Raising Interest Rates Is Like Starting a Fission Chain Reaction

Central bankers seem to think that adjusting interest rates is a nice little tool that they can easily handle. The problem is that higher interest rates affect the economy in many ways simultaneously. The lessons that seem to have been learned from past rate hikes may not be applicable today.

Furthermore, there can be quite a long time lag involved. Thus, by the time a central banker starts seeing an effect, it may be clear that the amount of the interest rate change is far too large.

A recent Zerohedge article seems to suggest that problems can arise with 10-year Treasury interest rates of less than 3%. We may be facing a period of declining acceptable interest rates.

Figure 1. Chart from The Scariest Chart in the Market.

Let’s look at a few of the issues involved:

[1] The standard reason for raising interest rates seems to be concern about inflationary impacts occurring as a result of rising food and energy prices. In practice, the impact of such an interest rate change can be quite severe and quite delayed. 

Figure 2 is an illustration from the Bureau of Labor Statistics website showing one of today’s concerns: rising energy costs. Food prices are not yet rising. Normally, however, if oil prices rise, the cost of producing food will also rise. This happens because modern agricultural methods and transportation to markets both require the use of petroleum products.

Figure 2. Figure created by the US Bureau of Labor Statistics showing percentage change in the Consumer Price Index between January 2017 and January 2018, for selected categories.

In fact, raising short-term interest rates seems to have been associated with trying to bring down rising food and energy costs, as early as the 1970s and early 1980s.

Figure 3. US three-month treasury interest rates. Chart prepared by St. Louis Federal Reserve.

The reason why an increase in short-term interest rates is helpful is because it reliably induces a recession. A person can see the close connection between short-term interest rate increases and recessions (gray bars) in Figure 3. Recessions in turn damp down food and energy prices.

The reason why this damping down effect occurs is because when there is a recession, many people are laid off from work. These people purchase fewer goods and services. With people out of work, “demand” for goods and services falls. (Demand is very closely related to “amount affordable.”) We might think of demand for goods and services as helping to maintain the “production” of new homes, new cars, upscale food products, toys, and even consulting services.

When demand falls, fewer goods of practically every type are made. This indirectly leads to less need for commodities of many types, including oil, natural gas, metals, and food. Commodities have very long production cycles, and only modest storage facilities. When lower demand for a commodity such as oil occurs, prices tend to adjust sharply downward, in order to signal the need for lower production. Figure 4 shows that interest rate spikes corresponded to the 1973-1974 oil price spike, the 1979 oil price spike, the 2004-2008 price run-up, and perhaps to other shorter oil price spikes.

Figure 4. Annual averages of Brent oil prices (in 2016$) and 3-month average interest rates, based on data similar to that shown in Figure 3 from “FRED.”

The annual data in Figure 4 loses the detail of month-to-month variations. Because of this, it makes the impact of the Great Recession look much less severe than it really was. Figure 5, using monthly data for recent periods, shows more clearly the severe fall in oil prices following the run-up in short-term interest rates in the 2004-2007 period.

Figure 5. Three-month US Treasury interest rates and Brent oil prices, both on a monthly average basis. Graph by FRED.

If a person looks at the indirect impacts on the economy as a whole, it becomes clear that the rise in short-term interest rates was one of the proximate causes of the Great Recession of 2008-2009. I talk about this in Oil Supply Limits and the Continuing Financial Crisis. The minutes of the June 2004 Federal Reserve Open Market Committee indicate that the committee decided to start raising interest rates at a rate of 0.25% per quarter for the purpose of stopping the rise in energy and food prices.

The huge financial problems that indirectly resulted did not occur until four years later, in 2008. It is likely that most economists are unaware of the connection between the decision to raise rates back in 2004 and the Great Recession several years later.

[2] Higher energy prices squeeze a person’s “spendable income.” Higher interest rates have the same effect.

Economist James Hamilton showed that ten out of eleven recent recessions were associated with oil price shocks. We would argue that if an economy is subject to higher interest rates in addition to higher oil prices, the economy is doubly likely to go into recession. Figure 6 shows an illustration of the situation.

Figure 6. Image by author showing recessionary impact of rising energy costs and interest costs.

A wage earner’s pay does not normally increase as energy costs rise, or as interest costs rise. Even if energy and interest costs are well buried (in higher food costs, or in the higher cost of goods transported across the country, or in higher student loan payments) the amount of income that a person has available to spend on discretionary goods and services falls if energy and interest costs rise. Having both energy and interest costs take a bigger share of available income at the same time is especially a problem.

