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. Fast Eddy says:

    Me and the dawg are watching videos… she didn’t care much for the Carlin channel … but she was enthralled with any videos involving dogs barking and growling….

    This was like a suspenseful movie for her…. she was on the edge of her seat

  2. Thomas Fink says:

    Djibouti wants to kick the US military out in favor of China’s military.
    US General: ‘China has totally outspent us, they are actually investing in Africa and its people, building shopping malls, bridges, football stadiums, we can never match that’

    • xabier says:

      Exactly how the British expanded their Empire in the 18th century:

      ‘Lovely place you’ve got here! We’ve just come to do business, and here are some gifts’.

      A little later:

      ‘Hmm, security’s a bit of a problem isn’t it? We’ll just bring in some troops, just to be on the safe side. What helps us, helps you ‘.

      Even later:
      ‘Custody is for your own good. it was all a little bit too much for you wasn’t it? We’ll take care of everything’.

      Of course, China isn’t imperialistic, it’s all a new model of international brotherly co-operation…….

    • Greg Machala says:

      The old saying: “You catch more flies with honey than you do with vinegar” seems to apply here. Watch out the US is spreading democracy again.

    • Energy^2 says:

      If the dense population in China and resources are now remotely controlled, directed and utilised to devastate the Middle East (who else?) and others for FF resources, like how Moscow has been summoned to send its troops to Kabul in 1980 (claimed the US Engineering Corps has patched the massive road network from the border to the capital, shortly before the invasion) and then to Syria after 2011 – this is very conscious method of conserving energy waging War.

      If we are in an open market system, according to the common perception, and all resources, including FF, are sold freely, why China needs to waste energy and take Djibouti for itself?

      How the Guardian’s report reconciles with the fact that when you purchase a piece of machinery from a Chinese factory today (in fact, since the 1970s), you fill the bank-order for the transfer to go to a New York bank, and the factory’s name just as an associate?

      If you really ask the population of the Middle East, Djibouti included, to give up peacefully everything the War aims to take from them forcefully, they will submit – they do NOT have anything National left in their possession or service!

      The risk is that all this choreography might be coming from a plan that is wasting very precious FF energies kicking and kicking a dead carcass, time, time and time again.

  3. Harry Gibbs says:

    “Bursting property bubbles, when they happen, hit banks hard. With rates starting to rise around the world, artificially inflated property prices may be running out of excuses to remain bubbly.”


    • Big T says:

      Excellent point. False high housing prices are more to blame for economic problems in usa than oil prices. The Fed should just keep prime rate at 5% and stop messing with it.

    • zenny says:

      My last family member that lived in Vancouver has sold for 2 million bucks and moved although not a dump. It is what I call a tired house…no granite counter tops 1950 ish cupboards and the like.
      The company that bought it is keeping it vacant.
      They love the house and cant understand why someone is not living in it.
      Honestly who can afford 100k a year mortgage.

  4. Harry Gibbs says:

    “As if a brewing trade war wasn’t enough to worry about, investors also need to be alert to the threat of a major currency conflict.

    “BOJ Governor Haruhiko Kuroda can deny it, but the central bank has every interest in seeking a weak yen. Japanese corporate earnings are highly cyclical: On a market-weighted basis, companies on the Topix index derive more than 37 percent of their revenue from abroad, data compiled by Gadfly show. A strengthening yen can cause stocks to plunge, depressing consumption and tipping the economy back into deflation.

    “With the Topix down more than 10 percent from its January high, that’s no idle threat. CPI ex-food, the BOJ’s inflation metric, was 0.9 percent in January, still nowhere near the 2 percent target that was last breached in 2015. Kuroda’s domestic toolbox, meanwhile, is starting to look empty. With a record 40 percent of government bonds already in its hands, the central bank is running out of assets to buy.

    “Desperate times call for desperate measures… ”


    • Of course, if Japan gets what it is looking for, namely a yen that is much lower, it will be much more difficult for citizens afford the goods they buy from outside.

      • Harry Gibbs says:

        Right and as a major energy importer you’d imagine a weak Yen would be a net negative.

  5. Harry Gibbs says:

    Looks like Canada is going to join Australia in chickening out of a hike in interest rates:

    “Investors have been paring back the odds of rate hikes in recent weeks on the back of a run of soft economic data, global market turmoil and growing geopolitical concerns that are expected to heighten Poloz’s already-elevated levels of caution with tightening monetary policy further.”


