Nine Reasons Why Globalization Can’t Be Permanent

Since the late 1990s, globalization has seemed to be the great hope for the future. Now this great hope seems to be dimming. Globalization sets up conflict in the area of jobs. Countries around the world compete for development and jobs. If there is not enough cheap-to-produce energy to go around, huge wage disparity is likely to result.

We know from physics and history that economies need to grow, or they collapse. The wage disparity that high-wage countries have been experiencing in recent years is evidence that the world economy is already reaching energy limits. There are no longer enough jobs that pay well to go around. Any drop in energy supply is likely to worsen the job situation.

Most observers miss this problem, because they expect high oil prices to signal energy limits. This time, the signal is low wages for a significant group of workers, rather than high oil prices. This situation is possible in a networked economy, but it is not what most people look for.

Unhappy citizens can be expected to react to the wage disparity problem by electing leaders who favor limits to globalization. This can only play out in terms of reduced globalization.

History and physics suggest that economies without adequate energy supply can be expected to collapse. We have several recent examples of partial collapses, including the Great Depression of the 1930s and the collapse of the Soviet Union. Such collapses, or even more extensive collapses, might occur again if we cannot find energy alternatives that can be quickly scaled up to replace oil and coal in the very near term. These replacements need to be cheap-to-produce, non-polluting, and available in huge quantities.

The story that the economy doesn’t really need a growing supply of very cheap-to-produce energy is simply a myth. Let’s look at some of the pieces of this story.

[1] The world economy needs to grow or it collapses. Once all of the nations of the world are included in the world economy, one obvious source of growth (incorporating nations that are not yet industrialized into the world economy) disappears. 

The reason why the world economy needs to grow is because the economy is a self-organized system that operates under the laws of physics. In many ways it is like a two-wheeled bicycle. A bicycle needs to roll quickly enough, or it will fall over. An economy must grow quickly enough, or debt cannot be repaid with interest.

Also, government promises may be a problem with slow growth. Pensions for the elderly are typically paid out of tax revenue collected in that same year. It is easy for a mismatch to take place if the number of younger workers is shrinking or if their wages are lagging behind.

Figure 1. Author’s view of analogies of speeding upright bicycle to speeding economy.

I explain a little more about my bicycle analogy in Will the World Economy Continue to “Roll Along” in 2018?

Economies throughout the ages have collapsed. In some cases, entire civilizations have disappeared. In the past 100 years, partial collapses have included the Great Depression of the 1930s, the collapse of the central government of the Soviet Union in 1991, and the Great Recession of 2008-2009. Economic collapses are analogous to bicycles falling over.

[2] A growing supply of energy products is extraordinarily important for keeping the world economy operating.

We can see in Figure 1 that the energy of the person operating a bicycle is very important in allowing the operation of the bicycle to continue. In the world’s economy, the situation is similar, except that we are facing a problem of a world population that is continually growing. In a sense, the economic situation is more like a rapidly growing army of bicycles with riders. Each member of the economy needs goods and services such as food, homes, clothing, and transportation. The members of the economy can collapse individually (for example, growing suicide rate) or in much larger groups (collapsing government of a country).

Figure 2. World population according to the United Nations 2017 historical estimates and Medium forecast of population growth after 2017.

In an economy, we have a choice regarding how much energy to use. If more energy is used, workers can have many tools (such as trucks and computers) to leverage their productivity. If all goods are made with few energy inputs other than human labor, most workers find themselves working in subsistence agriculture. The total amount of goods and services produced in such an economy tends to be very small.

If supplemental energy is used, many more jobs that pay well can be added, and many more goods and services can be created. Workers will be rich enough that they can pay taxes to support representative government that supports many services. The whole economy will look more like that of a rich nation, rather than the economy of Somalia or Haiti.

Individual nations can grow their economies by using available energy supply to create jobs that pay well. Globalization sets up competition for available jobs.

If a given country has a lot of high paying jobs, this is likely to be reflected in high per capita energy consumption for that country. There are two reasons for this phenomenon: (1) it takes energy for an employer to create jobs, and (2) workers can use their wealth to buy goods and services. This wealth buys more goods and services made with energy products.

[3] One measure of how well the world economy is doing is world energy consumption per capita. On this basis, the world economy is already reaching limits.

Figure 3. World energy per capita and world oil price in 2016 US$. Energy amounts from BP Statistical Review of World Energy, 2017. Population estimates from UN 2017 Population data and Medium Estimates.

It is clear from Figure 3 that energy consumption tends to move in the same direction as oil price. If “demand” (which is related to wages) is high, both oil price and the amount of energy products sold will tend to be high. If demand is low, both oil price and the amount of energy products sold will tend to be low.

