Will the World Economy Continue to “Roll Along” in 2018?

Once upon a time, we worried about oil and other energy. Now, a song from 1930 seems to be appropriate:

Today, we have a surplus of oil, which we are trying to use up. That never happened before, or did it? Well, actually, it did, back around 1930. As most of us remember, that was not a pleasant time. It was during the Great Depression.

Figure 1. US ending stocks of crude oil, excluding the Strategic Petroleum Reserve. Amounts will include crude oil in pipelines and in “tank farms,” awaiting processing. Businesses normally do not hold more crude oil than they need in the immediate future, because holding this excess inventory has a cost involved. Figure produced by EIA. Amounts through early 2016.

A surplus of a major energy commodity is a sign of economic illness; the economy is not balancing itself correctly. Energy supplies are available for use, but the economy is not adequately utilizing them. It is a sign that something is seriously wrong in the economy–perhaps too much income disparity.

Figure 2. U. S. Income Shares of Top 1% and Top 0.1%, Wikipedia exhibit by Piketty and Saez.

If incomes are relatively equal, it is possible for even the poorest citizens of the economy to be able to buy necessary goods and services. Things like food, homes, and transportation become affordable by all. It is easy for “Demand” and “Supply” to balance out, because a very large share of the population has incomes that are adequate to buy the goods and services created by the economy.

It is when we have too much income and wage disparity that we have gluts of oil and food supplies. Food gluts happened in the 1930s and are happening again now. We lose sight of the extent to which the economy can actually absorb rising quantities of commodities of many types, if they are inexpensive, compared to wages. The word “Demand” might better be replaced by the term “Quantity Affordable.” Top wage earners can always afford goods and services for their families; the question is whether earners lower in the wage hierarchy can. In today’s world, some of these low-wage earners are in India and Africa, or have no employment at all.

What is Going Right, As We Enter 2018?

[1] The stock market keeps rising.

The stock market keeps rising, month after month. Volatility is very low. In fact, the growth in the stock market looks rigged. A recent Seeking Alpha article notes that in 2017, the S&P 500 showed positive returns for all 12 months of the year, something that has never happened before in the last 90 years.

Very long runs of rising stock prices are not necessarily a good sign. According to the same article, the S&P 500 rose in 22 of 23 months between April 1935 and February 1937, in response to government spending aimed at jumpstarting the economy. By late 1937, the economy was again back in recession. The market experienced a severe correction that it would not fully recover from until after World War II.

The year 2006 was another notable year for stock market rise, with increases in 11 out of 12 months. According to the article,

Equity markets rallied amidst a volatility void in the lead-up to the Great Recession. Markets would make new all-time highs in late 2007 before collapsing in 2008, marking the worst annual returns (-37%) since the aforementioned infamous 1937 correction.

So while the stock market consistently rising looks like a good sign, it is not necessarily a good sign for market performance 6 to 24 months later. It could simply represent a bubble forming, which will later pop.

[2] Oil and other commodity prices are recently somewhat higher.

Recently, oil prices have been too low for most producers. Now, things are looking up. While prices still aren’t at an adequate level, they are somewhat higher. This gives producers (and lenders) hope that prices will eventually rise sufficiently that oil companies can make an adequate profit, and governments of oil exporters can collect adequate taxes to keep their economies operating.

Figure 3. Monthly average spot Brent oil prices, through December 2017, based on EIA data.

A major reason for the recent upward trend in commodity prices seems to be a shift in currency relativities for Emerging Markets.

Figure 4. Figure from Financial Times showing currency relativities based on the MSCI Emerging Market currency index.

While the currency relativities for emerging markets had fallen quite low when commodity prices first dropped, they have now made up most of their lost ground. This makes commodities more affordable in Emerging Market countries, and allows them to do more manufacturing, thus stimulating the world economy.

Of course, if China runs into debt problems, or if India runs into problems of some sort, or if oil prices rise further than they have to date, the run-up in currency relativities might run right back down again.

[3] US tax cuts create a bubble of wealth for corporations and the 1%.

With low commodity prices, returns have been far too low for many corporations involved with commodity production. “Fixing” the tax law will help these corporations continue to operate, even if commodity prices remain low, because taxes will be lower. These lower tax rates are important in helping commodity producers to avoid collapsing as a result of low commodity prices.

The problem that occurs is that the change in tax law opens up all kinds of opportunities for companies to improve their tax situation, either by changing the form of the corporation, or by merging with another company with a suitable tax situation, allowing the combined taxes to be minimized. See this recent Michael Hudson video for a discussion of some of the issues involved. This link is to a related Hudson video.

Groups evaluating the expected impact of the proposed tax law did their evaluations as if corporate structure would remain unchanged. We know that tax accountants will help companies quickly make changes to maximize the benefit of the new tax law. This is likely to mean that US governmental debt will need to rise much more than most forecasts have predicted.

In a way, this is a “good” impact, because more debt helps keep commodity prices and production to rise, and thus helps keep the economy from collapsing. But it does raise the question of how long, and by how much, governmental debt can rise. Will the addition of all of this new debt raise interest rates even above other planned interest rate increases?

[4] We have been experiencing artificially low oil prices since 2013. This helps the economic growth to be higher than it otherwise would be. 

In February 2014, I published an article documenting that back in 2013, oil prices were too low for oil producers. If a person looks at Figure 3, oil prices were over $100 per barrel that year. Clearly, oil prices have been much too low for producers since that time.

Unfortunately, it looks like these artificially low oil prices may be coming to an end, simply because the “glut” of oil that developed is gradually being reduced. Figure 5 shows the timing of the recent glut of oil. It seems to have started early in 2014.

