What really causes falling productivity growth — an energy-based explanation

What really causes falling productivity growth? The answer seems to be very much energy-related. Human labor by itself does not cause productivity growth. It is human labor, leveraged by various tools, that leads to productivity growth. These tools are made using energy, and they often use energy to operate. A decrease in energy consumption by the business sector can be expected to lead to falling productivity growth. In this post, I will explain why such a pattern can be expected, and show that, in fact, such a pattern is happening in the United States.

Figure 4. Total amount of energy used by Commercial and Industrial Sector (excluding transportation) based on EIA Energy Consumption by Sector, divided by Bureau of Labor Statistics Total Non-Farm Employees by Year.

Preview of Figure 4. Total quantity of per capita energy used by the US Commercial and Industrial Sectors (excluding transportation). Computed by dividing EIA Energy Consumption by Sector by Total Non-Farm Employment from the Bureau of Labor Statistics.

Background

The problem of falling productivity growth seems to be a concern to many economists. An August Wall Street Journal article is titled, Productivity Slump Threatens Economy’s Long-Term Growth. The article says, “Productivity is a key ingredient in determining future growth in wages, prices and overall economic output.”

The general trend in falling productivity growth does not seem to be particularly recent.  OECD data shows a long-term pattern of slowing productivity growth, dating back to the 1970s for many developed economies.

Figure 1. Five-year average growth in productivity based on OECD data

Figure 1. Five-year average growth in productivity per hour worked based on OECD data.

Falling productivity can be expected to affect wages. Figure 2 shows that in the United States, wages for both low and high paid workers increased much faster than inflation between 1948 and 1968. Between 1968 and 1981, wages for both sets of workers stopped rising. After 1981, wages for high paid workers (“Top 10 percent”) have risen much faster than for the bottom 90%.  This reflects the way this lower productivity has been distributed to the work force. Low-wage workers have been affected to a much greater extent than high-wage workers.

Figure 2. 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 2. 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.

A Major Culprit in Falling Productivity Seems to Be Diminishing Returns with Respect to Oil Extraction

Many people believe that the only oil problem we need to worry about is the possibility that supply will “run out” at some point in the future. In my opinion, the real problem is different. What we are experiencing is diminishing marginal returns with respect to oil supply. In other words, it is becoming increasingly expensive to extract and process oil. Total costs, including wages for human labor, the cost of capital, the cost of energy to extract the oil, and required tax payments, are rising ever higher. Businesses are finding it nearly impossible to earn a reasonable profit extracting oil. If oil producers want to cover all of their costs, they need to borrow an increasing amount of money simply to cover normal business expenses, including the development of new fields (to replace currently depleting fields) and the payment of dividends.

Figure 3. Bloomberg exhibit showing that returns for three large oil companies on a "cash" basis fell after 2008, and are now at 50-year lows. CROCI means "Cash Return On Capital Invested." Bloomberg source.

Figure 3. Bloomberg exhibit showing that returns for three large oil companies on a “cash” basis fell after 2008, and are now at 50-year lows. CROCI means “Cash Return On Capital Invested.” Bloomberg source.

The problem of diminishing marginal returns extends to other commodity types as well, such as coal, natural gas, fresh water, and metals. Oil is especially important, because it is energy-dense and easy to transport, making it the world’s most-used fossil fuel. At the same time, we are experiencing rising costs for pollution control of various kinds, including attempts to prevent climate change.

The combination of diminishing returns for commodity production together with rising pollution control costs tends to make the world economy increasingly inefficient. This increased inefficiency affects the cost of producing many things that consumers value, including food, fresh water, housing, and transportation. Indirectly, the ability of businesses to create jobs that pay well is affected, also. I believe that this growing inefficiency in producing goods and services is the basis for the falling growth in productivity that appears in Figure 1.

Why Diminishing Returns with Respect to Energy Supplies Are Likely to be the Culprit in Falling Productivity

There are several basic issues that make our economy vulnerable to the impacts of diminishing returns:

  1. Energy plays a critical role in creating goods and services, and thus in economic growth.
  2. Energy that is very inexpensive to produce is important in setting up a benevolent cycle of greater productivity and more economic growth.
  3. Diminishing returns for oil and other energy products lead to higher costs of production. If these higher costs of production are passed through to the consumer as higher prices, this leads to what we think of as a recession, and a slow-down in economic growth.
  4. The timing of falling productivity “matches up” with falling energy consumption on the part of employers, and also with high oil prices.

Energy plays a critical role in economic growth because energy is necessary for all kinds of economic activity. Energy allows transportation to take place; it allows heating to take place, so metals can be smelted and chemical reactions of many kinds can take place; it allows the use of computers and the internet. When workarounds for problems are needed–for example, increased pollution control, or deeper wells, or desalination plants–all of these workarounds also require the use of energy products. So, the problem is not simply that it takes more fossil fuel energy to create energy products. Many other parts of the economy, including pollution control and extraction of fresh water and minerals, become more demanding of energy supplies as well.

