Raising Interest Rates Can’t End Well!

The Federal Reserve would like to raise target interest rates because of inflation concerns and concern that asset bubbles are forming. Part of their concern seems to arise indirectly from the rise in oil prices, relative to their low level in early 2016.

Figure 1. WSJ figure indicating likely reasons for rate hike.

A finite world does not behave the way most modelers expect. Interest rates that worked perfectly well in the past don’t necessarily work well now. Oil prices that worked perfectly well in the past don’t necessarily work well now. It seems to me that raising interest rates at this time is very ill advised. These are a few of the issues I see:

[1] The economy is now incredibly dependent upon rising debt to prop up its spending. The pattern of total debt to GDP for the United States is shown in Figure 2.

Figure 2. United States’ debt to GDP ratios based on Federal Reserve Z1 data and BEA GDP data. The red line represents the increase over the latest three years.

There was a huge increase in debt in the period leading up to the 2008 crash. Every year between 2001 and 2008, the increase in debt was greater than four times the increase in GDP. In fact, for some years in that period, more than $8 of debt were added for every dollar of GDP added.

We now seem to be starting a new run up in debt. In 2015, the amount of debt added was $2.5 trillion ($66.1 trillion minus $63.6 trillion), while the amount of GDP added was only $529 million. This indicates a ratio of over 4.7 for the single year of 2016. (Figure 2 shows only three-year averages, because of the volatility of amounts.)

[2] The vast majority of the debt run-up since 1981 (Figure 2) seems to have been enabled by falling interest rates (Figure 3). Given how dependent we are now on large increases in debt to produce GDP, it would seem to be dangerous for the Federal Reserve to raise interest rates. 

Figure 3. US Federal Bonds 10 year interest rates. Graph produced by FRED (Federal Reserve Economic Data).

With falling interest rates, monthly payments can be lower, even if prices of homes and cars rise. Thus, more people can afford homes and cars, and factories are less expensive to build. The whole economy is boosted by increased “demand” (really increased affordability) for high-priced goods, thanks to the lower monthly payments.

Asset prices, such as home prices and farm prices, can rise because the reduced interest rate for debt makes them more affordable to more buyers. Assets that people already own tend to inflate, making them feel richer. In fact, owners of assets such as homes can borrow part of the increased equity, giving them more spendable income for other things. This is part of what happened leading up to the financial crash of 2008.

The interest rates that the Federal Reserve plans to change are of a different type, called “Effective Federal Funds Rate.” These also hit a peak about 1981.

Figure 4. US Federal Funds target interest rate. Graph produced by FRED (Federal Reserve Economic Data).

[3] The last time Federal Funds target interest rate was raised, the situation ended very badly.

Figure 4 (above) shows that the last time Federal Reserve target interest rate was raised was in the 2004-2005 period. This was another time when the Federal Reserve was concerned about the run-up in food and energy prices, as I mention in my paper Oil Supply Limits and the Continuing Financial Crisis. The higher target interest rate was somewhat slow acting, but it eventually played a role in bursting the debt bubble that had been built up. In 2008, the amount of outstanding mortgage debt and consumer credit started falling, and oil prices fell dramatically.

It is ironic that the US government is again trying to bring down food and energy prices, when they are at a price level similar to the price level when they tried this approach the last time.

Figure 5. Monthly average Brent oil prices, with notes regarding when the Federal Reserve changed its target interest rate.

The Federal Reserve looks at its favorite metrics, PCE inflation and PCE inflation excluding food and energy. From this high-level view, it is likely that they have no real understanding of exactly what energy price problems are causing the strange result. With this high-level view, they do not realize that a big contributor to the rising costs is the increase in oil prices between the January – March 2016 period, when they were under $40 per barrel, and recent prices, which were above $50. (They are now back below $50 per barrel, but this would not be apparent from the metric.)

When this high-level view is used, it is easy to miss how low energy prices are today, relative to the needs of energy producers. Most people who have been following what is happening in the oil industry know that prices are not high, relative to the prices needed for profitability. Even if some US companies claim to be profitable at $50 per barrel, it is clear that, in general, the industry cannot withstand prices as low as they are today. At the current price level, investment is too low.

Part of the problem is that oil exporters need higher prices if they are to obtain adequate tax revenue to fund their programs. For example, Saudi Arabia has found that because of its falling tax revenue, it needs to borrow money to maintain its programs. This is a big change from being able to set aside money in a reserve fund, out of excess tax revenue. This is another place where the shift is toward more debt.

[4] The pattern the Federal Reserve seems to want to follow is the 1981 model, in which temporary high interest rates seemed to force energy prices down for a long time.

If we look at oil prices compared to US wages per capita (dividing total wages by total population), we find that oil “affordability” was at a low point in 1981. We saw previously in Figures 3 and 4 that interest rates were raised to a very high level at that time. The gray stripes in Figures 3 and 4 indicate that a recession followed.

Figure 6. Average barrels of crude oil affordable by US residents, calculated by dividing the average per capita wages (calculated by dividing BEA wages by population), by EIA’s average Brent oil price for each year.

Figure 6 shows that after interest rates fell, affordability rose until 1998. To a significant extent this was the result of falling prices, but it also was the result of a larger share of the population working, and thus contributing to rising wages.

There were many things that allowed this benevolent outcome to happen. One was the fact that we already knew about available oil in the North Sea, Mexico, and Alaska. When this oil came online, oil prices were able to drop back to a much more affordable level. It is very doubtful that shale oil could play a similar role today, especially if it is likely that higher interest rates will drop oil prices from today’s $50 per barrel level.

One thing that helped improve affordability in the post-1981 period was improved gasoline mileage. There were also cutbacks in oil use for home heating and for electricity generation.