    • Australia has some sense. Of course, if there are too many debt securities dumped onto the international marketplace, it is possible that all interest rates will rise, whether or not Australia wants that outcome.

  6. Harry Gibbs says:

    A sobering perspective:

    “…The lesson of history is clear: Trade wars have no winners. And they are certainly not good. They tend to damage the economies of all countries involved, raising tensions and increasing the risk of international conflict.

    “The last full-blown global trade war was sparked by the infamous Smoot-Hawley tariff of 1930. As the U.S. slid into the Great Depression, two members of Congress introduced a bill whose goal was to protect struggling American farmers by raising tariffs on agricultural imports. As the bill moved through Congress, the limited farm protection bill snowballed into a protectionist behemoth, raising nearly 900 tariff lines covering 20,000 agricultural and manufactured products. Over the objections of economists, trade advisors, and foreign governments, President Herbert Hoover signed the bill into law.

    “The reaction from around the world was swift and punitive. Canada, America’s leading trade partner at the time, imposed retaliatory tariffs that cut U.S. exports to Canada by half. Several other European countries enacted protectionist policies in retaliation to the new U.S. tariff. A trade war had begun.

    “Who won this war? As the tragedy of the interwar period makes clear, everyone lost. In the U.S., the Great Depression worsened, and economists agree that trade protection not only deepened the country’s economic collapse but prolonged it. Global trade almost completely collapsed and the tariff was likely responsible for about half of the free fall. U.S. exports fell by about 40% over the course of the next year, crushing American industries.

    “U.S. imports fell by nearly the same amount, devastating the economies of our trading partners. These dire economic straits around the world increased antagonisms between countries, led to nationalist economic policies designed to impoverish other nations, facilitated the rise of fascist strongmen promising to restore economic growth by any means necessary, and contributed to the outbreak of World War II…”


    • JesseJames says:

      A trade war has been in progress for 20-30 yrs. Who are you kidding?

      • The nature of the trade ware has substantially changed, however.

        In the 1990s and early 2000s, we very rapidly ramped up trade, under the excuse that we were trying to cut carbon emissions (locally). Of course, world carbon emissions increased, as coal burning increased in China, India, and other countries.

        Now we are reaching a problem of increased wage disparity in Advanced Countries, thanks partly to competition for low wage jobs. Governments are under pressure to cut taxes, because companies that actually make anything physical have difficulty making an adequate profit. The US has actually made tax cuts; some European countries are looking at tax cuts. Japan has not had adequate taxes for years.

        Facing a different set of problems, one view is that tariffs can be helpful. Under this view, local jobs should increase. It should be possible to pay local workers more. The tariffs will, in theory, help offset the loss of other tax revenue. Of course, we are dealing with a self-organized system. The outcome is more complex than this.

        The problem, ultimately, is that there is not enough to go around. This is what causes resource wars. Trade wars are a different version of resource wars. They seem cheaper to fight than “hot” wars.

        • According to Wikipedia, https://en.wikipedia.org/wiki/Frédéric_Bastiat

          Claude-Frédéric Bastiat (French: [klod fʁedeʁik bastja]; 29 June 1801 – 24 December 1850) was a French economist and author who was a prominent member of the French Liberal School.[1]

          Bastiat developed the economic concept of opportunity cost and introduced the parable of the broken window. He was also a Freemason and member of the French National Assembly.[2]

          As an advocate of classical economics and the economics of Adam Smith, his views favored a free market and influenced the Austrian School.

        • JesseJames says:

          I doubt that Roman legions went out to conquer other lands because someone was unwilling to trade with them. They went out to conquer and pillage resources.

        • theblondbeast says:

          Carl Marx Loved free trade because it created tension between workers and capitalists. Free trade sacrifices labor in favor of global capital. It’s modern form is nothing but labor and net energy arbitrage. That being said there is no magic solution under which everything works out – we live in a finite world and consequences will obtain.

          • Greg Machala says:

            “That being said there is no magic solution under which everything works out ” – that is the predicament. More cheap energy would be a short term “solution”. Inevitably though more cheap energy would mean an even larger population and a much higher place from where to fall when the cheap energy runs out. Infinite cheap energy would cook us for sure….literally. So, I guess there really is no magic solution at all.