Since 2014, energy consumption has remained quite high, but oil prices have fallen very low. Today’s oil prices (even at $70 per barrel) are too low for oil producers to make adequate investment in the development of new fields and make other needed expenditures. If this situation does not change, the only direction that production of oil can go is down, rather than up. Prices may temporarily spike, prior to the time production falls.

Looking at energy consumption per capita on Figure 3 (above), we notice that this amount has been fairly flat since 2011. Normally, in a growing world economy, a person would expect energy consumption per capita to rise, as it has most of the time since 1820 (Figure 4).

Figure 4. 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 fact that energy consumption per capita has been nearly flat since 2011 is worrying. It is a sign that the world economy may not be growing very rapidly, regardless of what government organizations are reporting to the World Bank. Some subsidized growth should not really be considered economic growth. For example, some Chinese cities have been buying off the country’s housing glut with borrowed money. A better accounting would likely show lower GDP growth for China and the world.

Looking more closely at Figure 3, we note that energy per capita hit a high point in 2013, just before world oil prices began sliding downward. Since then, world energy consumption per capita has been trending downward. This is part of the reason for gluts in supply. Producers had been planning as if normal growth in energy consumption would continue. In fact, something is seriously wrong with demand, so world energy consumption has not been rising as fast as in the past.

The point that is easy to miss is that (a) growing wage disparity plus oil gluts and (b) high oil prices are, in a sense, different ways of reflecting a similar problem, that of an inadequate supply of truly inexpensive-to-produce oil. High-cost-to-produce oil is not acceptable to the economy, because it doesn’t produce enough jobs that pay well, for each barrel produced. If oil prices today truly represented what oil producers (such as Saudi Arabia) need to maintain their production, including adequate tax revenue and funds to develop additional production, oil prices would be well over $100 per barrel.

We are dealing with a situation where no oil price works. Either prices are too high for a large number of consumers or they are too low for a large number of producers. When prices are low, relative to the cost of production, we tend to get wage disparity and gluts.

[4] The reason why energy demand is not growing is related to increased wage disparity. This is a problem for globalization, because globalization acts to increase wage disparity.

In the last section, I mentioned that demand is closely connected to wages. It is really wage disparity that becomes a problem. Goods and services become less affordable for the people most affected by wage disparity: the lower-paid workers. These people cut back on their purchases of goods such as homes and cars. Because there are so many lower-paid workers in the world, demand for energy products, such as oil and coal, fails to grow as rapidly as it otherwise would. This tends to depress prices for these commodities. It doesn’t necessarily reduce production immediately, however, because of the long-term nature of investments and because of the dependence of oil exporters on the revenue from oil.

Figure 5 shows that China and India’s energy consumption per capita has been rising, leaving less for everyone else.

Figure 5. Energy consumption per capita comparison, based on energy data from BP Statistical Review of World Energy 2017, and UN 2017 Population Estimates.

A major way that an economy (through the laws of physics) deals with “not enough goods and services to go around” is increased wage disparity. To some extent, this occurs because newly globalized countries can produce manufactured products more cheaply. Reasons for their advantage are varied, but include lower wages and less concern about pollution.

As a result, some jobs that previously would have been added in developed countries are replaced by jobs in newly globalized countries. It is probably not a coincidence that US labor force participation rates started falling about the time that China joined the World Trade Organization in 2001.

Figure 6. US Labor Force Participation Rate, as prepared by Federal Reserve Bank of St. Louis.

Lower wages for unskilled workers may also occur as the result of immigration, and the resulting greater competition for less skilled jobs. This has been a particular concern in the UK.

[5] Adding China, India, and other countries through globalization temporarily gives a boost to world energy production. This boost disappears as the energy resources of the newly added countries deplete.

Both China and India are primarily coal producers. They rapidly ramped up production since joining the World Trade Organization (in 1995 for India; in 2001 for China). Now China’s coal production is shrinking, falling 11% from 2013 to 2016. Both China and India are major importers of fossil fuels (difference between black line and their own production).

Figure 7. China’s total energy consumption compared to its energy production by type, based on BP Statistical Review of World Energy, 2017.

Figure 8. India’s total energy consumption compared to its energy production by type, based on BP Statistical Review of World Energy, 2017.

China and India’s big surge in coal production has had a major impact on world coal production. The fact that both countries have needed substantial imports has also added to the growth in coal production in the “Other” category in Figure 9.

Figure 9 also shows that with China’s coal production down since 2013, total world coal production is falling.

Figure 9. World coal production by part of the world, based on BP Statistical Review of World Energy, 2017.

Figure 10 shows that world GDP and world energy supply tend to rise and fall together. In fact, energy growth tends to precede GDP growth, strongly suggesting that energy growth is a cause of GDP growth.