[3] Reduced interest rates can be used to conceal the adverse impact of rising energy prices.

This is another version of what we saw in Figure 6. If interest rates can be reduced, they can offset most of the bad impacts of higher energy prices. For example, if oil prices are higher, it helps if auto loans and mortgage loans are lower in cost.

Figure 7. Image by author showing that artificially low interest rates can mostly offset the impact of rising energy costs.

Of course, central bankers don’t necessarily think this through. To what extent is today’s economy really dependent on very low interest rates?

[4] Falling interest rates have an almost magical impact on the economy. Rising interest rates reverse these magical impacts, and replace them with very negative impacts.

We saw in Figure 6 how falling interest rates could more or less conceal a rise in energy prices. The following are a few of the additional magical things that falling interest rates can do:

(a) Falling interest can raise asset prices of many kinds, including homes, stock prices, resale prices of bonds, and the price of land.

(b) Falling interest rates can raise commodity prices, making it possible to extract more fossil fuels and metals. Resources that previously did not look economic to extract, suddenly become economic to extract. This change occurs because with lower interest rates, more people can afford to purchase goods that use oil, such as cars and motorcycles. This tends to raise demand for oil products, and thus prices.

(c) Because higher-priced energy extraction becomes feasible at lower interest rates, more advanced technology, at higher prices, suddenly becomes feasible. Jobs open up in research areas that would not previously have made sense at lower energy prices.

(d) Falling interest rates can make the balance sheets of companies holding stocks and bonds as assets look better, because of their rising prices.

(e) Rising asset prices “feed back” into spendable income. People with homes that have risen in value can refinance, and use the proceeds to fix up their home (add an additional room or an updated kitchen, for example). Individual citizens and companies can sell shares of stock that have risen in value and use those proceeds to augment other income.

If interest rates rise rather than fall, the impacts can be expected to be extremely recessionary. The stock market may crash. Homes are likely to lose value because of a lack of buyers that can afford them. Energy resources that seemed to be available can suddenly seem not to be feasible because of low prices.

[5] The economy was able to reasonably tolerate the run-up in interest rates in the 1950 – 1980 period because the economy was growing very rapidly. 

A person can see the pattern of short-term interest rates in Figure 3, above. Long-term (10-year) interest rates follow a somewhat similar, but smoother, pattern (Figure 8).

Figure 8. Monthly average 10-year Treasury interest rates, through January 2018, in chart by FRED.

World per capita energy consumption was rising very rapidly in the 1950 to 1970 period. Even in the troubled 1970 to 1980 period, per capita energy consumption continued to rise, although not as quickly (Figure 9).

Figure 9. World per capita energy consumption, with 1950-1980 period of rapid growth highlighted. 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.

When world per capita energy consumption is growing this rapidly, jobs tend to be plentiful and wages tend to rise faster than inflation. According to Figure 10, US wages rose more rapidly than inflation in the 1950 to 1970 period, without wage disparity becoming a problem. Even in the 1970 to 1980 period, when high oil prices were a problem, US wages were able to rise quickly enough to keep up with inflation. Rising wage disparity did not become a problem until after 1980.

Figure 10. Chart comparing income gains by the top 10% to income gains by the bottom 90% by economist Emmanuel Saez. Amounts are inflation adjusted. Based on an analysis of IRS data, published in Forbes.

The share of US citizens in the workforce also rose during the period up to 1980, as an increasing percentage of women joined the workforce (Figure 11).

Figure 11. Employment as a percentage of the population, aged 25-54. Chart from FRED, using OECD amounts.

The thing that made the 1950-1970 period unusual was the growing availability of inexpensive fossil fuels. With fossil fuels, it was possible to add expressways where they had never been before. This allowed more interstate trade and improved the productivity of truck drivers. Labor saving devices allowed women to join the workforce. Farming continued to become more productive, with all of its labor saving equipment. Even as energy prices rose in the 1970 to 1980 period, citizens were able to continue to buy energy products because their wages were rising enough to keep up with inflation.

The growth in productivity was so great that wages plus government benefits (as measured by “Disposable Personal Income”) rose almost too fast. This added inflationary pressures to the economy. It is my opinion that these inflationary pressures contributed greatly to the oil price run-up in the 1973-1974 and the 1979-1981 periods.

