not for the oil industry or main street.
In order to get crude oil indefinitely for IOUs, you would need to pay exporters a high enough amount to pay for their oil, plus give them a margin for taxes so that they can pacify their people. This amount is likely at least $100 per barrel now. Over time, the IEA estimates (in its BAU scenario) that this price will rise to $300 per barrel. If you do pay theses amounts for oil, your own economy will suffer. There is no way you can provide enough benefit for both. The fact that the two economies are co-dependent causes the problem.
Yes, though I’d see the $300 per barrel figure happening only as part of a crisis. I think that between $300 and $100 per barrel, lots of alternatives come into play. The net effect of these is to transfer investment to less efficient energy production, and if that happens the economy produces fewer goods, a lower GDP, and that shows up as a reduced per capita productivity. BTW, this:
http://www.zerohedge.com/news/2016-05-04/us-worker-productivity-slumps-worst-rate-23-years
“Despite a very modest beat of expectations US worker productivity fell for the 2nd quarter in a row (down 1.0% vs 1.3% QoQ), the two-quarter-average output per hour isdown 1.4% – the worst slump since 1993. Unit labor costs rose by a better than expected 4.1% (helped by a downwardly revised 2.7% rise in Q4), the highest since Q4 2014.”
“With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3 per cent from 2000 to 2015. From 2008 the annual average has been negative 0.5 per cent!”
And returning to the discussion, because there are fewer things to buy, the system may tend toward price inflation, instead of deflation, depending.
With the present price of oil struggling to get above $50, even the $100 per barrel figure looks like a stretch. I’d take that as a sign that alternatives are fast disappearing, if not already gone, though that depends, to some extent on the strength of the US $ vs other currencies.
Of course, it is “worker productivity,” not productivity enabled by capital goods made possible by fossil fuels.
I like #3 “a temporary false valuation of the benefit of energy products”. This applies at the largest scale without BAU oil and all the products of industrial life have little value.
I also love the concept of peak debt. Hard to exactly say when we are there as we can enter hyperinflation with notionally has higher debt but in real term has declining debt. We may be at peak debt today.
Peak world debt measured in dollars may have come at June 30, 2014, when commodity prices began to drop. In my post preceding the current one, I showed this image.
Note the drop in debt in US $ terms at precisely the time that oil prices turned downward. Of course, it is possible that more dollar debt will be issued by the US government, because no one has faith in the US dollar, but that would be different.
Economically, while it may pull consumption forward, I’m not convinced that government debt investing in energy grows the economy over the long term.
Government “investment” in bombs and bomb technology does little for anyone except the owners of bomb factories. Government investment in hydroelectric and sensible roads and ports does add future value.
Both the computer chip and the internet were funded or developed by the US Department of Defense.
Interguru and ed
roads and ports represent embodiment of energy, which then cannot be used again.
their function depends on constant inputs of still more energy—vehicles and ships etcthe internet and computer chip also require massive energy input to produce and keep functioning
the do not actually produce anything in themselves
Good points!
The US government (of some variety) aided in shale extraction research. I don’t remember the details. It may have been more eliminating antitrust rules, so that company scientists could work together on the project.
If a county can conquer another country, and expand its access to arable land and minerals, then the bombs can be viewed as a successful investment (less the case in a world with trade).
…and if a country is bombed back to the stone age it will be consuming less energy
Economic growth is short-lived, just as lives of humans are short-lived.
We have convinced ourselves that economies can grow forever, but an examination of history shows that an awfully lot have collapsed. The ones who have not collapsed are ones who were able to find a work-around, such as conquering new territory or discovering how to use fossil fuels for their own benefit. Physics seems to say that economies are dissipative structure, just as plants and animals, and hurricanes are. All start from small beginnings, dissipate energy over their lifetimes, and eventually collapse. This is a related post: https://ourfiniteworld.com/2016/02/08/the-physics-of-energy-and-the-economy/
“If you will hunt for food, I will gather plant food and care for the children.”
Is this really a promise among men and women? Men hunt because it gives them status to fell the largest deer and so on, and the best hunter might share his part among the tribe to show generosity, so that he can get a double status; a good hunter and a generous man with respect among the other tribe members. Women tend to flock around the men with status. So you can just as much say that men hunt for status and not for the food itself.
Men are too better to capture motion and to orient themselves in difficult terrain. Women have better color vision because they like to gather plants together with other women while talking gossip, discussing which man they think is the best hunter and so on.
An academic paper by Michael Guren and Kim Hill gives these reasons for the division of labor:
“Finally, successful hunting requires at least 15–20 years of experience to obtain maximum return rates.”
Yes, that’s why women often prefer older men. Then they laid down bigger and more game, now older men often have thicker pocket books. And an older and more experienced hunter has more status, giving the young women better security.
Men with high socioeconomically status often remarry when their original woman is not fertile anymore. Serial polygamy is significantly rising in Norway. This is too much because more women than men enter university now, and they want a husband with a matching status to their degree.
I discovered that in China, the “one child” policy is (or was) per woman. I met several men who had divorced their first wives and moved on to a second, younger wife.
Dear Eyvind Holmstad;
Sorry, you got that entirely wrong. Women, when given the opportunity hunt, run the tribe/country, and so on.
“WOUNDS FROM A BATTLE-AXE IN THE SKULL AND A bent bronze arrowhead embedded in the knee. Obviously this warrior had died in battle. Two iron lances were plunged into the ground at the grave’s entrance and two more spears lay beside the skeleton inside. A massive armored leather belt with iron plaques lay next to a quiver and twenty bronze-tipped arrows with red-striped wooden shafts. Other grave goods included glass beads, pearls, bracelets of silver and bronze, a bronze mirror, a lead spindle-whorl, a needle, an iron knife, and a wooden tray of food. A typical Scythian warrior’s grave of the fourth century BC. Except that this particular warrior was a young woman.”
Mayor, Adrienne (2014-09-22). The Amazons: Lives and Legends of Warrior Women across the Ancient World (p. 63). Princeton University Press. Kindle Edition.
Sincerely,
Pintada
A few women with stronger male characteristics might do so. While some males have a more female character. Exceptions confirming the rule.
NATO vs. Russia, explained in one picture…
https://pbs.twimg.com/media/Cf3CePHXIAApFHm.jpg
psile, wonderful.
Viking shield-maidens having a break for coffee and a chat?
I suggest the Russian chap should try to break out of the stereotype he’s fallen into. This is the 21st century after all!
Maybe he should join the NATO mothers club instead? He could be Mrs Nesbitt?
http://i.imgur.com/q7dZu5I.gif
This should be settled in a civilized matter. Those five in the mud wrestling cage.
A defensive operation:
“Obama Requests Military Support for Possible War Against Russia”
The Nobel Peace Prize winner
http://russia-insider.com/sites/insider/files/encirclement_0_3.jpg
http://russia-insider.com/en/obama-requests-military-support-possible-war-against-russia/ri14043
If the Neocons are crazy enough to start a global thermonuclear war then that’s what will happen. But then again crazed neocon Bill Crystal has gone on record saying: “what good are nuclear weapons if you don’t use them.”
There is no indication there war is intended. Rather it appears to be increased defensive measures. And Russia is not encircled as the article describes. German forces in WWII in Stalingrad – that was encirclement.
Rather strange!