          • Good points. It is labor that loses out under free trade. Capitalists win for a while, especially when they have control of investments in low cost (labor and energy) areas.

      • Harry Gibbs says:

        In 2009 at the London summit the G20 leaders issued a statement:

        “We will not repeat the historic mistakes of protectionism of previous eras. To this end:

        “We reaffirm the commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports. In addition we will rectify promptly any such measures. We extend this pledge to the end of 2010;

        “We will minimise any negative impact on trade and investment of our domestic policy actions including fiscal policy and action in support of the financial sector. We will not retreat into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries;

        “We will notify promptly the WTO of any such measures and we call on the WTO, together with other international bodies, within their respective mandates, to monitor and report publicly on our adherence to these undertakings on a quarterly basis;

        “We will take, at the same time, whatever steps we can to promote and facilitate trade and investment.

        And now here we are less than ten years on:

        “The director-general of the World Trade Organisation (WTO) is urging President Donald Trump not impose steep tariffs on aluminium and steel exports, saying that doing so could lead the world into a “deep recession”.

        “”An eye for an eye will leave us all blind, and the world in deep recession,” Director-General Roberto Azevedo told members of his organisation Monday. We “must make every effort to avoid the fall of the first dominoes.””


        • Big T says:

          Most eu and Asian countrie sd have tariffs and major protectionism. It’s high time the us a protected it’s manufacturing. We should stop trading with non-democracy countries and countries who’s work er rs earn less than equivalent 5 dollars per hour.

        • When there is not enough energy products to go around, then protectionism “makes sense,” especially from those adversely affected by wage disparity. Wage disparity becomes too much of a problem.

          Free trade is a luxury from the time when energy per capita was rising sufficiently to keep the world economy growing. Now the world economy is fighting collapse, although it is not understood that way. Cutting taxes is a sign that local economies are becoming too poor to support their governments. Even China going to a ruler for life looks like an energy saving approach. We are approaching the time when the world economic system seizes up.

          • JH Wyoming says:

            “Now the world economy is fighting collapse, although it is not understood that way.”

            QE, cutting taxes, worldwide debt load massively increasing, trade war initiated, more and more people just barely making the bills, oh yeah, I’d say fighting collapse is apt.

  7. with the ongoing discussions about EVs and batteries, this BBC4 radio prog is worth a listen


    • Claire Grey on the Big Battery Challenge

      Next time you swear at the battery in your mobile phone, spare a thought for the chemist, Clare Grey. Having developed a new way of looking inside solids (using nuclear magnetic resonance), her interest in batteries was sparked by a man from Duracell who asked her a question at an academic conference, and charged up by some electrochemists she met playing squash. For the last twenty years she has sought to understand the precise chemistry of the rechargeable lithium ion battery. And her insights have led to some significant improvements. In 2015 she built a working prototype of a new kind of battery for electric cars, the lithium air battery. If this laboratory model can be made to run on air not oxygen, it could transform the future, by making electric cars more energy efficient and considerably cheaper.

      Clare talks to Jim Al-Khalili about the years she has spent studying rechargeable batteries, seeking to understand, very precisely, the chemical reactions that take place inside them; and how this kind of fundamental understanding can help us to make batteries that are fit for the 21st century.

      • Duncan Idaho says:

        “For the last twenty years she has sought to understand the precise chemistry of the rechargeable lithium ion battery.”

        It was first commercialized in the early 1990’s. It has been a while, and the major bottleneck of our “EV” vision.
        I’m still waiting. It has been a while campers—–

      • Energy^2 says:

        Until 1763–1775, it took James Watt 50 years to improve on 1812 Thomas Newcomen’s first-generation steam engine.
        All what Watt has done is making steam condensation external to the expansion chamber and that’s it!
        If one considers Watt an electro-mechanical robot, the total energies were expended in mining for materials constructing and programming Watt and sustaining his continuity in food, shelter, research, experiments, prototyping, well-being, travel, consumables, communications – should all be added to the ratio between energies expended in making any replica of his steam engine to the useful energy produced by the replica.

        Not only that but the total energies put earlier by Newcomens to make the seed design, and all earlier knowledge that enabled Newcomens achieves his primitive engine.