Figure 7. Average on-road fuel efficiency by Sivak and Schoettle, “On-Road Fuel Economy of Vehicles in the United States: 1923-2015,” http://www.umich.edu/~umtriswt/

Figure 7 suggests that the earliest changes in fuel economy provided the biggest savings. In fact, overall savings after 1993 are quite modest.

One factor that helped reduce oil consumption both in the 1970s and in the 2008 to 2013 period was high prices. Now that oil prices are lower, we cannot expect as good a result. If oil prices drop back further, there is even less incentive to conserve.

[5] Adjustments made using Quantitative Easing (QE) (a way of producing low interest rates) appear to have had a rapid, significant impact on oil prices.  

In late 2008, after oil prices had crashed, the US Federal Reserve implemented QE. Using QE created very low interest rates, which seem to have had an impact on world oil prices.

Figure 8. Monthly Brent oil prices with dates of US beginning and ending QE.

Clearly, lower interest rates encourage more borrowing, and discontinuing a program that gives very low rates would tend to have the opposite impact. Thus, we would expect the direction of the oil price changes to be similar to those shown on Figure 8.

One hypothesis regarding the rapid impact of QE was that it encouraged borrowing in US dollars, in order to purchase bonds in other currencies with higher interest rates (“carry trade”). When QE ended, the carry trade was cut off, reducing investment in countries with higher interest rates. Instead, there was more interest in investing in the US. These changes led to the US dollar rising relative to many other currencies. Since oil is priced in US dollars, these shifting relativities made oil more expensive in non-US dollar currencies.  Thus, the affordability of oil declined for buyers outside the US. It was this decline in affordability outside the US that brought down oil prices. Figure 9 shows the shift in currency levels when the US discontinued QE in 2014.

Figure 9. US Dollar vs. Major Trade Weighted Currencies. Chart created by FRED (Federal Reserve Economic Data).

Increasing Federal Reserve target interest rates would seem to have the effect of further raising how high the US dollar floats compared to other currencies. If this happens, we would expect lower oil prices, and more problems with excessive supply.

[6] The way increased lending seems to move the economy along is by using time shifting to provide a “layer” of future goods and services that can be used as incentives for businesses to invest in making goods and services now.

The problem when making goods of any kind is that resources need to be purchased and workers need to be paid, before the finished product is available for sale.

Figure 10. Image created by author showing how goods and services are created. It also needs a “government services sector,” but it didn’t fit easily on the slide.

As a result, at the time goods and services are produced, there aren’t enough already-created goods and services to pay all of those who have contributed to the effort of making the goods and services. To work around this problem, debt or a product similar to debt is needed to pay some of those contributing to the process of creating future goods and services.

One way of thinking about the situation is that an increase in debt during a time period adds a layer of future goods and services that can be distributed to those contributing to the effort of making the goods and services (Figure 11). This significantly increases the amount of goods and services to be distributed above the level that would be available on a barter basis, based on goods that have already been produced.

Figure 11. Figure by author showing how the “increase in debt” effectively adds another layer of goods and services that can be distributed. (As with Figure 10, this chart should include a category for government services as well.)

[7] The spending ability of US citizens has been lagging behind, even with the huge amount of debt being added to the economy. If the Federal Reserve raises interest rates, it will tend to make the situation worse.

The biggest expenditure for most households is housing costs, either for an apartment or a new home. As with oil, we can compare affordability by comparing prices to per capita wages (total US wages/total population). On Figure 12, one amount shown is the median rent for unfurnished apartments in the US, based on US Census Bureau data; the other is The People History’s estimate of “new home” prices over the years. In general, affordability has been falling. Figure 12 shows that the fall in affordability of apartment rent is a relatively recent phenomenon. The fall in affordability of home prices is a long-term phenomenon, no doubt enabled by falling interest rates since 1981.

Figure 12. Comparison of new home prices from The People History and median non-subsidized rental asking prices based on US Census bureau data. These are divided by (total US wages/ US population) from the US BEA. The indexes are different for home and apartments, chosen so that two would show separately on the chart. If amounts shown are falling over time, housing is becoming less affordable.

Another product whose affordability is of interest is electricity. Electricity is an energy product whose affordability is important, because it is used in residential, commercial, and industrial locations. The affordability of electricity tends to be less volatile in pricing than oil, whose affordability was shown in Figure 6. Because the pricing of electricity is more stable, I have shown the affordability of electricity at three different spending levels:

  • Per Capita Wages – Total US wages divided by total US population.
  • Per Capita DPI – Total Disposable Personal Income (DPI) divided by total US population. Disposable Personal Income includes government transfer payments (such as Social Security and unemployment payments), in addition to wages. It also includes “proprietors’ income,”which is a relatively smaller amount.
  • Per capita DPI+Debt – Total Disposable Personal Income, plus the increase in Household Debt during the year, divided by population.

Figure 13. Quantity of electricity that an average worker could afford to buy, using three different definitions of income. (Average wages are based on BEA total salaries and wages, divided by BEA total population, and Disposable Personal Income is defined similarly, using BEA data. DPI plus debt includes the change in Household Debt, from the Federal Reserve’s Z1 report, in addition to DPI in the numerator.)

Based on Figure 13, electricity was becoming more affordable until 2001 on a wages-only basis. Since then, its cost has been relatively flat.

On a DPI basis, electricity was considerably more affordable until 2004, after which it declined, and then rose again.

On a DPI + Debt basis, there was a much bigger jump in affordability. This big increase in debt corresponds to the housing bubble of the early to mid 2000s. Interest rates were lower and underwriting standards lessened, so that almost anyone could buy a home. This allowed a run-up in home prices. Homeowners could borrow this equity and use it for whatever purpose they chose–for example, fixing up their home, buying a new car, or going on a vacation. The big increase in DPI+Debt, relative to DPI, gives an indication of the extent to which the housing-related debt bubble in the early 2000s affected spendable income.