S-500 operational this year. If its any good as deployment numbers build the monopoly on space and all of the extreme military advantages that monopoly provides ends. Draw your own conclusions.
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Bring back the big bills https://en.wikipedia.org/wiki/Large_denominations_of_United_States_currency
Gets rid of problems like this.
The largest bill is now $100. This is equivalent to $10 in 1948 according to the CPI inflation indicator. .
As time goes on, I doubt ( barring runaway inflation ), the US will print larger bills, so the $100 will become less and less.
During the Iraq war, the US airlifted $12 billion of $100 bills, which a weighed in at 363 tons. This shows that cash is no longer useful for large transactions already.
As a side note: most of it was untracked, and melted away. I know of a distant relative who worded as contractor and returned home to Turkey with suitcases full of cash.
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Gail –
I cannot agree with your thesis, as you state:
“The situation we are facing today is one in which growing debt has been holding up oil prices and other commodity prices for a long time. We are now reaching limits on this process, as evidenced by growing wealth disparity, low commodity prices, and the frantic actions of governments leaders around the world regarding slow economic growth and the need for more stimulus.”
You may not have heard of Joseph Tainter’s work on Complex Societies, but I find his thesis to resonate more strongly with me than your correlation of energy and debt.. In “The Collapse of Complex Societies”, Tainter wrote:
++++++++++++++++++++++++++++++++++++++++++++
Sociopolitical organizations constantly encounter problems that require increased investment merely to preserve the status quo. This investment comes in such forms as increasing size of bureaucracies, increasing specialization of bureaucracies, cumulative organizational solutions, increasing costs of legitimizing activities, and increasing costs of internal control and external defense. All of these must be borne by levying greater costs on the support population, often to no increased advantage. As the number and costliness of organizational investments increases, the proportion of a society’s budget available for investment in future economic growth must decline.
Thus, while initial investment by a society in growing complexity may be a rational solution to perceived needs, that happy state of affairs cannot last. As the least costly extractive, economic, information-processing, and organizational solutions are progressively exhausted, any further need for increased complexity must be met by more costly responses. As the cost of organizational solutions grows, the point is reached at which continued investment in complexity does not give a proportionate yield, and the marginal return begins to decline. The added benefits per unit of investment start to drop. Ever greater increments of investment yield ever smaller increments of return.
A society that has reached this point cannot simply rest on its accomplishments, that is, attempt to maintain its marginal return at the status quo, without further deterioration. Complexity is a problem-solving strategy. The problems with which the universe can confront any society are, for practical purposes, infinite in number and endless in variety. As stresses necessarily arise, new organizational and economic solutions must be developed, typically at increasing cost and declining marginal return. The marginal return on investment accordingly deteriorates, at first gradually, then with accelerated force. At this point, a complex society reaches the place where it becomes increasingly vulnerable to collapse.
Two general factors can make such a society liable to collapse. First, as the marginal returns on investment in complexity declines, a society invests ever more heavily in a strategy that yields proportionately less. Excess productive capacity and accumulated surpluses may be allocated to current operating needs. When major stress surges (major adversities) arise there is little or no reserve with which they may be countered. Stress surges must be dealt with out of the current operating budget. This often proves ineffectual. Where it does not, the society may be economically weakened and made more vulnerable to the next crisis.
Once a complex society enters a stage of declining marginal returns, collapse becomes a mathematical likelihood, requiring little more than sufficient passage of time to make probable an insurmountable calamity. So if Rome had not been toppled by Germanic tribes, it would have been later by Arabs or Mongols or Turks. A calamity that proves disastrous to an older, established society might have been survivable when the marginal return on investment in complexity was growing. . . .
Secondly, declining marginal returns make complexity an overall less attractive strategy, so that parts of a society perceive increasing advantage to a policy of separation or disintegration. When the marginal cost of investment in complexity becomes noticeably too high, various segments increase passive or active resistance, or overtly attempt to break away. The insurrections of the Bagaudae in late Roman Gaul are a case in point.
At some point along the declining portion of a marginal return curve, a society reaches a state where the benefits available for a level of investment are no higher than those available for some lower level. Complexity at such a point is decidedly disadvantageous, and the society is in serious danger of collapse from decomposition or external threat.
– Tainter, The Collapse of Complex Societies, p. 195/196.
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What you are attempting to describe is Western Civilization’s looming collapse, from declining marginal returns on investment in complexity.
Thanks for posting.
Jim, the overall debt-nexus Gail describes is very much part of the complexity as per Tainter. I think it is quite clear from her latest article as well (paragraph on nature of debt), perhaps you might persuade her to write it more explicitly next time..
None of what you quoted contradicts Gail. It is simply a different level of analysis.
You will notice that my link under “more complex society” is to the book “The Collapse of Complex Societies,” by Joseph Tainter.
I know Joseph Tainter reasonably well. We spent nearly a week together in Barcelona, when Charlie Hall, Joseph Tainter, and I were all speaking at conference there in 2010. This is a photo I took of him.
Oklahoma-based Midstates Petroleum Company and Texas based Ultra Petroleum have now filed for bankruptcy, citing combined debts of more than US$5.8 billion blamed on a long run of low commodity prices that have led to irreparable financial damage.
… … …
Since early last year, some 70 North American oil and gas companies
have filed for bankruptcy. The numbers aren’t stark: They only account
for about 1 percent of U.S. output, but there are fears the trend could
pick up pace.
According to a recent Deloitte analysis, which examined 500 oil and natural gas exploration and production companies worldwide, 175 of the companies (or around 35 percent) were at high risk of going bankrupt. Together, these companies have more than $150 billion in debt. The report added that the situation is “precarious” for 50 of these companies due to negative equity or leverage ratio above 100.
One view of the situation is that the oil company debt isn’t very much, and it is well spread out, with insurance companies and pension plans holding some of it. Of course, as this article points out, there is a lot more waiting in the wings. There are a lot of other kinds of debt that are defaulting as well–Puerto Rico comes to mind, as do countries with debt in dollars whose currency has dropped. There are also the many Eurozone problems.
Debt figured in pre-fossil-fuel economies such as the Hebrew bible, Rome and renaissance Italy. What was it role then.
Renaissance Italy capitalized on risky business ventures in foreign trade, actively seeking new routes/lands, new opportunities, new markets. We are beyond saturated globally right now.
I think that there were some key differences between the role of debt in pre-fossil fuel economies and now.
1. According to Michael Hudson, early debt was mostly a top-down matter. People owed money to the government or a religious power, or to their boss. The debt certainly was not packaged in a way that it could act as a backing to insurance companies and pension plans, or to be used as the basis for more debt.
2. Debt was forgiven at regular intervals–the Bible talks debt jubilee occurring every 50 years, and Hudson talks about a similar practice occurring in other countries as well. I believe the reason for doing this was to prevent the social problems that debt seems to cause, because of aggregation of wealth. This forgiveness was possible because of the top-down nature of debt. Those forgiving the debt remained wealthy and powerful, with or without the debt that was forgiven.
3. Debt was not as extensively used as today. A lot of land was transferred through inheritance, and people tended to stay on their family property. More recently, it seems like most historical records of debt relate to governmental debt. This debt typically was episodic in nature. Money was raised for a war or some other purpose, then repaid (or defaulted on) when the time-period ended.