Figure 12. Three-year average growth in Disposable Personal Income compared to inflation as measured by CPI-Urban. DPI from US Bureau of Economic Analysis; CPI from Bureau of Labor Statistics. Per Capita Disposable Personal Income is calculated by dividing DPI by US population, also from the BEA.

The run-up in oil prices also to some extent reflected a scarcity problem; note the two spikes in CPI-Urban in the 1970s in Figure 12, which are higher than would be expected, if the problem were simply a problem caused by the very high per capita Disposable Personal Income growth.

A major problem of the 1970s was a decline in US crude oil production for the area outside Alaska.

Figure 13. US crude oil production by type, based on EIA data.

This scarcity problem was significantly mitigated by the development of oil fields in Alaska, Mexico, and the North Sea in the next few years.

One of the things that substantially helped fix the oil problems of the 1970s was the fact that the US, as well as other developed countries, was able to make changes that substantially reduced their oil consumption. These changes included:

  • Moving to smaller, more fuel-efficient cars
  • Finding fuel substitutes when oil was being burned to create electricity
  • Changing oil-based home heating to approaches that used other fuels

Figure 14. Oil consumption by part of the world. Data from BP Statistical Report of World Energy 2017.

The combination of these approaches brought supply and demand more into balance. There was a small dip in consumption in the 1973-1975 period, and a larger dip in the 1979 to 1984 period. In comparison, the Great Recession of 2008-2009 hardly made a dent.

An indirect impact of these changes was the fact that the US economy needed to become more integrated into the world market. The US started importing smaller, more fuel-efficient vehicles from Japan, since Japan was already making these cars. Japan started making other kinds of goods as well to sell to the US and other markets. The US and other countries built nuclear electric generation to replace some of the oil-fired electricity generation. These plants were capital intensive and required growing debt.

Especially after 1981, changes started to take place in the US economy, reflecting its changed role in the world. US companies grew in size, as they began to add overseas markets to their local markets. Wage disparity became more of an issue, as high tech operations required more specialized high-wage workers and fewer of those with only a general education. Increased competition for jobs with workers from lower-wage countries also tended to hold down wages of those without advanced training.

[6] The situation is very different now, compared to the 1970s. It is doubtful that today’s economy could tolerate a spike in interest rates.

Today, we are not seeing rapid growth in per capita energy consumption, the way we were in the 1950 to 1980 period (Figure 9). In fact, world per capita energy consumption is almost flat (Figure 15), the way it was during the period of the Great Depression of the 1930s, and the way it was at the time of the collapse of the former Soviet Union in the 1990s (Figure 9).

Figure 15. 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.

There are other similarities to the 1930s period. Short-term interest rates are back to the low level they were in the 1930s (Figure 3). Growth in Disposable Personal Income per capita is persistently low (Figure 12). Wage disparity is at the high level experienced back in the 1930s (Figure 16).

Figure 16. U. S. Income Shares of Top 1% and Top 0.1%, Wikipedia exhibit by Piketty and Saez.

It is probably because of this renewed wage disparity that we are having difficulty with oil gluts. Oil gluts were also experienced in the 1930s. People with inadequate wages cannot afford goods made with oil products. These gluts occur because of affordability problems–inadequate wages for part of the workforce.

Figure 17. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure produced by EIA. Figure by EIA.

Despite the spike in oil prices that central bankers are concerned about, oil prices are currently too low for producers. Oil exporting countries, such as Venezuela, Saudi Arabia, and Nigeria, depend on high oil prices so that they can collect high tax revenue. These countries are especially hurt by today’s low oil prices.

An increase in interest rates could very easily create a recession and drop oil prices even lower than they are today. Of course, that is precisely the intent of the central bankers. Our problem is that the economy cannot operate without energy products, particularly oil. The cost of producing oil is rising because of diminishing returns. It simply is not possible to drop its price as low as oil-importing countries would like it to be.

[7] Economists and central bankers think that they have good models of how the economy operates, but they really do not. 

The economy is a self-organized system that is able to create goods and services using energy products. In fact, it cannot continue its existence, without continued very substantial energy consumption. The economy gradually builds itself up, with new businesses, new consumers, newly invented products, and with transportation and financial systems. I envision the economy as looking something like a child’s toy that is built from many pieces. If one or more pieces are removed, the system could collapse.