Which of these scenarios is really correct? It depends on the segment of the economy a person is looking at. For people of modest income, in other words, those who rent apartments, the wage-only scenario is probably the most representative. For people who have high incomes and own a home, the DPI plus Debt scenario is probably more representative.

[8] All income seems to ultimately derive in part from rising debt, and in part from energy consumption. If interest rates are too high, the required interest payment exceeds the benefit of time shifting.

We can see from Figure 13 that debt is very helpful in producing income for workers. Some of this comes from the government transfer payments, funded by debt. Some of this comes from the wages paid by businesses, funded in part by shares of stock, which are debt-like in nature. The currency with which workers are paid is, in fact, debt. A person can see the connection, by thinking of currency as being similar to “gift cards,” issued by a business. The business would need to record the value of these gift cards as a liability on its balance sheet.

The underlying problem giving rise to the need for debt is “complexity,” and the need to obtain the services of many trained people and of many types of tools, before goods and services can actually be created. All of this builds extra expense and delays into the system, in the manner described in Figures 10 and 11. Somehow, there must be interest payments to compensate for the time shifting that is necessary: the whole string of events that must lead up to producing the products that are needed. Tools must be made far in advance of when they are needed. In fact, there is a whole string of “tools to make tools” that takes place. Factory buildings need to be built, and roads need to be built. Workers must be trained. In order for the people and businesses involved in these processes to be compensated for their effort, and induced to delay their own consumption of goods and services, there need to be interest payments made for the time-delay involved.

Debt (together with shares of stock, which are debt-like) cannot operate the economy alone. Energy products are also needed to provide the physical transformations required. These include heat and transportation, and electricity to operate devices that use electricity. Of course, human workers are needed as well. The major pieces of the system, and the way they operate together, are shown in Figures 10 and 11.

It would appear that an economy can start “from scratch,” using only debt, plus available resources (including energy resources, such as biomass for burning), and some sort of government (perhaps a self-declared king). If the king sees a productive project that might be undertaken–perhaps building a bridge, or cutting down more trees for farmland–the king can impose a tax on the citizens, and use the tax to hire a group of laborers to use the available resources. Once the tax is imposed, it is a debt of the citizens. It can be used to pay the laborers who do the work.

The debt-based system seems to build upon itself. As more wages are available, these wages allow workers to take out loans, and allow businesses to create new goods and services that can be purchased using these loans. These loans are promises that can be exchanged for future goods and services. Since energy is used in creating all goods and services, these loans are more or less guarantees that the economy, and its use of energy products, will continue in the future.

The thing that connects debt to the rest of the system is the interest payments required for time shifting. When the system is relatively efficient, the return on investment is high, so interest payments can be high. As diminishing returns set in, interest rates need to be lower. We are now encountering diminishing returns in many areas: extracting fossil fuels, extracting minerals, producing enough fresh water for a rising population, creating an adequate supply of food from a fixed amount of arable land, creating new antibiotics as bacteria become drug resistant, and the cost of finding new drugs to treat diseases that affect an ever-smaller share of the population.

[9] It is relatively easy to make economic growth occur when energy products are becoming more affordable, relative to spendable income. When energy products are becoming less affordable, it becomes virtually impossible for economic growth to occur.

We know that historically, the cost of energy products has tended to fall over time. This has been described in more than one academic paper.

Figure 14. Figure by Carey King from “Comparing World Economic and Net Energy Metrics Part 3: Macroeconomic Historical and Future Perspectives,” published in Energies in Nov. 2015.

A United Nation’s report also shows the same pattern (the bottom two categories are energy related):

The only way that energy costs can fall relative to GDP, at the same time that energy use is rising, is if energy products are becoming less expensive over time, compared to the incomes of the citizens. This falling price level allows more energy products to be purchased. As energy prices drop, it is possible for the economy to afford the increasing quantity of energy products required to produce even more goods and services.

There are many ways that energy products can become less expensive. For example, the mix can shift among different energy products, shifting to the less expensive products. Or new techniques can be found that make extraction less expensive. Finding more efficient ways to make use of energy products, such as the increasing miles per gallon shown in Figure 7, also contributes to the falling relative cost to workers. Of course, “falling EROEI” tends to work in the opposite direction.

Unfortunately, we are now running out of ways to truly make energy use cheaper over time. The ways we seem to be down to now are (a) paying energy companies less than their cost of extraction, and (b) reducing interest rates to practically zero.

We can see from Figure 6 that oil was becoming more affordable relative to wages between 1981 and 1998. Falling interest rates and rising debt seemed to play a role in this, as well as success in drilling for oil in places such as the North Sea, Mexico and Alaska. Since then, the only way that oil affordability could rise was by oil prices falling below the cost of extraction, starting in mid 2014.

The situation for electricity is shown in Figure 13. Electricity was becoming more affordable on a “wages-only” basis, until 2000. Since then it has plateaued. The economic push that would have come from falling electricity prices must come from elsewhere–presumably from adding more debt.

Affordability of electricity on a “DPI plus debt” basis rose considerably more, with a peak in 2004. Thus, adding more debt, in the form of transfer payments and rising debt for homes and vehicles, added considerable spendable income. But it has not been possible to regain the affordability of the 2004 period in recent years.

We are now reaching limits because we no longer are truly seeing a reduction in energy costs. Instead, we are seeing very low interest rates and oil prices lower than the cost of production. These seem to be signs that we now are reaching limits. Energy prices really need to drop for the economy to grow; the economy will make them drop, whether or not producers can profitably extract oil at the low cost that is affordable by the citizens.

[10] China seems to be cutting back on growth in debt now, at the same time the US is talking about increasing interest rates. Energy products, especially oil, are sold to a world market. If China cuts back on debt at the same time as the US raises interest rates, energy prices could drop dramatically. 