Figure 5. US Stocks of crude oil and petroleum products (including Strategic Petroleum Reserve), based on EIA data.

If we look at the combination of oil prices and amount of oil in storage, a person can make a rough estimate of how this glut of oil might disappear. Quite a bit of it may be gone by the end of 2018 (Figure 6).

Figure 6. Figure showing US oil stocks (crude plus oil products) together with the corresponding oil prices. Rough guess of how balance might disappear and future prices by author.

Of course, one of the big issues is that consumers cannot really afford high-priced oil products. If consumers could not afford $100+ prices back in 2013, how would it be possible for oil prices to rise to something like $97 per barrel by the end of 2018?

I am not certain that oil prices can really rise this high, or that they can stay at this level very long. Certainly, we cannot expect oil prices to rise to the level they did in July 2008, without recession causing oil prices to crash back down.

What the Economy Needs Is Rising Energy Per Capita

I have published energy per capita graphs in the past. Flat spots tend to represent problem periods.

Figure 7. World per Capita Energy Consumption with two circles relating to flat consumption. World Energy Consumption by Source, based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent, divided by population estimates by Angus Maddison.

The 1920-1940 flat period came shortly after the United Kingdom reached Peak Coal in 1913.

Figure 8. United Kingdom coal production since 1855, in figure by David Strahan. First published in New Scientist, 17 January 2008.

In fact, the UK invaded Mesopotamia (Iraq) in 1914, to protect its oil interests. The UK wasn’t stupid; it knew that if it didn’t have sufficient coal, it would need oil, instead.

There were many other disturbing events during this period, including World War I, the 1918 flu pandemic, the Great Depression, and World War II. If there are not enough energy resources to go around, many things tend to go wrong: countries tend to fight for available resources; jobs that pay well become less available; deflation becomes more likely; population becomes weakened, and epidemics become more likely. I wrote about the 1920 to 1940 period in a recent post, The Depression of the 1930s Was an Energy Crisis.

The 1980-2000 flat period included the collapse of the Soviet Union, in 1991. The Soviet Union was an oil producer. The Soviet Union collapsed after prices had been low for a long time.

Figure 9. Former Soviet Union oil consumption, production, and inflation-adjusted price, all from BP Statistical Review of World Energy, 2015.

Even many years after the collapse of the Soviet Union, population growth in former Soviet Union countries and its affiliates was much lower than in the rest of the world.

Figure 10. World population growth rates between 2005 and 2010. Source: https://en.wikipedia.org/wiki/List_of_countries_by_population_growth_rate

Lower population (through falling birth rates, rising death rates, or rising emigration) are a major way that economies self-adjust because of falling energy per capita. Economies tend to fix the low-energy per capita problem by adjusting the population downward.

Recently, we have again been hitting flat periods in energy consumption per capita.

Figure 11. World per capita consumption of oil and of total energy, based on BP Statistical Review of World Energy data and UN 2017 population data.

The slowdown in world energy consumption per capita in 2008-2009 was clearly a major problem. Oil, coal and natural gas consumption fell simultaneously. Oil consumption per capita fell more than the overall mix, especially affecting countries heavily dependent on oil (Greece with its tourism, but also the US, Japan, and Europe).

The recent shift in political strategy to more isolationist stances also seems to be the result of flat energy consumption per capita. It is doubtful that Donald Trump would have been elected in the US, if world energy consumption per capita had been growing robustly, and if wage disparity had been less of a problem.

The primary cause of the 2013 to 2016 flat trend in world energy consumption per capita (Figure 11) is falling coal consumption (Figure 12). Many people think coal is unimportant, but it is the world’s second largest source of energy, after oil. We don’t have a good way of getting natural gas production to rise enough, to make up for loss of coal production.

Figure 12

Wind and solar simply do not work for solving our problem of flat or shrinking energy consumption per capita. After spending trillions of dollars on them, they make up only a tiny (1%) share of world energy supply, according to the International Energy Agency. They are part of the little gray “Other” sliver on Figure 13.

Figure 13. Figure prepared by IEA showing Total Primary Energy Supply by type from this IEA document.

Something Has to “Give” When There Is Not Enough Energy Consumption per Capita

The predicament we are facing is that energy consumption per capita seems to be reaching a maximum. This happens because of affordability issues. Over time, the price of energy products needs to rise to keep up with the rising cost of creating these energy products. But if energy prices do rise, workers earning low wages cannot afford to buy goods and services made with high-priced energy products, plus honor all of their other commitments (such as mortgages, auto loans, and student loans). This leads to debt defaults, as it did in the 2008-2009 recession.

At some point, the affordability problem can be expected to hold down energy consumption. This could happen in many ways. Spiking prices and affordability issues could lead to a worse rerun of the 2008-2009 recession. Or if oil prices stay fairly low, oil-exporting countries (such as Venezuela) may collapse because of low prices. Even if oil prices do rise, we may find that higher prices do not lead to sufficient additional supply because investment in new oil fields has been low for many years, because of past low prices.

As long as the world economy is expanding (Figure 14), individual citizens can expect to benefit. Jobs that pay well are likely to be available, and citizens can afford to buy goods with their growing wages. People who sell shares of stock and people who get pension benefits can all receive part of this growing economic output.

Figure 14. Author’s image of an expanding economy.

Once the economy starts to shrink (Figure 15), we start having problems with dividing up the goods and services that are available. How much should retirees get? Governments? Today’s workers? Holders of shares of stocks and bonds? Not all commitments can be honored, simultaneously.

Figure 15. Author’s image of declining economy.

 

One obvious problem in a shrinking economy is that loans become harder to repay. The problem is that there is less left over for other goods and services, after debt plus interest is subtracted, in a shrinking economy.

Figure 16. Figure by author.

