Debt: The Key Factor Connecting Energy and the Economy

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.

    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.

    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.

  5. 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 (with inflation!) in that five year period. GDP from Bureau of Economic Analysis; debt is non-financial debt, from BIS compilation for all countries.

    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).

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

    Figure 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.

  7. 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 4. Ten year treasury interest rates, based on St. Louis Fed data.

    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.

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.

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 7. 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.

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.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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695 Responses to Debt: The Key Factor Connecting Energy and the Economy

  1. Yoshua says:

    Labour’s Khan becomes first Muslim mayor of London after bitter campaign

    http://www.reuters.com/article/us-britain-politics-election-london-idUSKCN0XX1W4

    Fantastic! Sharia Law is coming to London. The Muslim immigration into European capitols will change Europe… and it wont be for the better. Islam is (despite all political correctness) not the religion of peace. Islam believes in human rights… according to Sharia Law… and infidels are not included.

    Islam has allied it self with Socialists in Europe. A economic collapse in Europe will lead to a bitter civil war.

    • Tim Groves says:

      As a Cockney ex-pat, II’m very happy with Sadiq Khan as London’s new Mayor. His religious affiliation counts for little when compared with his political views and his individual character. It wouldn’t matter to me if he was a Catholic, Mormon, Jew, Buddhist or Atheist—and it didn’t matter to the voters of London, who gave him more votes than any other politician as ever received in a UK election. Although I admit that I would have problems with him if he was a follower of Kali at the Temple of Doom.

      But symbolically, I think having a Muslim Mayor of London is very significant. We’re living in the era of the War on Terror, which has been largely portrayed in the West implicity as a war on Muslims—the latest incarnation of the barbarian hordes who are supposedly invading the West and are out to conquer it through their superior reproductive capabilities. By electing Mr. Khan, Londoners have sent a message that they don’t buy into that particular alarmist narrative. Also, once London has been running for a few years under a Muslim Mayor who shows no intention of trying to implement Sharia Law, force everyone to eat Halal food, or close the restaurants down during Ramadan, perhaps there will be a little less hyperbole and hyperventilation wasted on the whole issue of Islamic incompatibility with Western civilization.

      Of course, i could be quite wrong and Mr. Khan could turn out to be Saladin with a Cockney accent. Time will tell.

      Born in Tooting, not quite within the sound of Bow Bells, but close enough to be a real Cockney by present-day standards, Khan is a natural born Londoner and was also raised and educated in that city. Contrast this with his predecessor, Alexander Boris de Pfeffel Johnson, who was born in the Upper East Side of New York City to upper class English parents and educated in Brussels, but whose suitability to be London’s Mayor was never called into question. On the subject of religion, Johnson, who is nominally C of E, has said it would be “pretentious” to suggest that he is a “serious practicing Christian” even though he “thinks about religion a lot”.

      Compared with Boris, who will doubtless go on to higher things, and to his opponent in this election, fellow Londoner Frank Zacharias Robin “Zac” Goldsmith, who is the son of the late billionaire financier and frnech immigrant to Britain Sir james Goldsmith, Sadiq, a bus driver’s son who has worked his way up the legal and party political ladders, seems an obvious choice for ordinary Londoners. He’s clearly committed to making his home city a less difficult place for people to live and work in. Despite undercurrents of race and religion baiting, most Londoners are well aware that when it comes to bed and butter issues, divisions of class trump those of race and religion any day.

      • Yoshua says:

        A class war, a religious war and a tribal war… it will get bloody when the collapse comes.

        The Socialists and the Islamist united in Lebanon. They said that it was a class issue… and then the slaughter of the elite Christians began.

    • Pintada says:

      Dear Yoshua;

      I share your fear of muslims. Unfortunately, here in the US, the christians are just as crazy, and just as deadly. Give a hungry and ignorant person a piece of ancient fiction to point to and the stage is set. I stay away from all superstitious people – they are dangerous.

      Yours in Reason,
      Pintada

      • The issue is a lot of people being “left out” of the current economy–not earning enough to take care of themselves and their families. They find ways of expressing it. Some express it as some forms of Muslim; some express it as some form of Christianity.