Figure 16. UBS Total Credit Impulse. The Credit Impulse is the “Change in the Change” in debt formation.

UBS calculates a global “credit impulse,” showing the extent to which there is a trend toward increasing use of debt. According to their calculations, since 2014, it is China that has been keeping the Global Credit Impulse up. If China is cutting back, and the US is cutting back as well, the situation starts looking like the 2008-2009 period, except starting from greater problems with diminishing returns.

Observations and Conclusions

The economy looks to me like a type of Ponzi Scheme. It depends on both rising energy consumption and rising debt. Judging from the problems we are having now, it seems to be reaching its limit in the near term. Raising interest rates will tend to push it even further toward its limit, or over the limit.

Debt is used to pay participants in the economy using a promise for future goods and services. This allows the economy to appear to distribute more goods and services than are actually available. In a way, adding debt is like being able to manufacture future energy supplies that can be used to pay those who participate in making the goods and services we produce today. When energy products are high-cost to produce, and delayed in timing (such as wind and solar PV), the need for debt especially rises.

Part of our problem today is the extent of specialization of those analyzing our current problems with energy and the economy. This means that virtually no one understands the full problem. Bankers seem to think that debt, and interest rates on debt, can solve all problems. Energy analysts think that energy resources in the ground are all-important. They both create incorrect analyses of the overall problem. Rising debt is needed, if energy products that have been created are to be absorbed by the world economy. The energy gluts we are seeing are signs of inadequate wage growth. A major function of growing debt is to add wages. Unwinding debt leads to the kinds of problems that we encountered in 2008.

It is tempting for world financial leaders to think that they can find a solution to today’s problems by using higher target interest rates to slightly scale back economic growth. I don’t think that this is really a good option. The world economy is operating at too close to “stall speed.” The financial system is too fragile. If any solution can be expected to work, it would seem to need to be in the direction of re-starting QE. Even if it produces asset bubbles, it may keep the world economy operating for a bit longer.

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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2,229 Responses to Raising Interest Rates Can’t End Well!

  1. dolph says:

    “The Elders” themselves are a creation of the industrial age. What happened long ago was a fusion of old feudal aristocratic, and new merchant lines, and some of these lines happened to stumble upon billions of units of currency, and as long as they can keep the currency game going, their wealth remains intact.

    But the currencies themselves will begin to fail, as they are all just artificial debt promises. But without growth, the money promises no longer have any meaning. The collapse will see the end of most elder families (or transformation, so to say). What they will be left with is estates, land, art, gold, etc.

    Now, that is certainly fine, but it’s nothing like billions of dollars, jets, access to modern medicine, ability to buy and sell companies across the planet at whim, etc.

    • Fast Eddy says:

      They will have no way to protect their estates – art – gold…. so they will be in the gutter starving with everyone else…

      You will have a chance to meet all sorts of interesting people in the gutter… such as:

      • Not really. The truly chic always seems to get away from any kind of turmoil.

        If Czarina Alix married her daughters to the commissars at Yekaterinburg, like Austria’s Emperor Franz who married Marie Louise off to Napoleon, the entire history of Russian Revolution would have turned out vastly different.

  2. Fast Eddy says:

    And so on….

  3. The world’s last chance was the Korean War, which USA got involved because MacArthur wanted to play the king of Asia.

    The hapless Koreans were collapsing, and USA should let the undeveloped and primitive country collapse, and let commies take the trouble to feed it. Instead USA got into the habit of getting involved to every bush war on earth and sending lots of materiel, which only fed into more pop growth.

    In fact the so-called Cold War was an attempt to enlarge the markets so the Third Worlders could consume more Western goods. It proved to be a very short-sighted policy; they increased too much, and consumed too much of the world’s resources which is why we are in such big mess.

  4. Fast Eddy says:

    This discussion addresses a range of issues that have come up on FW

  5. Van Kent says:

    On an aggregate basis, the real economy was 7% smaller in 2015 than in 2005, and SEEDS indicates that Britain hit “peak prosperity” back in 2003 (line 71). On a per-capita basis, discretionary income declined by 13% between 2005 and 2015 (line 87), and is falling at a trend rate of about 1.4% annually.


    Overall, then, the SEEDS assessment of the British economy is very bearish. Individual prosperity is deteriorating – as is the aggregate, once the effect of “borrowed consumption” is adjusted out – whilst debt continues to rise markedly. Dependency on overseas creditors has become acute, mainly because income flows have been impaired by past patterns of asset sales and borrowing from abroad.

    Looking ahead, the deterioration in British economic performance is starting to look irreversible, and certainly cannot be halted, let alone reversed, without wholesale changes in policy.

    • Van Kent says:

      Funny how the mother of the industrial revolution, now becomes the poster child of the demise of the industrial civilisation.

      UK Oil and NG peak production 2003 -2004, peak prosperity 2003, real debt adusted debt to GDP is now over 330% and will be over 400% by the end of the decade. The UK economy no longer is savable. What happens to Brexit? Will Scotland run for independency? Is localization under overwhelming burdens of debt, the key to maintain BAU ?

      Whatever happens in the UK now, looks to be like a mirror image of whats happening everywhere else a while later.