4. One difference between ancient debt and today’s debt is the changing role of international trade. International trade is now essentially backed by debt, because companies order goods from another country, and quite often production begins after the goods are ordered. (Think about a company ordering dresses made in China, or an automobile manufacture subcontracting for car seats to be used in its vehicles.) In pre-fossil fuel days, international trade played a much more minor role, so debt jubilees would not have been such a problem. It is not clear to me that international trade at that time was even debt backed. Failure of debt today would have a huge impact on international trade.
The Bible says that there were banks back in Biblical days, and that the banks paid interest on deposits. Clearly, they must have made their money somehow, so they must have been making loans as well. It is not clear to me how these banks could have done well during debt jubilees. Maybe they had different rules than today.
We also know that part of the Lord’s Prayer is, “Forgive us our debts, as we forgive our debtors.” Despite the jubilees, debt must have been a problem then, as it is now.
We still have a Jubilee. Every fifty years or so there is an economic collapse and great amounts of debt are written off. Unfortunately in those times the big guys are bailed out while the little guy suffers.
This time is likely to be different, but we don’t know how things will play out. Maybe at first the big guys (say, the banks) will be bailed out, but even that will fail.
if in past times debt was owed to a central body, or figure, then it could easily be wiped clean.
after all, if the creditor realised the debtors had no hope of paying, then there was little option on a broad scale—though i don’t think it was quite that easy. A destitute person or family could sell themselves into bonded servitude until the debt was clear.
but this time it’s different.
the debt is owed by everybody to everybody.
my pension is dependent on your continued (taxed) employment—your employment (say youre a bricklayer) is dependent on some one taking on debt on the house you’re building.—and so on and on.
You couldn’t be debt selective.
if everybodys debts were wiped clean, then our commercial infrastructure would be destroyed overnight
Right!
Lovely description, Gail.
I should add in Ancient Athens debt tensions reached some radical point every century or so. This was the case at least in the Classical period, each “revolution” leading to an important debt forgivness and to a more liberal -or democratic as they called it- Constitution as well.
But, as much as I know, trivial debt and finances have not been an important source of inspiration for philosophers, poets or mathematicians. We must consider, however, that writing did was an economical invention (a fact that was rather rapidly forgotten). We know in some parts of Greece much of the land (almost all at some moments) was rented. Which was written and certified. And used as a collateral for loans.
There was some complexity. Mediterranean navigation has more or less always been funded with debt, at least since the Phenicians. It was not cheap and Neptune remained impredictable, so public or shared enterprises were also very common in Rome and before (but I don’t think you could find many companies shared by ten holders).
Of course it’s easier if a portion of them are slaves, but it’s hard to run an economy of sixty million people without many promises, and riskiest ones (as long distance trade but also crops and wars) will require interest. I think earliest price bubbles are found in the two first fields, and we know that war expectations and realities can also make anything of prices…
I know that Lloyds’s of London got into business around 1688 to provide insurance coverage for maritime risks. While most of this related to loss of cargo or ship, I believe there was some credit risk included as well.
The financial backing was provided by a large number of wealthy individuals who received profits it results were good, but who could be assessed, if outgo was greater than expected.
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fair enough, money has been created by increasing debt, and debt is the problem….so I still dont understand why creating money without debt(helicopter money) is not the solution?
Perhaps it will be a desperate short/near term solution of limited timespan as this is one of the few remaining escape valves of current situation, but it will most probably take form of only erasing certain sectors of debt (transferring the debt into some diasppearing gov-CB ledger), e.g student debt. Direct helicopter money are unlikely or of token systemic significance anyway, lets say few thousand EUR per year per person.
Money is debt regardless of how it is created, because it is a promise for future goods and service.
If a country just creates more money and puts it in the bank accounts, there will be three effects: (1) The currency of that country will float lower relative to other currencies in the world. This means that imports will be more expensive and exports will be less expensive for countries buying them. Oil products will likely be more expensive. The worth of labor from this country will be lower, on the world market, so it is similar to everyone getting a pay cut. (2) The individuals receiving the additional funds will tend to buy more goods, hopefully locally, because imported goods will be more expensive. This could perhaps temporarily stimulate the local economy. (3) The government really needs to make a permanent program of helicopter money for it really to be helpful to people, because otherwise the payment represents just money for a few toys for the kids, or a chance to pay down a little debt. To buy a new car, or change ones style of living, it needs to be a permanent program. If the government does try to give away helicopter money indefinitely, their credit rating will go way down, so their cost of borrowing will go up, and the currency will float lower relative to other currencies, making it ever more difficult to buy oil, medicines, and other goods from outside.
The country will look more and more like Greece. Greece has promised a lot of pensions to people that it cannot really afford. Of course, Greece is part of the Euro, so its problems are a little different. Maybe it becomes more like Venezuela instead–no imported goods in the stores, in fact not too many goods period.
“The currency of that country will float lower”
There is no free market in currencies and no price discovery. “floating”s is another inaccurate and misleading word. There are no free markets and currency is no exception.
“If the government does try to give away helicopter money indefinitely, their credit rating will go way down, so their cost of borrowing will go up,”
Not if they are buying their own bonds.They determine their own cost of borrowing.
Think about what you are saying with respect to Venezuela. Can they follow these practices, and get their currency to rise relative to the US dollar?
Also, the magic hand seems to make it very difficult to maintain supposed pegs to the dollar, even when a country would like to do this. I know that there have been discussions regarding the difficulty of keeping the Saudi peg of the Riyal to the dollar. http://www.bloomberg.com/news/articles/2014-12-23/saudis-counting-on-745-billion-to-defend-riyal-peg-currencies
Also, Gulf currency pegs: Oman, Bahrain seen as most under threat–Saudi Arabia has the firepower to support the riyal; UAE could choose to de-peg.
http://www.ft.com/intl/cms/s/3/87f532a2-b94e-11e5-b151-8e15c9a029fb.html#axzz47hMFcKSP
Everything you say is true for the small countries. The countries amble to create currency USA China Japan euro block can define the price of their currency. The leverage in the for ex is huge.
You Gail could take your savings and effect the price of a major currency cross. There is not even a real commodity in the relationship, the cross is akin to comparing the value of the tooth fairy to donald duck. Yes the relationships relate to many things goods,and economics but in the end what determines the relationship…
“Saudi Arabia has the firepower to support the riyal;”
As you say
http://money.cnn.com/2016/05/02/investing/saudi-workers-protest-binladin-oil/
Here’s a rare sight in Saudi Arabia: Protesters setting buses on fire.
The Saudi Binladin Group, a massive construction company founded by the father of the late al Qaeda leader Osama bin Laden, has laid off at least 50,000 workers, according to local press reports.
The job cuts come as the Saudi government has delayed payment to construction firms and cut spending to GRAPPLE WITH THE PLUNGING PRICE OF OIL, which makes up three-quarters of the government’s revenue.
Saudi-based newspaper al-Watan reported the Binladin Group terminated the contracts of 50,000 workers — mostly foreigners — and has given them permanent exit visas to leave the country. Some workers refused to leave the kingdom because they claim the company has not paid them for months, the paper reported.
The Saudi military confirmed to al-Watan that protesting workers torched seven buses in Mecca — a rare sight in Saudi Arabia, which Human Rights Watch has criticized for cracking down on free speech and imprisoning peaceful dissidents.
The layoffs are on top of the 15,000 workers cut last year after the Binladin Group’s contracts were frozen when a crane collapsed at Mecca’s Grand Mosque last year. The incident killed more than 100 people and the company was involved in the expansion project.