Figure 10. World three-year average GDP growth compared to world three-year average energy consumption growth. GDP data is from the World Bank, based on 2010 US$ weights of GDP by country; energy consumption is from BP Statistical Review of World Energy, 2017.

If a growth in energy consumption is indeed a primary cause of world economic growth, the drop in world coal production shown in Figure 9 is worrying. Coal makes up a large share of world energy supply (28.1% according to Figure 12). If its supply shrinks, it seems likely to cause a decline in world GDP.

Figure 11 shows energy consumption growth on a basis comparable to the energy consumption growth shown on Figure 10, except for different groupings: for the world in total, the world excluding China, and for the combination of the US, EU, and Japan. We can see from Figure 11 that the addition of China and Japan has greatly propped up growth in world energy consumption since 2001, when China joined the World Trade Organization.

Figure 11. Three-year average growth in energy consumption, for the world total; the world less China and India; and for the sum of the United States, the European Union, and Japan. Energy data from BP Statistical Review of World Energy, 2017.

The amount of the “benefit” was greatest in the 2003-2007 period. If we look at Exhibit 10, we see that world economic growth was around 4% per year during that period. This was a recent record high. Now the benefit is rapidly disappearing, reducing the possibility that the world energy consumption can grow as rapidly as in the past.

If we want world energy consumption per capita to rise again, we need a new large rapidly growing source of cheap energy to replace the benefit we received from China and India’s rapidly growing coal extraction. We don’t have any candidates for a suitable replacement. Intermittent renewables (wind and solar) are not candidates at all. According to the IEA, they comprised only 1% of world energy supply in 2015, despite huge investment. They are part of the gray “Other” slice in Figure 11.

Figure 12. Figure prepared by IEA showing Total Primary Energy Supply by type from this IEA document

Academic studies regarding wind and solar have tended to focus on what they “might” do, without considering the cost of grid integration. They have also overlooked the fact that any energy solution, to be a true energy solution, needs to be a huge energy solution. It has been more pleasant to give people the impression that they can somehow operate a huge number of electric cars on a small amount of subsidized intermittent electricity.

[6] On a world basis, energy consumption per capita seems to need to be rising to maintain a healthy economy. 

When energy consumption is growing on a per capita basis, the situation is similar to one in which the average worker has more and more “tools” (such as trucks) available at his/her disposal, and sufficient fuel to operate these tools. It is easy to imagine how such a pattern of growing energy consumption per capita might lead to greater productivity and therefore economic growth.

If we look at historical periods when energy consumption has been approximately flat, we see a world economy with major problems.

Figure 13. 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 flat period of 1920-1940 seems to have been caused by limits reached on coal production, particularly in the United Kingdom, but also elsewhere. World War I , the Great Depression of the 1930s, and World War II all took place around this time period. Charles Hall and Kent Klitgaard in Energy and the Wealth of Nations argue that resource shortages are frequently the underlying cause for wars, including World Wars I and II.

The Great Depression seems to have been a partial economic collapse, indirectly related to great wage disparity at that time. Farmers, in particular, had a difficult time earning adequate wages.

The major event that took place in the 1990 to 2000 period was the collapse of the Soviet Union in 1991. The central government collapsed, leaving the individual republics to operate independently. The Soviet Union also had strong trade relationships with a number of “satellite” countries, including Cuba, North Korea, and several Eastern European countries. In the next section, we will see that this collapse had a serious long-term impact on both the republics making up the Soviet Union and the satellite countries operating more independently.

[7] The example of the Soviet Union shows that collapses can and do happen in the real world. The effects can be long lasting, and can affect trade partners as well as republics making up the original organization.

In Figure 14, the flat period of the 1980-2000 period seems to be related to intentional efforts of the United States, Europe, and other developed countries to conserve oil, after the oil price spikes of the 1970s. For example, smaller, more fuel conserving vehicles were produced, and oil-based electricity generation was converted to other types of generation. Unfortunately, there was still a “backfire” effect related to the intentional cutback in oil consumption. Oil prices fell very low, for an extended period.

The Soviet Union was an oil exporter. The government of the Soviet Union collapsed in 1991, indirectly because with these low oil prices, the government could not support adequate new investment in oil and gas extraction. Businesses closed; people lost their jobs. None of the countries shown on the Figures 14 and 15 have as high energy consumption per capita in 2016 as they did back when the Soviet Union collapsed.

Figure 14. Per capita energy consumption for the Soviet Union and three of its satellite countries. Energy data from BP Statistical Review of World Energy, 2017. Population data from UN 2017 Population data and Middle Estimates.