Cheap-to-produce oil and other types of energy are important in setting up a cycle of economic growth. We think of productivity growth as being something that an employee is able to do. In fact, productivity growth is enabled by the use of “tools” that the employer (or the government) gives workers, allowing these workers to create more goods and services per hour worked. These tools can be either physical tools, such as machinery, computers, vehicles, and roads, or they can be tools provided through more specialization and training. In the case of physical tools, it is clear that energy is used both to create and operate the tools. In the case of specialization, energy is needed in a more indirect way; extra energy allows the economy to have sufficient surpluses to permit training of specialized workers, and also to allow them to have higher wages later.

Thus, we can think of human labor as being increasingly leveraged by energy-related tools. In fact, if we divide energy consumption of businesses (commercial and industrial) by the total number of non-farm employees in the United States, we find that energy consumption per employee falls very much according to the pattern we might expect, based on the rise and then fall in productivity growth shown in Figures 1 and 2. A slowdown in energy leveraging seems to correlate with the decline in the rate of productivity growth.

Figure 4. Total amount of energy used by Commercial and Industrial Sector (excluding transportation) based on EIA Energy Consumption by Sector, divided by Bureau of Labor Statistics Total Non-Farm Employees by Year.

Figure 4. Total quantity of per capita energy used by the US Commercial and Industrial Sectors (excluding transportation). Computed by dividing EIA Energy Consumption by Sector by Total Non-Farm Employment from the Bureau of Labor Statistics.

Figure 4 shows that energy consumption per employee reached a peak in 1973. Energy consumption per employee started falling in 1974. This date corresponds to the first major run-up in oil prices (Figure 5). Oil prices, on an inflation-adjusted basis, have never returned to the very low level experienced prior to 1973.

Figure 4. Historical annual average price of oil, for a grade of crude similar to "Brent," based on data of 2016 BP Statistical Review of World Energy.

Figure 5. Historical annual average price of oil, for a grade of crude similar to “Brent,” based on data of 2016 BP Statistical Review of World Energy.

The period between the end of World War II and the early 1970s was generally a period in which inflation-adjusted oil prices were under $20 per barrel. At this very low price level, it made sense to add a new interstate highway system and to greatly upgrade the electric grid and the oil pipeline distribution systems. Once oil became high-priced, the US greatly backed away from leveraging worker productivity with such big projects. Other changes began as well, including gradually shifting manufacturing to other countries. These countries typically had lower labor costs and a cheaper energy mix (more coal and hydroelectric, and less oil).

The first run-up in prices occurred after US oil supply reached a peak in 1970 (Figure 5). According to a presentation by Steve Kopits, the second run-up in prices started occurring about 1999 (Figure 6). By then, we reached a point where a disproportionate share of the cheap-to-extract oil had already been removed. Oil producers needed to start work on new oil fields in areas where extraction costs were higher.

Figure 5. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is "Compound Annual Growth Rate."

Figure 6. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is “Compound Annual Growth Rate.”

Oil’s diminishing returns affect the economy. As we reach diminishing returns with respect to oil production, the cost of producing additional barrels of oil tends to increase. If this higher cost is passed on to goods made directly and indirectly with oil products, we find that the prices of many products rise. Food costs are particularly affected, because oil is used extensively in agriculture and in transporting goods to market. Higher oil prices affect the cost of other types of goods, because many goods–even coal–are transported using oil. The higher cost of oil tends to ripple throughout the entire economy.

The problem, however, is that higher oil costs lead to lower productivity, because employers and governments tend to purchase fewer energy products for the benefit of their workers when oil prices are high. We end up with a mismatch:

  • The cost of oil products, and many other products, tends to rise.
  • The productivity of workers tends to grow more slowly. Wages rise very slowly, if at all. They certainly do not keep up with soaring oil prices.

The result of this mismatch is recession, as occurred in the 2007-2009 period. Economist James Hamilton has shown that 10 out of 11 post-World War II recessions were associated with oil price spikes. A 2004 IEA report states, “.  .  . a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. Inflation would rise by half a percentage point and unemployment would also increase.”

A Second Way Diminishing Returns Can Work Out Badly: Prices that Are Too Low and Oversupply

In the preceding section, I explained how oil prices, if passed on to the consumer via higher prices of other goods, could lead to recession. Because our economy is a networked system, the situation doesn’t need to work this way to come out badly. There is an alternative scenario in which oil prices stay too low for businesses extracting oil to make an adequate profit. In this scenario, it is businesses, rather than consumers, who find that they have a huge financial problem. This is the problem we are encountering now. In fact, it is not just oil-producers who have a profitability problem; the profitability problem extends to businesses producing coal, natural gas, metals, and many kinds of agricultural commodities.