        In other species, such as dogs, territoriality is a big issue. (It tends to hold population down, according to Craig Dilworth in “Too Smart for our Own Good.”) Territoriality in humans can be overcome when there are forces that make it advantageous to do so–enough resources to sort of go around, and trade which make lack of territoriality advantageous. Religion can work either way depending on the resource level. If there is not enough to go around, the territorial feelings are likely to predominate. If there is plenty for everyone, goodwill toward everyone will tend to be the theme. We are now seeing the version we get when resources are short.

        • Ed says:

          Christianity and Islam started out as the voice of the poor and disposed but ended up as the tools of the owning class. As John Crossan writes

          ” In the beginning was the performance; not the word alone, not the deed alone, but both indelibly marked with each other forever. He comes as yet unknown into a hamlet of Lower Galilee. He is watched by the cold, hard eyes of peasants living long enough at subsistence level to know exactly where the line is drawn between poverty and destitution. He looks like a beggar yet his eyes lack the proper cringe, his voice the proper whine, his walk the proper shuffle. He speaks about the rule of God and they listen as much from curiosity as anything else. They know all about rule and power, about kingdom and empire, but they know it in terms of tax and debt, malnutrition and sickness, agrarian oppression and demonic possession. What, they really want to know, can this kingdom of God do for a lame child, a blind parent, a de­mented soul screaming its tortured isolation among the graves that mark the village fringes? Jesus walks with them to the tombs and, in the silence after the exorcism, the villagers listen once more but now with curiosity giving way to cupidity, fear, and embarrassment. He is in­vited, as honor demands, to the home of the village leader. He goes, instead, to stay in the home of the dispossessed woman. Not quite proper, to be sure, but it would be unwise to censure an exorcist, to criticize a magician. The village could yet broker this power to its surroundings, could give this kingdom of God a localization, a place to which others would come for healing, a center with honor and patronage enough for all, even, maybe, for that dispossessed woman herself. But the next day he leaves them and now they wonder aloud about a divine kingdom with no respect for proper protocols, a kingdom, as he had said, not just for the poor, like themselves, but for the destitute. Others say that the worst and most powerful demons are not found in small villages but in certain cities. Maybe, they say, that was where the exorcised demon went, to Sepphoris or Tiberias, or even Jerusalem, or maybe to Rome it­self where its arrival would hardly be noticed amidst so many others already in residence. But some say nothing at all and ponder the possibility of catching up with Jesus before he gets too far.”

      • Fast Eddy says:

        I’ll use an example of the hockey tournament I just finished up as a microcosm to explain the human condition…

        I was watching two of the elite division teams play the other night — these are mainly ex pros and college players who are under 30…

        You couldn’t meet a nice group of men off the ice. Not a single Muslim or Christian fanatic among them…

        Yet towards the end of what was a very close game there was a moment when the fangs came out — some vicious punches were throw for no apparent reason other than to perhaps intimidate — or out of frustration because of the inability to establish dominance…

        I stood watching this and thinking of dogs …

        Generally dogs can get along — particularly once the hierarchy of the pack is determined… but as we all know cordiality can quickly turn to vicious snapping and potentially to bloody battles…

        The only thing preventing that outcome in the match I watched was the referees (police…) and the fact that one team had some players who clearly felt they would win if a full scale battle were to erupt — essentially the other team backed down (or perhaps they understood that this was not a bone worth fighting over…).

        The take-away from this is that we are all capable of vicious behaviour. If some of us are willing to fight over something as meaningless as a game — think of what we will do when faced with a situation where there are 7.3 billion of us — and no food.

        Throw a bone into a cage of starving dogs to get an idea of what the outcome looks like.

  2. Rodster says:

    “Islam is (despite all political correctness) not the religion of peace.”

    As someone else put it. It’s the “religion of rest in peace”.

  3. Anselmo says:

    The idea of the importance of the growth of the debt,induces me to reinforce the value of the tesis of Mikhail Khazin, according which this, the global economy crisis is due to the imposibility of compensate the diminishing returns by the way of to extend the market, which in this moment is practicaly global, and hence impossible of extend .