The three satellite countries shown on Figure 14 (Bulgaria, Hungary, and Poland) seem to be almost as much affected as the republics that had been part of the Soviet Union (Figure 15). This suggests that loss of established trading patterns was very important in this collapse.

Figure 15. Per capita energy consumption for the three largest (by population) republics that made up the Soviet Union. Energy data from BP Statistical Review of World Energy, 2017. Population data from UN 2017 Population data and Middle Estimates.

Russia’s per capita energy consumption dropped 29% between peak and trough. It had significant fossil fuel resources, so when prices rose again, it was again able to invest in new oil fields.

Ukraine was a major industrial center. It was significantly impacted by the loss of oil and gas imports. It has never recovered.

The country that seemed to fare best was Uzbekistan. It had little industry before the collapse, so was less dependent on energy imports than most. Of all of the countries shown on Figures 14 and 15, Uzbekistan is the only one that did not lose population.

[8] Today, there seem to be many countries that are not far from collapse. Some of these countries are energy exporters; some are energy importers.

Many of us have read about the problems that Venezuela has been having recently. Ironically, Venezuela has the largest oil reserves in the world. Its problem is that at today’s prices, it cannot afford to develop those reserves. The Wikipedia article linked above is labeled 2014-2018 Venezuelan protests. Oil prices dropped to a level much lower than they had been in 2014. It should not be surprising that civil unrest and protests came at the same time.

Figure 16. Monthly average spot Brent oil prices, through December 2017, based on EIA data.

Other oil producers are struggling as well. Saudi Arabia has recently changed leaders, and it is in the process of trying to sell part of its oil company, Saudi Aramco, to investors. The new leader, Mohamed bin Salman, has been trying to get money from wealthy individuals within the country, using an approach that looks to outsiders like a shake-down. These things seem like very strange behaviors, suggesting that the country is experiencing serious financial difficulties. This is not surprising, given the low price of oil since 2014.

On the oil-importer side, Greece seems to frequently need support from the EU. The lower oil prices since 2014 have somewhat helped the country, but the basic shape of the energy consumption per capita chart makes it look like it is struggling to avoid collapse.

Figure 17. Greece energy per capita. Energy data from BP Statistical Review of World Energy, 2017; population estimates from UN 2017 Population data and Medium projections.

There are many other countries struggling with falling energy consumption per capita. Figure 18 shows a chart with four such countries.

Figure 18. Energy consumption per capita for Japan, UK, Italy, and Spain. Energy consumption from BP Statistical Review of World Energy; population from UN 2017 Population data and Medium Estimates.

In a sense, even though oil prices have been lower since 2014, prices haven’t been low enough to fix the economic problems these countries have been having.

China is in a different kind of situation that could also lead to its collapse. It built its economy on coal production and rapidly growing debt. Now its coal production is down, and it is difficult for imports and substitution of other fuels to completely compensate. If slowing growth in fuel consumption slows economic growth, debt will become much harder to repay. Major debt defaults could theoretically lead to collapse. If China were to collapse, it would seriously affect the rest of the world because of its extensive trading relationships.

[9] Leaders of countries with increasing wage disparity and unhappy electorates can be expected to make decisions that will move away from globalization. 

Unhappy workers are likely to elect at least some leaders who recognize that globalization is at least a small part of their problems. This is what has happened in the US, with the election of President Trump.

The hope, of course, is that even though the rest of the world is becoming poorer and poorer (essentially because of inadequate growth of cheap-to-produce energy supplies), somehow a particular economy can “wall itself off” from this problem. President Donald Trump is trying to remake trading arrangements, based on this view. The UK Brexit vote was in a sense similar. These are the kinds of actions that can be expected to scale back globalization.

Conclusion

Having enough cheap energy for the world’s population has been a problem for a very long time. When there is enough cheap-to-produce energy to go around, the obvious choice is to co-operate. Thus the trend toward globalization makes sense. When there is not enough cheap-to-produce energy to go around, the obvious choice is to try reduce the effects of globalization and immigration. This is the major reason why globalization can’t last.

We now have problems with both coal and oil. With the decline in China’s coal supplies, we are reaching the point where there are no longer enough cheap energy supplies to go around. At first glance, it looks like there is enough, or perhaps even a superabundance. The problem is that no price works. Producers around the world need higher oil prices, to be compensated for their total cost, including the cost of extraction, developing new fields, and the tax levels governments of exporting countries need. Consumers around the world are already having trouble trying to afford $70 per barrel oil. This is what leads to gluts.

We have been told that adding wind and solar to the electric grid can solve our problems, but this solution is simply absurd. If the world is to go forward as before, it somehow needs a new very large, very cheap supply of energy, to offset our problems with both coal and oil. This new energy supply should not be polluting, either.