Figure 18. Dome constructed using Leonardo Sticks

The economy has been built based on the laws of physics. It requires sufficient energy. It is in many ways like a hurricane that loses power if it is forced to go over land for any distance. A hurricane gets extra strength if it is able to pass over very warm water, which provides the energy it needs. Right now, the world economy is showing signs that it does not have sufficient energy; the standard of living of young people around the world is falling. The return on energy investment is far too low.

While it may be true that the US economy looks like it is at full employment, based on the number of people looking for jobs, the percentage of people aged 25-54 with jobs tells a different story (Figure 11). This percentage has fallen since 2000, at least partly because of globalization.

Unfortunately, the approach that economists are taking to model the economy cannot provide a good representation of how the economy really works. A self-organized system has many feedback loops that are difficult to understand and model. One change leads to other changes that are hard to see in advance. The problem with current models is that they are likely to produce misleading indications.

[8] Conclusion

We have heard the saying, “That which does not kill you makes you stronger.” The theory behind raising interest rates seems to follow a similar line of reasoning. If central bankers can raise interest rates, economies will be stronger.

The catch is that we are too close to the “edge” to be testing an increase in interest rates. Economies, below a certain “stall speed,” cannot repay debt with interest, and cannot hope to provide entrepreneurs with an adequate return on investment. Our low rate of growth is already close to this stall speed.

Given where we are today, it would be quite possible to accidentally “kill” the economy with rising interest rates. This would be especially the case if short-term and longer-term interest rates rise at the same time. A budget with large deficits could cause longer-term interest rates to rise. So could selling large amounts of QE debt.

Also, feedbacks don’t come quickly enough to make necessary course corrections. This makes raising interest rates way too much like playing with physics reactions we don’t fully understand. Interest rate increases (like fission reactions) start chain reactions. In an open environment such as the world economy, we have limited understanding of the outcome of these chain reactions.

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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2,489 Responses to Raising Interest Rates Is Like Starting a Fission Chain Reaction

  1. mottgreene says:

    Wonderful post, Gail. Have forwarded it to a number of others. There is an astonishing clarity to your argument that even the least mathematical of my acquaintances seem able to grasp.

    • Thanks. There seems to be a “dose response” to energy consumption. The more energy the economy consumes, the better it functions. The less it consumes, the worse it functions. Unfortunately, this idea is a hard sell who think that we can get along on a tiny percentage of the energy we have today, provided by what are optimistically called “renewables.”

      Also, the chain reaction issue that I mention. Working in the insurance industry, I have been able to see how interest rates function in practice. When interest rates rose in the 1970s, one insurance company employer I had went bankrupt (after I left, but I could see the problem coming), and another almost did. I then joined a consulting firm in Atlanta in 1981. This firm did a lot of work with small start-up companies. It was possible in 1981 for doctor and hospital groups to start their own companies, and use the very high interest rates on bonds to bring down their malpractice insurance rates. The big older insurance companies saw the value of their bonds and stocks drop precipitously because of the higher interest rates, pushing some into bankruptcy. Their bond portfolio didn’t “turn over” vary rapidly, so they were not able to get much of the benefit of the higher interest rates. The start ups were able to charge lower rates, because of the higher investment income. In many cases there was also a tax issue. A company domiciled in a suitable location (Caymans) was not subject to US income tax. This further helped the comparison.

      Needless to say, an awfully lot of pension plans were started back in the 1960s and 1970s, when looking back, growth and investment income had been fabulous. I don’t work in this area, however.

      • zenny says:

        I worry about pension plans they may be the straw that breaks the camels back. Markets down interest rates up…Bad news considering most are under funded.

        • pensions are paid out of current contribuions

          money is itself only a token of energy availability—right now we have enough energy available to fund our economic system

          in 25 years time, pensions will also be funded by current taxpayers, but if we do not have sufficient surplus energy to prop up the system, money will be worth nothing so pensions will not be paid

          scary aint it?

  2. Third World person says:

    another great article by gail

  3. philsharris says:

    A very clear outline – thanks Gail.
    And that is mostly the USA? As America goes, how goes the world? There must be feedback.
    I wonder about world food production – the USA provides significant primary production for international trade. I wonder if we have reached the point of diminishing returns of yield compared with inputs, as well as increases in real costs of transport and processing. This could be begining to effect affordability – the old 30s thing of gluts and need.

