Why have long-term interest rates generally fallen since 1981? Why have asset prices risen? Can these trends be expected to continue? The standard evaluation approach by actuaries and economists seems to be to look at past patterns and assume that they will be repeated.
The catch is that energy consumption growth plays a hugely important role in GDP growth. It also plays an important role in interest rates that businesses and governments can afford to pay. Energy consumption growth has been slowing; it is hard to see how growth in energy consumption can ramp back up materially in the future.
Slowing growth in energy consumption puts the world on track for a future like the 1930s, or even worse. It is hard to see how GDP growth, interest rates, and inflation rates can ramp up in the future. More likely, asset price bubbles will pop, leading to significant financial distress. Derivatives may be affected by rapid changes in prices and currency relativities, as asset bubbles pop.
The article that follows is a partial write-up of a long talk I gave to a group of life and annuity actuaries. (I am a casualty actuary myself, which is a slightly different specialty.) A PDF of my presentation can be found at this link: Reaching Limits of a Finite World
After the audience had a chance to answer this question (mostly with yes), I gave my answer: “Yes, indeed, it is possible to build a model that gives misleading results, and not understand the situation.” For example, a flat map works as a perfectly adequate model in some situations. But when longer distances are involved, a globe is needed. A two-dimensional model works for some purposes, but not for others.
The model in Slide 5 is the familiar Supply and Demand model used by economists. According to the model, if Demand increases from D1 to D2, then price will increase from P1 to P2. The rising price, in turn, will allow the quantity produced to rise from Q1 to Q2, based on the upward sloping supply curve S. This model is true in some cases, but it is not always true.
Supply and Demand Are Both Affected by Reaching Limits
As the economy approaches energy limits, lack of sufficient growth in energy consumption affects both Supply and Demand. Diminishing returns leads to high costs on the Supply side. Because of this, the cost of producing oil and other energy products tends to rise.
At the same time, businesses find that they cannot pass on these higher costs to their consumers because the wages of consumers don’t rise with rising energy costs. Diminishing returns acts like growing inefficiency; it takes more materials, more labor, more tax dollars, and more debt to produce the world’s overall mix of energy products, leaving a smaller amount of resources for producing end products (such as homes, cars, and bicycles) that consumers really want.
Persistent high energy costs lead businesses to try to find workarounds to reduce total costs. A major target for cost reduction is labor costs. If some labor costs can be replaced by lower-paid labor from overseas, or by robots, the company can perhaps make a reasonable profit, even with higher prices for oil and other energy products. The catch is new lower-cost labor force does not create as much Demand for goods and services as was available before jobs were replaced by robots or sent overseas. Workers in China and India will buy some goods and services, but the quantity will likely be lower than if the jobs remained in the US, Europe, and Japan.
We end up with a tug-of-war between the high prices that the producers of energy products need and the low prices that the many low-wage workers around the world can afford. Energy products are used in making pretty much everything, including food, homes, cars, and computers. As young people need to live with their parents longer, and as demand moves to lower-waged countries overseas, the lack of buying power tends to pull energy prices down below the cost of production. Energy prices below the cost of production are just as much a product of reaching energy limits as high energy prices!
Peak Oil is Another Two-Dimensional Model
Before we go on, I should probably offer some more explanation. Some of you may have thought that I would be talking about the Peak Oil story today. I consider the Peak Oil story to be another two-dimensional model. It gives some insights, but it really does not give a good explanation of what can be expected as we go ahead. Its emphases on oil and on high prices are both wrong, in my opinion.
Geologists coming up with the Peak Oil model relied on the incorrect Supply and Demand model of economists. They did not understand that both Demand and Supply are affected, as energy limits approach. They also never considered what the energy needs of the economy really are–total energy consumption needs to grow, if enough goods and services are to be produced for the growing world population. Rising energy consumption is also needed to keep commodity prices high enough to keep production from collapsing from low prices, due to inadequate Demand.
The Role of Added Energy
Many of you have heard the saying, “As you sow [seeds], so shall you reap.” In other words, the effort you put in can be expected to correspond to the end product that is produced. This saying is somewhat true if an economy uses only human labor to produce goods and services. For example, if a person digs a ditch for five hours, the result will correspond to effort put in. Increasing the hours of digging to six can perhaps add 20% to the length of ditch that can be dug. (There is the detail that it even takes energy products to make a shovel. Perhaps the example should be digging a ditch with a stick, and thus using only human labor!)
If a person really wants to dig a ditch quickly, he needs ditch-digging equipment and diesel fuel to operate the equipment. The ditch-digging equipment is made with energy products; it also uses energy products while it is operated. If energy consumption per capita is rising, then businesses, on average, can use increasing amounts of energy to increasingly leverage the labor of the workers they hire. This seems to be what leads to productivity growth.
This is why I talk so much about energy consumption per capita, and the importance of falling prices of energy services (including efficiency gains) to encourage the growth in energy consumption. One example of energy services (whose costs need to fall) would be the cost of heating a 1,000 square meter home (including efficiency gains in furnaces and insulation). Another example would be the cost of transporting 100 kilograms of grain 100 kilometers.
In fact, over time, the cost of energy services has been falling. The fall in costs more than offset the growing quantity of energy consumed. Thus, the cost of energy services is becoming a smaller and smaller share of world GDP. This falling share of energy products as a percentage of the world GDP seems to be necessary, if the remainder of the world economy is to grow. If the cost of energy products starts to rise, it will tend to crowd out some of the discretionary goods and services that the world economy has been able to add, as the world economy has grown.