At this point, it is hard to see any solution to the energy problems that we are facing. The best we can try to do is “kick the can” down the road a little farther. Perhaps “globalization light” is the way to go.

We live in interesting times!

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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2,343 Responses to Nine Reasons Why Globalization Can’t Be Permanent

  1. Baby Doomer says:

    Tax cut scoreboard: Workers $6 billion; Shareholders $171 billion

    A survey of Morgan Stanley analysts released last week found that just 13% of companies’ tax cut savings will go to pay raises, bonuses and employee benefits. 43% will reward investors with stock buybacks and dividends.

    http://money.cnn.com/2018/02/16/investing/stock-buybacks-tax-law-bonuses/index.html

  2. Baby Doomer says:

    Volatility is driving the markets towards chaos

    As the stock markets showed recently, volatility is back, with stomach-churning extreme highs and lows not seen since the Great Depression, according to analysts.

    https://nypost.com/2018/02/17/volatility-is-driving-the-markets-into-chaos/?utm_campaign=SocialFlow&utm_source=NYPTwitter&utm_medium=SocialFlow

  3. Baby Doomer says:

    Bill Maher: Jeff Sessions has already ordered the arrest of the Black Panther….

  4. Baby Doomer says:

    Bulletproof backpack sales rise in wake of mass school shooting

    https://nypost.com/2018/02/16/bulletproof-backpack-sales-rise-in-wake-of-mass-school-shooting/?utm_campaign=SocialFlow&utm_source=NYPTwitter&utm_medium=SocialFlow

    Can’t wait for it to be on the trump store. The MAGA red bulletproof backpack would go great with my red Russian history books. /s

    • JH Wyoming says:

      So a student gets shot in the chest and the bullet lodges in the backpack. What good is that? I guess it makes it easier for ballistics later.

  5. Rendar says:

    “There Is An Acute Crisis Coming”: Apartment Developer:

    “There is just one problem: developers are putting up the wrong kinds of buildings, focusing almost entirely on the luxury segment. However, as discussed here recently, the luxury market is by now largely overbuilt, while the shortage of affordable rental housing is growing, as developers remain hamstrung by the now record-high cost of construction.

    Why is the sub-luxury segment being ignored? Simple: the need to maintain high margins amid rising input costs:

    “It’s really tough to deliver product at those lower price points. The cost of land, the cost of building materials, the cost of labor. It’s really about the same regardless of what product you’re doing and it’s just tough to make a deal work financially if you’re going toward that middle-market price,” Greg Willett, chief economist at RealPage, told CNBC.

    “The two-by-four doesn’t care whether it’s in a luxury building or in an affordable building. It costs the same,” said Bozzuto. “The differential of course, is the rent and there’s a huge disparity in high-end rent versus low-end rent. So the issue is for us to develop an economically viable, feasible project, it has to be, by its very nature, high end. The rents have to be high to support the cost.”

    And for those who have troubling finding input cost inflation, here is where it’s hiding: the cost of that two-by-four, lumber, is now at a record high. Other products like steel and concrete are more expensive, but the real cost spikes are in land and labor. Skilled construction labor is not only expensive, it is extremely difficult to find.

    The biggest problem, for developers, is passing on these soaring input costs to renters, something which is virtually impossible when nearly half have zero incremental capacity to absorb even higher rents.

    Investors, according to Bozzuto, are now moving away from new construction and instead rehabbing older rental stock. These so-called value-add projects just raise the rents on current tenants even more.

    Meanwhile, the Fed is unable to find inflation anywhere it looks or, as Janet Yellen recently said, it “remains a mystery.”

    https://www.zerohedge.com/news/2018-02-17/there-acute-crisis-coming-apartment-developer

    • Dennis L says:

      Yes, and Glenlivet is up close to 21% at my pub YY also. Food is up, I am redoing my home, materials are up, meals out are up, real estate taxes are up, medical insurance premiums are up, auto insurance premiums are up, etc. Where is deflation? I suspect it is in things that one time produced more value than they consumed. A fracking oil well would be an example. Invest 10K and get 7K back in total. GE has been selling off machine tools used in manufacture of generating turbines, it appears these tools are selling below their book cost which means prior year earnings were inflated. GE stock is down, that is deflation. Purchasing income is incredibly difficult to maintain and is deflating, stuff seems to be getting more and more expensive.
      Dennis L.

    • I know with new homes, many of them are being built at for the luxury buyer, because the margins are better. It stands to reason that the same thinking pattern would go for apartments.

      If poor people are getting poorer, the thinking is probably that they can simply more together more closely (get a roommate, for example). That way, no more apartments are needed. It is the rich people–perhaps retirees, downsizing from a big home, who want a fancy apartment.