Thanks! I doubt that Saudi Arabia will actually be able to construct the world’s tallest building, given their current financial problems. And the job situation there must be terrible–what kind of other jobs would be available for people who are laid off?
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Gail, typo alert:
The end of first section 5: “when oil prices were less than $20 per dollar (in today’s dollars).” Replace “per dollar” with “per barrel”, if you’re so inclined.
Thanks!
Hedge funds are unable to make money — none have been the index over the past 8 years,,,
http://www.zerohedge.com/news/2016-05-02/it-has-been-while-we%E2%80%99ve-had-profitable-quarter-report-einhorns-first-quarter-letter
It would appear that we are fast approaching a situation where it will be impossible to obtain a return on any investment — as I have pointed out earlier junk bonds are returning what a US treasury once returned… stocks would return nothing either if it were not for buy-backs…
On a personal level – I see absolutely nothing that makes to put money into that generates ROI unless it is massively risky.
So what happens as the trillions of dollars flowing through the global economy just give up — money gets pulled out of hedge funds, ETFs… the stock market… bonds…. where does it go?
Huge numbers of people rely on ROI including pensions, insurance companies, trust funds etc etc…. when there is no longer any way to generate ROI what happens?
Certainly a collapse in spending … also complete collapse of the money managing industry….
Also bonds go unbid… corporations wither and die….
And central banks won’t be able to do anything.
Perhaps this is the trigger — the Roberto Duran ‘no mas’ moment?
Watch as the big hedge funds redemptions accelerate and they start to collapse….
“bonds go unbid”
nope. never happen. Belgium’s appetite is insatiable and they have very deep pockets
Whoops looks like you are talking corporate bonds. Those could go unbid.
Fast Eddy, your post deserves a YouTube moment….1980….
https://m.youtube.com/watch?v=U_gmZn9YlXs
It is going to surprise EVERYONE!
We could take this a step further by recognizing that debt is a claim on future energy, but my head hurts when I try to make this substitution into the above dependencies.
Very nice article Gail.
You argue that growth in energy consumption is dependent on growth in debt.
I agree this is true today, but I think a dependency in the opposite direction existed in the past, namely that growth in debt was dependent on growth in energy consumption.
It seems that when EROEI is high, debt growth depends on energy growth, and when EROEI is low, energy growth depends on debt growth.
Tim Garrett showed that economic growth is proportional to energy growth.
http://www.inscc.utah.edu/~tgarrett/Economics/Economics.html
We can therefore restate this as when EROEI is high, debt growth depends on economic growth, and when EROEI is low, economic growth depends on debt growth.
As you point out, there is a maximum limit to the ratio of debt to income, even at near zero interest rates.
This means we could not have built industrial civilization if the cost to extract fossil energy started out at today’s level. It also means that industrial civilization will be ending soon.
Perhaps what you are saying is similar to what I was saying related to Figure 3–when oil costs were low (presumably high EROI), the amount of debt added to the economy was quite low. As costs rose (and presumably EROEI fell), it was necessary to add more debt. I think the relationship is more to prices than costs, however. When prices fell (Even thought extraction costs did not), the amount of debt required to raise GDP fell. This is what we would expect if the issue is a price issue, not an EROEI issue. I would note that relationships can very by country. China’s primary energy has been coal. Coal has a very high EROEI. But China chose to try to raise the living standards of its people, practically overnight, with lots of debt. Debt was also used to fund many industries. In recent years, its debt level has been very high, regardless of the EROEI of its fuel.
As I understand it, what Tim Garrett showed is not related to GDP. His finding is that accumulated global wealth that is closely related to energy consumption. Global wealth is “stuff” that is made using energy products, so it should be related to energy consumption. Or maybe I am missing something. It would help if I could see the time series that he is trying to fit.
Good points. Had not thought about Chinese debt with high EROEI coal. Lots of complexity here.
Garrett show energy consumption is proportional to total wealth (integral of GDP less inflation as I understand it). If economy is growing I think this means energy must grow, but maybe I am wrong to say the relationship is proportional.
Cherry picked this shortonoil comment regarding the excellent article posted by Gail.
There is known debt risk and unknown debt risk
There is another player in this game, and it is far bigger than the FED. It is called the derivatives market, and it has been estimated at $1000 trillion. About half of it is in interest rate derivatives, and they are primarily bought and sold by the big banks. If there was a significant change in inter bank rates, counter party exposure could be in the 100s of trillions over night. No one would know who was solvent and who wasn’t. Banks could literally stop doing business with each other; the entire system would come to a halt.
This almost happened after the Lehman collapse. Lehman had a huge derivatives book, and no one knew who was holding it. These things are sometimes sold ten levels deep. A counter party that may be solvent when they bought the contract could very well not be when the contract comes due. This market is equivalent to a financial nuclear bomb, and the chances are that it will go off at some point. If, and when it does it will turn the FED into a sheet of smoldering glass in a flash.
http://peakoil.com/business/shale-debt-and-its-implications
https://m.youtube.com/watch?v=GiPe1OiKQuk
Enjoy the ride….because it only will stop in a crash!
Thanks Gail…you keep me up at night.
Greece has proved no one takes derivitives seriously. They are just more chits of pretend bits.
They are traded back and forth to try to get some balance but if a big event happens everyone just wads them up and throws them away. When they are used as ballast to tweak things a bit they work for the banks but the banks know no one can pay off on their full value. Just more imaginary trash space junk floating aroud the financial universe.
Sure they are…
No one takes them seriously?
Tell that to Warren Buffet, zerox!
Warren Buffett issues a fresh warning about derivatives ‘timebomb
http://www.telegraph.co.uk/business/2016/05/01/warren-buffett-issues-a-fresh-warning-about-derivatives-timebomb/
The Sage of Omaha told the annual meeting of his company Berkshire Hathaway that while he still believes in holding shares in financial firms such as Bank of America, the sector continues to build derivatives that could create “dangerous” jolts in value that would exacerbate a major shock.
“Some of these things get so complicated they’re very hard to evaluate… I know one that’s so mismarked it would blow your mind, and the auditors I don’t think are necessarily capable of holding that behaviour in check,” he said.
Emphasising a warning he gave last summer, when he described derivatives as “weapons of mass destruction,” Mr Buffett said a major event such as a cyber attack that shut down the financial markets would trigger “enormous gaps in things you thought might be protected by collateral”.
“I regard very large derivative positions as dangerous. We inherited a modest sized position at [Berkshire’s reinsurance vehicle] Gen Re in a benign market and we lost about $400m just trying to unwind it with no pressure on us whatsoever.”
Sorry, your opinion does not hold water, bye.
Derivatives are in a sense a form of insurance, but without the reserve backing an insurance program would have. The risks that derivatives take on are not independent–in fact they tend to “blow up” simultaneously, so the whole program doesn’t really make sense from a risk management point of view.
Sorry but what I have to say here may appear to be off topic but bear with me, it’s actually very much on topic. I’ll try and explain:
Unfortunately I work in the nuclear industry. I’ve reached a point now where I feel I have to say something. Warn people at least. I don’t think we quite understand how dangerous nuclear energy is particularly if reactors are left unattended due to some catastrophe. If people knew the truth they would be terrified. I blame certain so called “Green” movements for that. When I read their anti-nuclear stance I’m not surprised that many people have a sort of Ho Hum approach to nuclear. It’s almost deliberate misinformation and probably is. They telling you the trivia and avoiding the truly scary parts.