Higher Energy Prices Are Damaging to the Economy; Lower Energy Prices Encourage GDP Growth
Energy needs to be consumed by the system, whether workers dig ditches with shovels or with ditch-digging equipment. If energy is very expensive, it is likely that all that employers can afford is the equivalent of shovels for workers to work with. If energy becomes less expensive to use (including efficiency gains), then it becomes possible to scale up the use of tools using energy, and the economy can expand. As a result, workers can become more efficient, businesses can make more profits, and the government can collect more taxes. The falling price of energy services seem to be the major force underlying GDP growth.
Conversely, if oil consumption growth is constricted by a spike in oil prices, we know (based on the work of Economist James Hamilton) that the US economy tends to go into recession. Higher prices make it difficult for both businesses and consumers to buy energy products. Falling energy consumption is damaging to the economy, because the creation of goods and services depends on the use of energy products.
High Correlation Between World GDP and Energy Consumption
Energy consumption is not mentioned at all on the economists’ supply and demand model (Slide 5), but it is clear that energy consumption is highly correlated with economic growth. There is a reason for this: it takes energy products to make both goods and services. It even takes energy to heat and light an office for workers, and to make and power computers.
Economists tend to miss the connection between energy and the economy because they tend to perform their analyses on an individual country basis. The connection between GDP growth and energy growth is less clear on a country-by-country basis because individual countries can reduce their energy consumption by shifting some of their manufacturing to less developed countries, confusing the analysis. The International Energy Agency has concluded that higher oil prices can be expected to have an adverse impact on the world economy as a whole.
The Economy Is a Self-Organized System Operated by Energy
The reason for the strange behavior of energy prices near limits is because the system is very interconnected. It is a self-organized system that gradually changes over time. New customers are added over time. These customers are often also wage-earners. They decide what to buy based on their own wages, and based on other considerations, such as the prices of competing products and whether inexpensive financing is available.
Businesses make decisions based on what they think customers might want. They also consider products offered by competitors. Governments play a role as well, both in regulation and taxation.
Physics indirectly helps determine prices, wages, and profits, because the economy uses energy to make goods and services. If a rapidly growing amount of cheap energy is available, it becomes easy for businesses to make a profit and raise wages. As businesses grow, economies of scale tend to increase profits. Higher energy prices tend to reverse these beneficial effects.
Oil Prices Are Now Too Low for Many Oil Producers
If you are not familiar with energy price trends, it probably would be worthwhile to take a minute to look at the strange price pattern shown on Slide 9. If you are coming from a financial background, you will probably be familiar with the financial disruptions of 2008, but not the high oil (and other energy) prices of the same period. The steep drop in prices corresponds to the time of major financial distress.
Most United States infrastructure, such as interstate highways, pipelines, and electricity transmission systems, were built in the pre-1970 period, when the inflation-adjusted price of oil was generally less than $20 per barrel. Thus, in a sense, most of the oil prices we are seeing in recent years on Slide 9 are high, relative to historical costs. The question becomes, “How high a price can the economy withstand?” It becomes very expensive to replace a worn-out pipeline built with $20 per barrel oil using $120 per barrel oil.
On Slide 9, prices required by oil exporting countries (such as Saudi Arabia, Venezuela, and Norway) seem to be well over $100 per barrel. Such a high price is needed if these countries are to be able to collect enough tax revenue and also have funds for investment in new fields to replace depleting fields.
On the other hand, the economies of the United States, Europe, and Japan do very much better if oil prices are low. They would prefer prices under $50 per barrel. This is the price mismatch mentioned on Slide 9.
Extended periods of low prices can be expected to lead to two adverse impacts over a period of several years:
- Falling growth in energy production. Investment in new fields to offset declining production from existing fields is likely to fall. The big drop in oil prices occurred in 2014, and it is now four years later. Many analysts expect growth in oil production to slow in the next few years, because of inadequate investment. Coal, natural gas, and uranium have somewhat similar problems, with falling prices discouraging reinvestment.
- Collapsing governments of oil exporting nations. Governments of countries that export oil are often very dependent on the high price of oil to collect adequate tax revenue. The central government of the Soviet Union collapsed in 1991, after several years of low oil prices. Lack of adequate tax revenue could cause a similar problem today. Venezuela is particularly at risk, but Saudi Arabia and many other countries could follow.
It is ironic that Venezuela reports the highest oil reserves in the world. These reserves can only be extracted if energy prices are much higher than today. This would seem to require higher wages of non-elite workers around the world. If wages were much higher in countries such as India and Nigeria, they could afford goods such as motorcycles and air conditioning, helping push up world demand for energy products.
It is clear that the growth rate of energy consumption simultaneously affects Supply and Demand.
An important point on Slide 10 is the fact that growing debt acts as a helper for energy consumption. It allows consumers to afford goods and services with their monthly wages, and it allows businesses to pay for new tools for workers over the lifetime of those tools. In a sense, debt is the promise of future goods and services made with energy products.
Money is a type of debt. We can print money, but we can’t print cheap-to-produce energy products. Thus, at some point, there can be a mismatch between promises of future goods and services and the quantity of affordable energy products available to create those goods and services. This is part of what is likely to cause debt defaults.
Slide 11 lists some of the things that seem likely as we reach the limits of cheap-to-produce energy supply. I will describe these issues more, later in this talk.
Slide 12 is an outline of the rest of the talk. This post primarily covers Points 1 and 2. Thus, this article relates primarily to GDP growth, interest rates, and asset prices. Slides are shown for Points 3 and 4 as well.
In recent years, it has become increasingly apparent that the ability of humans (and pre-humans) to cook part of our food supply has had a major impact on our ability to be different from other animals. We could eat a wider variety of foods, and we could get more energy value from those foods. Our bodies could evolve in a very different way. Our brains could become bigger, and our jaws and gut could be smaller.