The reason why this kind of low-price scenario can take place (despite rising costs) is because workers are also consumers. We saw in Figure 2 that the wages of the lower 90% of workers tend to lag behind when energy consumption per worker is falling. There are a very many workers in the bottom 90%. If the wages of these workers lag behind, homes, cars, vacations, and many other kinds of discretionary goods become less affordable. The reduced demand for these finished products leads to lower demand for a wide range of commodities. This lower demand tends to push commodity prices of many kinds lower, even though the cost of production is rising. As a result, profits for a wide range of commodity producers tend to fall in a way similar to that shown in Figure 3.

It may be that we can expect a recessionary impact, a short time after profits fall. According to Deutsche Bank:

Profit margins always peak in advance of recession. Indeed, there has not been one business cycle in the post-WWII era where this has not been the case. The reason margins are a leading indicator is simple: When corporate profitability declines, a pullback in spending and hiring eventually ensues.

The article goes on to show that there is a lag of about two years between the time of profit compression and the time when recession hits. The amount of variability is quite high, with one recession coming as soon as 4 quarters after a fall in profitability, and two coming as late as 15 or 16 quarters after a fall in profits. The median lag was 8 quarters, and the average lag was 9 quarters.

This Deutsche Bank description of the cause of recessions gives an explanation why Hamilton encountered recessions after oil price spikes. These rising oil prices affected one of the costs of production for most companies. These rising costs compressed profits, and eventually led to recession.

This description of the cause of recession shows how recession can also ensue if commodity prices remain too low for an extended period. We know that oil prices began falling in the third quarter of 2014. It is now two years later. Profit margins of many commodity producers have been squeezed. We have already seen layoffs in the oil and coal industries. In this low-priced situation, companies are affected unevenly: some benefit from low prices, while others are hurt by low prices.

Commodities are often essential to economies, especially for countries that export commodities. These exporters are especially likely to be affected by low prices. Impacts are likely to include civil disorder and falling production, similar to what we are now seeing in Venezuela.

Oil importers are dependent on oil exporters, so eventually oil imports must drop. Low oil prices are likely to lead to a drop in locally produced oil products as well. As a result, we can expect that less oil and fewer other energy products will be available for leveraging the labor of human workers. If past patterns hold, we can expect a further decline in productivity growth. Rising oil prices are not really a solution either, because, as we have seen, they tend to lead to recession.

Diminishing Marginal Returns Don’t Just Go Away by Themselves

Economists claim that the law of diminishing marginal returns operates only in the short run, because in the long run, all factors of production are variable. This statement might be true, if we lived in a world without limits. In fact, the amount of arable land is very  close to fixed. We have not found a way to stop population growth, either. As a result, the amount of arable land per person is falling. We need to keep finding ways to produce increasing amounts of food per arable acre of land. Doing so typically requires energy products, including oil.

We are having similar problems with fresh water supply. We can solve our falling fresh water per capita problem with deeper wells, long-distance transport, or desalination. Any of these workarounds requires energy products.

Of course, we have had diminishing returns with respect to oil supply since the 1970s. We have not yet found a reasonable workaround. Intermittent electricity is not a reasonable substitute; it does not power existing airplanes, trucks and most cars. When all costs are considered, intermittent electricity tends to be very expensive. Experience shows that if subsidies are given for intermittent electricity, they are needed for other types of electricity generation as well.

Figure 7. Figure by Euan Mearns showing relationship between installed wind + solar capacity and European electricity rates. Source Energy Matters.

Figure 7. Figure by Euan Mearns showing relationship between installed wind + solar capacity and European electricity rates. Source Energy Matters.

The belief that diminishing marginal returns are temporary is probably related to the belief that there are substitutes for everything, including energy supplies. Unfortunately, this is not the case; the laws of thermodynamics dictate otherwise.

As a result, when businesses use falling amounts of energy per capita, we should not be surprised if productivity lags, and if wages for many workers barely rise with inflation. It is possible to get some productivity gains through education, but it is very unlikely that these gains are as large as when more capital goods are used, as well as more direct use of energy.  There are also clearly diminishing returns with respect to education and training; for example, if we need 10,000 additional dentists per year, training 50,000 additional dentists per year would not be helpful.

Can We Solve Our Productivity Problem with Lower Interest Rates, or with Increased Deficit Spending?

I wouldn’t count on it. Our problem is an energy problem.

Increased deficit spending could perhaps raise commodity prices a bit, and thus help the profitability of companies producing commodities. The reason commodity prices might rise is because increased spending by governments would act to supplement the low spending by workers who are suffering from low growth in wages. The sale of goods might rise for a while, but productivity of workers would still lag. Economic growth would, at best, remain very slow. If the economy were headed for recession or the collapse of commodity exporters, that situation would continue to be the case.