Nuclear energy is a ticking extinction level time bomb. Most people imagine that if a nuclear reactor is left unattended for whatever reason, say global pandemic (or economic collapse…), that nuclear reactors have a fail safe shut down. That’s primary Myth number one. They don’t. They scram which is the insertion of control rods into the core to stop criticality. However the core is still super hot and radioactive. It requires cooling and it takes months to cool down. This is an active management process requiring human involvement and lots of cooling water being pumped around the core. In the US they are required to keep 24 hours worth of backup diesel to run the cooling systems. None have more than a few days worth. There is no backup plan for an unmanned reactor, period. So within a few days of being unattended the core becomes exposed. Decay heat will cause meltdown and breach of containment. Huge amounts of radiation will be released into the atmosphere and into ground water. There are 99 reactors in the US alone!
Giant myth number 2: Nuclear waste is radioactive stuff that you stick in the ground in concrete barrels. It might leak a little but I’ll be ok. Wrong. HLW is extremely dangerous and will meltdown if cooling systems fail. It’s kept in cooling pools because of decay heat. There may be a couple of tons of radioactive fuel in a reactor. There can be hundreds of tons in a single HLW cooling pool. Many of them right next to the reactor! As of today there are 99 nuclear reactors in the US and many more HLW cooling pools. France has 58 reactors. Globally there is around 225,000 tons of HLW in cooling pools. There is simply no where to hide on the planet and no way to survive if even a fraction of this amount melts down.
So in a nutshell Nuclear energy is based on one fatal assumption. That no catastrophe will strike mankind and the reactors will always be manned. History has proven how ludicrous this assumption is. The current state of the global economy is horrifying in the context of what I am saying. Believe me I want to be wrong but I’m not. We have in effect built a Doomsday machine. If any catastrophe strikes the globe or even just the US or France for example, it is quite literally the end. I pray to God people wake up and something is done about this. I’m trying but I’m a small cog. There appears to be a deliberate plan out there to suppress this information. There is definitely an army of trolls out there who try to kill this issue off as soon as it appears which is very concerning. I now know how Noah felt.
And course there is the Grand Mother of Nuclear Extinction Bombs… otherwise known as Spent Fuel Ponds (4000+ around the world)
Containing radiation equivalent to 14,000 times the amount released in the atomic bomb attack on Hiroshima 68 years ago, more than 1,300 used fuel rod assemblies packed tightly together need to be removed from a building that is vulnerable to collapse, should another large earthquake hit the area. http://www.reuters.com/article/2013/08/14/us-japan-fukushima-insight-idUSBRE97D00M20130814
The problem is if the spent fuel gets too close, they will produce a fission reaction and explode with a force much larger than any fission bomb given the total amount of fuel on the site. All the fuel in all the reactors and all the storage pools at this site (1760 tons of Uranium per slide #4) would be consumed in such a mega-explosion.
In comparison, Fat Man and Little Boy weapons dropped on Hiroshima and Nagasaki contained less than a hundred pounds each of fissile material – See more at: http://www.dcbureau.org/20110314781/natural-resources-news-service/fission-criticality-in-cooling-ponds-threaten-explosion-at-fukushima.html
A typical 1 GWe PWR core contains about 80 t fuels. Each year about one third of the core fuel is discharged into the pool. A pool with 15 year storage capacity will hold about 400 t spent fuel.
To estimate the Cs-137 inventory in the pool, for example, we assume the Cs137 inventory at shutdown is about 0.1 MCi/tU with a burn-up of 50,000 MWt-day/tU, thus the pool with 400 t of ten year old SNF would hold about 33 MCi Cs-137. [7]
Assuming a 50-100% Cs137 release during a spent fuel fire, [8] the consequence of the Cs-137 exceed those of the Chernobyl accident 8-17 times (2MCi release from Chernobyl). Based on the wedge model, the contaminated land areas can be estimated. [9] For example, for a scenario of a 50% Cs-137 release from a 400 t SNF pool, about 95,000 km² (as far as 1,350 km) would be contaminated above 15 Ci/km² (as compared to 10,000 km² contaminated area above 15 Ci/km² at Chernobyl).
http://belfercenter.hks.harvard.edu/publication/364/radiological_terrorism.html
Of course we need to ignore this outcome otherwise almost all comments on FW would be pointless…
It’s almost as if we have created another reality — one that ignores the obvious…. we have our own matrix 🙂
Yes I mention that in my post under HLW cooling pools. I estimate 225,000 tons at any given moment in cooling pools. Not all super hot though depending on length of time in the pool but more than enough. But more importantly what to do? How do we stop this madness? I’m brainstorming crowd funding to launch a massive global advertising campaign. Any ideas?
If something can be done then the people who run the world will have a plan.
But of course nothing can be done – because all of these installations require BAU to be functional — spare parts are needed from factories — electricity is needed — engineers would need to be educated — on and on and on…
This is simply not going to be possible because we are going to collapse into a very primitive existence post BAU — one where you won’t be able to buy a toothbrush – let alone a replacement valve for a key component on a spent fuel pond or nuclear reactor.
In any event this is a good outcome because 1. who wants to live in a world of chaos, disease, starvation and suffering and 2. Humans are a cancer on the planet that needs to be eradicated – hopefully the nuclear issue does not wipe out everything else
“How do we stop this madness?”
Brave workers like yourself need to step up and man the stations to the last.
Secretly acquire buckets and store them at the plant to cool the reactors.
Just kidding
The madness will be stopped by extinction of course.
“I’m brainstorming crowd funding to launch a massive global advertising campaign. ”
Oh my. There have been many before you. There are more important issues. Mcribs are back.
I wish you the best in your efforts but we are too stupid to live.
Asking me for ideas about nuclear crisis would be like asking a four year old. While some artists are good at science (even though most are probably not), I’m not one of them. Long story behind that which I won’t go into. But the average person is no better informed than I, and if I can learn the very basics, so might the general public.
I don’t know the first thing about the science, so I’ll say what I vaguely think is the case, while leaving blank the many areas where I lack even that vague sense.
1) Nuclear rods are made from or with uranium and ? that react together to make heat.
2) The heat is relayed somewhere to make electricity.
3) The rods get so hot that they will explode unless constantly cooled by water.
4) They are cooled (when?) (how?) in cooling ponds.
5) The water in cooling ponds become nuclear contaminated (how soon/long?).
6) The contaminated water must be relayed elsewhere for long-term storage.
7) “Spent” fuel rods remain radioactive and must also be stored “safely.”
I read in the previous FW article that contaminated compost from Fukushima was removed and used elsewhere to grow something (can’t recall what). That something was tested and found to have “tolerable” levels of radiation.
Long prior to reading this, I got the impression that bacteria could in some cases eat and thus neutralize radiation.
QUESTIONS:
1) Can bacteria in some cases–and if so, which?–clean up radioactive materials?
2) If they can, why are they not more widely used for this purpose?
If you’ve read this far, thanks for your patience!
They need to achieve geometry for detonation which is highly unlikely. But that is not the issue. Strontium 90 and Cesium 137 are the issue.
Excuse me for being suspicious, but please assure me and others here that FE & RD are not one in the same. Thanks in advance for clarifying.