    • Duncan Idaho says:

      10 calories in, 1 calorie out—–
      Anyone see a problem?

      • DJ says:

        Nope, solar powered vertical farms when oil dries up.

        • Duncan Idaho says:

          Have you ever farmed?

          • DJ says:

            It’s a nice delusion you would be able to grow ten layers of plants, around the clock, by pulling the sunlight through panels.

            Like melting snow on roads with roads built of solar panels.

        • the sun delivers about 100w/sq.m of energy to us as an average—we have nothing else.

          vertical farms, by their very nature, block out sunlight, so that light has to be brought in from elsewhere—together with pumped water and fertilisers etc

          from where exactly?

      • Actually no, not very directly.

        Most animals need at least a 10 to 1 return on gathering the food they eat, because their base metabolism and such activities as reproduction take much of the energy value that is available. Humans, if they were not in control of fire, would be similar. Putting the 10:1 problem you mention together with the normal 10:1 ratio would suggest that if humans were to make this system work without supplemental energy (which we can’t), we would need at least a 100:1 return on the today’s processed food we “gather.” This, I agree, would be a problem.

        Since hunter-gatherer days, humans have supplemented energy from food with burned energy from biomass. This changes the balance for humans. Even back in hunter-gatherer day, humans could walk relatively farther than other animals for food, because cooking of food (with the energy from biomass) makes the food energy more available. Cellulose walls are broken by cooking, especially. Heating also killed micro-organisms, cutting back on the need for a hyperactive immune system. But most importantly, the supplemental energy does allow humans to eat foods with low energy return, and has since hunter-gatherer days. If humans expect to stay alive, we have to have supplemental energy. Only a tiny number of us could live on a raw foods diet (likely mostly fish, or perhaps vegetables put through a grinder to make them more digestible).

        • Duncan Idaho says:

          We shall see————-
          I bet we go back to a 1-10 million population with reduced energy.
          (And I’m a optimist). We have a devastated planet. You need resources to keep the game going.

        • grayfox says:

          There are some who say that what first changed the balance for early humans was walking and running on 2 limbs instead of 4. This allowed humans to walk farther than other animals and more importantly outlast prey that are on the run by using a steady, economical running gait. Also sweat glands gave us the ability to keep cool while running.

          • Walking on two feet may have helped a bit. But the economy is a dissipative system, and we humans are dissipative systems. The energy piece plays a very important role. It walking on two feet plays a role, it would be because it would let us use our hands as “tools.” I don’t think we get any place more quickly. Monkeys use their hands as tools. I am afraid that I am still at a loss regarding how walking on two feet is more than marginally important.

            • djerek says:

              What humans evolved that other primates lack that enables us to be a more effective dissipative system is our particular structure of blood vessels that is more like pigs. It allows us to operate at a much higher metabolic rate since we can cycle the heat out of our bodies more efficiently via blood flow to surface blood vessels that cool via evaporative means with perspiration. This also allows us to have much larger brains without them overheating.

            • Thanks! I can believe that. I can also believe greater endurance in running.

            • grayfox says:

              Its not so much the walking. The theory is that persistence / endurance / distance running made us who we are.

            • the following scenario will have been played out over about 1 m years maybe—condensed here for easy reading——
              primitive hominid bangs 2 stones together (opposing thumbs make that easy)

              stones split—primitive hominid figures out that gives a sharp usable edge for killing each other and capturing energy sources

              lots of primitive hominids catch on to the idea of stone bashing, and gradually get good at shaping the edges they want

              then one PH figures out that it’s easier to do it with the stones resting on an animal fleece or dried grass

              so they all start doing it that way.

              then one PH strikes a spark from a stone and sets the dried grass/fleece on fire.

              lightbulb goes on over head of PHt!!!

              the human race begins its race for world domination at that moment—control of fire gives control of everything else.
              It ultimately consumes the planet, but that’s another story.

            • MG says:

              The fire was more important than walking, as the fire allowed humans to protect themselves and later become predators. They did not have to escape anymore, either on four or two legs, it does not matter.

            • fire also gave us complex language

            • Fast Eddy says:

              I’ve seen people crawl on all fours after too much drink….

            • This isn’t the group I get involved with.

    • I know that the problem today for food is prices that are below the cost of production. I haven’t looked at the situation enough to tell whether demand is failing to grow, or supply is rising faster than ever (or perhaps, year to year variability is on our side).