Lower interest rates would likely be even less helpful than deficit spending. There is no guarantee that these low interest rates would lead to increased spending on capital goods that would benefit workers. Banks in Europe and Japan would likely have even more problem with adequate profitability than they do now. Bank failure would become even more of a concern than it is now.

Our problem is really a lack of very cheap-to-produce energy that can be used to inexpensively leverage the labor of human workers. This energy needs to be of the correct kind to match the requirements of existing equipment. Without this leveraging, it is likely to be impossible to fix our productivity problem.

 

 

 

2,051 thoughts on “What really causes falling productivity growth — an energy-based explanation

  1. to a real black person your on the same page as me when you state carbon reduction emissions stuff is just a cover for the taboo topic of fossil fuel depletion,the elites have been preparing for this for a long time and thankfully that they have because we would not be around enjoying ourselves on our finite world. my advise to anyone on this website don’t put all your eggs in one basket

    • This is (used to be?) very plausible, high degree scenario for me as well, however I’d say the world has become so fractured today, that the best opportunity window to force it just lapsed, although nominal deals on climate change have been already signed globally across the board (north/south, east/west). But I could be wrong, and with the first salvo from depletion imbalance, they might resurrect the push for action, in my book somewhat low probability at the moment.

      On another note, the recent war drumbeats, seem more pressing and plausible danger now, as they can’t let Russia finish their conventional (nuclear to some extent as well) rearmament program run at this pace till 2020-25, by that point it will be giant, modern continental dominating and perhaps global force.

      • How would countries carry out these ‘climate change deals’ without collapsing the global economy?

        • Asked them not me, the UN deals are already signed (mostly of declaratory and/or unrealistic goals to fulfill), perhaps they meant to use it as a base – springboard to hide future urgent FW issues (mostly in energy depletion) behind the cloud of “good doers” climate change mitigation action plans..

          But again, the world is now oversupplied in oil and other energy carriers, who knows how long this situation will last under the deflation/mild stagflation scenarios and consumer countries here and there falling into chaos..

          The global economy is already a mirage, so mirage squared might be a modus operandi for a while kicking the can..

          • RealitySANT 101 – Learning how to play by the rules of a world based on fact and logic

            I believe ARBM has already put forth a theory on this — that you disputed — if you are to dispute that theory you need to explain why…

    • “don’t put all your eggs in one basket” = diversification

      I agree. None of us knows exactly how this will turn out, so it is good not to be too intent on changing things to match one future scenario.

      • Gail, please send Fast Eddy a PM and let him know, he seeks to think you feel otherwise.
        Expecting to eat rat with stuffing this Christmas.

  2. In sharper numbers:

    A gallon of crude API 37.5 contains 140.000 BTU.
    The extraction of 1 gallon of crude API 37.5 costs 15.000 BTU.
    The ICE works at 20 percent efficiency.
    The extraction costs 15.000 BTU * 5 = 75.000 BTU.
    75.000 BTU / 140.000 BTU = 0.53 = 53 percent

    Diesel costs $2.4 / gallon.
    It cost $2.4 * 0.53 = $1.27 to extract a gallon of crude API 37.5
    1 barrel equals 42 gallons
    It costs $1.27 * 42 = $53 to extract 1 barrel of crude API 37.5
    The WTI crude oil price is $50 a barrel.

    The end consumer pays $2.4 * 42 = $100 for a barrel of Diesel

    These numbers are close to the numbers from EIA.

  3. how would countries carry out these ‘climate change deals’ without collapsing the global economy? . and that is the $64000 question how would the world deal with a size-able reduction in energy production without the system imploding , perhaps with perpetual nirp,, ,free trade deals,, elimination of cash and more heli-copter money experiments and a way to keep the sheeple distracted as their standard of living evaporates .all these things i’ve mentioned have come up in the mainstream media but fossil fuel depletion gets nary a mention, i smell a rat

    • A refinery cannot smelt copper with free trade… NIRP or any other policy.

      Some might suggest it can be hopium-fired…

      But it cannot.

      This is not a 64,000 question — it is a rhetorical question….

    • But what if its not actually about delivering on the climate deal, but rather the work involved in looking like we’re delivering on the deal? Remember cash for clunkers, and the push for shovel ready transportation projects (FASTER/TIGER grants)? Were any of them “about” getting old cars off the road or building nicer smoother streets? Of course not, they were fiscal stimulus schemes aimed at generating some kind of activity, any kind, to keep factories running, fuel burning, and people working. They might as well have been digging and then refilling holes.

      For more than a decade now the stage has been set to prepare people for the biggest public works project ever undertaken. It doesn’t matter that the outcome doesn’t deliver the intended results. The opportunity here is to keep the fires burning a little longer, as demand for FF falls, artificially create new demand by ordering millions of solar panels and wind turbines, ship them all over the world, install them. It doesn’t matter that it actually ramps up GHG emissions in the short term to manufacture all of this stuff- that’s the idea. More GHG emissions means more manufacturing and commercial activity, when the people can no longer afford it. Governments can pay for it, directly monetized by central banks… for as long as it lasts.