Duncan, as I understand HLW must be actively cooled down for a variable lenght of time -up to 4 years (you say months)- in order to avoid explosions and fires. It doesn’t look at all impossible from a technical point of view. And it doesn’t seem attending this situation would require too many people
Yes you right. It can take years. I don’t believe it’s impossible but I don’t think it would be simple. Diesel also has a shelf life. Might need to look at other fuel forms for long term storage. Depends on the catastrophe too. EMP for example would have a wide reaching impact on power systems. The EMP issue has popped up in congress a few times only to be ignored of course. (goes without saying). When you have a system that revolves around money and profit then decisions are rarely logical or for the benefit of mankind. That is the ultimate issue and why we are in this position. As things stand now if a major catastrophe struck any major nuclear country or the globe it is quite literally game over. The trolls should start popping up soon telling us all about the wonderment of nuclear power and how healthy radiation is…. (of course ignoring radionuclides)
That’s not how EMP works.
In the UK, there are at least two nuclear power stations that have been safely shut down and decommissioned. That said, the figure of 225,000 tonnes of toxic waste is worrying. That’s not so much because of the reasons you state – it because of “temporary”.
I’ve learned that the civil service uses “temporary” to mean exactly the opposite of its intended meaning. Whenever funds are unavailable to do a task the cost-effective way (See also Gail’s comments on debt) a “temporary” solution is delivered. There is no end date and it remains in service until it becomes a health hazard.
I’d prefer to have provided some words of comfort, but this is serious.
Not really much of this kind of trolls here around, where did you had that problem?
It’s about money, yes, but not just that. Financial collapse, EMP and nuclear war are almost synonyms for everybody, but only cold war did got some preventive measures. I don’t know what to think about it, though it somewhat fitted the existing label “war situation”
Diesel won’t last much, and I have recently learned it is decaying quicker since it is mixed with agricultural oils. In a few cases NPPs are located aside a set of hydroturbines, so it’s rather up to manage some replacement parts (in case anybody is expected to be there, transcending automation). But generally speaking, In many cases solar PV can handle the situation. The required period is in the range of life of batteries, which will decay alongside radioactive heat
NPP’S emergency generators use to be rated in megawatts, but I suppose less energy is needed to pump and filter strictly speaking
Albert Einstein “Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.” {www.brainyquote.com/quotes/a/alberteins148795.html
and lets not forget…
“In San Diego, I talked with Captain Eddy. He had been with the expedition in the Marshall Islands on November 1, 1952, when America exploded her first hydrogen bomb. In a sober voice, Captain Eddy said, ‘No one could visualize the awfulness of that sight unless he were there in person.’ Two hundred miles above the Pacific, the mighty hydrogen bomb was detonated. The blast lighted up thousands of miles of Pacific sky. At Auckland, New Zealand, 3,800 miles away from the scene of the blast, New Zealanders said the ocean showed a reflection that was blood red. ‘The scientists present at the scene were dreadfully shaken,’ said Eddy. ‘They thought they had set the heavens aflame with a chain reaction of exploding atoms that would surely go around the world.’ On returning from his mission, Captain Eddy asked to be transferred to another department of service, and was given a position in the field of seismology, studying earthquakes back in the South Pacific.” {Cantelon pg. 91-92}
and what about sending nuclear powered machines out into the universe? This can’t be good or safe like for example one satellite that was sent out to the sun. Called Genesis of all things and costing in the neighborhood of some 300 hundred million dollars it was launched in August of 2001 and has travelled out some two million miles to a point in our solar system called the L1 Lagrangian Point which is where the gravitational and centrifugal forces of the earth and sun meet. Here the satellite thankfully stopped and has remained for 30 months where it has observed the sun and using specially designed tiles made from gold, sapphire, silicon and diamonds has it is hoped collected enough solar wind dust particles to determine what the sun is made of. Information that hopefully will provide insight into how our solar system developed along with an explanation and understanding of what is occurring in relation to climate change. Now excuse me but what would happen if something were to go wrong with that spacecraft and it were to continue on towards the sun especially if it were nuclear powered or explode right there where it is sitting? Or let’s consider what would happen if our scientists in studying those dust particles were to learn that our sun is dying? What are they going to do –try and play God by sending a team of astronauts out there to try and fix it? Or maybe given what some scientists are being led to believe these days {aliens from some planet Timbuktu} and maybe what they’ll end up doing is hooking up those huge radio telescopes to some extra juice of power in the hopes that their plea for immediate help will reach some aliens ears?
and….
“Mankind must put an end to war before war puts an end to mankind.”
~ John F. Kennedy
and finally:
‘beware of turning to evil which you seem to prefer to affliction’ Job 36:21
http://www.caseyresearch.com/articles/will-your-bank-go-broke-because-of-low-oil-prices
Debts don’t matter, because all debts can be monetized by the creation of new fiat money.
I know this sounds hard to believe, but it’s true. You don’t want to believe or admit it, any more than you want to admit that you have been a working slave your entire life. This is a key point going forward. It’s much easier to fool people than to convince people that they’ve been fooled. The latter is hard to do because the person has to admit they were conned. Notice how ferociously people react if you question their jobs.
“How dare you say I’m a slave! I’m a citizen and consumer, and an important part of the global economy at the height of human civilization! I matter, I count! I’m not replaceable!”
Alright, so now that I’ve come out and questioned all of this, I have to back it up with at least some prediction going forward. This process of fiat money creation to monetize debt can last as long as people (usually some other country out there) is willing to accept the said money as payment. If they stop using it, the money inflates/hyperinflates.
What is my timeline? I don’t know but I’m guessing in the 2020 to 2040 years we will see the complete end of our system. What do I mean by that, I mean the hyperinflation of the entire global currency structure.
It’s Not Random——The Global Economy’s At Stall Speed, Rapidly Loosing Lift
by David Stockman • May 2, 2016
South Korea’s exports tumbled to $41 billion in April, marking the 16th consecutive month of declining foreign sales. Last month’s result represented a 11.2% decline from prior year, and an 18% drop from April 2014. Moreover, within that shrinking total, exports to China were down by 18.4% last month, following a 12.2% drop in March.
http://cdn.tradingeconomics.com/charts/south-korea-exports.png?s=koextot&v=201605021409n&d1=20140402&d2=20160502&trend=2
The Korean export slump is no aberration. The same pattern is evident in the entire East Asia export belt. That’s because the Red Ponzi is in its last innings. Beijing is furiously pumping on the credit accelerator, but to no avail.
As can’t be emphasized enough, printing GDP by means of wanton credit expansion does not create wealth or growth; it just results in an eventual day of reckoning when the speculative excesses inherent in central bank money printing collapse in upon themselves.
China is surely close to that kind of implosion. During Q1 total credit, or what Beijing is please to call “social financing”, expanded at a $4 trillion annualized rate. This was up 57% over prior year and represented debt growth at a 38% of GDP annual rate.
Stated differently, during the first 90 days of 2016 China piled another $1 trillion of debt on its existing $30 trillion debt mountain, while its nominal GDP expanded by less than $175 billion.
That’s right. The Red Ponzi is generating barely $1 of GDP for every $6 of new debt. And much of the “GDP” purportedly generated during Q1 reflected new construction of empty apartments and redundant public infrastructure.