Even back in hunter-gatherer days, humans were using more energy than similar animals. Now, in the industrial period, we are using 80 times as much energy (=8000/100) as a human-like animal would use, considering the various types of supplemental energy available to us. Some people have described the situation as having 80 energy-slaves for each person. This makes it possible to do tasks, such as farming and digging ditches, in a more efficient way than using sticks as tools.
Besides the usual tools, we have many related ways of using energy, with the goal of eventually providing more goods and services. Energy can be used to organize data on computers. Energy can be used to provide advanced education on topics helpful to growing the economy. If individuals or businesses are paid wages or interest payments, they can use those proceeds to buy energy products, such as a new car, or an overseas vacation. Thus, energy consumption growth affects every part of the economy.
Growing debt is extremely important in growing the world economy. I describe the situation more fully in this article: What has gone wrong with oil prices, debt, and GDP growth?
Technology is what most people focus on, as being the way to move the world economy forward. However, it takes energy products to make the new machines made possible by technology. Without a steady supply of energy products, we cannot maintain existing roads, or the electric grid, or the internet.
Anyone who has purchased a home knows that interest rates are very important in determining what price of home a particular buyer can afford. Here I show a range of monthly payments, for a 30-year, $300,000 mortgage at various interest rates. It is clear that a person can afford to buy a great deal more house at a low interest rate than a high interest rate. If interest only loans are available, costs are lower still.
Everyone who works with interest rates is aware of this pattern in 10-year US Treasury interest rates. The peak in interest rates was in 1981, and there has been a downward trend most of the time since that date.
The interest rates that regulators can easily adjust are short-term interest rates. When these interest rates are increased, they tend to induce recession. There may be a lag in timing. The increase in short-term interest rates in the 2004 to 2006 period seems to have been instrumental in popping the subprime debt bubble and bringing on the Great Recession of 2007-2009. This is my article relating to this issue: Oil Supply Limits and the Continuing Financial Crisis
When energy consumption is growing rapidly, and there are productive projects that can be added (interstate highway system, long distance electric grid, interstate pipelines, first-time telephone service for many people, growing number of trucks and airplanes), then it is possible for the economy to grow rapidly.
In this rapidly growing economy, the economy could easily ramp up long term interest rates without damaging the economy because the underlying growth rate was so high. In a sense, the higher interest rates were analogous to inflation affecting food and energy prices. There was so much growth in demand for goods and services that the economy could afford to pay rising interest rates during the period between World War II and 1981.
The period since 1981 is a period when investments have become much less productive, from a point of view of allowing more goods and services to be produced. Instead, growth is coming from selling more services to each other, and sending more manufacturing to lower-cost parts of the world.
Since 1981, we find ourselves with an increasing amount of old infrastructure that needs to be maintained. Fixing this infrastructure doesn’t really improve productivity. New investments simply keep productivity from falling.
One recent innovation has been the internet. It gives us more information, and it relieves us from the burden of having to use the phone book or go to the library. Thus, it makes us more productive. But in many ways, it is not as important as many earlier inventions, such as the internal combustion engine, the light bulb, and the telephone. There is a temptation to computerize all kinds of data and to expect data mining to solve all our problems. A person wonders what the true cost/benefit is.
Innovations in medicine now allow more 85-year-olds to live to be 86-year-olds and allow more cases of cancer to be cured. But the big changes, brought about by antibiotics and better sanitation, occurred before 1981.
Another growth area has been higher education. The payback is often wages that are barely high enough to live on. How are college graduates who cannot find high-paying jobs going to be able to repay their loans and still get married and have a family?
Admittedly, some investments have been productive. This is especially true when new factories, roads, and ports have been installed in emerging markets. But a large share of recent investments have been aimed at making vehicles more fuel efficient. Or trying to reduce CO2 emissions. These do not really have a payback in lower-cost goods and services.
Interest on debt can only be paid if the economy is truly growing, and thus has a sufficient margin to pay interest with. This seems to be less and less possible outside of emerging markets. I would expect that this is why long-term interest rates are persistently low.
The decline in the ten-year interest rates should make homes more affordable. The long-term decline in shorter-interest rates should make vehicles more affordable. In spite of this boost to the economy, US GDP growth rates have persistently fallen. World GDP growth rates have fallen as well.
There is relatively little storage available for commodities of most types, including oil. As a result, even a small change in demand can lead to a major price shift.
I show in Oil Supply Limits and the Continuing Financial Crisis that the peak in oil prices corresponded to the peak in US debt in several categories, including credit cards and home mortgages. Once US debt stopped rising, the demand for oil fell, and prices dropped precipitously.
Quantitative Easing (QE) by the US Federal Reserve began near the end of 2008. It acted to lower interest rates, especially long-term interest rates. These lower interest rates helped get oil prices back up closer to the level required by producers. But once QE stopped in 2014, prices slid back down. As noted earlier, recent oil prices are far too low for most producers. But they do help stimulate the economies of oil importing countries.
If a business adds debt to expand a factory, this may lead to more wages. The chart indicates that growing non-financial debt does not always lead to higher wages. Sometimes it leads to asset bubbles.
Disposable personal income (DPI) is income that individuals receive, including payments such as Social Security and Unemployment Insurance. This amount is netted out for taxes paid. If we divide DPI by population, we get per capita DPI. This amount is not inflation adjusted; it gives us an estimate of how much incomes have been rising, including payments made to compensate for inflation.