    In consecuence the diminishing returns forbid the posibility of new debt, and are the ultimate cause of the present crisis. And the limits of the resources ,including the debt are of secundary importance in this moment .

    According Khazin the way for to overcome the present crisis, is the rupture of the global economy in various economic blocs of lesser scale; each one contaning a population between 0,5 and 1 billion people

    • I agree that the rupture of the economy is likely to take place, because if diminishing returns. I don’t see how blocks of between 0.5 and 1 billion will be anywhere small enough. The Dunbar number is 100 to 150 people who can reasonably get to know each other, so don’t need too much of a hierarchy. Groups of this size may be able to succeed. I don’t know how much bigger will succeed. We will also have a major transportation barrier.

      • Whenever I try to explain your thesis in a one minute elevator talk, I use the term “the law of diminishing returns.” Everyone understands that phrase.

  4. Ed says:

    Doom seeps into popular music, Grace Potter, We are Alive Tonight.

  5. Don Stewart says:

    Stilgar Wilcox
    Post today from BW Hill. Covers many of the topics we have discussed…Don Stewart

    Another oil commentator who does not understand that oil production is an energy function, not a volumetric function. It is only oil producers who care about volume; that is because they sell oil by the barrel. The economy only responds to the quantity of energy it receives, the amount of oil in barrels is irrelevant without a delivered energy per barrel figure.
    That trips them up when they try to determine price/ production relationships. Oil powers the economy, and the economy is the source of demand for the oil. They are not mutually exclusive. As the energy supplied to the economy per barrel goes down, the number of barrels supplied must increase enough to maintain that economy. That has not happened so the economy is now contracting, and with that contraction has come a weakened demand for oil. Consequently, the price fell.
    The idea that there will be a balanced market, where supply becomes equal to demand requires two assumptions that are not true.
    1) That, on a dollar bases, oil can power enough economic activity to return the price payed for it regardless of that price.
    2) That the amount of economic activity that a barrel of oil can power is constant.
    The price of oil is now far below its theoretical maximum level. The world’s economy is contracting faster than is oil ability to power it:
    http://www.thehillsgroup.org/depletion2_0 22.htm
    This discrepancy may be resulting from the depletion of other fuel sources such as coal and NG, which is not taken into consideration by the Etp Model. It may be resulting from a skewed monetary policy that is attempting to push growth that is not fundamentally possible. Regardless, it now requires more energy to produce oil and its products than it supplies to the economy. With oil production itself now the largest user of the energy that comes from oil, a decline in production will be met by an equal decline in demand. The oil market today is like a dog chasing its tail, no matter how fast it runs it never catches up!

    • Stilgar Wilcox says:

      Interesting post, Don, but I’m heading out to Stockton, CA on business so will need to look at this later. Enjoy the weekend.

    • houtskool says:

      A dog chasing it’s tail; in economics it’s called ‘insolvency’.

    • Vince the Prince says:

      Reminds me somewhat the same as debasing the precious metal fineness in coinage.
      As a Numismatist an apt example is the economic collapse of the Third Century during the reign of Emperors Gallienus and successor Claudius Gothicus….basically the Antoninianus (double denarius) was rendered a bronze coin with a silvered coating.
      Contributing factors were the silver mines being played out, export imbalance to purchase exotic goods from India, massive expansion of Government and military expenses.
      This coupled with economic decline due to political instability, invasions, and lower agricultural output due to soil depletion.
      We speak here of the crapification of the economy now a days, History is repeating itself in a different variation.

      • richard says:

        Long story short:
        The Romans were the first Empire that attempted to continue monetary expansion and to avoid a (Debt) Jubilee. I write Debt in Parentheses because there was more to the history of Jubilee than the debts being forgiven.
        Rome expanded its money supply by conquest, and by mining. It probably ran out of fuel as well.
        Another failed experiment we seem to be repeating.