Changing interest rates can to some extent help offset problems related to higher energy prices and shrinking supply. The danger is that interest rates can move in the wrong direction and make our problems worse. In the lead-up to the Great Recession of 2008-2009, the US raised short-term interest rates, helping to puncture the sub-prime mortgage debt bubble.

Figure 17. Figure comparing Case-Shiller Seasonally Adjusted Home Price Index and Federal Reserve End of Quarter Target Interest Rates. See Oil Supply Limits and the Continuing Financial Crisis for details.

We now hear a lot of talk about raising interest rates and selling QE securities (which would also tend to raise interest rates). If growth in energy consumption per capita is already flat, these changes could make the problems that the economy is facing even worse.

Our Economy Works Like a Bicycle

Have you ever wondered why a two-wheeled bicycle is able to stay upright? Research shows that a bicycle will stay upright, as long as its speed is greater than 2.3 meters (7.5 feet) per second. This is the result of the physics of the situation. A related academic article states, “This stability typically can occur at forward speeds v near to the square root of (gL), where g is gravity and L is a characteristic length (about 1 m for a modern bicycle).”

Thus, a bicycle will be able to continue in an upright manner, as long as it goes fast enough. If it slows down too much, it will fall down. Our economy is similar.

Gravity plays an important role in determining the speed of a bicycle. If the bicycle is going downhill, gravity gives an important boost to the speed of the bicycle. If the bicycle is going uphill, gravity very much pulls back on the bicycle.

I think of the situation of an economy having rising energy consumption per capita as being very much like riding on a bicycle, speeding down a hill. The person operating the bicycle would not need to provide much extra energy to keep the bicycle going.

If energy consumption per capita is flat, the person riding the bicycle must provide the energy to make it go fast enough, so it doesn’t fall over. This is somewhat of a problem. If energy consumption per capita actually falls, it is a true disaster. The bicyclist himself must provide the energy necessary to push the bicycle and rider uphill.

In fact, there are other ways that a speeding bicycle is analogous to the world economy.

Figure 18. Author’s view of analogies of speeding upright bicycle to speeding economy.

The economy needs a constant flow of outside energy. In the case of the bicycle, the human rider can provide the energy flow. In the case of the economy, the energy flow comes from a mixture of various fuel types, typically dominated by fossil fuels.

Growing debt (front wheel) is important as well. It tends to pull the economy along, because this debt can be used to pay wages and to buy materials to make additional goods and services. Thus, the effect of this increase in debt is indirect; it ultimately works through the bicyclist, the gears, and the back wheel.

In fact, the financial system as a whole is important for the “steering” of the economy. It tells investors which investments are likely to be profitable.

The gearing system of the bicycle plays a modest role in the system. Changing gears allows greater efficiency in the use of the energy that is available, under certain circumstances. But energy efficiency, by itself, cannot operate the system.

If the human rider does not provide sufficient energy for the bicycle to go rapidly enough, the bicycle glides for a while, and then falls over. The world economy seems to be similar. If the world economy does not obtain enough energy per capita, economic growth tends to slow and eventually collapses. The collapse can relate to the whole world economy, or to parts of the economy.

The Problem of Parts of the Economy Not Getting Enough Energy

We can think of the economy as being made up of many bicycles, operated by bicycle riders. At the beginning of the post, I talked about the problem of wage disparity. This issue occurred at the time of the 1930’s Great Depression and is occurring again now.

We might call wage disparity “too low a return on the labor of some workers.” In groups of animals in ecosystems, too low a return on the effort of these animals is what causes ecosystems to collapse. For example, if fish have to swim too far to obtain additional food, their population will collapse. It should not be surprising that economies tend to collapse, when the return on the efforts of part of their workers falls too low.

Wage disparity has to do with how well the operators of bicycles are doing. Are the operators of these bicycles receiving enough calories, so that they can keep pumping their bicycles fast enough so that the speed is high enough to remain upright?

If energy consumption per capita is growing, this greatly helps the operation of the economic system. If there is growing availability of inexpensive energy, machines of various types, including trucks, can be used to increasingly leverage the labor of workers. This increased leveraging helps each worker to become more “productive.” This growing productivity, thanks to growing energy consumption, allows more goods and services to be produced in total. It also allows the wages of the workers to stay high enough that they can afford to buy a reasonable share of the output of the economy. When this happens, “gluts” of unaffordable goods are less of a problem.

If energy consumption per capita is flat (or worse yet, falling), greater “complexity” is needed, to keep output of goods and services rising. Greater complexity involves more specialization and more training of individual members of the economy. Greater complexity leads to larger companies, more government services, and more wage disparity. Unfortunately, there are diminishing returns to complexity, according to Joseph Tainter in “The Collapse of Complex Societies.” Ultimately, increased complexity fails to provide an adequate number of high-paying jobs. Wage disparity becomes a problem that can cause an economy to collapse.

If there is not enough economic output, the physics of the economy tries to “freeze out” workers at the bottom of the hierarchy. Workers with low wages cannot afford homes and families. The incidence of depression rises. Debt levels of disadvantaged groups (such as young people in the US) may rise.

So the situation may not be that the whole world economy fails; it may be that parts of the economy collapse. In fact, we are already seeing evidence that this is taking place. For example, life expectancies for US men have been falling for two years, because of growing problems with drug overdoses.

Conclusions

In 2017, the world economy seemed to be gliding smoothly along because the economy has been able to get the benefit of artificially low energy prices and artificially low interest rates. These artificially low prices and interest rates have given a temporary boost to the world economy. Countries using large amounts of energy products, including the US, especially benefitted.