More http://davidstockmanscontracorner.com/its-not-random-the-global-economys-at-stall-speed-rapidly-loosing-lift/
It doesn’t matter… till it matters…. i.e. when you desperately add 0’s to infinity after a 1 …. and GDP remains flat-lined….
Oh – and of debt doesn’t matter you should avail your consulting services to the likes of Guinea-Bissau and other dirt poor countries… inform them that they are missing the good ship Living Large — all they need to do is run up debt to infinity….
Slight problem you say – nobody will buy the bonds to infinity …. right … just as any country that issue bonds to infinity will eventually end up like Guinea-Bissau
I think you are missing a major premise of Gails work here. I see the failure as that $ loses value not because of hyperinflation but because nothing is available to buy with it. People are adapting non productivity. They cant make a go of it. It cost more to be in business than to not be in business. This is true for oil but everything,also, they are hunkering down living off their parents welfare, SS, ecetera. Production has ended for all things not propped up. The endless flow of chinese goods continues for now but at some point the deflationary death spiral hits them too.
You an have a platinum card and a roll of benjamins but if there are no products to buy its a couple mm of plastic and a roll of TP. The end of productivity=end of products=end of $=rat on a stick.
Adding more debt tends to make the currency of the country in question float lower among world currencies. As a result, the wages of the people in that country buy less in world markets. Thus, your statement “Debts don’t matter, because all debts can be monetized by the creation of new fiat money,” is simply false. I wish you would quit posting this nonsense.
Countries lately have wanted this result–the goal has been to bring the value of their currencies as low as possible, so that their exports will be more valuable to the US, and perhaps to a few others.
If there were only one country in the world, and it added a whole lot of new fiat money, I expect the new money would tend to run up asset prices (assuming that the money actually got into circulation). Someone would have to do a helicopter drop to get the money out to the general population. In that case, there might be general price inflation.
‘Adding debt is something that governments can influence, either by lowering interest rates or by borrowing the money themselves.’
Governments don’t set interest rates. The owners of the Fed do. The power to do this (along with the power to print the reserve currency) allows them to run their empire
You are right, in the United States, the Federal Reserve has great powers. I still think that the Federal Reserve is very much influenced by the political powers that be.
Outside the US, I doubt that a parallel agency to the US Federal Reserve sets interest rates. I believe that the agencies are more a part of the governments. If I am wrong, someone can correct me.
https://s-media-cache-ak0.pinimg.com/236x/57/84/8d/57848d08c69b3122c52682887558c0f1.jpg
Maybe I didn’t read carefully enough, but I thought you’d make more detailed explanation of the RISK that is connected to any debt.
Especially because there has been a tremendous evolution in the way this risk is considered by FIRE (Financial Industry, Insurance & Real Estate) these last years (decades?), and the consequences of such a change.
It’s no longer a one-for-one, ie one default affecting one loan only, but now it’s ‘packaged’ and spreaded, so that a default has lighter impact on its direct lenders, but multipled tiny effects throughout the whole system.
Even before the avalanche has started, the whole system finds itself more interconnected, interdependant and brittle than it should, and thereby guarantees nastier and broader consequences of any systemic incident.
(cf. Perrow, Turcotte, and others, about risk management)
It seems like there were a lot of topics I wanted to cover that didn’t get covered. As it is, the article is pretty long–over 3,400 words. I would rather keep articles down to 2500 words or less.
One reason for writing the article is because I plan to write an academic article covering some of these topics. I also will be giving a talk related to this topic in late June. I thought by writing a shorter article with some pieces of the story, I could get a better understanding of how much more background information I need to be adding. I can also think through more advanced topics I might consider, such as the increased connectivity of today’s financial system, that I might cover.
Another issue I could cover is how new regulations requiring more capital for individual banks makes is less likely for an individual bank to fail, but because these regulations tend to reduce the amount of debt for the system as a whole, they increase the likelihood that the whole system will collapse. This is related to the risk management issue–spreading out debt helps up to a point; after that, there is a greater chance that the system as a whole will collapse.
I very much glossed over the topic of changing relativities of other currencies to the US dollar, and its effect on the buying power of workers from these other countries. If the relativity of another currency to the dollar decreases, it is as if a worker who is paid in the other currency is getting a pay cut.
One problem I have is that readers who are concerned about Peak Oil/EROEI often have virtually no understanding about the economy or debt. They can’t understand why debt could possibly be a problem, or why we can’t just “start over” with a different financial system. People coming from more of a financial perspective can understand many more nuances.
Seems like we cannot be too far off of the day of reckoning when debt no longer does it’s magic for the economy, as negative interest rates to stimulate lending must certainly be a warning signal to all, especially the CB’s.
It seems that way to me as well.
This week Puerto Rico has said it plans to default if not bailed out by the US and Alantic City was going to default but found $1.8 million to service the “interest on it’s debt”. We will see these types of occurrences both within the US and around the globe as time moves on and the financial system begins to break.
Price discovery via bankruptcy of any key player at this point would trigger a chain event. As the house of cards gets stacked higher as more loans get made to insolvent players (all) banks get more nervous and lend less. Red you lose black you lose. What is absolutely clear is the lending to any key insolvent player will continue so the only thing that could shake the boat is a US$ collapse. But as fear comes up the US $ become a safe haven. This is the substance of our situation the foundation of what we know is insanity counterbalanced by fear. As strange as this is it has proven remarkably resilient.
…or as the saying goes: “things will continue until they can’t”.
It seems to me that in a way, the fact that businesses cannot live without non-elite workers is parallel to the world situation–that is, the US cannot live without all of the countries whose currencies are now floating at low relativities to the dollar. The United States needs a market for the few goods we export; we also need these countries to be doing well enough to export goods to us. We can’t make computers on our own. There are many things as well.
Yes Gail that is the consequence of the interconnectedness of globalisation, a subject you know well and written about extensively. Chindia especially drank the coolaide. I can’t decide if entering globalisation was a can kicking exercise or a hastening of our demise……maybe it was both.
Speaking of Puerto Rico, on a Max Keiser installment several months ago they talked about a notable celebrity (the name of which escapes me now) that invested all of his millions in Puerto Rican bonds. The bonds folded and he lost all of his investment. So people be careful with those investments.
http://gantdaily.com/2016/02/22/ive-lost-over-200000-on-puerto-rican-bonds/
That’s a link to an article about regular people losing money in Puerto Rican bonds.
It comes down to deciding what might go poof its gone. PR bonds are apparantly not key. I am sure Goldman Sachs got the memo but those “imvestors” did not.
POOF
Why “anyone” would invest in any Gov’t bonds is beyond me?
Everything is going to vapourize… so might as well jump into the asset that has the best ROI – ideally something that is considered TBTF.
Alternatively blow the money enjoying the final months….
“Speaking of Puerto Rico, on a Max Keiser installment several months ago they talked about a notable celebrity (the name of which escapes me now) that invested all of his millions in Puerto Rican bonds. The bonds folded and he lost all of his investment.”
I didn’t see the show but I know this happened to Felix ‘Tito’ Trinidad, one of Puerto Rico’s greatest ever boxers.
Atlantic City is also in grave financial difficulty:
Financially strapped Atlantic City scraped together enough money to make a $1.8m bond payment Monday morning, narrowly avoiding becoming the first New Jersey municipality to default on its debt in 78 years.
Mayor Don Guardian likened the city’s desperate state to rummaging around the sofa cushions in search of stray cash, and said the payment was made at 10am. That was an hour before a news conference at which the mayor came out swinging against a proposed state takeover of Atlantic City’s finances.