      • Davidin100millionbilliontrillionzillionyears says:

        even though “… with new homes, many of them are being built at for the luxury buyer…”

        I have heard that the construction is still low quality…

        which has much to do with profit margins…

        anyone have backup/reference for that?

        • This article https://www.realtor.com/news/trends/new-home-builders-recovery/ says,

          “Builders are creating larger, more expensive homes for older buyers” with the money to burn, Dietz says. Sorry, millennials! Those target older buyers are typically existing homeowners who want to move up into bigger homes.

          So first-time buyers are caught in a classic bind. They don’t make up a significant share of the new-home market—only 11% of those 35 and under bought new, never-occupied homes, according to a recent National Association of Realtors® report. They’re just too darn expensive, and so not many new homes are being built for them. Can anyone say “chicken vs. egg”?

          Also

          Labor ain’t cheap either

          The burst of the housing bubble in 2008 was catastrophic for the residential construction industry—about half of builders went out of business as buyers and financing dried up. Laborers who got laid off went on to other industries or careers.

          Loans are tough to come by

          It isn’t just hopeful home buyers who have to run the gantlet with newly strict lenders to get the necessary cash for a new home. The bulk of residential construction around the country is done by smaller builders who typically go to local lenders such as banks and credit unions for financing.

          But after the crisis, lenders became way more cautious about doling out loans. This means developers and builders have a harder time getting the financing needed to embark on new projects and that limits the amount of new construction.

          Another issue, that I have read about elsewhere, is that local governments are having problems financing new roads and schools. They add a fairly high fee per unit for new infrastructure to support the new homes in many places. It is easier to hide this high fee in a high cost home than in a low cost home.

          • MG says:

            Some people do not see it: when the construction materials are cheap due to the oversupply and the interests are low, they think that now is the time to build a house I have dreamed of. But who will care for that house, when they are old and they lose their job?

            I have a heard a story from my friend about and old university teacher here in Slovakia: he got deep into debt because of the loan/mortgage for a new big house close to his work at a university. Then he was fired from that university, as the population of the new students is shrinking. Now he has got a big house and must travel hundreds of kilometers to a different university. Certainly, he did not get it…

          • Dennis L says:

            Re older people and homes. I have no data, but twenty to thirty years ago, living on a very nice golf course I heard many people tell me that large homes were not very comfortable, too much space, etc. I have no idea what is the case now, but more is less; try and find a good cleaning lady and you quickly understand the issues.

            Dennis L.

        • Dennis L says:

          It is simple and always has been.
          Assume a 10% profit margin and a $1 cost. To the homeowner a penny change in costs is 1%, to the builder it is 10%, the builder will always try and cut that 1%. Solution, hire an onsite architect to supervise the job.

          • Davidin100millionbilliontrillionzillionyears says:

            okay, there’s the logic…

            I suppose a builder will go for making a house appear as expensive as possible, while internally the construction is at the lowest cost possible.

    • CTG says:

      Inflation by nature follows the same way as “bankruptcy” – slowly and then everything at once. This applies to every single incident of hyperinflation. The reason why it is a political reason rather than economic reason is because of the following :

      When money printing starts, it usually goes to the top 1% first as they are close friends of the “money printer”. They benefit the most. The money printer continues to print more and more and thus raising the prices of assets like RE, stocks, etc. The average Joe is not the receiving end of the free money yet. The free money will trickle down when there are transactions on the assets. The top 1% bought a block of condo and sold it to the upper middle class. The upper middle class sold the condo and bought something cheaper (maybe 2 units of “normal condo” as an investment instead of 1 luxury condo). The owners of the 2 “normal condos” are now richer because of the free money. That is how the money trickles down and that is how the super rich think that “trickle down economy works”.

      Think of this as a pyramid (and thus exponential) where the top 1% bought and sold assets and it trickles down. At one point of time, there will be a lot of money at the bottom chasing fewer goods. Does this help the poor or normal middle class ? Not at all if the lower and middle class is struggling to survive. It will not make it better but make it much worse because they now have to contend to rising prices.

      ** The keyword is exponential because that is what Prof Bartlett reminded us.

      The time it takes for the trickle down inflation to happen varies from days to months and years depending on whether it is Weimar (socially it is already at boiling point) or Roman where the economy is not complex or too interconnected. When it happens, there is NO way it can be stopped because the money has already flowed into the system. Raising rates DOES NOT have any impact on this at all.