Clearly, there have been huge changes in the growth of per capita DPI over time. Prior to 1981, per capita DPI was rising rapidly, as more women joined the workforce, and as companies gave cost of living raises, in an attempt to keep their employees. In several years, per capita DPI was rising at over 10%.
Families with rapidly rising incomes were looking for ways to spend their new-found wealth. This seems to be at least part of the reason for the high inflation rates of this period. Without this rapid run up in DPI, it is hard to see how the oil prices spikes of the 1970s could have occurred.
Now, the economy has slowed greatly. DPI per capita is sputtering along at less than 4% per year. With this low rate of increase in funds available for spending, it seems like the current economy will not be able to support a big spike in oil prices.
If the economy is not really growing, it is very difficult to pay interest. This is why a person would expect interest rates to roughly follow GDP growth. Back before 1981, GDP growth was significantly greater than 10-year Treasury yields. Since then, 10-year Treasuries have tended to yield a little more than GDP growth (including inflation). Very recently, the pattern seems to have returned to the pre-1981 pattern.
If interest rates are lower, more people can afford to buy a given house, or a piece of land, or shares of stock. The additional demand tends to bid up asset prices.
This should be clear from Slide 29.
Interest rate assumptions often were originally made when interest rates were higher.
Payments to individuals in a particular year act as a way of dividing up goods and services available in that year. If the share of goods and services going to those who are paid interest rises, it will mean fewer goods and services are available for others. History says that it is the non-elite workers that are most likely to be “shorted,” if there are not enough goods and services to go around.
Even a decline in coal consumption is a problem, if it causes total energy consumption per capita to fall! Wind and solar cannot possibly make up the shortfall. Also, their installed cost is high, if the cost of intermittency workarounds is included.
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US preacher asks followers to help buy fourth private jet
A US televangelist has asked his followers to help fund his fourth private jet – because Jesus “wouldn’t be riding a donkey”.
Jesse Duplantis said God had told him to buy a Falcoln 7X for $54m (£41m).
He added he was hesitant about the purchase at first, but said God had told him: “I didn’t ask you to pay for it. I asked you to believe for it.”
Although preachers owning private jets is not unusual, this particular appeal has caused controversy.
Twitter users responded to the request with disbelief, with many quoting Bible verses warning against greed and “false prophets”, or suggesting that the money could be better used to help the poor.
In a video address posted on his website, 68-year-old Mr Duplantis explained: “You know, I’ve owned three different jets in my life, and I’ve used them and just burning them up for the Lord Jesus Christ.
“Now, some people believe that preachers shouldn’t have jets. I really believe that preachers ought to go on every available voice, every available outlet, to get this Gospel preached to the world.”
Hmmmm….. Church of Hedonism….. by Fast Eddy?
California, Texas Face Summer Power Shortage, Grid Watchdog Says
Why is Elon Musk raging at “big media”? Because he’s finally being called on his tall tales.
There are fewer 35K Teslas on the road than there are floating in space.
God damn, vox got jokes.
Sweden is prepping for doomsday in Cold War style
Sort of depressing.
I found an article in the online WSJ called, Why Corporate Profits May Be Weaker Than They Seem.
The article shows this chart of profits, excluding the impact of income tax change, and excluding the impact of stock buybacks.
According to the article:
Taylor Swift couldn’t sell out any concerts, Star Wars bombed..The consumer is tapped out..
Moving US troops ‘to frontline with Russia’ in Poland ‘makes sense’ – Bloomberg
This is just asking for disaster..
Someone posted this on reddit..It was in their social studies classroom..”The oil map”
The amount that can be extracted depends on the price of oil.
Venezuela has the highest reserves according to values at December 31, 2016, but that doesn’t mean that it will have the highest oil production.
Flip This Well: How Fracking Company CEOs Get Rich While Losing Billions
Time for a rate cut.
Italy could be the next Greece — only much worse
we are all on the same slippery slope
true… and yet, for the short remainder of my life, I would prefer not to go down that slippery slope…
Am I going to see my life flashing before my eyes soon?
the supernova of your existence
So, what is our conclusion? Does one:
1/ Dig a vegetable garden?
3/ Stockpile baked beans?
4/ Buy champagne (and dark chocolate)?
I would hedge, personally, by removing myself to a moderately remote island and living a life of wanton self-indulgence with a bit of vegetable gardening thrown in for good measure.
last time i visited the hebrides—wanton self indulgence was notably absent
or maybe i just wasnt invited to the rght parties
Fate and genetics have blessed me with the capacity to be wantonly self-indulgent almost anywhere, Norman. That being said, there is nothing straight-laced about the Hebrides, as far as I can tell. Obviously much alcohol is consumed to obviate the unpleasantness of long, dark winters, and swinging is quite the thing up here – probably for similar reasons. Growing pampas grass in your garden indicates a willingness to engage, I gather.
hearsay is no good
you have to find out for yourself
you can always ”make your excuses and leave”
my guess is lowlanders prize the highland malts, and highlanders the lowland stuff, is that about right?
Doomphd, I must confess I am an Englishman and not hugely well informed about the drinking preferences of the Scots generally. Islay, where I now reside, is famous for producing the peatiest whiskeys in the world, which tend to be an acquired taste, pungent as they are. Harrison Ford is keen on Bruichladdich, my local distillery.
Plenty of the locals don’t care for whisky at all but everyone I’ve met here likes a drink of *something*.
i must visit your island someday, and hope to make it out alive. actually, i’ve turned away from the peaty malts, and am now tasting my way through Speyside.
I’m told that swinging reached this village some decade or two after London: now, all the ladies involved are either dead or house-bound.