  6. JT Roberts says:

    It’s been well demonstrated on this site that technology is not the solution if anything technology has become a problem. For example the real issues affecting the economy are demographic but the demographic changes aren’t merrily based on birth rate it’s really based on death rate. If we want to be honest with ourselves the healthcare industry itself is a major contributing factor to the crisis. Global productivity is being funneled into an unproductive arena. Obamacare was a demonstration of this. Here is an attempt to force the healthy young segment of the population to compensate for the decline in the unhealthy unproductive parts of the economy. It may seem cruel to make that statement but the reality is the most efficient thing all the governments of the world could do would be to abolish healthcare . So in reality the problem is not a technical problem the problem is a moral issue. Mao was vilified because of how he handled the opium crisis in China. Of course we are only exposed to the western side of the story, forgetting that Brintan was behind the trade. But where would China be now if the addiction had continued. Something like where the US is now with hillbilly heroine? For that matter why does a healthy disciplined segment of the economy have to subsidize the high risk lifestyles of others? Whether it’s Aids, cancer from smoking, drug abuse. Why should someone have free will to destroy their personal productivity and expect society to pick up the tab?

    Are any of these things relevant to the immediate crisis? No it’s too late but it does demonstrate the moral inability for people to make rational choices. So for anyone to think there is a work around solution they are delusional. But that is not uncommon.

    I have a friend who is a senior risk analyst for a major international bank. He see’s no risk in the QE so far and believes there will never be any. He also believes that the solution to growth is interplanetary travel. This will be accomplished by a low orbit launch platform that will be teathered to a an elevator of some sort. He is responsible for hiring other analysts throughout the company. What do you think? Is there any cause for hope?

    2Tim 3:8

    8 Now in the way that Janʹnes and Jamʹbres opposed Moses, so these also go on opposing the truth. Such men are completely corrupted in mind, disapproved as regards the faith. 9 Nevertheless, they will make no further progress, for their folly will be very plain to all, as it was with those two men.

    • Jay says:

      JT you make a great point. Humanity had a chance 40 years ago to reduce its collective birth rate but failed miserably. Now we have Europe, Russia, Japan etc at zero population growth rates but most of Africa and many countries in Asia still growing exponentially.

      Trivia: At one point in his presidency Richard Nixon came close to proposing a national population policy.

      • Kurt says:

        Overall, the models show that we will level off at about 9 billion. Can we feed this many people? It seems like we can. Can we continue to truck strawberries across the u.s.? Probably not. If collapse were imminent, I think you would see a greater disruption in the transport of food than we are seeing.

        • Harry Gibbs says:

          That food supply-chains are functional now (outside of countries already collapsing like Yemen or with major inflation like Nigeria or Venezuela) is no evidence that they will remain so or that they aren’t in danger of breaking down soon when major financial problems manifest. The scary thing to me is that we are likely to go from well-stocked supermarkets to a food security crisis almost overnight.

        • true—we CAN feed 9 maybe 10 bn

          that’s not the problem–problems are

          1…as food and support resources go into short supply, denial of the problem will increase exponentially

          2 …fighting over what’s left will destroy what’s left

          right now, in Sudan, there’s enough food for everyone (just) but they are spending money on arms to fight a civil war that will devastate the entire country
          This will happen in every country where crisis hits.
          And I make no exceptions

          • Fast Eddy says:

            ‘fighting over what’s left will destroy what’s left’

            Venezuela has not collapsed (yet) but they are eating dogs, cats, flamigos. anteaters…



            In North Korea https://www.amnesty.org/en/latest/news/2010/07/starving-north-koreans-forced-survive-diet-grass-and-tree-bark/

            Makes you wonder — when collapse does hit — will people not eat everything that is edible?

            Will they not kill every single animal including rats — will they not rip every single plant that can be eaten — from the ground?

            Of course they will.

            • Fast Eddy says:

              I was watching the interview with the U of T professor that I posted last night … he was discussing soviet russia — and how at one point during the mass starvation that killed tens of millions — they had to put up signs urging people not to eat their children…

              See the photos


              They dropped dead in the streets, lay dying and rotting in their houses, and some women became so desperate for food that they ate their own children.


              It is important to note that the famine is Russia would be considered Famine-Lite compared to what post BAU is going to look like

              There was still food being grown – there was still energy available — there were still animals alive to provide manure ….

              So when you read the above stories — keep in mind — that will seem like utopia post BAU….

            • Kurt says:

              The U.S. won’t get to that point. Too much arible land and too much oil on the continent. It is not a good idea to generalize the worst case scenario from history all the time, especially when it doesn’t fit the current circumstances. It is simply hyperbole.

            • Fast Eddy says:

              Now that is wishful thinking at it’s best!

              The proven oil reserves in Venezuela are recognized as the largest in the world, totaling 297 billion barrels https://en.wikipedia.org/wiki/Oil_reserves_in_Venezuela

              Plenty of arable land http://www.fao.org/ag/agp/agpc/doc/counprof/venezuela/venezuela.htm

              People seem to think America is special — that this cannot happen there — that’s what you get when these myths are hammered into your head from the time you are born …

              It’s also what happens when you live in a country that lives large off of its pillaging for the world’s resources —- it becomes impossible to even think that the grocery stores shelved could ever empty….

              The can be No End of More….

              Think again — when BAU goes — America will be in the same boats as Venezuela — the entire world will starve.

              My buddies up there in the mountains of Irian Jaya will be ok — until the spent fuel ponds get them of course

            • havent checked the figures lately, but the usa has about 40 m people on food aid

              oil is food, and food is oil. Oil/food is being misappropriated somewhere down the line—mega yachts, corporate jets etc etc no doubt.
              People are going hungry everywhere

              a government has just been elected that seems hellbent on slashing every intermal and external aid program to benefit the wealthy.
              (Sheriff of Nottingham or what?)

              It might be possible to feed everyone on a median diet, in median house etc etc—but the elite arent having that.
              Eventually they may be forced to—but not without a struggle

              that is the stuff of revolution i fear

            • hkeithhenson says:

              “usa has about 40 m people on food aid”

              That would give about 280 million who are not on food aid. What is it that sorts the population into those who have and those who don’t have?

              What sort of personality traits has evolution worked into the ones who have? The question is answered right at the end of this 27 minute talk.


              It’s certainly consistent with the underlying FW model.