        To assess the value from Claire Grey’s research and thousands and thousands of other researchers and technicians like her, why not starting from the gap 1824 Sadi Carnot has left us all with: Identifying the total Energy expended in making an energy-producing device to the energy ever produced by the device?

        If you have a large uncertainty in energy (ΔE), the lifetime (Δt) of the particle(s) created must be very short. (Derek B. Leinweber).

        And, this is no less than ‘Entropy Internal to Matter’, we all call ‘wear and tear’, also originally expressed by the thesis of Nicholas Georgescu-Roegen, yet described on Wekipedia as being false, but recently resurfacing again in ‘One-way entanglement between isolated energies’ thesis.

        God bless Fossil Fuels that enabled Claire Grey trying, trying and trying….

    • Volvo740 says:

      Thanks Norman! She is a cutie! I’ve approach Tesla sales people with battery (replacement) cost questions and they don’t want to talk about the toothbrush/shaver/fell phone syndrome that one day it’s over for the pack.

      But of course other have pointed out more fundamental issues such as manufacturing costs/emissions, and the very challenging issues that it can be more efficient to burn the fuel in the car than some place far away and then store it in a battery. In short, the EV is keeping the dream of mobility alive for some people.

      Unfortunately we also drive on oil. It’s pretty amazing because we’re in 2018 and no one really buys these cars. We would need the penetration to be close to 100% now for them to make a difference.

      • the focus of our current system seems to be the ongoing consumption of energy

        whereas our real problem is obtaining supplies of cheap energy in the first place.

        eg—as long as we can go on driving around, flying, tapping on keyboards, all will be well with the world, because somehow we have come to make that ”productivity”

        but it isnt production—it’s consumption. If Musk gets that, he certainly isnt saying so.

        The bitcoin thing is following the same pattern, but in a slightly different way, they burn fuel to provide an illusion of wealth—which is what we do with cars and planes if you think about it.

        that is now our twisted commercial logic, driven by the forces of infinite debt (we have no choice now but to power on to the bitter end

        • Energy^2 says:

          Norman Pagett – “the focus of our current system seems to be the ongoing consumption of energy” to deplete easy FF as soon and rapidly as possible without any technologically-working safety-net to be left behind for the masses – one may safely think?

          • I don’t think that there can be a technologically-working safety net.

          • as Gail points out…there is no technological safety net—there can’t be, because ‘technology’, in the context of the way we exist, can only be a product of energy systems–ie oil coal an gas.

            our danger lies in the fact that the vast majority of people are totally convinced that it works the other way round, that ‘technology’ will keep our energy dense system going, even when there’s no energy going in.—”they” are bound to come up with something.

            remove oil coal and gas, and the only technology we have is that of the blacksmiths forge, the farmcart and the sailing ship.—there may be other things—suggestions welcome.

            that ‘majority’ are going to get seriously annoyed when’they’ dont deliver that tech-myth, because living conditions will drop below zero.they are going to fight to survive, and that’s when things will start to get very unpleasant.—for everyone

          • Energy^2 says:

            Norman and Gail – I would say, free fossil fuels from price-fixing and looting sachems and humans will come up with viable technological solutions that make what has left of FF reserves last for another 3000 years.

            No magic humans can use to cheat Physics, but energy scarcity will motivate them to come up with the best of energy-management processes. Planting a trillion tree a year is one of them (instead of cutting hundreds of thousands trees every day).



            • No. The physics of the situation says that it is energy per capita that matters. It needs to keep increasing. There are too many dissipative structures that need to keep being fed energy products and also needing to be replaced. Not to mention the problem with all of the debt outstanding.

            • Energy2
              as ive said before–our entire industrial infrastructure is dependent on converting explosive force into rotary motion. I will explain as clearly as I can

              it’s important to consider just how radical that is—even if it is mine own observation–, you read it on OFW first, so pause and consider it for a moment

              therefore—if we can accept that as an immutable state of affairs (and I’m willing to be proved wrong–but so far not)–then whatever ”technology” man comes up with, must replicate that –ie, the provision of the forces we need to sustain ourselves. (moving stuff from a to b basically)

              we now have the ‘technology’ to recognise that the physical forces that govern our lives are prevalent throughout the universe—everything functions on the same laws, everywhere. Planets, stars etc. The same elements are out there. Kryptonite doesnt exist. We know that.