      That’s the best sense I can make of it anways. I just can’t believe all the posturing will be for nothing. TPTB will try, somehow, to use the push for RE as a tool to extend BAU and ultimately thier grip on power.

  4. Deutsche Bank, Goldman warn of growing China property risks
    China going through extreme investment cycles: JPMorgan Asset

    Tai Hui is experiencing deja vu.

    China’s surge in home prices reminds JPMorgan Asset Management’s chief Asia market strategist of last year’s stock market mania. Spiraling leverage and implicit state support are among the common denominators, he says. Shanghai property values jumped 31 percent in August from a year earlier, the latest data show. In 2015, a 60 percent rally in the city’s equities through June 12 was followed by a $5 trillion rout.

    Deutsche Bank Group AG warned last month that China’s housing market is in a bubble, while Goldman Sachs Group AG said this week it sees growing risks across the real estate industry. Home prices started to take off last year in the wake of the stock market crash after the governments eased curbs on property purchases. In recent days, cities including Shenzhen have started re-imposing restrictions.

    “It’s similar to the equity market where if you let things loose, it just runs like a stallion,” said Hui. “And then you have to really rein it back, then it’s like an ice bucket challenge. So you go through this extreme heat and cold. That’s not particularly good for the economy because then you’re going through very aggressive investment cycles.”

    More http://www.bloomberg.com/news/articles/2016-10-06/china-s-housing-boom-looks-a-lot-like-last-year-s-stocks-bubble

    • There are an awfully lot of citizens owning properties that are very expensive relative to their income.This could end very badly–or maybe China would bail banks out as before. They might be able to get away with it better than some other countries.

    • German exports rising strongly in August

      http://www.dw.com/en/german-exports-rising-strongly-in-august/a-36003187

      German businesses shipped goods and services worth 96.5 billion euros ($107.8 billion) abroad in August, which was 5.4 percent more than in the previous month of July and a staggering 9.5 percent more than in the same month a year ago.
      …………………………..
      Germany is feeling immortal. The Chinese housing bubble is most likely behind this feeling of immortality.

  5. i was reading one of my past issues of a conspiracy magazine when i came upon this nugget of information that i would like to share with ‘ofw’ bloggers ,the article was about a gathering of elites that occurs yearly’, it is the august-september 2005 issue. the paragraphs that caught my attention were as folllows ‘ of course,discussion turned to oil.an elitist expressed concern over the sky-rocketing oil price. one oil industry insider at the meeting remarked that growth is not possible without energy, and that according to all indicators the world’s energy supply is coming to an end much faster than anticipated. according to sources estimate the extractable world’s oil supply will last a maximum of 35 years under current economic development and population. however one of the representatives of an oil cartel remarked that they must factor into the equation the population explosion and economic growth as well as demand for uil in china and india. under the revised conditions, there is apparently only enough oil to last for 20 years. no oil spells the end of the world’s financial system.the conclusion expect a severe downturn in the world’s economy over the next two years as the elites try to safeguard the remaining oil supply by taking money out of people’s hands. in a recession or, at worst, a depression, the population will be forced to dramatically cut down their spending habits, thus ensuring a longer supply of oil to the world’s rich as they try to figure out what to do.’ Whether this is fact or fiction or a little bit of both it was interesting when i saw this

    • There would be decades of oil left — the problem is that it is too expensive to extract….

      We are not finding any more cheap to extract oil

  6. For those who are not sure how a small disruption could jeopardize the entire economy, please have a look at this article http://www.iwar.org.uk/cip/resources/PSEPC/fuel-price-protests.htm

    I have read somewhere but I have no reference that if the strike continued for a few more days or a week, UK’s economy would be so crippled that it may not be possible to recover.

    In 2008 during the height of the financial crisis (just after Lehman), my workplace, a high tech factory that produces semiconductors nearly went bankrupt. JIT is widely used as parts and consumables are very expensive and we keep minimum stock. Our supplier also keeps minimum stock. Some very expensive and no-so-easy-to-spoil parts are not kept at all. It needs to be ordered from the supplier and it takes many weeks to get it fabricated and sent to us. Our raw materials have expiration dates and we cannot keep a large stock. At most, we have 1-2 weeks of supply. Why spend money to keep stock when you can ask your supplier to keep stock. The supplier also keeps minimum stock as they can ask their supplier to do the same. It goes all the way to the top.