      So I don’t know whether diminishing returns are an issue yet. There is such a wide variety of food, substitution can take place in many cases, making the situation less clear.

      • Duncan Idaho says:

        “So I don’t know whether diminishing returns are an issue yet.”

        Might be best to take a look–
        “The global industrial civilization that currently supplies us with everything that is necessary for life is coming apart—politically, socially, economically, and ecologically. Our leaders are incapable of acknowledging, much less reversing, industrial society’s progress toward oblivion.”

        Bingo! We have a winner—–

        • I think there is an issue of the minor nutrients we need being missing from the soil. We are still getting food, but it is not as nourishing. And some of the pollinators not being available. And running short of water in many places.

          • djerek says:

            Soil depletion of trace minerals is a massive issue.

            • DJ says:

              That is a good reason to have a koombayah garden before collapse.

              Assuming home grown has more nutrients per calorie.

            • Fast Eddy says:

              Yes – it is important to be in good health — when BAU ends…

            • grayfox says:

              Yes, if a “forest garden” can close the loop, recycling all materials (yes, all of it) then it is possible to stop the loss of fertility and trace minerals from the soil.

            • DJ says:

              If you don’t eat exclusively from your koombaya garden, more like 20% of calories, only 20%+ has to go back.

              Also, if it is about health/taste and not “sustainability” then bringing in output from the outside is possible.

              If you’re gonna close the loop 100% you have to use humanure and you would still lose nutrients.

            • Fast Eddy says:

              So many people that I know – who have healthy diets – next to no rubbish food — have gastro issues…. and the doctors have no solutions other than to follow the lowfodmap…. I am wondering if this has something to do with GMO….

        • Greg Machala says:

          And to add insult to injury there are people trying to “profit” from this too. A buying or selling opportunity. It certainly has never been this crazy in the history of in-humanity.

  4. Baby Doomer says:

    Is the global economy facing a financial Armageddon?

    An Australian economist is warning the recent turmoil on global stock markets is just a sign of things to come, and a massive crisis is on the cards.

    John Adams sees the massive sell-off of global stocks in early February, which saw American markets plunge 10 percent from recent highs, as the harbinger of an economic death spiral, eventually bringing about soaring interest rates, a collapse in share and house prices, higher unemployment and widespread bankruptcies.

    With global debt at a record high $US233-trillion and interest rates on the rise, Mr Botherway said a day of reckoning was due.

    “Global debt (318 percent of global GDP) is unprecedented, and we don’t know where that will end up. But there is economic precedence that suggests that those scenarios could be very bad.”


  5. Baby Doomer says:

    I wanted to share this video with Gail and everyone.

    In my home state of Michigan. We have an Island up by the UP, called “Mackinac”…And there are no oil powered machines allowed on the Island..You take a ferry from shore to get to it. And you can bring your bicycle along for free..

    They also have bikes you can rent on the Island..And they have some horse and buggy’s you can ride..There are a bunch of hotels, restaurants and beeches. And you can bike the entire island around….And you can just park your bike outside stores and shops and nobody will steal it.

    Many people take their honey moons here. This would be the ideal place to live in post peak oil world, if it wasn’t for the winter time weather..


    • I have visited Mackinac Island. (I grew up in Wisconsin.) The joke I heard then was, “What day will summer land on this year on Mackinac Island?” I remember that the flowers in bloom were spring flowers in the middle of the summer. It is hard to believe that you could grow very much, with its short growing season.

    • Mark Danielson says:

      I live in the UP and have been to the Island. Nice place but without the boat loads of supplies shipped in it would be a tough life.

    • no oil powered machines?

      i don’t know of course—but do the hotels cook on woodstoves and are they lit by candles?

      the ferry itself doesnt appear to have sails

      i could go on but you get my drift.

      • Baby Doomer says:

        LOL Sorry Norm..I guess I should have said “No ICE vehicles on the island”

        • Greg Machala says:

          I was gonna say too that if there are no fossil fuel powered machines then there would be no refrigerators, microwaves, stoves, heaters, fans etc. You know the devil really is in the details isn’t it. Transportation isn’t everything (like Norm likes to point out) it is the destination that matters. And if that destination has no machines it will probably be pretty a boring and undesirable destination. At least for most people.