We cannot expect this temporary condition to continue, however. Low oil prices have already started to disappear, with Brent oil prices at nearly $69 per barrel at this writing. The trends in oil prices and oil stocks in Figure 6 are disturbing. If oil prices begin to rise toward the price needed by oil producers, they are likely to trigger a recession and a drop in world energy consumption, just as spiking prices did in 2008-2009. There is a significant chance of collapse in the next 12 to 24 months. It is hard to know how widespread such a collapse may be; it may primarily affect particular countries and population groups.

To make matters worse, our leaders do not seem to understand the situation. The world economy badly needs rising energy consumption per capita. Plans to raise interest rates and sell QE securities, when the economy is already “at the edge,” are playing with fire. If we are to keep the world economy operating, large quantities of additional energy supplies need to be found at very low cost. It is hard to be optimistic about this happening. High-cost energy supplies are worthless when it comes to operating the economy because they are unaffordable.

Many followers of the oil situation have had great faith in Energy Returned on Energy Invested (EROI) analysis telling us which kinds of energy supplies we should increase. Unfortunately, EROI doesn’t tell us enough. It doesn’t tell us if a particular product is scalable at reasonable cost. Wind and solar are great disappointments, when total costs, including the cost of mitigating intermittency on the grid, are considered. They do not appear to be solutions on any major scale.

Other researchers looking at the energy situation have not understood how “baked into the cake” the need for economic growth, rising per capita energy consumption, and rising debt levels really are. Rising debt is not an error in how the financial system is put together; a bicycle needs a front wheel, or it cannot operate at all (Figure 18). I have written other articles regarding why debt is needed to pull the economic system forward.

This economic growth cannot be “fake growth” either, where a debt Ponzi Scheme seems to allow purchases that real-life consumers cannot afford. Quite a bit of what is reported as world GDP today is of a very “iffy” nature. If China builds a huge number of apartments that citizens cannot afford without subsidies, should these be counted as true GDP growth? How about unneeded roads, built using the rising debt of the Japanese government? Or recycling performed around the world, because it makes people “feel good,” but really requires substantial subsidies?

At this point, it is hard for us to know where we really are, because every government wants to make GDP results look as favorable as possible. It is clear, however, that 2018 and 2019 can be expected to have more challenges than 2017. We have interesting times ahead!

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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2,782 Responses to Will the World Economy Continue to “Roll Along” in 2018?

  1. futhark says:

    Yes, the long awaited “tractor beam” could be on its way:

    https://www.cnet.com/news/tractor-beam-acoustic-levitate-bristol-university-humans

    That doesn’t help us grow more food or mine more metal, of course. It doesn’t magically increase our physical resources.

    It’s likely that pre-ancient civilisations used sound to move great weights:

    https://www.thoughtco.com/the-ancient-secrets-of-levitation-2593647

    Until now, we didn’t know how they achieved these feats. It didn’t stop their civilisations dying out, of course.

    • futhark says:

      The Buddhists don’t need machines to levitate:

      Allegedly. 😉 Can anybody spot the trick?

      • A Real Black Person says:

        My posts get routinely stopped and frisked while “f******” gets to post pseudoscience ?

        • I looked at some of this and it does look reasonable to post. A little strange, but maybe someone else knows more about it.

        • psile says:

          He must have wandered out of rehab into an internet cafe.

          • JH Wyoming says:

            I saw this other video with this guy in India who has a bum leg, sits on the ground and spun a playing card in the air without touching it (to get hand outs). Then someone gave him a paper currency and he made it levitate and spin. There’s stuff we don’t understand about the universe as much as science claims there are just a few things they still need to figure out (although don’t ask them what caused the Big Bang).

            • A Real Black Peson says:

              ^^^This is not a reasonable post.

            • Fast Eddy says:

              We went to the Amazon about 10 years ago …. we meet this couple who were both professors in a US university…. we took the same boat back to Manaus and had lunch with them…

              They appeared to be completely normal people…. then suddenly they started into a story about visiting India recently and seeing people levitate…

              ‘Really – they were levitating’

              Nice ta meet ya!!!

              This was my first encounter with what I later realized were DelusiSTANIs. I will always remember this moment.

            • DJ says:

              Yes we know. You believe in magic.

            • futhark says:

              A Real Black Pest wrote: “^^^This is not a reasonable post.” Without giving any reasons. Irony. If RBP were to place his hand against any of the black text on this screen, he would see that his hand (palm or back) is far lighter in colour, i.e. not black at all. John Michael Greer is a very grounded person, and he knows from experience that certain elements of “magic” do work.

              “There’s stuff we don’t understand about the universe” – perfectly true, and lots of it.

            • Fast Eddy says:

              Oh come on … there’s some show that reveals all the secrets of the magicians… there is no magic

    • Davidin100millionbilliontrillionzillionyears says:

      I have not eaten any food for 10 years…

      I can levitate cars and trucks…

      I am faster than the fastest skyscraper…

      I can leap over bullets in a single bound…

      look, up in the sky!

      it’s a bird!

      no, it’s a plane!

      no, it’s Davidinagodzillionyears!

      • futhark says:

        “I can levitate cars and trucks”

        Well, when this new beam is fully developed, maybe you will be able to. As they say, technology resembles magic in its effects. Maybe that fairy’s magic wand is just a technological device!

  2. Baby Doomer says:

    Recently, the HSBC oil report stated that 80% of conventional oil fields were declining at a rate of 5-7% per year. This means that there will be an oil shortage of ~30 million barrels per day by 2030 and ~40 million barrels per day by 2040.
    http://www.scribd.com/document/367688629/HSBC-Peak-Oil-Report-2017

    What is mentioned far less often is that annual oil discoveries have lagged annual production since the 1980s.