            • Herbert Hoover arranged to feed the Bolsheviks. It would have been better if more of the would-be soldiers of Stalin to have starved.

            • DJ says:

              I am confused that UN says four countries are facing starvation, and neither Syria or Venezuela makes the list. Is it just as exaggerated as Greece?

          • bandits101 says:

            I don’t think we are adequately feeding 7.5B now. Consider the environmental destruction humans have inflicted, over the past 10k years as we ran our population up to the present number (Australia was being ravaged for tens of thousands of years prior to that). The damage we were doing at 3B was horrific, then it was 5B and worse, now to achieve 9 or 10 billion, that’s ridiculous. The destruction inflicted by 7.5B doesn’t go away, it’s still there and gets worse.

            There won’t be another species living in the wild. Even now, managing wildlife parks is a losing battle and becoming cost prohibitive. Not before too long, I imagine the various custodians will throw their hands up in despair.

            • a great deal of the famine and food shortage in the world is caused by conflict.

              if there was no conflict and people were able to plan seasons and harvests, there would be very little food shortage.

              denial of the problem forces leaders into wars—and has done for 000s of years—just that in our time its become vastly magnified.

            • Fast Eddy says:

              We are effectively feeding them oil…. which is not ideal given….

        • Fast Eddy says:

          We won’t get to 9 billion

          • Kurt says:

            Dream on. Me, I’m going to have some Turkey. You really need to think about the overall resources of the U.S. To suggest that we are anything like Venezuela is sheer nonsense. Fun, but absolute nonsense. Again, the hyperbole just gets really old after awhile. If you want to engage in a reasonable conversation, think before you type. But you don’t, do you.

            • Fast Eddy says:

              Kurt — I assume you read Gail’s posts — but you do not understand them.

              God will look after America post BAU. God Bless America.

              I almost can’t wait for the STHF — because I can imagine the shock on so many people’s faces when they realize America is not special — it is not immune….

              Actually America would be very low on my list of places to be when BAU ends —- it is a cesspool of hatred….

            • A Real Black Person says:

              If the U.S. has so many “Resources” then why has the U.S. outsourced so much? Why is the U.S. importing so much?

              Self-sufficiency is what matters.
              There are no self-sufficient countries anymore.

            • ejhr2015 says:

              I don’t know the latest stats, but the USA with 5% of the world’s population consumed 50% of the resources at the end of WW2. It’s lower today but still probably the most unsustainable nation on the planet.

            • DJ says:

              Even Venezuela is not Venezuela.

    • Fast Eddy says:

      I have a friend who is a senior risk analyst for a major international bank. He see’s no risk in the QE so far and believes there will never be any. He also believes that the solution to growth is interplanetary travel. This will be accomplished by a low orbit launch platform that will be teathered to a an elevator of some sort. He is responsible for hiring other analysts throughout the company. What do you think? Is there any cause for hope?


      AIDS…. let’s be frank — for the most part people who get this are engaging in some very risky business… gay saunas must be high on the list — shooting drugs as well….

      So we spend billions on this disease — trying to keep people alive — people who didn’t give a rats ass about getting or giving HIV in the past….

      So what are the odds that they are going to play it safe now that they have another lease on life? Sure some might — but plenty won’t – as evidenced by the increasing rates of infection.

      Would we not be better off neutering such people? As for the drug users we just put them in front of a firing squad….

      Desperate times >>>> desperate (wise) measures.

      Too much people.

  7. This is an answer to an earlier post of Pintada.

    “What are they doing wrong?” – they killed us, and themselves in the process. If they are so smart, so intelligent, and actually exist as an organized group, why did they [The ‘Elders’] not:
    1. control population in the 1950’s?
    2. eliminate all nuclear power plants – or if you do not have a phobia for all things nuclear – build breeder reactors
    3. Keep Johnny down on the farm even after he had seen gay Paris.
    4. etc. Since these mythical “elders” are so smart, they would have seen 100 (10000) other ways to prevent the current predicament.

    There is no-one in control,

    1, What happened is that at that time , except for some far-seeing people, everyone thought growth was good and great. They also thought every person had an equal ability.

    2. There had to be a job program for the nuclear scientists and something to get rid of the nuclear material assembled, since thanks to the Rosenbergs nuclear war was no longer a monopoly of America.

    3. This is probably a reference to the American soldiers seeing Paris during World War II.

    Stalin’s soldiers saw Berlin, Prague, Vienna and Breslau (which was more important than Prague and Vienna before WW2, although the Poles neglected this city after it became Wroclaw, which still has many pre-WW2 buildings complete with bullet holes).

    But Stalin had commissars indoctrinating the soldiers to pay no attention to these cities, and after their round of rape and looting was over the Soviet soldiers duly went back to their factories and kolkhozes. It was done successfully.

    Truman essentially bribed the US soldiers with the GI bill, which started a huge round of education bubble.

    4. There are ways to save these Elder’s behinds, although I don’t think they have a solution to save all 7.5 billion.


  8. Van Kent says:


    “If you use barter, then the goods bartered require energy to be created and sustained.
    Therefore you cannot have a chain of bartered goods where the chain itself gives a diminishing return with each ‘exchange’ down the line. There must always be an ‘upward’ barter. And if you have an upward barter, you must have constantly increasing energy at the start and in subsequent exchanges.”

    That sounds like how Adam Smith SHOULD have started his book. Maybe we’d be in world somewhat different, if you’d been there.

    Care to elaborate? Not that the above needs any elaboration, but just because you do it so well.

    • to elaborate if I can, starting from base products/needs. I have chosen pots and bread because they are fundamental to any basic living condition.