              Technology functions through use of physical materials. We know all the elements that are in existence

              there are no ”new” technologies out there to provide our utopia, everything is governed by what acts upon us. essentially gravity, wind resistance, entropy and so on—these are permanent and cannot be overcome other than by energy input. The more we want to lift free of gravity–the more energy (explosive force) we have to feed into the system.

              fossil fuels fix their own price, by the ease by which they can be extracted balanced by the rate at which we can burn it—it really is that simple.

              back in the 30s, there was so much oil we didn’t know what to do with it,
              excess oil crashed the price

              having unlimited oil did not ease the great depression, because we did not posses sufficient means to burn it. You ease depressions by consuming energy=creating employment=paying wages in an endless circle—–break the circle and the ‘economy’ falls apart.
              burning it in WW2 ended the 30s depression–how? by forcing us to build millions of fuel burning wartoys, and provide jobs for everyone in building them—and then exploding them

              planting a trn trees a year will use up living space. Our forbears harvested trees to do what oil did later–making charcoal to make iron

              as a final thought—our industrial civilisation might have 20/30 years momentum in it. perhaps less. That means that any ‘new’ technology can only be derived through the industry that exists ‘now’

              but that ‘new technology’ isnt even in the desgn phase yet, let alone being built. So far no one has even thought of anything beyond what I have outlined above

              (and I havent gone into the debt factor outlined by Gail)

              wish science I’m afraid. I seriously wish it wasn’t

            • Our oil glut problem in the 1930s arose from wage disparity (and too many without jobs) as far as I can see. We again have the wage disparity problem now.

            • as i see it, we didnt have enough ‘machines’ in the 30s to burn the oil we were producing

              all our employment is derived from operating machinery and getting paid to do that.

              we spend our wages on goods and services produced by still more people who operate machines and receive wages.

              this makes us prosperous and well fed, so we have more babies, who also operate machines and get paid,

              you see where this is going?

            • I looked at life expectancies. They were rising rapidly between 1900 and 1930. Families had a lot of children back in these days. Many more of them survived to maturity. Families with many children were in some sense poorer, since the output of a frm still would need to support the family, no matter how large. This contributed to the problems of the era as well. It is hard to keep resources per capita up, when the capita part is rising too fast.

            • i agree with your line of thinking up to a point

              my gparents had 9 kids–the boys went into coalmining, extracting energy

              most of the girls went into ‘service’—basically skivvies in big houses. they were acting as ‘machines’ consuming energy— because there were no labour saving devices–only human labour.

              as more and more gadgets came on the market, more and more people were required to make them—my mother eventually made shoes in a shoe factory—but that could never make her a cobbler—she operated machines that required an industrial system to make them
              that was in the 20s/30s

              My main point was that machines begat machines in all directions.

              The cobbler making 1 shoe at a time couldnt afford to buy much other that basic sustenance. Somebody making 000s of shoes began to see a bit of surplus in wages—this primed the economic pump for all of us, and ”machines” became gradually cheaper in real terms

              but machines consume fuel—so the more machines, the more fuel we had to find.—forever

            • Right. Back in the 1930s, the amount of energy supplies that people around the world could afford to buy was pretty low. Part of this had to do with coal peaking in the UK. I believe Germany was having some difficulties as well. Coal was available, but it cost more to extract than people could afford to pay for goods made with it.

              Without coal pulling the economy along, it became difficult to use as much oil. I don’t know about relative costs back then. I know that now coal has been used to “average down” the cost of energy products. Citizens cannot afford too expensive a “mix” of energy products. This is why China could do so much better than the US and Europe when oil prices soared. Greece, with all of its tourism and oil fired electricity (for islands) was especially hurt by high oil prices.

            • Energy^2 says:

              Norman – “..there is no technological safety net—there can’t be…” is another extreme.
              Free FF from price-fixing and looting schemes and you’ll see how humans manage and live up adapting very well with scarcity. Then what’s left of FF reserves now can be a huge energy catalyst to carry on prosperity for another 1000 year.

              ..our entire industrial infrastructure is dependent on converting explosive force into rotary motion..” – Again, Free FF from price-fixing and looting schemes leaving FF resources traded on abundance or scarcity basis and our entire infrastructure will immediately self-adapt intelligently.