Out of luck again…….
they were probably at queen victorias funeral
I am the anti prepper..I have spent over 27k in my savings account the last three years..And I took off a year from work for family leave last year..So when SHTF in the near term..I will at least be able to say I lived it up while I could…
you didnt invite any of us
yor real friends
Excellent BD! You have made the right decision.
Conclusions are sobering.
I have done the vegetable garden and concluded that a really large garden is necessary and with it storage for the one bad year out of seven.
Praying gives some peace and a nice cathedral is helpful here. Perhaps confession?
Garbanzo beans are very good on a salad, but how many cans?
Dark chocolate is great, semi sweet baking chocolate is tax free as a foodstuff in MN so all is good.
Abstract algebra is politically correct as far as I can tell and a two hundred page book will provide several years of enjoyment as long as paper and pencil are available and I am finally reading “Tragedy and Hope” which I started in the 1970’s.
Someone is going to make it, life will go on and it is a beautiful world.
i have my doubts about humans making it, at least at the level we now call ourselves humans. fossil fuels have allowed wide interconnections to beat the beast of climate change. witness the amount of preparations being made now in the SE USA for a single approaching tropical storm, whole states declaring emergencies, looking for federal aid in advance.
CC got a lot of regional civilizations trying to hedge their agriculture, e.g., the Anazasi, the Maya. think of Tikal in Guatemala, with its huge underground cisterns, the Casa Bonita site in New Mexico, with their huge grain storehouses. unless we get fusion going, and it looks too late for that now, these semi-isolated gardening communities, most of them, will suffer a violent end. what’s the point of insuring as best you can that you will survive to be molested/tortured/killed in some new, darker period? quite depressing to contemplate.
fusion produces electricity—it doesn’t produce ”stuff”
humankind demands employment/wages—which can only be derived from making/exchanging/buying/selling ”stuff”
and stuff can only be produced by converting forms of raw material into products we either need or think we need—essentially metals or other hard materials
fusion might power electric transport, but it will never produce the right environment for that transport to function efficiently, or even to be manufactured
and sustaining transport is the least of our worries
After deep contemplation (and a waste of funds)… I have concluded … I will ski Coronet Peak on Saturday because it is opening two weeks early due to the cold weather… I will not waste the day pickling carrots.
It will be a good day… when the last human is dead.
Depending on your beliefs, I think there is an advantage. For one thing, when we go, we know we’re not missing out on the fabulous future, but concern for descendants is a problem.
The only prep I have made is having a easy and peaceful way to die, should I choose that option. (As opposed to bravely fighting off the hordes with a butter knife.)
The silver lining here… is that everyone goes… so it’s not like you are missing out on anything.
Kinda like… you get the death sentence from the doc…. you hire a 747 and invite all your friends and family to join you on a free week long vacation in the tropics…. you enjoy the vacation … then on the return flight you pile the plane into the side of a mountain….
We are all on a giant plane that is headed for the mountain
5/ Give up?
I mean, that’s in the long run…
otherwise, is it a good strategy to prep for a near future world that has mostly or totally collapsed?
though I can see the value in prepping for short term issues…
Buy champagne (and dark chocolate)?
Here is a cost effective ‘champagne’ option …. https://www.cloudybay.co.nz/our-wines/pelorus/pelorus
Some years ago LVMH bought Cloudy Bay …. LVMH owns some top champagne brands… I am told they transferred their know-how to the Cloudy Bay operation …. and recently they launched their first vintage…
I know little about wine … but from what I can tell… this Pelorus is the good stuff… indistinguishable from a good bottle of French bubbles…. for a fraction of the price.
Do not confuse it with the shite out of Italy referred to as Prosseco…
The only problem I see with this strategy is that this must be consumed ice cold… so my suggestion would be … as BAU starts to sink… is to freeze as many blocks as ice as possible and keep them ready in a large freezer unit….
I also recommend Plan B — good whisky…. no need for ice…. and a single bottle goes a long way… a case longer… a pallet … well… a pallet will keep the singing and dancing going on for weeks.
Mac10 has laid out his summary of our global economic predicament on ponziworld. Very happy to see he’s included resource-constraints:
“The root failure of Globalization is the fact that a finite planet cannot service the infinite growth aspirations of an ever-growing human population. Since 1970, the human population has doubled while the wildlife population has been reduced by 50%. Thus creating a 4:1 asymmetric imbalance increasing on an exponential basis. The fact that the average developed world lifestyle uses 3-4 times as much resources as the average developing nation, should have exposed the failed third grade math behind the perpetual growth model. If not, then oil at $150/barrel in 2008 should have provided the final convincing.”
“As Donald Trump’s tax cuts power up the American economy, rising US interest rates are driving the greenback higher and sucking liquidity from the global economy. That’s hitting emerging market economies, such as Argentina, Turkey and, to a lesser extent, Indonesia on our northern doorstep.
“At the same time, Italians are trying to cobble together a bizarre coalition government that wants to both increase public spending and cut taxes. The Mediterranean refugee crisis has devastated support for the European Union among Italian voters who once saw Brussels as a safeguard against their own unstable governments. The result is a re-emerging euro crisis…
“…did anyone mention the alarming build-up in debt in China, which now takes nearly 30 per cent of our [Australian] exports, compared to only 5 per cent in the early 2000s? Hey, Reserve Bank governor Philip Lowe did, just last week.”
“…it seems like President Trump may be gearing up to launch a trade war between the world’s two largest economies after all.”
“Nowadays, when sorrows come to the global economy, they would seem to come not as single spies but as battalions. First, we have a full- blown currency crisis in Turkey. Then we have another such crisis in Argentina.
“Before either of those two crises are resolved, we now have Italy plunged into a political crisis that could end up with Italy eventually being forced out of the euro.