      You want a pot.
      I know a claypit, and I have a potters skill—so i dig out a ball of clay and make you a pot.
      But for it to be any use, I must fire it, and that takes wood….so your pot has incorporated heat. I also have the investment of a kiln to incrementally pay for.
      So you have my energy input of muscle+heat+skill=pot

      To do all that, i need food—and you are a baker
      you make wheat into flour and using heat make it into bread.
      You have the investment of an oven to incrementally pay for
      so your energy input of muscle+heat+skill=bread
      so we trade bread for pot.
      All cash does is allow you to buy either as separate transactions.

      But we cannot survive just by trading bread and pots, so other skills must be brought into the system.

      If I consistently traded pots for less calorific value than i received in your bread—i and my family would starve to death–(and vice versa). I would be “undervaluing” my pots in terms of pure energy.
      Money is irrelevant in a barter economy. I might give a pot away if I was feeling generous, but that gift would have to be made up by everyone else over time.

      The calorific value in potmaking and breadmaking can be precisely measured,
      so each trader must gain a calorific increase (profit) in the transaction, in order to stay energy-solvent.
      But both cannot “gain”–so benefit has to come from “somewhere”, because an exact balance is impossible unless you are a hunter-gatherer.
      so to do that there must be efficiencies of scale—ie our ovens must make 0000s of pots, and 0000s of loaves constantly bartered to and fro together with everything else within our commercial infrastructure, no matter how basic.

      Nothing can be made without heat, so baker or potter must constantly source heat in order to “gain” advantage This applies to every traded product with any usable function. And every loaf and pot carries its energy boost within itself up the trading line

      It is impossible to define a pair of shoes as having 2310 incorporated calories, or to look for a tradable product (a hat say) with 2310 incorporated calories, so there is an inevitable uptrade to make the system work in the sense that we know it. In other words we are forced to seek some kind of profit-advantage if we can, according to the skills we have to trade.

      If we don’t do that, then civilization will distintegrate, because the trade/skills that allow it to function will cease to be viable in the long term.

      This is where we have collectively lost our sense of reality, in that we still live in a barter society, lubricated with money. (I work for 25 years to buy your house) We remain in denial of it.
      We have been conditioned to expect that growth is infinite, because there has always been gainful advantage in our system. We now think money pops out of slots in walls, and carries actual value.

      As the price of pots and bread rose year on year, so we had payrises to cover it year on year. Which worked fine so long as there was a constant input of cheap energy to prop up the system. (vast forests, cheap coal and oil—etc…we had to find stuff to burn)
      Now the cheap energy has gone, an we are trying to make the system work with expensive energy—or worse, fantasise that we can make it work on no energy input at all.

      Which is why reversion to hunter gathering becomes inevitable.

      • hkeithhenson says:

        “and you are a baker you make wheat into flour”

        Wrong job title. The person who makes wheat into flour is a miller. Bakers take it from there.

        • i remain eternally grateful for correction of an error of such cataclysmic proportions.

          in order to put over meaning and concept of a subject, in a manner which is clear sharp and to the point, using a minimum of words, my style of writing takes into account a certain assumption of reader-intellect.

          Or to put it more clearly–stating the bloody obvious is not always necessary
          In here, as a general rule that assumption is not misplaced or under estimated.

          there are of course exceptions to that reader level, I can make no allowances for that

          • hkeithhenson says:

            I should not be so pedantic, but there are a lot of complicated steps to making something as simple as bread. Back in the 70s, I did every one of those steps, grew the wheat, thrashed it, ground into course flour and made bread. In fact, I made all the bread the family ate for several years. My conclusion at the time was that without store bought flour, we would eat a lot less bread. 🙂

            • xabier says:

              This is why the Bible describes the agricultural life as a punishment for Sin…..

            • it’s coarse flour

              never leave a good nit unpicked is my motto

            • hkeithhenson says:

              Thanks for picking up the misspelling. Spell checkers will only go so far.

            • you will probably appreciate this

              Eye halve a spelling chequer
              It came with my pea sea
              It plainly marques for my revue
              Miss steaks eye kin knot sea

              Eye strike a quay and type a word
              And weight four it two saye
              Weather eye am wrung oar wright
              It shows me strait a weigh

              As soon as a mist ache is maid
              It nose bee for too long
              And eye can put the error write
              Its rare lea ever wrong

              Eye have run this poem threw it
              I am shore your pleased to no
              Its letter perfect awl the weigh
              My chequer tolled me sew

      • JT Roberts says:

        Nice analogy Norman.

        The interplay between the potter and baker well describes economic activity. You’ve also made a good case for the physiocrates. The surplus value is the bread that acts as a storage of energy and a tasty one at that. The pot has embedded energy but no convertibility. It is a durable good. Clearly the pricing power lies with the baker. He is willing to trade a loaf of bread today for your pot but tomorrow he doesn’t need a pot he’s got one. The potter on the other hand needs bread because it’s his primary energy source.

        So in very simple terms we have explained why the US has dominated the global oil trade. If you control the energy you control production. But relative to this is the necessity of generating a surplus.

        If the baker only has the ability to bake enough bread to sustain himself then economic activity ceases. This is the conundrum the oil industry is facing. Without enough surplus energy the system starts slowing down.

        Considering that Capitalism is a dissapative system the feedback accelerates the decline. Like a hurricane it either grows or collapses.

        One way to keep the game in play during the growth phase is to build a bunch of crappy durable goods. Which we call planned obsolescence. So if my pot only lasts a day I have a balanced system of trade. This has been our general approach till now. However in the contraction phase the system unwinds very quickly.

        I was in Rome two years ago and a friend took us to one of the seven hills. Likely we were on the path Hannibal took. In the woods there was an abandoned section of Roman road. It was in perfect condition. 2000 years ago bread was traded for that road and the value remains.

        My point is structurally the present system was designed to consume and destroy. This is not evolutionary advancement this is devolution. A civilization that is determined to be on a path of self destruction is not civilization is it?