    • Tom says:

      Look at all those wonderfully people with their children enjoying their holiday on their bicycles. So many wonderful people are going to have to die such horrible deaths. It is so depressing.

      • We don’t really know how this will turn out. Historically, plagues have been the cause of most deaths, as groups have approached limits. I suppose the opioid crisis is part of reaching limits. Each time is different.

      • Davidin100millionbilliontrillionzillionyears says:


        after their horrible deaths, their non-existence will leave them with no memories of their horrible deaths…


        Reality is a win-win. 😉

      • Fast Eddy says:

        Depressing? Really?

        This is depressing…

        The end of humans is something to celebrate.

  6. Baby Doomer says:

    Markets are ignoring ‘major risk’ of rising interest rates and end of QE, warns Citigroup

    “There are clearly signs of late-cycle froth in financial markets, in everything from equities, to corporate credit, and real estate, especially in the US. There is the risk of an overdue correction,” said Willem Buiter, the bank’s chief economist and a leading theorist on monetary policy.


    • It always amazes me how little understanding many people have of the risk of rising interest rates. Rising rates are frightening.

      • Greg Machala says:

        Could the rise of interest rates mean a return of the debtor prisons? As more and more people are unable to pay up, I would seem that something would have to give. Some folks will have to “drop out” of the game. Debtor prisons may be one way to do that.

        • DJ says:

          I don’t think it will be worse than you being cut off from credit, and having only basic health care, but still being allowed to stay in “your” home as long as the bank has noone to sell it to.

          The employable will work their but off keeping credit flowing, having lower interest rates, keeping health care … and never retiring.

          There will be fewer and fewer employable each year.

  7. greg c says:

    I always look forward to your well thought out articles. Because of its clarity and breadth of understanding, this is one your best.

  8. arun says:

    Great article, thanks Gail!

    I have a question on the charts for energy consumption in general. Are there similar charts that’s adjusted for the efficiency gains that we see every year? Things like improved gas milage due to more efficient IC engines, improvements in power efficiency of consumer electronics, energy consumption drop due to remote teleworking, etc.

    • Not exactly, or at least I don’t have information on them. I wrote a section related to efficiency for the post, but it did not fit in. I will see if I can copy it in here.

      [9] The ideal situation for the economy is when the cost of “energy services” is falling, because then these services become increasingly affordable.

      By energy services, we mean the cost of using energy, including both the cost of the energy product itself, plus any efficiency in its use. Thus, the cost of energy services might be the cost of heating a 100 square meter home, considering the cost of the fuel, the efficiency of the furnace, and the amount of insulation used. If this cost is falling, a worker whose wages are unchanged will have more funds left over, after paying for home heating, to buy other goods and services. Thus, his standard of living can rise. This is one of the things that drives GDP growth. (More and better tools for workers is also helpful.)

      We can see need for a falling cost of energy services several ways. In Figure 3, Roger Fouquet shows that for the period 1700 to 2008 in the United Kingdom, the cost of energy services fell fairly consistently, even though the cost of energy (not considering efficiency changes) was often quite flat, or even rising. Of  course, the Industrial Revolution took place during this period.

      Figure 10. Total Cost of Energy and Energy Services, by Roger Fouquet, from Divergences in Long Run Trends in the Prices of Energy and Energy Services.

      In Figure 11, Robert Ayres and Benjamin Warr show that the use of electricity in the US grew as the price of electricity fell, between the years 1900 and 1998.

      Figure 11. Ayres and Warr Electricity Prices and Electricity Demand, from “Accounting for growth: the role of physical work.”

      We can even see this in recent data of the United Nations. The portion of GDP spent on energy and energy products keeps falling over time, even as the quantity purchased keeps rising.

      Figure 12. Value added as a percentage of world GDP, based on a United Nations analysis.

  9. Kurt says:

    Thanks Gail! It is strange that they are raising rates. It beginning to really affect the housing market. Nobody does a refi at these rates. They will probably need to drop them by fall.

    • If the problem is overspending, it is not clear that they will really be able to drop them. If we need to sell bonds, and no one will buy them without a high rate, then we will have no choice but to raise interest rates.

      If the issue is our decision to sell QE securities, a decision can be made to stop selling the securities. That would at least help that part of the problem.

      Short term interest rates can drop, I would agree.

      The housing market is mostly affected by long-term interest rates, and these are mostly set by the market.

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