    At the height of the crisis where banks do not trust each other, some suppliers are cash crunched. These suppliers may be from China, Japan, USA, Europe. They request up-front cash payment as they need to pay their suppliers who are asking for up-front cash payment. Companies do not keep cash. They need to roll their money over and sometimes, take bridging loans when the payment period does not match. Payment period not matched simply means that your supplier gives you 3 months to pay and your customer says they can pay you only in 5 months. So, you have to pay your supplier first and you may not have the cash as your customer has not paid up. So, in this case, you need to get a bridging loan from the bank (i.e. to bridge you over). If your company’s performance is not good, then you may not get a loan. You will end up in liquidation overnight. That is the real facts of live.

    So, our factory was in deep trouble as up-front cash payment was required before the parts were sent. If the parts were not available, we cannot produce the chips that our customer wants. If it went past the deadline (i.e. contract delivery date), then we have to pay penalty. So, somehow, we need to get money to get the parts. Why upfront? Letters of Credits (LoC) are not accepted as they are not sure if the banks are good enough to honour them. Luckily, Bernake rescued us by providing blanket guarantee for the banks in US and in Europe and the up-front cash payment subsided. Our suppliers in USA, Europe. Question is, what will the central banks do now ? The implicit guarantee is already there but “crisis” still happens.

    If Ben Bernake did not come in with 1 week, I would be out of job without a single cent for salary. With millions of dollars worth of products being sold, with millions of dollars of parts, consumables and raw materials required, it is not possible for many companies to just have that kind of cash. Do bear in mind that most of the employees or workers work for small and medium-sized industries and they are the ones who are not cash-rich. A biscuit factory, a small outfit doing precision-steel parts, a commercial import-export trading firm. These are the companies that rely on trade financing and banking. They cannot issue bonds for their day-to-day expenses. They don’t have a large stash of cash. They are too big to sell their wares at Ebay. These companies may hold a lot of patents for their products that are used in systems all over the world.

    With 7B people on this planet, things has to be carried out quickly and efficiently. Otherwise, things will just fall off. We need machines to make biscuits. Traditional baking methods (slow) does not provide enough quantity for the ever-growing appetite. We need large scale farming, and aqua-culture to ensure that we have enough food. Machine are required. We don’t have the will power, the time, the capability, the resource to do a change to other method without having a failure in between.

    There will be people butting in to say : “You know, Mr XXX says that perma-culture or something similar will be able to feed the people in the world”. Again, falling back to the fallacy of “This farm can produce XXX calories per day and we have YYY people, therefore, with XXX/YYY, we have sufficient to feed them”.

    Using the biscuit factory for example, the traditional method requires that a dome-shaped oven be used and it produces about 50 pieces per hour per dome. You need charcoal and you fire up the oven in the morning. By the end of the day, you have product about 500 pieces which is good for the village that you stay in. You have sufficient charcoal as you don’t use a lot and the supply is just nice for the demand. Now, fast forward 50 years and now, it is an industrial version. Why? the demand exceeds supply and you need to be efficient. The village is now a large city and the population has balloned 10 times. You don’t have space to build more domes, you cannot get more charcoal and manpower is just too expensive. Therefore, you have to use machines. The machine is made in China; the motor is from South Korea (it lasts longer); the steel is from Japan (lasts longer); the printed circuit board is from Hong Kong. The transformer is from Japan. The conveyor system is locally made but the belt is from Germany. The belt needs to be changed every week as wore out easily. The oven is customed made and so are all the parts for the oven. You have to get local companies and technicians to support that oven. The heating element is from Italy as that company has the most consistent heating element in the world. It gives a uniform temperature so that your 200 pieces of biscuit are heating quickly and uniformly. It costs a lot of money but at least you need to change it only once 1 year. You have run this process for 10 years and you have expanded the factory to have 5 ovens. The process of making the biscuit has changed from the domed to the oven-fired version.

    Question – what does it take to move back to the domed oven? Can anyone still remember how to stick the biscuit to the wall of the dome? For how long do we need to heat the biscuit? Are there any methods to make few thousand biscuits per day? Do we have the charcoal? Do we have the people? the skill? Can we even go back to the traditional method without any disruption?

    Same goes for semiconductor. All the machines that makes semiconductor uses the most sophisticated chips to control the process. To design the machines, they use super-fast computers to do so.

    So, how do you have a step-down collapse? How do you want to de-globalized? The biscuit factory’s process has been set to use the Italian heating element. Can you ask them to use a local version? How many batches of burnt biscuits can the company take before going bankrupt? How about the penalty for slow delivery? Cash flow issue if you want to switch to to use all local parts? The factory employs hundreds of people and all of a sudden, there are not jobs for these hundreds? How about the knock-on effects of these jobless people in the local economy? If 4 or 5 of the biscuit company in the country collapses, all of a sudden, there will be a shortage of “portable dry food”. How about the loans that these company owes to the bank?

    If someone were to put in some thoughts, they would have come out with a more detailed scenario for all the industries across the world. Yet, there are many people still claiming that “banks are not important”, “we can go local”, etc.