“A key difference between Italy on the one hand and Argentina and Turkey on the other is that Italy is a country of systemic importance to the global economy. As such, it has the potential to trigger a global economic and financial market crisis.
“It has the potential to do so in much the same way as the September 2008 Lehman bankruptcy had the potential to set off the worst global economic recession in the post-war period.
“One indication of Italy’s systemic importance is the very size of its economy. Being the eurozone’s third-largest economy, it is 10 times the size of that of Greece. As such, it makes it difficult to contemplate how the euro could survive in anything like its present form were Italy forced to exit that monetary arrangement.
“Another indication of Italy’s importance to the global economy is the fact that it has the world’s third-largest sovereign debt market after that of the United States and Japan, with a total public debt of more than $2.5 trillion.
“Were Italy to default on that debt, as would almost certainly occur were its government’s borrowing cost to increase should Italy leave the euro, it is difficult to contemplate that there would not be a full-blown European banking crisis that would reach America’s shores.
“Among the reasons to fear that Italy could be heading for a full-blown economic crisis is the precarious sate of its economy. Remarkably, Italy’s per capita income is lower today than it was on the eve of the country’s euro adoption in 1999.
“Equally remarkable is the fact that over the past decade, Italy has experienced a triple-dip recession, and it is yet to regain its pre-2008 crisis output level…”
“Asian stock markets slumped Wednesday as jitters spread over Italy’s escalating political crisis and renewed US-China trade tensions.”
“Shares in Germany’s biggest bank, Deutsche Bank, were plummeting Tuesday morning as market turmoil surrounding the Italian political crisis spread to the shares of global banks.”
The Net International Investment Position (assets minus liabilities) NIIP of the eurozone is not that bad, it’s about minus 13% today.
Now if the eurozone’s external assets are located in South America, then the assets are bit shaky today.
Italy’s NIIP is only minus 15% today.
Eurozone nations with a NIIP minus 100% or more are Greece, Cyprus, Spain, Portugal and Irland…the usual suspects.
I dont blame my baby boomer parents for the collapse. They’re just brainwashed. Old people seem to have completely bought into propaganda. They just repeat things from cable news verbatim without thinking…
Nearly everyone does that.
Including the elaborate academic versions.
Few people think, or have the capacity to do so.
Still fewer are sufficiently well-informed to make their thoughts worthwhile.
Of course, Xabier counts himself among the elite few.
Thank them… for consuming….
It is my understanding that after the second leg down during the Great Depression …. WW2 saved the day….
Plan B >>> WW3 (sarc)
Isn’t this equivalent to boatloads of government spending? It doesn’t help the resource problem – and probably there is not the same potential as existed back then. But it seems to me like we can dodge the depressison/deflation/lack of demand problem with moar government spending.
Bottom line is that if it is physically possible to produce more goods and services we can afford to consume them. We can extend and pretend until then.
What will bring the ban of plastic use?
I am affraid that we can not go back. When we ban the use of plastics like
“Plastic ban in certain products: Where alternatives are readily available and affordable, single-use plastic products will be banned from the market. The ban will apply to plastic cotton buds, cutlery, plates, straws, drink stirrers and sticks for balloons which will all have to be made exclusively from more sustainable materials instead. Single-use drinks containers made with plastic will only be allowed on the market if their caps and lids remain attached;”,
the collapse is here, as the plastics allows us use less energy in everyday life…
I bet a lot of gordon gecko types are looking at this situation — and licking their chops — expecting that they will be featured in The Big Short 2.0.
Yep, the sequencing of future events is unknown, however the preponderance of historical evidence is that usual step wise unfolding of events is only seldom punctuated by less frequently occurring event of total chaos/rupture/doom..
I’m still not convinced this is the end of road, single event culminating process.
Great discussion at Surplus in recent days.
I especially liked Dr. Tim’s educated guesses about the nature of the GFCII, he mentioned being partial to sort of the end of consumer capitalism hypothesis.
What does it mean in practice though?
Well, my take on it could mean the spent fuel ponds will be cared for afterall, but most of the JIT consumer economy (incl. frivolous consumerism) disappears, the limited resources put towards keeping the core energy-mil-food infrastructure alive. Likely including the internets as this keeps the younger generation docile-numb..
You see FE/TM, even under such sequencing there “will be winners” either in autocratic gov-security structures or even in few much smaller remaining international hubs with quasi capitalist/trade pedigree, because the flow of some goods/money would continue globally for some time..
Obviously, the probability we are really pushed just in the final corner, no escape from instant collapse this time around is certainly non trivial – bigger than zero..
Trade Off: Financial system supply-chain cross contagion – a study in global systemic collapse
This study by David Korowicz explores the implications of a major financial crisis for the supply-chains that feed us, keep production running and maintain our critical infrastructure. He uses a scenario involving the collapse of the Eurozone to show that increasing socio-economic complexity could rapidly spread irretrievable supply-chain failure across the world.
BAU Lite … is impossible.
Also – can you define what you mean by frivolous spending.
Yep, the ‘I’m a winner: I can get rich from this’ types.
state pensions: state employees work for 30 years and expect to get paid for 60…
it worked for a few decades when the USA had lots of surplus energy…
now, of course, surplus energy is declining, so the economy will shrink because it must shrink…
something’s gotta go… sooner rather than later…
when decisions are soon to be made about whether it is current expenses that must be cut or future expenses that must be cut…
the clear loser will be future expenses…
I would guess that these pension funds will evaporate in the 2020s…
Some State Pension Funds May Collapse In Economic Downturn
Chinese state media slam U.S. trade announcement, say Beijing ready to fight
Soros Warns “Another Major Financial Crisis” Is Looming—and Trump Is Partly to Blame
George Soros warns the European Union is on the brink of collapse — and Trump is partly to blame
Bernie Sanders ‘is considering another run for the presidency,’ former campaign manager says
Billionaires can’t buy Bernie!