              FF don’t have to make us so unintelligent we cannot change an infrastructure but only destroying it to ground-zero by the agency of Collapse.

            • In a self-organized networked system, scarcity produces wage disparity. It doesn’t necessarily produce high prices. Scarcity also tends to lead to complexity (high tech solutions and globalization). This too leads to wage disparity. It is the inability of governments to collect enough taxes from the many low-wage workers that brings the system down, in many cases. There are many related things that could bring the system down as well.

              You have listened to Peak Oilers too much.

            • Energy^2 says:

              Gail “scarcity produces wage disparity…: Wage disparity is better than collapse. Today, the media systemically traumatising the world that most of the wealth is given to 1%. Is this the wage parity we fear to lose?

              Thinking of solutions to the energy predicament doesn’t mean we need to keep everything ‘as is’ and that is the safety-net mind set that many are pathologically resisting it, tooth and nail, favoring what is called ‘Collapse’!

              If this is true, no wonder the world has done nothing since 1865’s Jevons but waiting for the Collapse to come.

            • Wage disparity causes collapse. We are following the path of the 1930s. There are other outcomes, admittedly–war, lasting Depression.

              Given the way the system is put together, collapse seems the likely outcome. But war is another possibility, before collapse.

            • Fast Eddy says:

              I’m partial to WW3 which would last about as long as it takes for the giant flocks of nuclear missiles to crash around the world… then collapse…

              The incineration effect would save us a whole lot of suffering.

              And oh what a way to go out … the most ruinous, vindictive species the planet has ever known… gone in a blaze of glory taking everything but the cockroaches with us…

              Not that Mother will notice… she’ll be back in business in a few thousand years… introducing new life forms

        • Volvo740 says:

          The cost of driving a Tesla. Here are some inventory numbers.

          Year . Model . Mileage . Price
          2015 Model S. 51K. 26300
          2013 Model S Base. 51K. 36995
          2013 Model S 85 110K 39899
          2013 Model S 85 73K 42995
          2014 Model S Perf. 13K 57900
          2015 Model S P85D 12K 81955
          2017 Model S 90D 109000

          I don’t care how much you saved on “gas”. Oh, and most bought on credit, so add to this the interest you paid each year. Yeah baby. This is one of the most expensive car to own and drive. Period.

    • 100% of Americans are at risk of losing pension plans and social security, besides their bank account balances.

      • Dennis L says:

        Agreed with an exception, Amish who do not have SS.
        In my years of treating them, I con’t recall treating an elderly Amish, it is a closed culture, where are the elderly Amish? Does anyone know? The elderly must depend upon their children, they have many, how does it work? Again, does anyone know?

        • The Amish depend on the same financial system that we do. They use a lot of products that come through the fossil fuel system, such as tools, shoes, clothing, phones, horse shoes for their horse. They cannot use only old fashioned ways for producing food, or they would not be able to support themselves. I expect that they will have problems, just as everyone else does, when the system collapses.

        • Fast Eddy says:

          In Amish communities there are death panels. When you hit a certain age, you are expected to wait for the next snowstorm then go to sleep in a bank of snow – and never wake up.

          It’s kinda like being a member of https://en.wikipedia.org/wiki/Menudo_(band) They put band members to death on their 14th birthday….

          • xabier says:

            ‘I’m going for a walk, and may be gone for some time’. Indeed you will, brother Moses……

            Not so bad a death: you’d want to have a good meal and lots to drink, and then let hypothermia set in – probably a warm glow and then sweet dreams?

            • Fast Eddy says:

              Before taking the walk… drink a really great bottle of red wine… along with the meal… take another to the snow bank… to wash down a few Oxycontin tablets…

              yamama…. Yamaha…. YAMAHA!!!!!

      • Greg Machala says:

        I agree! All of us are at risk of either loosing retirement plans or not having enough to retire on. The more things contract the more precarious retirement becomes. BTW retiring broke is an oxymoron no?: Can’t retire if one is broke eh?

        • djerek says:

          The unspoken assumption is that SS is going to provide a floor for retirement standard of living even for those who are “broke”.

      • Fast Eddy says:

        But what abut deposit insurance??????? (sarc)

    • Dennis L says:

      So all the US debt is sold; for what? Where does the money go, who purchases? If you were given a million dollars and wanted to invest it, what would you purchase that has value tomorrow? Think modestly, you only want half your money back, how is that done?