    Now, this problem has nothing to do with the recent decline in the oil price, which started in 2014. This has been an on-going problem for the past 30 years. Now, the IEA is predicting oil shortages by ~2020 due to declining exploration.
    https://www.wsj.com/articles/iea-says-global-oil-discoveries-at-record-low-in-2016-1493244000
    Saudi

    Here, the IEA blames this problem on the low oil price. But, this problem started in the 1980s. The problem is geological: we are running out of conventional cheap oil. Shale and tar sands are not the answer, either. Those resources are far too expensive, compared to conventional oil, because the global economy is based on cheap conventional oil. Expensive oil is not a replacement for cheap oil.

    Based upon the HSBC report, the End of Oil Age will start around ~2020: there will be a dramatic economic depression due to exhaustion of cheap oil. Which will cause a global economic collapse.

    • JH Wyoming says:

      How come there aren’t two distinct factions about that data? How come there aren’t people claiming the bars on the chart are actually getting taller or arguing reduced oil finds has nothing to do with people, i.e. not anth ropo genic. Versus the other people that look at the chart and are concerned about future oil supplies and accept the data and that it is people that drill for oil.

      • Davidin100millionbilliontrillionzillionyears says:

        “This means that there will be an oil shortage of ~30 million barrels per day by 2030 and ~40 million barrels per day by 2040.”

        more good news!

        an oil shortage in 2030 means The Collapse will not have happened by then…

        (after The Collapse, both oil supply and oil demand will be zero)…

        based on this data, the 2020s are looking like a decade of decline, but not worldwide disaster…

        the peripheral countries most likely will bear the highest burden from those shortages…

        bummer for them.

    • JH Wyoming says:

      “Expensive oil is not a replacement for cheap oil.”

      Sure it is, you just have to print like mad – lol.

      • A Real Black Person says:

        Show me one example of a government using the printing press to make something expensive cheap.

      • Greg Machala says:

        Well it isn’t just that oil is more expensive in dollar terms to extract, it is alwo more energy intensive to extract. So more and more energy is used to get energy, leaving less to do the useful things like power commerce, jobs, transportation and economic growth.

        • I know that we hear this over and over from the EROEI folks, but the extent to which it is true is iffy. For example, it is not at all clear that tight oil from shale is more energy intensive to extract. There may be a general tendency that way, but particular type of oil extraction may not work in that direction. Unconventional oil may at times be less energy intensive than conventional oil.

  3. Baby Doomer says:

    World finance now more dangerous than in 2008, warns top central bank veteran

    Nine years of emergency money has had a string of perverse effects and lured emerging markets into debt dependency, without addressing the structural causes of the global disorder.

    “All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten,” said William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements.

    http://www.telegraph.co.uk/business/2018/01/22/world-finance-now-dangerous-2008-warns-central-bank-guru/

    • JH Wyoming says:

      The crescendo this time will make Lehman folding look like the simple version, but what’s worse it leaves CB’s with no ammo to counter the next debacle, so it seems likely it will be disastrous in the extreme. It’s one thing to dig one’s self out of a ditch, but how to dig one’s self out of the Marianna Trench is what it’s going to be like. About all the CB’s could do under a dire, do something fast or face all out collapse is QE4 to the masses, but that insures hyper-inflation, leading to collapse of currency. Then if a few weeks pass without jolting the sucker back into coherence, every day infrastructure begins to fail. Once that ensues it’s incredibly difficult and expensive to get things going again. Why you’d need a whole lot of cheap energy and fracking ain’t gonna do it.

    • Greg Machala says:

      “Without addressing the structural causes of the global disorder.” – yes indeed the structural cause – diminishing returns. It takes more and more energy to get energy! That is the cause.

  4. Tango Oscar says:

    Trump just imposed a 30% tariff on foreign solar panels and washing machines. I predict this just opened the floodgates and is the beginning of the end for the globalization experiment. Every country is going to start playing this game as we watch bankruptcies pick up en masse.

    • Baby Doomer says:

      That’s called big government regulating on the free market…Protectionism.. And the final NAFTA meeting is this month. I bet he pulls out of it…

    • A Real Black Peson says:

      If we exclude computer technology, globalization has been a disaster.

      For the jet-set, it has been great.

      • Baby Doomer says:

        globalization has been a disaster

        Not true…Since signing free trade agreements US exports to GDP have soared. And free trade has increased global GDP substantially …

        • A Real Black Person says:

          Like I said, the average person has not benefited from all this. Almost every single country that has become dependent on imports has performed worse economically. People who benefit from globalization do not represent the average person. The average person faces falling wages.

          • Africa is an area that has become much more dependent on imported food and imported medicines. Population has mushroomed, but it is hard to see that it has really has benefitted otherwise.

      • JesseJames says:

        True, I don’t think globalism has any long term benefits.

        • Baby Doomer says:

          Notice both the far righters of OFW come out against globalism…As long as Fox News and right wing politicians say something is bad then they will believe it…No evidence needed…

          • My post Twelve Reasons Why Globalization Is a Huge Problem is incredibly popular.

            It has had 363,768 “views” on Our Finite World alone. It has been copied onto other websites as well.

            • Baby Doomer says:

              Study: Most US manufacturing jobs lost to technology, not trade

              https://www.ft.com/content/dec677c0-b7e6-11e6-ba85-95d1533d9a62

            • I notice when I look to find more information, I see “Refined oil is America’s top manufactured good.” That is true. America’s other top manufactured products are pharmaceuticals, airplanes and automobiles. Rounding out the top 10 are iron and steel, animal slaughtering, plastics, organic chemicals and petrochemicals. https://www.marketwatch.com/story/us-manufacturing-dead-output-has-doubled-in-three-decades-2016-03-28

              This is the chart that the Financial Times shows regarding manufacturing output and employment.