      Look at China. They printed so much, given to the top people and they are obscenely rich. It flowed down to the first tier, second tier and stops probably “just before the tier of average Joe”. Does the average Joe gets the benefits ? No. However, with so much money sloshing around, inflation on normal goods is horrible. If China does not control its currency, we would have very high inflation in every country of the world. Can China stop its inflation? No? In fact, they pressed the gas pedal even harder by creating more than USD500b in credit in January alone. https://www.zerohedge.com/news/2017-02-14/china-just-created-record-540-billion-debt-one-month

      We are not talking about a one-level economy or a simple economy but a very complex global economy where everything goes at the speed of light. What happened at Weimar will not be exact as in 2018 or Roman times.

      We are currently seeing inflation ticking up everywhere in the world. It will not be long before it goes exponential.

      Slowly at first and then all of a sudden. Take the heroin and slowly increase it to get more kick until the very last jab that kills you. You cannot die slowly but it is always the last jab that kills you.

      • Davidin100millionbilliontrillionzillionyears says:

        just because China created $500B debt in January doesn’t mean they will do that every month…

        “We are currently seeing inflation ticking up everywhere in the world. It will not be long before it goes exponential.”

        the CBs surely see this starting to happen before the public sees it…

        will they allow hyperinflation?

        of course not… hyperinflation and deflation must be avoided above all else…

        they aren’t stewpid…

        though they could mishandle this… we’ll see in the coming years.

      • jupiviv says:

        Very nicely explained. I’m surprised I didn’t notice your posts here before.

        • CTG says:

          Appreciate if you check the data before you post. Is the trend going up or down?

          Why would the CB continue printing if they know this will happen?

          It is not a matter if they allow it or not. It is now beyond their control. What they can do is just to tame whatever may come.

          We will have both inflation and deflation at the same time on different areas of the economy. Inflation for inputs like food or materials for manufacturing and deflation for outputs especially for non-essential items (because no one has any money to buy a lot of stuff anymore)

          • djerek says:

            “We will have both inflation and deflation at the same time on different areas of the economy.”

            It seems to me we’ve had this dynamic already for some time as the wealth gap has completely polarized. Anything that is marketed specifically to the top ~10% can see its price go to the moon for all it seems to matter, while any product that wants to hit the broad market gets stuck and even has significant downward price pressure.

        • CTG says:

          I used to post a lot but then I lurk more. The regulars know me.

          • ITEOTWAWKI says:

            “The regulars know me”

            Yep CTG, you are one of the best commenters since I started following this blog all the way back in 2011 🙂

            Man time flies!!!

            • Mark says:

              BAU UP YOUR ARSE BABY!
              (Gail’s busy and the comments are about to be cut off)
              🙂

            • Davidin100millionbilliontrillionzillionyears says:

              wow, no collapse since 2011…

              does that tell you anything?

              I’ve been reading Gail’s articles since then, also…

              let’s go another 7 years!

            • Davidin100millionbilliontrillionzillionyears says:

              BAU everywhere, Mark! 🙂

          • Davidin100millionbilliontrillionzillionyears says:

            “Is the trend going up or down?”

            yes, up… but no trend can continue forever…

            “It is not a matter if they allow it or not. It is now beyond their control. What they can do is just to tame whatever may come.”

            okay, you have the opinion that it is “beyond their control”…

            while I am not so sure…

            I think they can “tame” it for a lot longer…

            we’ll just have to wait and see what the next few years brings.

  6. Ann says:

    Why we’re underestimating American collapse – The strange new pathologies of the world’s first rich failed state

    “Let me give you just five examples of what I’ll call the social pathologies of collapse — strange, weird, and gruesome new diseases, not just ones we don’t usually see in healthy societies, but ones that we have never really seen before in any modern society.”

    https://eand.co/why-were-underestimating-american-collapse-be04d9e55235

    • greg machala says:

      Americans just don’t care. The pursuit of materialism is probably mostly to blame. The endless pursuit of profits above all else could be a cause as well. Don’t let any good crisis go to waste. If there is a way to profit from a crisis, no matter how grotesque, it will be done. I think the country is eating itself from the inside out at this point.

      • Dennis L says:

        Search and read Bernays and a different view of what has shaped opinion and why might emerge. We have gained much knowledge and with that gain comes a responsibility to use it wisely; this is not always the case.
        Americans do care greatly and we are a great people; some ideas don’t seem to work, secular humanism seems to be one of them.

        • doomphd says:

          America put whitey on the Moon. But, it also is the only country to use nuclear weapons on civilian populations, apparently just to see what happens, as the war was basically so over by then that the Japanese government took several days to figure out what had happened to them.

        • greg machala says:

          McDonalds doesn’t care, Wal-Mart doesn’t care, Amazon doesn’t care. The corporations that are now the owners of what was America – they just don’t care about anything but profits. The corporations are the new America. The suffering (of what was once America and Americans) is a symptom of this take-over. Just collateral damage. Look at how homeless are treated in California. That is the new order of our nation.