    • When you think about it …. you realize how fragile the system is….

      If you don’t think about it… you might convince yourself that it is not.

    • @CTG

      A very good explanation of the problem. And you also touch the problem, that all suppliers mentioned in your example have exactly the same problem – even the miners of raw materials….

      But I can contribute a partly solution: For food, get rid of the processing at whole! No one needs cookies, you can eat the soaked or sprouted grains…. no one needs soup, you can make one yourself with basic food staples.

      But still, this solves only a little part, as the whole system of agriculture and truck-delivery is ultra-dependent on JIT, loans and the whole embedded complexity of out techno-society. Maybe not in Cuba or Somalia…. but everywhere in the west.

      So I hope for a prolongation of BAU – because there is (from my viewpoint) no other plausible way to get the system that supports 7.5 billion people (for better or worse) working.

      • You admit it yourself 🙂 but if we assumed everyone would volontarily start eating sprouted grains we could assume a whole lot of stuff that would make BAU lite possible.

        • @DJ

          Yes, theoretically I think BAU lite is possible. But most people (from my viewpoint) would never voluntarily accept or engage in it. They would instead waste a lot of energy to find the “responsible” people for the “fraud” and misfortune happening to them… or even burn down things in their rage, exacerbating the problem.

          • you have it exactly right

            the vast majority of people will look (or are looking) for causes for the coming crises as some external force that ”someone” can be held responsible for, and that prosperity can be voted into office, that the right government will fix things

            there is virtually no acceptance or awareness that our problems are caused by each and every one of us.

            and yes once the fan is spattering everybody the reaction will be to riot loot and burn —we have countless examples of exactly that happening (its the immediate survival factor)—
            Yes the military will try to stop it, but they too will run out of energy and thus run out of control
            police/ soldiers have to survive too

      • Food – you cannot do anything. We need the efficiency to get the food out in the shortest possible time. Your store is not going to wait for 3 months for the tomatoes or carrot to grow (example)

        • Yes, redesigning the whole food system without a supply-chain interruption and then giving the alternative system and economic viability while BAU still continues… that’s a huge challenge. Can’t see it happening without full government rule, subsidies, laws, etc. pp.

          That that government wouldn’t be popular… even if it would be for the greater good / stability in regard of the future.

          • I have read somewhere this quote for politicians:

            “Good decisions are seldom popular. Popular decisions are seldom good”

            • Those words are very true.
              Now the words of a heretic: “democracy” does not respond adequately to the current situation. It is dysfunctional, and in fact, we can consider it as a big problem added.
              Of course I am not advocating the dictatorship. I speak of this strange thing called “democracy” where the people elect the government that promises more toys.

  7. One cannot compare “now/present” with situation 30, 50 or 100 years ago. Our needs now are significantly higher than what we need 20 or 30 years ago. This “need” can be a personal need or a regulatory need. These needs will translate to more “fossil fuel” use.

    Examples of a personal need – Before tablets (iPads) comes out, there is no need for that kind of gadget but now, many of them cannot make do without it. Same goes for cell phone, computers, leisure/business flights, etc.

    Some of the needs are indispensable – medication, kidney dialysis, glasses, etc. Actually, if you are not reading in poor light, playing computers, etc, you may not even have vision problem to begin with !

    Some of the needs are regulatory – airbags for cars, food toxicity check, environment quality check and a huge amount of other regulations that many people find it useless or waste of time (actually it should be known as waste of energy).

    For those who are more than 40 years old, can anyone remember that we don’t wear any helmets when we cycle around? Our parents more or less could not be bother if we fell down? We sat in cars that was rikety and has no safety features? We swing on the bus railings or do other things that are considered “dangerous” now. How come it was not dangerous then? Does it mean that our fatality rate now is much lower than last time?

    If you think about it, NO. Cars go much faster now and waste more fuel. We felt confident that with airbags, ABS, EBD, TCS or whatever 3-letter acronym is there to save us from any accident. In fact, the best way to reduce accident to close to “zero” is not have an airbag but a stake/sharp knife on the steering wheel. The knife will just pierce through you if you brake suddenly or have a crash. All of a sudden, everyone will be very careful, driving 20 mph, everyone turns on the turn indicator and everyone is very polite on the road. Cars are checked very often and I am not surprised if no one dies on the road anymore.

    Now, not only are cars goes much faster, we have more accidents. Jevon’s Paradox suggests that due to the marked efficiency of fuel injection, lower engine weight (aluminum engine) and other improvements, we should improve on the air conditioning, entertainment, GPS, fine leather seats, etc. We can make the car bigger and better.

    Historically, every generation of cars goes through an improvement cycle that is not “fossil fuel friendly”. Longer, heavier, more features. With Jevon’s paradox, if we just maintain that same size from 1980s till today, we would not have used so much fossil fuel.