Tesla in autopilot mode crashes into parked Laguna Beach police cruiser
How Systems Collapse
Charles Hugh Smith makes some interesting points about how systems collapse.
I am not sure though, that the money buffer is the problem. It may be all of the pieces that we assume are operating independently, but are not. If one loan goes bad, a large number will go bad simultaneously.
I wonder if students might reconsider their treatment of other students not in the ‘in crowd’
I would hope not… this could get very entertaining if we get a lot of copycat incidents… maybe we could have a dark remake of Revenge of the Nerds…. in this version the Nerds rise up and butcher those who mock them… kidnap them.. waterboard them… pull out fingernails… hack off fingers and ears….
Perhaps when this hits the cinemas might the bullying stop?
Well, some have a different perspective:
it’s good to know that Venezuela is experiencing victory this year…
I thought it was a pathetically sad situation where they were collapsing…
must have been fake news…
Right now, we already have a revenge of people who are not in the “in-crowd”.
Many nerds are sympathetic to social justice causes.
There are prominent people in the Intelligensia who can barely hold back their contempt for successful, normal people. They are obsessed with increasing the social status of “marginalized groups”.
Jim Jones, a minor figure in the Civil Rights Movement in the U.S., “came to sympathize with the country’s repressed African-American community due to his own experiences as a social outcast. ”
“Childhood acquaintances later recalled Jones as being a “really weird kid” who was “obsessed with religion … obsessed with death”. They alleged that he frequently held funerals for small animals on his parents’ property and had stabbed a cat to death.”(WIKEPEDIA)
The kinds of people who become school shooters have probably always been around with us. They are a certain kind of social outcast.
Mock them at your peril….
California is shattering renewable records. So why are greenhouse emissions creeping up?
What’s that all about? There’s a hint in the report. California had to dump about 95,000 megawatt hours of renewable power in April, because all that power would otherwise have flooded onto the grid when people didn’t need it — blowing fuses, igniting fires, and melting every computer without a surge protector. That’s a lot of energy, enough to provide all of Guatemala’s electricity for the month.
Transporting electricity and storing it is expensive, so the people managing the electrical system ask power companies to stop putting power on the grid, to curtail their production. It’s called “curtailment” in electric-system jargon. As the number of solar panels feeding the grid increases, so do curtailments.
Soros has the solution 🤪
Somehow people have been deceived into believing that prosperity is a function of the economic and political system. How foolish. No politician has ever brought prosperity and never will. The US is a prime example. It was abundant resources that made the US wealthy it was these same resources that caused the revolution that created the country. Had the founding fathers been living in the Sahara I don’t think anyone would presently be fooled into thinking that a democratic free market system brings prosperity would they? And the revolution would have been about a day long since there is nothing of value there.
The point is all wars are resource wars. All economies prosper because of resources. It is no coincidence that the US has pumped 250 billion barrels of oil. More than any other nation on earth. It also pumps more gas than any other nation on earth. And it still has more coal.
Europe was built around abundant resources which have become increasingly depleted. That’s what drove colonialism. It wasn’t political will it was resources. Had Rio Tinto continued to supply the Spanish throne enough gold do you really think Columbus would have set sail?
However even though it is as clear and simple as that most people believe that some politician will conjure up prosperity. “Make America Great Again” etc etc etc.
Interestingly these thoughts have been planted by the government run public school system of indoctrination. Propaganda 101. Observations are not thoughts. Thoughts are images in the mind created by opinions. That’s why there is no news because it is all commentary which are opinions on observations. Once the image has been established no contradiction observed will change the image. Instead the observations will be modified to match the established image.
So the image that free market capitalism is good and beneficial and fair will not be shaken even when it is revealed that it is wasteful collusive and unfair. Even though no politician has ever benefited the subjects he or she “serves” people still believe in change and get the same every time.
The blind leading the blind for thousands of years.
So if anyone thinks or believes that humanity will come to the rescue they have been brainwashed. Not only has humanity been a dismal failure with resources what will they be without?
Ruptly TV runs raw footage … no voice over… no explanations… no context .. no editorial comment…
If you watch clips you have no idea what is really going on … even though you are watching ‘the news’
This serves to demonstrate how powerful the editorial component of ‘the new’ is…. those in control can plug in whatever story they want … whatever narrative they want… even though we can see exactly what is happening… this is a tabula rasa …..
Here is an example — youtbue slaps editorial below – ignore that…. is this a police state cracking down on democracy protests — or are these protesters hooligans running wild after a football match — do the protests have a valid reason for their actions — what about the police….
where was this? looks like the one flopping like a fish is brain dead
Must have been protesting some sort of an iphone tax.
This was in Leipzig. Actually pictures like that you can get in Germany every year 10 times. G20, Hitlers Birthday, 1st Mai-demonstrations, soccer……
A lot of people enjoy this kind of happening.
Correct. And several studies confirm that once an idea or image is accepted cognitively most people will not change their view despite overwhelming evidence against it. So skyscrapers can implode because of fire. Trump can make America great again. Resources are a function of economic forces.
An unbiased view of world history presents a very different story than we’ve been told. Rather then a world of developed countries and undeveloped countries we actually have a world of exploited resources and unexploited resources.