        • Vince the Prince says:

          From my readings the economy of Rome was largely agricultural and indeed there was a concept of debt, but not in our mindframe, nor did the Imperial Government run continual deficit account spending. Toward the end phase in the 4th, 5th centuries, the Government turned to payment in kind of goods or melted gold coinage turned to bullion as taxation!
          Not trusting the value of its own currency, which may have been clipped or shaved. Of course, no paper currency was in existence in that part of the world.
          The very wealthy tried their best to avoid their financial duties and impoverished citizens would later become serfs tied to the landed estates of the Duke. In turn the one provided protection and the other labor. The Imperial government also mandated its people would be frozen to their occupations and the offspring would follow suit.
          Harsh measures to ensure the system remained intacted.
          BTW, back in the 1980’s Jeremy Rifkin wrote the same as BW Hill group regarding we will largely satisfy needs not wants in this book concerning the second law of thermodynamics, “Entropy: A New World View”….all is coming to pass as he foretold!

          • A Real Black Person says:

            The Collapse of Complex Societies by book Joesph Tainter mentions how the Roman elite tried to debase their currencies so they paid their soldiers less money in real terms over time by replacing the gold in their coins with something else. It seemed very similar to the quantitative easing and government borrowing that has been done recently in the sense that they both hide fiscal problems instead of dealing with said fiscal problems.

            • DoGf00d says:

              Very different. In the example you site the value was the gold. Now the value is the force of the military capabilities. Spending imperial credits on military strenghthens those credits

          • richard says:

            Back in 30BC or so when Rome was still a Republic, the treasury of Egypt was paraded through the streets of Rome. That probably doubled the money supply, for sure interest rates fell. Then, Ever wondered why Trajan made severall attempts before succeding in conquering Dacia? Gold and Silver from the “Metal Mountain” because otherwise Trajan could not pay the army. These were the days before debasement became popular.
            And 250-300AD the Roman Army terrorised the citizens seizing goods and produce in lieu of taxes, and barter became common because the currency was in trouble.
            But my point was that the system was unfixable. Not much has changed.

  6. richard says:

    There is a strong correlation between acceleration in debt and growth in GDP.
    It would seem obvious to me that an increase in US interest rates would push the US$ higher, and, all things being equal, the price of oil would fall in US$ but rise in other currencies.
    This is a somewhat extended way of saying the same thing:
    http://www.zerohedge.com/news/2016-05-07/innoculation-big-narrative-lie
    but there are lots of other ineresting things said.

    • Maybe the issue is “affordability”–what the buying power of the currencies in dollars are.

      • richard says:

        I’m re-reading the article – I thought I understood the causal relationship between oil priced in US dollars and the dollar strength, but the linkage seems suspiciously strong.

        • richard says:

          OK – the summary – you can have Central Bank Intervention or you can have functioning Commodities Markets, but not both. It would be nice to be given the choice.

  7. Siobhan says:

    Gail’s AMA is off to a great start! You can find it here:
    https://www.reddit.com/r/collapse/comments/4ic5n1/i_m_gail_tverberg_ask_me_anything/

    • Brendon Crook says:

      Gail,

      I read the reddit/collapse comments on Siobhan’s link above & thank you for being there to answer peoples questions.
      I follow what you say very closely because of the methodical non-sensationalist way you analyze & write about things.
      I try not to hit the “Notify me of new comments” button on OFW but always find myself doing so (even though it fills up my inbox quickly) as I find the comments here well worth the read.
      I read you believe in a fast collapse………………….
      I know this ship is going down but don’t know enough like most of the contributors/commentators here to make a statement which is why I appreciate the comments here. A fast collapse for one person might be a slow one for someone else. In geological terms a fast collapse over 200 years might incredibly fast……

      I do know that this culture needs to end (I’m in the FE camp there) & that the non human world will breath a sigh of relief when it does. The fact I’m typing this on an old laptop sadly includes me as part of this culture.

      http://www.abc.net.au/news/2016-05-07/conservationists-welcome-additions-to-endangered-animal-list/7392266

      How long does this neon lit holocaust have to go on for?,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

      • Ed says:

        ‘neon lit holocaust” wow that phrase is a keeper.