“Financially, we’re running on fumes,” Guardian said. “We really are teetering on the edge.”
http://www.theguardian.com/us-news/2016/may/02/atlantic-city-misses-debt-default-bond-payment
My expectation remains that we don’t get to the end of this year…
The fact that China has unleashed a trillion dollars of new stimulus cash in Q1 with relatively minimal impact — that Japan is back in deflation despite a tsunami of QE and has so far decided not to pump out more yen — the fact that Europe has the pedal down and are getting no traction — all these lead me to the conclusion that the end is nigh…
International trade is slowing, with even demand for PC’s and smart-phones falling, manufacturing is sluggish at best, profits and capex are dwindling, international lending is nosediving, serious cracks are appearing in the banking industry, Deloitte is suggesting a third of the shale industry could be bankrupt by the end of the year, Venezuela looks primed to fall into the abyss with several other nations hot on its heels. We are very obviously now entering a global recession and the central banks have shot most of their wad. How it plays out from here and when the big dominoes start to fall is anyone’s guess but clearly the prognosis is gloomy.
Excellent paper, thank you Gail.
Thanks also for linking to the historical perspective by Michael Hudson, “How economic theory came to ignore the role of debt”:
http://www.paecon.net/PAEReview/issue57/Hudson57.pdf
Hudson points out that if people actually understood what debt could be expected to do, the chances that the financial industry could ramp up its role would be very slim. So the decision was to keep its problems hidden.
Moreover, the consequences of the ‘hidden problems’ are to be supported by the borrower, hte taxpayer, the depositor, maybe the shareholder, maybe others, but not by those who actually earned lots of money with use of debt and interests.
Private profits, Public losses, that has worked quite well so far. Unclear it can work again, IMHO not in scale that will be required next time.
Regulators don’t understand the scale of the problems approaching.
People understand. They dont care as long as the musical chairs continues and the chance of winning a apple pie exists. Apple pie is tangible understanding of debt is not.
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. Henry Ford
Issuing new debt to fiance old debt seems to be working for now. I uneasily await the time it quits.
“Extend and pretend” is one name for this, particularly in real estate. If we can pretend tomorrow will be better, it is possible to add more debt.
“If we can pretend tomorrow will be better, it is possible to add more debt.”
Is their any doubt? Just last week I heard chocolate rations had increased from 30 grams to 25 grams! The recovery has taken place and we are back to normal. 2008 is not even a faint dream to most.
+++++++ 🙂
‘Ponzi lending? In China, 45% of new company debt is raised to pay interest on existing debt’
http://www.marketwatch.com/story/chinas-giant-bonfire-of-debt-needs-one-spark-to-become-an-inferno-2016-04-14
“If an energy product needs a government subsidy, it is doubtful that that energy product is really providing an energy profit.”
Yes!
Isn’t that obvious to everyone?
Not to the economic illiterates like Obama and most Democrats
Please point me to a Iowa republican who does not support ethanol subsidies. Paint a crook blue or red it matters not.
Can we please leave politics out of this discussion.
We all know who is really in charge….
Discussions involving Dems and Republicans is akin to a discussion of I wonder what would happen if Pinocchio was the president instead of Kermit the Frog….
in terms of Pinocchios main lifeskill—he might just be
We had a chance with Bernie, though.
Chance of what?
No, unfortunately it isn’t. Danish politician in a discussion about windmills: “Money and energy have nothing to do with each other.” Read also all Wikipedia definitions in several languages of ‘fiat money’ – not a word on the intrinsic connection of energy consumption and the creation of money. Most people don’t see any connection at all. That is why your posts are so clarifying. However, I see signs that more and more economist see this connection. I am happy to present your graph to various people showing almost 100 % correlation between global GPD and energy consumption. I do not recall that you have produced a similar graph showing global energy consumption + global GPD + global debt. If so, we can see what we have ‘promised to pay back in future’.
Global debt figures don’t go back very far, but a comparison of their annual changes with annual changes in energy consumption are an idea.
This is a chart I put together but didn’t use in the post. It shows world debt, world assets (value of land, stocks, and bonds held by individuals), and world oil prices (not oil consumption or energy consumption).
<Clearly oil prices are a lot more volatile than asset prices in general. Assets values and the amount of debt grew at pretty much the same rate until 2008, when asset prices took a step down. If I had put in US wages, the line would have been a lot flatter than either the debt or asset lines. The reason that debt needs to keep rising is because wages are not growing very much compared to commodity prices. If wages were keeping up, there would be much less need for rising debt to keep up demand for commodities.
Have you considered that as a central bank distorts the markets in an attempt to stimulate economic growth, it creates an environment where debt is available at an interest cost that so low that malinvestment is a risk? I see the current zero interest rate environment as having forced capital to seek returns in areas that have high risk of default, such as small shale producers with insufficient cash reserves to weather a downturn in commodity prices. The rush of investment led to overproduction and a crash in prices, which will force many of them into default.
I agree that the ultra-low interest rate environment pushes investors into increasingly risky investments. In fact, negative interest rates are even worse in this regard. They should push up stock prices as well as building and land prices, because any alternative to these ultra-low rates would seem to be better.
Of course, it ultra risky investments such as investments in shale are made, they to some extent push up the use of energy and other commodities. They also add to employment. So they are as the government intended.
How do you evaluate risk? Every single individual institution and individual in the world is bancrupt. What technique of negating risk is valid if the fat lady sings? If she doesnt sing there is no risk.
Big money has recognized that risk doesn’t matter — they understand that total collapse is in the cards – as evidenced by their willingness to pile into insane risk for what would have previously been insanely low returns.
Some of the worst garbage is being gobbled up with a 5% return — pre crisis that was what the US debt returned!!!!
Case in point is the oversubscribe of Argentinian bonds…
As an investment manager you MUST beat the index or you end up as a salesperson at the Gap…. the only way to beat the index is to ignore the insanity and pile into anything that is likely to beat the index… which means you need to go where no man has ever gone before — explore new worlds ….
I like to refer to this as you need to dance while the music plays – even if the music is Air Supply’s Greatest Hits on a loop….
Everyone knows how this ends…. what they do not know is what the real cause is … nor do they understand that the coming collapse is complete – no recovery — and quite likely an extinction event.
There is that saying in finance IBGYBG…. I be gone – you be gone…. it is usually trotted out when there is an opportunity to obtain a massive bonus by taking a position that is guaranteed to blow up in the future….
Never has this saying been so appropriate… although it might be updated to ‘I’ll be dead – you’ll be dead — and everyone else will be dead’
Actuaries cannot at this point even think about the issue. They know that every pension fund in the world is underfunded, if you consider current interest rates. Of course, someone can figure out some long term averages to cover up the problem.
I used to talk at quite a few actuarial conferences, but that was back when the risk seemed far away, and the risk seemed like it perhaps would have a small impact on auto or homeowners rates. Once the risk becomes too real, and too large, no one even wants to consider it any more.
Gail,
Incredible professional advice: “Once the risk becomes too real, and too large, no one even wants to consider it any more.”
When reality gets too real, just deny it!
Abilify anyone?
Sort of sad, isn’t it. Economists can’t sit down now and look at the real situation either. It is too late.
economists are as transfixed by the oncoming headlights as the rest of us.
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