To keep the masses from rebellion because of their own personal exploitation they are bombarded with constant stream of violent and sexual imagery. These tools were employed effectively in Greek Theatres and Roman Coliseums. The effect is that the frontal lobe which control higher orders of thought like empathy and conscience are shut down. Their empty lives of meaningless toil is washed away by their addictions. Soon they become unable to express themselves without sexual vulgarity combined with violent gestures. As their communication descends to grunts and groans they cling to their pathetic belief that they are an advancing species. Unable to articulate abstract thoughts and ideas they begin to ponder their own sexuality and gender assignment because these are all they can control in the world around them. To dull the relentless emotional pain from the helplessness they feel they are given psychotropics and opioids in higher and higher doses until finally respiration stops. But not until they have performed.
Arbeit macht freI
JT, you know that the Arbiet Macht Frei sign was stolen from Dachau entrance gate in 2014. turns out is was a replicate of the original sign, which was apparently stolen by some US liberating troops in 1945. one of the greatest propaganda pieces of all time.
Auschwitz I was there.
When you strip back the veneer of civilization … what you expose… is not very impressive…
Speaking of burning buildings
vs controlled demolition
It is obvious what went down here…. but there is nothing anyone can do about it… so it gets tucked into the back corner of the mind
Even those who have seen that ‘free market capitalism’ is not what they were taught, still want all the toys – quite hilarious.
Prosperity is there – it’s just been taken from you by…….them!
Wait until they find out that prosperity was just an illusion of the Oil Age.
The market is punishing Italy for voting populists into power?
The market in the euro zone is called ECB. The ECB is the largest holder of Italian sovereign bonds…but seems to have lost appetite for more.
Mario Draghi has done “what ever it takes” and bailed out the Italian government and Italian banks…quietly without big headlines…but those ungrateful Italians are still not happy…they want more…and what’s even more crazy…they want to leave the euro!
According to some traders the ECB is actually buying Italian bonds, but the market is dumping them in larger quantities than the ECB is allowed to buy since there is limit to the QE program.
The ECB is losing control of the situation. Either the ECB is given a higher limit or starts to break the rules or Italy goes banco rotto.
When you make the rules… you can change the rules…. whatever it takes
How long can the ECB continue to invent new rules?
The ECB’s balance sheet is today 40% to the eurozone’s GDP.
The ECB is the biggest money making machine that Europe has ever invented…but how long can this scam go on?
It’s a constantly evolving new world,
so easily targeting ~x,xxx% of GDP levels.. if you have to ..
I suspect these things determine how long it can go on:
1. If the CBs have decided something is TBTF then they will not put a stop to it… supposedly when certain sovereign debt thresholds are breached — a country implodes… but only if the CBs do not allow them to implode — see Japan — see UK… see many many more…. the CBs ignore the problem… and it festers….
2. The CBs are not all powerful though — when we run into a supply problem with oil — which forces the price far beyond what the economy can handle — they will at some point not be able to mitigate this with stimulus …. they did that in the run up to GFC… but now the world is drowning in debt… so this time will be different
3. Likewise… the consumer is choking on debt…. wages are stagnant – and low… he wants to consume but increasingly does not have the means… the credit cards are maxxed out…. he already has a auto payments so cannot swap for another new car so sales are dropping… (see UK)…. what can the CBs do about this? At some point they run out of tricks….
I thought we were in some kind of stick house and everything collapses if you pull a couple sticks out. Is Italy a stick? Is Brazil a stick? Is the stick house model incorrect?
italy and brazil are simply conforming to my universal law of nations:
“”””if a nation doesn’t produce enough indigenous surplus energy to support the demands of its people, they must beg, buy, borrow or steal it from somewhere else, or face eventual collapse and starvation until their numbers reach a sustainable level.””””
they have no choice, 2 years ago I said Italy was wobbly—that much was obvious, it was the time when greece was on the brink (they still are. Spain will be next)
this explains it better
Oh no the Spanish sleeping on the streets of Paris.
“Is the stick house model incorrect?”
I dialed up Amber Heard, and she told me that the stick house model is indeed correct, but that Italy and Brazil are too small to bring down the house…
I tried to convince her that the stick house model is INcorrect, and that a better model has the Core countries at the top of a hill and the peripheral countries are positioned on the sides…
economic erosion causes the weakest countries to fall down the hill first, and this weakens the position of all the other countries on the hill…
eventually, enough of the side countries will fall and weaken the entire hill, which will collapse…
Amber rejected me again…
can you believe it?
Italy is a stick… and it has not been pulled from the house… yet
In the United States, we’ve been drawing down our reserves, our inventory and the amount of oil we have in storage, consistently since February of 2017. We’re going into the 15th month of drawing from storage each week because we’re not producing enough to meet the need.
To those paying attention: the United States is right now producing more oil than it ever has in its history. We are a million barrels a day higher than the peak in 1970 — the one that King Hubbert got in trouble for warning about. We’re higher by 50,000 or so barrels per month of production. Yet, here we are, still sucking oil out of storage. What does that tell you? There is only one way to interpret that: We are using more than we are producing.
Countries like the United States and western Europe; our demand is pretty much stable. We are not a big growing economy anymore. But the emerging markets – Asia, Latin America, and Africa – they are going full bore. That is where something like 80% of world demand growth is coming from.
Never ever lose sight of the fact that the United States imports a ton of oil. I mean we are importing, on average, 7 million barrels of crude oil a day. I mean that is more than many continents use a day. Why are we importing all that when we are also producing 11 million barrels a day?
We are nowhere near energy self-sufficiency, nor do I think we will ever get there.
We’re in deep trouble.
“Why are we importing all that when we are also producing 11 million barrels a day?”
because we want to…
because we can…
Because we consume a lot more oil than we produce. We need to drive long distances to get places. We use oil for many purposes.