              Manufacturing output vs employment

              I thought that it was interesting on this chart that employment stayed up near the 100 line until about the time China was added to the World Trade Organization (2001). Then employment dropped from something like 90% of the 1980 base to more like 60% of the 1980 base. Strange coincidence! Maybe all of the technology was added in the same time frame as globalization.

            • Sven Røgeberg says:

              I don’t know if you’ve written about it before I started following your blog, but this is my question:
              1971 U.S. President Richard Nixon decided to end international convertibility of the U.S. dollar to gold, just one year after the U.S. crude oil production peaked. A coincidence, or is it documented that in the administration there were strategist thinking about the petrodollarsystem, which enabled the U.S. to pay it’s own debt?

              a

            • I don’t really know. This article from Resilience says,

              By 1970, the U.S.had drastically over-spent on the Vietnam War, and the number of dollars in circulation far outnumbered the amount of gold actually backing them. Other nations recognized that there wasn’t enough gold in Fort Knox for the U.S.to back all the dollars in circulation, and wisely began to exchange their excess USDs for gold. Before long, something akin to a run on the bullion bank had begun, and it became clear that the USA could not honor the $35 conversion price indefinitely.

              On August 15, 1971, President Nixon did exactly what Triffin predicted more than a decade earlier: he declared force majeure, and defaulted unilaterally on theUSA’s promise to honor gold conversion at $35/oz, as prescribed by the Bretton Woods accord.

              Of course Nixon was not about to admit that the reason this was happening was that the U.S. Government had abused its status as reserve currency issuer and recklessly spent beyond its means. Instead, he blamed “speculators”, and announced that the United Stateswould suspend temporarily the convertibility of the Dollar into gold. Forty-two years later, the word temporarily has taken on new meaning.

              Of course, Nixon may have known that US oil production had peaked in 1970. Hubbert’s prediction seems to have been widely known after 1957. The book “The Limits to Growth” was published in 1972. It must have been started in 1970 or 1971.

            • Baby Doomer says:

              NAFTA has helped grow American agriculture for two decades

              Among NAFTA’s many accomplishments, it has opened markets in Canada and Mexico to American farmers that would otherwise be closed completely or complicated by needless barriers.

              In 2016 alone, this resulted in $43 billion worth of food and agricultural goods being exported to Mexico and Canada, making those countries the largest export markets for American agriculture.

              The growth driven by NAFTA has been nothing short of amazing. Agricultural exports from the United States to these two countries have grown by 450 percent since 1994 and Mexico is now the top export destination for a long list of U.S.-grown products, including beef, rice, soybean meal, corn sweeteners and apples. With record yields being produced across the United States, we’ve needed access to export markets more than ever and NAFTA has met the challenge.

              The benefits of NAFTA are seen across various sectors within the American economy, however. For example, post-NAFTA, the U.S. food and agriculture industries have flourished and now support more than 43 million jobs and economists say NAFTA has boosted the U.S. economy by $127 billion annually. The benefits are wide-ranging, extending down to American consumers who pay less at the store for everything from avocados to televisions thanks to this trade agreement.

              http://thehill.com/opinion/energy-environment/370363-nafta-has-helped-grow-american-agriculture-for-two-decades

            • I can believe this story a whole lot more for Mexico than Canada. But now Mexico is running into problems. How will it even keep order, if is oil production is declining? And if Mexico still has avocados to sell, who is it going to sell them to? Canada can take only so many avocados. Once trees are planted, they are likely to continue to give fruit.

          • A Real Black Peson says:

            You’re an idiort. There are people on the Left who are against globalization because it grants much greater power to capitalists. Now, they mostly support it because they despise “Western Civilization” which they equate with “Old White Men”.

          • A Real Black Peson says:

            I think you’re projecting here.
            A few months ago you and JH Wyoming were posting stuff about Russian hacking the presidential election…which has yet to be proved.

            Every day we are bombarded with your sour grapes about Republicans cutting funds to an entitlement you think they don’t have to because the U.S. is swimming in cash and has unlimited resources to absorb more and more immigrants and provide expensive social programs. It’s like the concept of a “finite world” has gone over your head.

            • Fast Eddy says:

              Far righters and far lefters are = abhorrent.

              In fact left and right on any level are equally abhorrent.

          • JesseJames says:

            Does that make you far left?

        • jupiviv says:

          “I don’t think globalism has any long term benefits.”

          Neither does industrialism. Without globalism, post-1971 industrial civilisation would have collapsed even sooner than it otherwise would.

          • JesseJames says:

            Globalism was about a couple of things.1. Exporting jobs to cheaper countries so corporations could make more money.
            2. Supposedly “lifting” the rest o the world to a “higher” standard of living.
            3. The shadow purpose of one day having a world gov.
            #1 definitely happened. I don’t think #2 really happened. I mean, 3rd world is not any better off these days. I look at peoples happiness. Much of the 3rd world in the old days was happy I think, not super consuming rich like Americans….but reasonably happy.
            In other words, the western lifestyle does not equate to happiness.
            #3 is still on the table.

            • Fast Eddy says:

              I was in BC Canada a few years ago …. a shop had a BC-hand made corn broom for sale — if I recall the price was 70 bucks…. I bought the China made option for 20…

              I recently replace a water pump on our shack at the ocean — the china made option was half the price of the other options…I went for the china made option

              Of course at some point if you export all the decent jobs … you end up using a bucket to fetch your water… because none of the other options are affordable

        • Greg Machala says:

          Globalism was the last growth frontier. There is nowhere (and no room) left to grow. And certainly no cheap energy to do it.

    • You might be right about starting a trade war.