      • JH Wyoming says:

        All good questions, Dennis, which I’m hoping someone has the answers to.

        • there’s still trillions in cash money floating around the global economic system, held by people with a certainty of cornucopian foreverness, also certainty that cash will retain its value irrespective of energy availabilty

          though Gail can explain this more lucidly than I can

          they want a ‘return’ on that money, and one of the places they can get it is on the ‘promise’ of the us treasury–so they buy us debt, convinced they will be repaid in due time,

          Just like any family having to borrow money to repay debt, money goes on living essentials (ie energy, food and fuel)

          And just like that family, infinite borrowing eventually leads to 100% interest on the accrued loans.

          It wont get to that of course—but as income squeezes up towards that, there’s less and less money available to keep the system itself functioning—hence you get 44m on food aid, and other services falling apart

          when the system crashes– the musical debt chairs will stop, and everyone will be left holding an empty parcel

      • Greg Machala says:

        Having billions vs millions makes all the difference. With just one million you are limited. With billions to invest you can finance the manufacturing of XXX and influence politicians to make policy that uses XXX. If had had a million to “invest” (I say invest loosely because I believe such a thing can’t be done anymore in a conventional sense) what would I do? I would think investing it into the local community in some way would be the best course. Local food growing, healthcare, housing. I would try to improve my local community and be visible doing it. So, if things start to fall apart maybe the community would be a bit more resilient. Try to get people cooperating again. That is the only way forward. This virtual world of FB, Twitter and Bitcoin is not physical and does not give our communities a sense of cohesion.

        • Fast Eddy says:

          I would invest the cash in Living Large Now. Doing anything else… would be a waste of $1,000,000

        • Artleads says:

          1. The dots aren’t connecting up. FB is being used to baby sit and distract, although it could just as easily serve to unify and cohere. The result is tantamount to fire in a theatre and everyone trampling each other to get out. In contrast to forming a queue. Concerted effort is prevented through entrenched individualism and wage slavery. You propose some project on FB and now and then some promising presence follows. Then the poster disappears. Ergo, no concerted effort, no queue.And MSM reinforces this pattern.

          2. “Economic pragmatism” might not necessarily be all local, since there are too many products that depend on scale that we can’t do without. But we don’t need most of what the global economy produces. So try getting people to grow some food and collect some water. It won’t replace (by any means ) the food and water systems we have now, and it only makes sense if it becomes a part of BAU culture and everybody does it. But people won’t do it for much the same reason as for 1. No harm in a few souls trying it though. It could catch on the way many seemingly unlikely trends have done over time.

          3. Half measures are rarely tried. So there is a proposal for UBIs, even for those who don’t need it. But what if UBI’s were a half measure–subsidize employment in fields we can’t do without? Oil, nuclear, food, maintenance, etc.? The worker gets a benefit, as does the employer. That benefit ought to encourage the employer to employ more and to declare income, and so be easier to track for taxes.

          But I totally agree with focusing on the local community, for what it’s worth. It is helpful in many ways, but does not replace a variety of larger scales. If local communities are better off they can better help to promote those larger scales in a pragmatic fashion.

    • Lastcall says:

      My view is that the use of military interventions to protect the reserve currency is becoming a negative-sum game. Trade protectionism is a response to this (irrational perhaps but, what to do).
      There has only been ‘free-trade’ if you ignore the benefits the US enjoys (exorbitant privilege) of issuing the reserve currency. This privilege (might is right) has been enjoyed by various regimes through time.
      We will probably not see true free trade except in the absence of trade agreements, not because of them; therefore only in the absence of Governments. Perhaps in small neighbourhood transactions it exists?

      • I think you are probably right. The US had gone about as far as it could go, and beyond, in the area of military interventions.

        • Fast Eddy says:

          Are the el ders beginning to flail?

          All empires end…

          They’ll be pleased that the end of this empire = extinction … because what awaits them will make the German Experience… a tea party by comparison…

          All one has to do is browse the Zero Hedge comments to see the intense hatred for the tribe… all it would take is a spark from a demagogue… and the fire will rage…

          • Energy^2 says:

            Fast Eddy – “All one has to do is browse the Zero Hedge comments to see the intense hatred for the tribe… all it would take is a spark from a demagogue… and the fire will rage…“:
            To that extent, one feels “the intense hatred for the tribe [and the extremely strong invitations into Collapse]” is actually a well invested-in and orchestrated operation run by same FE’s el ders.