      • Artleads says:

        Brendon,,

        If you want to be consistent, the three top issues (as best I can figure) are:

        1) Abortion rights. Apart from philosophical and moral grounds, it’s hard to see how prohibiting safe and legal abortion gets you the “ending the human scourge” seal of approval.

        2) Unprecedented global action to preserve habitat for wildlife species.

        3) Immediate and unprecedented global action to safeguard nuclear materials for all time. The nuclear status quo points to a nuclear death of wildlife as well as human civilization.

      • It always seems to me as though our economy should collapse quickly, but the financial folks have figured out ways to get first very low interest rates and then negative interest rates. With everything as bad as it is, it seems like something major should give way, but so far it hasn’t. It is hard to believe we can get through the next couple of years without a major step down, but my ability to predict timing is not as good as it should be.

        It looks like the world economy is beginning to contract, and if oil supply starts decreasing, that will definitely be the case. I would think that this would lead toward collapse, but we may still have rounds of attempts to send checks to everyone first, or attempts to use IMF SDR’s instead of other currencies. So it may be put off a little longer.

    • Vince the Prince says:

      Happy Mother’s Day, Gail!
      Some interesting inquiries and stark responses…..in a nutshell…make the most of the here and now with family and friends and look on the bright side!
      Good advice.

    • richard says:

      A partial answer to one of the questions asked:
      http://www.debtdeflation.com/blogs/2016/04/02/the-seven-countries-most-vulnerable-to-a-debt-crisis/
      “This data lets me identify the seven countries that, on my analysis, are most likely to suffer a debt crisis in the next 1-3 years. They are, in order of likely severity: China, Australia, Sweden, Hong Kong (though it might deserve first billing), Korea, Canada, and Norway.”

  8. Don Stewart says:

    Dear Finite Worlders

    George Mobus has given us his current assessment of and plans for working on Systems Science. You can find his report and program here. I have also excerpted a few paragraphs he wrote outlining humanity’s current predicament….Don Stewart

    http://questioneverything.typepad.com/question_everything/2016/05/systems-science-ascending.html

    Over the years this blog has been dedicated to the analysis of the human condition from a systems perspective. I have asked questions ranging from biophysical realities (as in real economics) to how the mind works, and what might consciousness be. Along the way I have offered a few of the answers I have developed (my beliefs) to some of those questions. I have spent no small amount of text analyzing the plight of the human condition regarding the major global problems that confront us and have concluded that in every case they are related to one another and are of our own making. In a comment on my last post Don Stewart asked if maybe I had the answers but just hadn’t mentioned them. A few times I did explore things like living styles (permaculture with low energy footprint) that would be more sustainable than what the current BAU style could be. But as often pointed out to me in comments and actually quite obvious to me already, these cannot be solutions to the problems everyone (or the vast majority) want to have solved. The problem they want solved is for all the problems to go away through some magic of technology (e.g. alternative energy) so that they are not inconvenienced in their lifestyles. They do not want to give up their lifestyles, dependent on lots of high power energy so they won’t even explore the options of living on far fewer resources (where the goal is still to live as comfortably as possible). And so they are doomed to suffer the loss of those resources the hard way, through depletion, and without adequate preparation for how to live.

    On several occasions I have stated that the solution is the one the Universe has always had for systems that are out of control — the rise of negative feedback loops amplified such that the system is brought low (or destroyed completely) so that something new can evolve in its place. The physical (material) resources aren’t used up; the metals and other minerals will still be available in abandoned cities. But the energy resources in fossil fuels will be gone, requiring that any future evolution must be based on real-time solar input as was the case for billions of years prior. The biosphere and humanity in particular are about to go through an evolutionary bottleneck event. And then the world starts over, with or without a hominid ape population.