        Monuments to man’s achievements in our time include nuclear bombs, napalm, agent orange, carpet bombing, cluster bombs, military drones, roundup, crumbling highways, toxic waste dumps, space program, moon shots, radioactive poisoning of the pacific, a population who can’t determine sexual identity, but are sure their sexuality is genetic.

        If we’re honest this period of human history has been the darkest of all. If we just take casualties of war which has been over 100million in the last 100 years. For anyone to think the solution is expansion into space I would reply have a little mercy I believe our destruction of one planet is sufficient.

        • your comment neatly stretched my analogy further in ways i hadn’t thought of, sort of completes it in a way

        • Van Kent says:

          Oh Man you’re good. Norm and JT. Thanks!

          Where were you guys when the ‘dismal science’ was born? It really could’ve used those two comments in length..

          JT how would you categorize Roman aqueducts? Standing for millenia, bringing fresh water from miles away. Making the city of Rome itself capable of supporting a million people in the ancient times (just had to bring a lot of wheat from Egypt, but drinking water and sanitation wise).

          Just still wondering about intergenerational ‘artificial habitat’..

        • Sceadu says:

          This was very thought-provoking. We all came to think about collapse from different paths, but I’ve always been particularly sensitive to destruction, even as a kid. The idea of making things for the purpose of having them break or be almost instantaneously destroyed is heartbreaking, really. There is even a specific word for this kind of regret or sadness about waste in Japanese.

          We often hear of “externalities” in industry — side effects. The ironic thing about GDP is that it counts the abatement or mitigation of externalities as beneficial to GDP. So if a company spills oil in a river, and the cleanup effort creates jobs, that is positive for GDP. Or if people are sickened with cancer or asthma as a consequence of industrial activity, that creates jobs in the healthcare field. Our economy does indeed thrive off of destruction. The more disasters occur, the more jobs are created.

          It’s fair and good for someone to earn a living from making a good or service that benefits society. But we live in a corrupt world where people can earn a living by setting things up for destruction.

        • CTG says:

          Have a look at Concrete Planet :

          People knew that steel rebar in the concrete is not permanent. Steel rusts, expands and concrete crumbles. However, due to very shortsightedness of the homo sapiens (and also greed), we choose to use it even though it lasts no longer than 100 years (generally). How much energy it takes to replace all the concrete in the world? Do we even have that kind of resource to do it when building crumbles?

          • I have heard the crumbling concrete story before. We have a whole lot of dams in operation right now. Some of them are getting close to 100 years old. How do we fix them? We don’t seem to be able keep them from declining due to other causes. We have all heard about the Oroville dam, with its problems, in California. This article says,

            “The lower half of the spillway has concrete erosion, creating a gaping hole in a structure that is used for controlled releases of water.”

            This article says,

            Damage to the main spillway triggered a series of problems culminating with the first use of the emergency spillway, which quickly began eroding and threatened to unleash a torrent of water on cities downstream.
            . . .

            Experts said problems like the cracks in the concrete spillway and spots in nearby areas where water seeped from the reservoir through a hillside were common issues with dams. What mattered, said John Moyle, New Jersey’s director of dam safety and flood control, was whether dam operators dealt with the problems carefully — patching cracks so they were watertight, and dealing with spots where water was leaking through so they didn’t grow to undermine the concrete.

            Construction of the Oroville dam began in 1961 and was finished in 1968. The recent infrastructure report on dams says that the average age of dams is 56 years, so this dam in probably typical of dams we have today. The report singles our California as having a much-above-average level of regulation of dams, with only 20 dams per regulator. Yet, they seem to have missed the problems in recent reviews.

            • Fast Eddy says:

              Doomsday Prepper Tip of the Day (sponsored by Peak Prosperity…)

              When doomsday hits…. and you run out of cans of beans …. take a stick of dynamite (make sure you have a stock of dynamite…) head up to the nearest dam …. and blast a hole in it …. then as the water drains take out your net and catch all the fish that thunder through the hole…

              Then with all that salt you have stockpiled you can cure all that fish and you’ll avoid starvation for many more months.

      • Thanks for the very nice example!

  9. jerry says:

    population problem
    I’ve always kind of believed that if it weren’t for 2 world wars so close to each other we wouldn’t have the kind of population problem we have today. Those 2 wars threw everything out of whack population wise. Too many dead at once and too many born at once changed the demographics of the entire world. It’s a known fact isn’t that we are approaching a day and age wherein there are going to be more old people around than young or am I barking up the wrong tree here?.

    • ww1 and 2 took out 100 million

      at the start of ww1 world pop was about 2.5 bn give or take—its now 7.5 bn

      world wars barely blipped population rise, which is why it will take more than world wars to solve the population problem

      • grayfox says:

        Meanwhile, other species have a different population problem. Two examples: it is estimated that there are 300 black footed ferrets and 30 vaquitas remaining in existence. My recommendation: pick at least one threatened species (besides H.”sapiens”) to foster and promote in whatever way that you can. Its also good for relieving unhealthy preoccupation with our own species’ survival.

        • Artleads says:

          Sort of agree. We need to whittle down our issues drastically. Three max maybe. Put them in order of strategic priority, and don’t move majorly onto the next one till the preceding is “done.” Although it’s exceedingly difficult to get any worthwhile ones done at all.

          • Fast Eddy says:

            Ok — I’ll stop using the powdered black rhino horn and switch to Viagra…

            But I’m not giving up my whale burgers and shark’s find soup. There are plenty of whales and sharks in the ocean

      • It might have been a blip in raw numbers, but the people who died in the world wars tended to live in developed countries and were more valuable for civilization.

        The population increase, in terms of quality, is meaningless. We gained 5 billion people who are good for very little.

  10. you never mentioned infamy

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