    Personal needs

    Do you think anyone would give us their needs? Simple put, do you think anyone would want to trade down their smartphones to feature phones like the old Nokias? Do you know how many people are employed in this “smartphone” field? The semiconductor designers, the chip factories, the logistic companies (planes to fly the engineers, phones, trucks to ship the capacitors, screens), the factories that build these phones, the plastic companies that produces the casing, the glass factory that does the glass, the machines that makes the casing, glass, the chemical used in making this phone, the software engineers that make the games like Candy Crush, the HR/facilities/cleaners personnel that maintains the headquarters of King Software (maker of Candy Crush), the phone shops that sells the phones, the repairman that repairs the phone, the people who mined lithium for the batteries, etc There are literally hundreds of thousand of livelihood that depends on smartphones. Mind you, smart phone took hold in 2006 and began its epic rise in 2010 onward. In a few years, it has given employment to so many people.

    So, if anyone thinks of ‘living simpler” without smartphones would literally means that thousands of people from every corner of the world out of work. So, who is going to give them jobs? Who will feed them, clothe them.

    Do we have a backup plan just in case smartphone fails ? Can we do everything a smartphone does with an old Nokia clamp shell phone or a fixed line phone? Can we do it without any efficiency loss? We are so primed for efficiency that we have no room for errors when we go down the efficiency curve (example: if our farming yield goes down from xx% to yy%, can we still sustain the same lifestyle?). A 5-man software company replies on 1Gb internet to work as they need that high speed to do the programming. If it drops to 100Mbs, does it mean that they will continue to function as a company? Probably not. Why? They are not used to that kind of speed and in the end, they will just not get anything done.

    Medical needs
    Do I need to say that without advanced kidney dialysis, MRIs, etc, do we still have today? Are the doctors trained to do diagnosis without the modern equipment. I can tell you now – NO. They cannot because they are being taught in school how to read the images from MRIs and not from talking to patients, examining them, etc. No MRIs, no diagnosis. All the old school method of checking, diagnosing. They are all but gone. It is the old doctors, like those in the 70s probably know what that is all about but not the young ones.

    The MRI – I have no idea how to build one without BAU. Furthermore, they are filled with software and patented hardware that no one can replicate. I can give you an MRI, you can tear all down but you cannot know what software it is running inside its EEPROM, chips, PLDs, etc. Those are patented and no one can copy them. There are no substitutes.

    Regulatory Needs
    Government will grow in size, regardless of race, country and time. Even the Aztecs, Babylonians has way too many priests and artisans that needs to be supported by the productive society.

    Safety requirements, be it real or not is energy intensive. Same goes for all others. Even if government shrinks, will be population accepts it? Example – less police to enforce the law, less checks on medicine? The population will just ask for more. So, in the end, more fossil fuel use.

    I would like people to re-butt what I have written. Tell me that I am wrong but give me facts and evidence. I don’t want “just talk”.

  8. Just because I think things will be slow, does not mean I think the elite have everything under control.
    Here in America, for example, they have done well with subsidized foodstuffs and entertainment. Absolutely necessary to keep the people fed and entertained. They have done very poorly, however, when it comes to ending speculative bubbles, such as housing, and healthcare costs.

    I actually think housing and healthcare costs could and will drive America to civil war even though we have it better than 90% of the planet.

    • Dolph…things are the way they are for complex reasons. The complexity of our society means that attempting to “fix” one problem causes another problem somewhere else. Everything is interconnected. The soaring costs of housing, education and healthcare, I have long suspected are interconnected and cannot be addressed without breaking the system. My hypothesis is that soaring costs in housing, education and healthcare are related to two things, supporting a growing elderly population and finding something for people to do. The speculative bubbles are JOB PROGRAMS. ZIRP and other policies that encourage real estate price inflation allow older homeowners to use real estate to extract more and more money from everyone else. A similar phenomenon is happening in education. The people benefiting from high tuition and poor quality( ITT Tech) are Americans nearing retirement age or their (middle class) children who can get sinecure jobs in the education field.

      Healthcare is cannibalism. Everyone is exploited in this system. It is a place where wealth goes to be destroyed. It is a sector where homeonwers and property owners spend a significant amount of the money they’ve made off their property on.

      If anyone makes a genuine effort to reduce costs in healthcare, education, or real estate, that person or persons could potentially to cause unemployment to rise to 30% overnight, for starters.

      The food and entertainment that is provided is cheap to produce. Technology does much of the work. The focus on franchises and new technology is a way of marginalizing human labor, therefore keeping costs low. Illegal immigration keeps the costs of food grown in America lower than they would be without it. Food production and entertainment have not been major job creators in over 50 years.

      CTG does a better job of explaining why it’s possible to remove components of our society without consequences but I thought I’d respond to your particular complaint in general.

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