    That isn’t good news for us. It is just the way the Universe works. The real problem we should be trying to solve is: Can our genus make it through this bottleneck with a viable breeding population, and if so, what will it take in the way of preparation? I can’t easily address the first part. But I can work on a little piece of the second part, namely to consolidate our hard won knowledge of systems science and encode it into a medium that stands a chance of making it through the bottleneck. The book, my subsequent work on systemese, and leveraging on the current interest in systems science/thinking by the NSF (and other organizations) might be useful in this regard. The idea is that if there is a future Homo, say 5,000 years from now, they might be able to start from a better position of understand the world than we did coming out of the Pleistocene. This is my version of acting on faith and with purpose!

  9. richard says:

    It looks like the Bank of England, and others are trying to get in on the act :
    http://www.bankofengland.co.uk/research/Pages/conferences/1116.aspx
    “Central Banking, Climate Change and Environmental Sustainability”
    “Against this background, the Council on Economic Policies (CEP) and the Bank of England (BoE) are organizing a workshop on Central Banking, Climate Change and Environmental Sustainability, on November 14-15, 2016 at the Bank of England in London, UK.

    The event will bring together researchers from academia, central banks, and other non-academic research institutions. It is part of a larger CEP program on monetary policy and sustainability, and a contribution towards the core research theme 5 (“Response to Fundamental Change”) of the BoE’s One Bank Research Agenda.”

    • xabier says:

      ‘Sustainability’ is just a buzzword of the day.

      If ‘sustainability’ means less money TODAY, it is just toast. Goldfish have a longer attention span than bankers, and the truly rich in general.

      The environment they move in selects for that mentality.

      To lose income stream for even a moment is like castration to a rich man – I choose my words advisedly: castration!

      I am not making this up: a very rich man (very) said this to me: ‘Forget all the cool-aid crap they come out with: it’s all about the money here and now. Whatever they say, it’s about the money. Today. ‘

      So, if you are making plans for the future, bear in mind that this is how our lords and masters think.

      Extrapolate from that.

      There will be no sudden outbreak of Wisdom and Sanity.

      Which does not mean that you cannot take the course of wisdom and sanity.

      You will probably be crushed of course, but then life is tragic, and all bets are losing ones in the end.

      But it is good to live well, to be a decent sane human being.

      • tagio says:

        xabier,
        +++++++++
        Their horizon, and the horizon of “investors,” is extremely short-term, and based on the most simplistic assumptions – there is zero systemic thinking or understanding.

      • Ed says:

        “Goldfish have a longer attention span than bankers” so many good quotes with this article.

    • As I look through the list of suggested topics, the list is all about how environmental risks might affect the financial system. They don’t seem to care about energy limits. I guess environmental problem seem like a smaller, more contained subject.

  10. Yoshua says:

    Debt allows us to invest/consume future sales/income today. This investment/consumption leads to economic growth. Economic growth leads to higher demand for commodities. Higher demand for commodities leads to higher prices on commodities. Higher commodity prices allows us to extract more expensive to extract commodities.

    Higher commodity extraction costs leads to smaller returns on investments. Higher commodity prices for consumers leads to rising living costs. Smaller returns and higher living costs leads to economic slowdown. Economic slowdown forces the central banks press the interest rates down to zero. In the end we still reach peak debt.

    When we reach peak debt the debt bubble starts to contract, which leads to economic contraction and falling demand for commodities and falling commodity prices. When commodity prices fall below extraction costs, the commodity producers start to default on their debt.

    In a deflationary environment with falling prices, new debt creation and new investments on future falling sales becomes a problem.

    What we are looking at is a very nasty market correction in my opinion (if I understood your paper correctly this time). The global economy might collapse to half of today, people will get hurt and there might be war. Perhaps this will be the end… but then again… perhaps not.

    Strangely enough I’m optimistic now… peak debt will save us. I must have missed something. 🙂

    • Artleads says:

      Yoshua

      Thanks much. But I’d add resource depletion and climate change as factors to consider too.

      • Yoshua says:

        Yes, there is no escape from reality.

        • A Real Black Person says:

          Most humans will never fully grasp what led to the collapse of industrial civilization after it happens. They will not deal with reality. They will fall back on their belief systems.
          Reality-based belief systems have historically been unpopular. I don’t see a severe bottleneck really changing that.

Comments are closed.