          • Baby Doomer says:

            If only there was a German Philosopher who lived over a hundred fifty years ago who could have predicted this would happen?

          • Dennis L says:

            Pension plans demand 7-8% returns from their stocks with an economy growing maybe 3% on a good day. Managers have to meet the goals of their stockholders and stockholders get managers who will make that goal. The real change in wealth is moved to the retires with a skim for those doing the stripping of the economy. The most egregious seem to be state and municipal governments; they promised to get elected, got elected and hired who ever it took to get the returns. One of the largest if not the largest holders of stocks are pension plans, they are driving the the companies. We have met the enemy and he is us.

    • An awfully lot of our young people are finding that they did everything “right,” but they still cannot find a job that pays a living wage that in anything close to their field of study. And they have huge debts to pay when they get out of school. The situation is true whether the young people drop out of school, graduate with a degree (except perhaps if it is in a few favored areas, such as information security), or go on to get a master’s degree. People with a Master’s Degree often find that they are turned down as being overqualified, when they apply for a job that a person with a lesser degree could do.

      Other people are older people who started out with a high school degree, and worked themselves up through the ranks of one or more employers. But they get laid off for one reason or another, and find the doors are now closed to them. Although they know the industry well, and have worked themselves up through the ranks, they need to find some job, any job, that they can support themselves on. I know one man who is now repairing appliances. His mechanical skills carried over well enough that he found that was a niche he could fit into. But it is very difficult to have to start over at the bottom in a new industry.

    • grayfox says:

      I think the earth is trying to tell us that it doesn’t need more people.

      • Duncan Idaho says:

        Yep, we need to go from 7.6 billion back to 1-10 million, which was the population for most of our existence. Of course, we had a rich, intact planet then.

        • Dennis L says:

          So are you one of those who are volunteering to not go back with the 1-10 million, if so, my thanks and gratitude; me I am an old fart who is going to hang on and see what happens.

        • grayfox says:

          Yes DI, I think you are saying the population thing will take care of itself and I agree it has to happen eventually. Maybe we can still have some wild places somewhat intact for whoever remains.

    • Davidin100millionbilliontrillionzillionyears says:

      “… the world’s first rich failed state”

      the hyperbole is very thick in this screed…

      he may be correct in recounting his examples of dysfunctional Americans, but these are small percentages of the population…

      if these issues continue to grow, then eventually they could cause America to become a failed state…

      but for now, there is no “American collapse”, in spite of these serious issues.

  7. MG says:

    The German police can not control the ban of diesel cars: there is not enough personel

    http://www.spiegel.de/auto/aktuell/abgasskandal-polizei-kann-diesel-fahrverbote-nicht-kontrollieren-a-1194057.html

    • The different “parts” of a barrel of oil have been divided up the way different countries made choices. Germany opted for diesel vehicles. There is not enough extra gasoline to replace the diesel cars with gasoline if we wanted to. Germany has electricity problems already with all of its wind and solar and very high rates. I am not sure that it could convert to electric vehicles if it wanted to.

      • Ert says:

        @Gail

        The German politicians (and people) don’t get it – its not about facts, science or reality. It’s about ‘being good’, ‘Ideology’ and the like. Its a real pitty…. Even the car manufacturers don’t argue with the facts but ‘chime in’ (hope that works) into the e-mobility bandwagon. When I speak with people in the automotive industry… most of them have no clue concerning the big picture. I don’t know how intelligent the higher echelons of the automotive industry are… but I have sometimes my doubts…

        For German readers here, you may want to take a look at: http://www.peak-oil.com/2017/07/e-pkw-mobilitaet-die-fehlentwicklung-und-politische-doppelzuengigkeit/ – there are these issues are written about.

        Unfortunately the peak-oil discussion in Germany is quite dead. Even peak-oil.com only survives on a bare level, getting some 3-4 guest posts a year.

        • Unfortunately, the story is more complex than “Peak Oil.” I don’t blame people for not paying attention to the peak oil story. It really isn’t correct.

        • djerek says:

          ” I don’t know how intelligent the higher echelons of the automotive industry are… but I have sometimes my doubts…”

          It’s not even a question of intelligence really. People tend to not look at the big picture and instead focus on their area of specialized knowledge. For other areas they trust the mainstream experts and never look at the details. This it becomes possible for the 150 IQ automotive engineer to focus on the “EV of the future”…

    • Davidin100millionbilliontrillionzillionyears says:

      “… the fact that at times there are over 150 one thousand-watt lamps running inside…”

      so, AFTER the “Apocalypse”, they are assuming plenty of available electricity?

      b w a h a h a h a h a…

  8. Baby Doomer says:

    Barnes and Nobles (781 bookstores) lays off all full time employees

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