      This is an article about the tariffs. http://abcnews.go.com/Business/wireStory/trump-approves-tariffs-imported-solar-panels-washing-machines-52533536

      Apparently not all solar panels and washing machines are affected:

      Up to certain levels, imports of solar cells will be exempt from the tariff, while the first 1.2 million imported large washing machines will get a lower tariff, peaking at 20 percent.

      As I understand the situation, the lower business tax rate was already hurting solar, to some extent, because those buying the solar were generally taking advantage of tax credits that businesses could not really use. Now those tax credits are less available, because of the recent reduction in tax rate.

      • Christiana says:

        I wonder why they start with washing machines? Why not dishwashers, TVs, smartphones?

        • Solar panels and washing machines were areas where they had received complaints.

          I am sure that if other product manufacturers see that tariffs can be obtained through this route, the number of complaints of this type will increase. There are already other decisions on other products in the works. https://www.bloomberg.com/news/articles/2018-01-22/trump-makes-first-big-trade-move-with-tariffs-aimed-at-asia This Bloomberg article says

          Trump has about three months to decide whether to impose tariffs on imported steel and aluminum, while his top trade official is probing China’s intellectual-property practices.

          China is well-known for reverse engineering any product that they import, and building similar products. In some cases, they explicitly require companies to give details of how things that they are importing are built.

          • A Real Black Person says:

            Gail, correct me if I am wrong but do you think it’s a coincidence that Trump is being allowed to impose tariffs at a time when many imports from China are not selling well at U.S, retail outlets like Wal-Mart anymore?

            https://finance.yahoo.com/blogs/the-exchange/why-wal-mart-is-getting-too-expensive-for-the-middle-class-215417616.html

            This just seems like symbolic move to make it appear the Trump administration is being productive and is addressing a problem.

            • I notice that this article about Walmart is about four years old. But it is interesting that it points out some things that happened in 2013 and early 2014:

              At the start of 2013, Congress repealed a payroll tax cut that had been in effect for two years, effectively taking about $80 per month from the typical household budget. In November the government cut back on food-stamp benefits, which had also been beefed up during the recession. And effective January 1 of this year, Congress zeroed out enhanced jobless benefits that had been in effect since 2008, leaving less money for 1.3 million unemployed people already struggling to get by.

              This timing was close to when the price of oil and other fossil fuels dropped. It could have been a contributing factor, along with the rise in the level of the dollar at that time. The dollar/yuan relativity would make a big difference in the price of imports from China.

              Of course, these things happened during the Obama administration. I would have to look at current Walmart information to see how it is doing now. I noticed that Walmart is raising its minimum wage to $11 per hour. That will be putting pressure on other retailers to raise pay as well.

              There seem to be a lot of things going on simultaneously. The tariffs on some solar panels and clothes washers is part of it. But so are NAFTA negotiations. The recent changes in corporate tax rates is intended to make US producers more competitive compared to companies in other countries. There seem to be other tariffs being examined (aluminum and steel) and also Chinese treatment of intellectual property.

      • DJ says:

        Sweden did the opposite (always does), last summer started taxing electronics sold in Sweden by the kg (“chemical tax”).

        Do now you have to weigh money saved by buying from abroad against extra hassle if/when you return stuff or it breaks.

        • So the tax in Sweden is on locally made electronics, rather than imported electronics? This is truly strange. It does encourage reducing the local CO2 production, but it clearly has a lot of detrimental effect–loss of jobs in Sweden.

        • DJ says:

          On locally SOLD. So the same computer factured in say Japan is cheaper bought online from a danish company than a swedish.

      • A Real Black Person says:

        The ultimate blow in a real trade war would be for China to stop accepting the petrodollar.
        I’ve heard that one of the reasons why Russia is being deemed an enemy by those in the U.S. intelligence community is because it’ s attempting to stop accepting U.S. dollars in exchange for energy products.

        • China is a buyer of energy products. In fact, it is the biggest importer of energy products in the world. It is part of what is driving up the prices of energy products for the world as a whole. It can admittedly negotiate a contract with Russia and buy energy products (probably based on the world market price for oil; natural gas would likely reflect the high cost of shipping) and make the exchange using gold, rubles, yuan, or whatever is preferred. But it won’t demand that goods it is trying to sell to the rest of the world is paid for in yuan or gold.

          I am not sure it would make a difference. Not buying treasury bonds, or selling of existing treasuries, would seem to be a bigger issue.

    • JH Wyoming says:

      Trump is going after solar because he wants the country to burn coal. The tax benefits for renewables took a hit in the latest tax code change as well. He also hates California (because of Brown) and CA has big plans to increase solar (which will now cost more).

      • Fast Eddy says:

        The decision makers — not Trump – understand that the solar ho ax can only be taken so far without threatening BAU … so they are stopping it.

      • JesseJames says:

        Most solar panels were made in China. Additionally, SolarWorld, the largest US manufacturer, owned by a German firm BTW, went into bankruptcy. There is an argument for protecting domestic industry from bottom of the barrel, possibly state subsidized panels made in China.

        • The ways of operating companies and taxation are so different from country to country that it becomes difficult to figure out what is going on. The links I gave in my recent China article said that China’s major motive for building solar panels was the export market. They found them too expensive for use at home. It was only when they were unable to sell them abroad that they started putting them in place in China (and the official who allowed to this to happen got fired for graft). With all of the state ownership of companies and unusual types of debt, it is hard to tell what the real costs are of making solar panels are.

          I am sure the cost of making panels depends on the price of coal, since they are made using coal. The cost of coal has fluctuated in much the same pattern as oil–down, then up recently. I imagine it also depends on interest rates on debt. Given how little benefit they truly add to the system, adding tariffs doesn’t sound like a bad idea. If nothing else, if we are collecting less in taxes from our own companies, we need to make up the loss with more taxes on goods from other countries.