            The web is not a playground for anybody, mind you. If Gail is single-handedly trying to organise comments on OFW, others employ armies of comments writers over all geographies and time zones on full time bases to keep the space well orientated, only one-direction-going and immensely fenced.

            What “ZH comments to see the intense hatred….“? Comments on the web is now THE big business shaping the perception of all of us, as you might have felt long ago!

            • Fast Eddy says:

              Now why would they want negative comments about the tribe — when they go to great lengths to stop all negative comments across the MSM?

              Did I mentioned a business I am involved in was threatened with shutdown by a tribe member who was a top guy at Disney in Asia – simply for posting the award winning documentary Palestine 101

      • djerek says:

        There is no such thing as “true free trade”. Someone always has power controlling the market since power voids are always filled. If the government doesn’t maintain control via tariffs, etc. then companies seize hold via monopoly/oligopoly/etc. The trade market is also controlled inherently by whoever is issuing the currency, which is currently the Federal Reserve principally.

        • Energy^2 says:

          djerek – “There is no such thing as ‘true free trade’”:
          This brings us to Maxwell’s demon in physics where the demon itself remains subject to wear-and-tear (Entropy).

          When the “no-true-free-trade” has actually ‘fixed’ the price of FF supplies since the Rockefellers worldwide, what it has done, in fact, is it suspended humans’ ability to sense a profound natural input essential for their survival: feeling the real value of Energy measured and compared to human’s mechanical capacity and efforts. This has distorted everything even civilisation at large and at core, since the silly decision by Rockefeller to be smart, play and mess with truth.

          This far, the enterprise that controls the no-free-trade became itself confused of what it’s doing, being impacted by Entropy that’s always faster than its calculations and sensory (see Gail’s critically-brilliant comment “Hubbert’s curve [deceptively] lets us think we have more time than we really have”).

          Truth is a property of Physics. No matter how an amount of Energy and time expended by an individual or group flipping it, Physics forcefully brings it back to its real set up!

          One of the first people/caucus were distorted by the ‘Rockefellers’ energy-fixed-price was Turing et al: If a machine intended to match human’s mind, more energy to be expanded and more time will be taken in making it than the total energy put earlier in designing and bringing man to this level of features and abilities.

          AI et al can enjoy the investment “no-true-free-trade” is putting in them, but they never add any real value to solving the world’s real energy problems – being parasitic (as touched on in Nicholas Georgescu-Roegen’s 1971 thesis).

          Fossil Fuels have now come and gone but is not this very sad 100-year long story and its drawbacks worth to be historically called from now on Man’s Fossil Fuels Grand-Curse?

          • Energy^2 says:

            Saudi Aramco’s CEO sounds VERY comfortable and inviting to any Shale oil increased production: “demand is always there” (note growth consumption figures he mentions, on the contrary to many news reports).
            To my humble understanding, he stopped shy saying Aramco is actually run by US Halliburton et al.

            If the gentleman reads OFW, he will start saying from next interview with the press: “Crude required for Civilisation’s massive heat-engine repairs will keep growing higher and higher indefinitely – by Physics“.

            • Maybe the crude oil will be required, but the system will start falling apart.

              I see China’s rejection of trash (recycling) from the US and Europe as the “canary in the coal mine.” If boats now need to come back to China empty, instead of carrying goods, they either lose money or they need to charge more to the folks selling goods.

              We lose the shipping of low-valued items first, because it no longer makes sense. Not enough wage dollars can come from the recycling.

      • Artleads says:

        It’s hard to believe that America doesn’t have enough of a foothold in Africa to do some good for itself and the continent as well. It has many military bases and alliances there. If those aren’t working well enough, they might try a better plan.

        • Fast Eddy says:

          ‘and the continent as well’

        • zenny says:

          The plan is LET CHINA DEAL WITH THEM. I have worked on the dark side and want nothing to do with the continent.

          • Artleads says:

            I’m not entirely opposed to that idea. I would recommend working (if one is so motivated) somewhere else, allowing the continent (if it so desires) to come to me. I won’t go to it.

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