  5. Baby Doomer says:

    Immigration SS just snatched a Doctor by where I live who has been here for 40 years…

    Doctor who came to US as child jailed by immigration agents
    https://apnews.com/cce214ce28df402aa0aa3abac186ccd8?utm_campaign=SocialFlow&utm_source=Twitter&utm_medium=APCentralRegion

  6. Fast Eddy says:

    So I take it that the issue of xxx xxxxx has been put to rest —- we are all agreed… it is a ho ax.

    Excellent.

    We’re all one big happy family now!

    • Baby Doomer says:

      Tesla says you have to keep your hands on the wheel at all time…What the hell is the point of having an autonomous car if you have to do that? You might as well just drive the stupid thing. I thought the whole selling point of autonomous cars was supposed to be that you could yak on your phone or read a book and the computer would drive.

      • DJ says:

        “What the hell is the point of having an autonomous car if you have to do that? ”

        1. Tesla can say they sell autonomous electric vehicles.
        2. Buyers can say they own an autonomous electric vehicle.

        • smite says:

          3. With the software update ‘carOS 2.2’, you are no longer required to keep your hands on the wheel.

        • Fast Eddy says:

          Up is down

          Down is up

          Good is bad

          Bad is good

          War is peace

          Peace is war

          Autonomous means you must steer the car and push the pedals.

          It all makes sense

      • Fast Eddy says:

        Or send sms messages….. or play facebook….

    • Baby Doomer says:

      I hate this shit, Tesla is releasing untested “beta cars” into production and its endangering everyones lives. You dont release a 80 mph traveling metal box unless you are sure it works flawlessly.

      • A Real Black Person says:

        Telsa does not have a fully autonomous car.
        Yes, they have implied through their supporters in the media that it has one or is workking on one… but it does not have one.

        It’s not it’s fault that some of its wealthy and highly-educated buyers did not read the instruction manual.

      • A Real Black Person says:

        “You dont release a 80 mph traveling metal box unless you are sure it works flawlessly.”

        You lead a very sheltered life. That has never been the case with any machine. Ever.

      • smite says:

        I don’t know what is worse, that or unleashing 60+ year old coots with their gas-guzzler SUV’s to freely roam the streets with their myopic and cataract blurred vision feeding their unreliable and stroke-prone alzheimers riddled brains with an extremely dim representation of the objective reality.

    • Crash at 65 miles per hour against a stopped fire truck and no injuries–that sounds unusual to me. Perhaps it barely scraped it.

  7. Jan says:

    Gail,
    does the World Economic Forum reads your blog? The Global Risks Report 2018 says:

    “But we are much less competent when it comes to dealing with complex risks in the interconnected systems that underpin our world, such as organizations, economies, societies and the environment. There are signs of strain in many of these systems: our accelerating pace of change is testing the absorptive capacities of institutions, communities and individuals. When risk cascades through a complex system, the danger is not of incremental damage but of “runaway collapse” or an abrupt transition to a new, suboptimal status quo.” (http://reports.weforum.org/global-risks-2018/executive-summary/)

    Seems as if they have copied one of your articles!

    Jan

    • https://www.euractiv.com/section/economy-jobs/news/imf-warns-of-harder-crisis-as-bullish-ceos-come-to-davos/

      the International Monetary Fund (IMF) has warned that the next crisis will hit sooner and harder that we thought.

      • It is amazing how many people can avoid talking about energy when they mention the problems we are having.

        • Greg Machala says:

          I don’t think people avoid talking about energy as much as they assume that energy will always be available. Just like assuming water will always be available and free because we need it to survive. We were mostly all born into a world of abundant and cheap energy so we have that normalcy bias built in from childhood.

          I have mentioned energy before in discussions with people about technology and the economy and they literally laugh at the mention that energy supplies such as coal, oil and natural gas may not be available in the near future. The reasoning is that there are 1000’s of years of fossil fuels left. It is those government regulations blocking access. I am not joking. That is what most people believe. To challenge this is akin to practicing witchcraft in the 15th century.

          • Fast Eddy says:

            And long before they run out… we will have transitioned to clean renewable energy.

            The MSM has done a great job of indoctrinating the goy….

  8. Fast Eddy says:

    The Bank of Canada raised interest rates another 25 basis points last week. It was the third time in the past six months. Rates have more than doubled in that time, going from 0.50% to 1.25%. This hike was baked into the economic data, and now it’s getting baked into the debt loads of Canadian households.

    Following the announcement, Canadian banks hiked their prime lending rate by an equivalent 25 basis points. The prime lending rate is the annual interest rate Canada’s major banks use to set interest rates on variable-rate loans, lines of credit, variable-rate mortgages, and HELOCs (Home Equity Lines of credit).

    This means nearly instantly higher interest payments for borrowers carrying variable-rate mortgages, HELOCs, and lines of credit.

    This is critically important, considering the context of the current situation. Interest rates have been at historically low emergency levels since the Financial Crisis. This has allowed households to absorb elevated house prices and a record amount of debt. Each rate hike reduces the ability to service that debt.

    https://wolfstreet.com/2018/01/22/rate-squeeze-in-vancouver-toronto-house-price-bubble/

    Now what are they seeing… that is forcing them to raise rates

    • Fast Eddy says:

      Given the current size of the mortgages, for Vancouver households, a 1% rate increase in their variable mortgage rate would require an additional 9.2% of their income to make the payment, according to Better Dwelling, and for households in Toronto, it would require an additional 8.3% of their household income. In Montreal, it would require an additional 3.2% of their household income:

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