## How the Economy Works as It Reaches Energy Limits — An Introduction for Actuaries and Others

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

Slide 1

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Slide 4

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.

Slide 5

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.

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.

Slide 6

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

Slide 7

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

Slide 8

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

Slide 9

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:

1. 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.
2. 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.

Slide 10

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

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

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.

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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.

Slide 15

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.

Slide 16

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.

Slide 17

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.

Slide 18

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.

Slide 19

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.

Slide 20

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

Slide 21

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.

Slide 22

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.

Slide 23

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.

Slide 24

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.

Slide 25

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.

Slide 26

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.

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Slide 28

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.

Slide 29

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.

Slide 30

This should be clear from Slide 29.

Slide 31

Interest rate assumptions often were originally made when interest rates were higher.

Slide 32

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.

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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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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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### 1,963 Responses to How the Economy Works as It Reaches Energy Limits — An Introduction for Actuaries and Others

1. Lastcall says:
2. Lastcall says:

But wait theres more; pity about all that virtue signalling huh?

• This references an academic paper, at least for part of its findings:

http://iopscience.iop.org/article/10.1088/1748-9326/aaa512/meta

John D Sterman, Lori Siegel, and Juliette N Rooney-Varga
Jan 18, 2018 – Environmental Research Letters
Does replacing coal with wood lower CO2 emissions? Dynamic lifecycle analysis of wood bioenergy

Part of Abstract:
Because combustion and processing efficiencies for wood are less than coal, the immediate impact of substituting wood for coal is an increase in atmospheric CO2 relative to coal. The payback time for this carbon debt ranges from 44–104 years after clearcut, depending on forest type—assuming the land remains forest. Surprisingly, replanting hardwood forests with fast-growing pine plantations raises the CO2 impact of wood because the equilibrium carbon density of plantations is lower than natural forests. Further, projected growth in wood harvest for bioenergy would increase atmospheric CO2 for at least a century because new carbon debt continuously exceeds NPP.

• Fast Eddy says:

wow

• Davidin100millionbilliontrillionzillionyears says:

well, could you switch to burning wood?

if not, at least burning coal is 2nd worst…

• Fast Eddy says:

I sometimes mix wood with the coal…. all angles covered

3. SomeoneInAsia says:

@ Speedy Gonzalez Eddy:

“If it wasn’t Churchill it would have been another leader who would have stood…

I prefer to discuss the forced starvation of many millions of Indians…

Any thoughts on that?”

For now all I have to say is that, once TSHTF, there will be millions of starving British. A state of affairs more or less brought about by their own hand, being the ones to be credited for ushering in the Industrial Revolution.

Looks to me like an excellent illustration of the (Indian) concept of karma. What goes around comes around.

• Baby Doomer says:

Humans, wolves, and chimps all kill other groups of their own kind..Its just what they do naturally..

• Under certain circumstances. Not enough resources to go around is one of them. Also, the evolution is set up so that species will not grow too large in proportionate to other species. This is done through territoriality. Humans have overcome this instinct, when there is plenty of energy to go around, though “free trade” and “a rising tide raises all boats.” Religion is helpful in implementing this as well.

But once the tide goes back up, something has to happen to fix the situation. Energy per capita needs to keep rising, or humans run into a major problem. The whole system cannot keep operating. There are too many humans and too many diminishing returns to deal with.

• Davidin100millionbilliontrillionzillionyears says:

when humans become extinct…

will that also be a case of karma?

• Lastcall says:

Karma?; guess that accounts for the continual sho.tings in US?
All the US bull.ts/b.mbs (no. 1 supplier anyone) sent into other countries (not meddling!!) children bouncing back?

• xabier says:

Short-term perspective: blame it on the gods dressed as -talking – fish who taught the Sumerians the arts of civilization.

I suspect Sumerian beer was quite potent….

4. Baby Doomer says:

Of course US birth rates are falling – this is a harsh place to have a family

This fact is met with shrugs from those who assume that companies provide maternity leave. Only 56% do, and of those, just 6% offer full pay during maternity leave. This assumption also ignores the fact that 36% of the American workforce, a number expected to surpass 50% in the next 10 years, are contract laborers with no access to such benefits. That gig economy you keep hearing so much about, with its flexible schedule and independence? Yeah, it sucks for mothers.

Generation Z won’t be much help either, given that about 40% of them are expected to default on their college loans when they can’t find jobs, according to Brookings.

https://www.theguardian.com/commentisfree/2018/may/21/hat-looks-good-slug-birth-rates-us-falling-reasons-why-family-policies?CMP=share_btn_gp

5. jupiviv says:
• Davidin100millionbilliontrillionzillionyears says:

briefly mentioned:

is this the big missing element in the economic writings of Marx?

it was the economic base in his day, as of course it is in ours…

• jupiviv says:

I think Steve’s gist is that Marx understood the contradictions and flaws of capitalism itself but failed/refused to dig deeper and expose the real root of those flaws. Marx saw socialism as the final, perfected, universal form of industrial civilisation. The reality is that true socialism can only work on a regional, self-sufficient basis, with not much industry or global interaction going on. Industry as we know it is impossible without state/state-corporate capitalism.

• Fast Eddy says:

He certainly did not seem to understand that any system that delivers anything above a hunter gatherer lifestyle…. that relies on fossil fuels… is doomed to collapse…

A socialist utopia would collapse sooner than a capitalist hell on earth … because it is very inefficient (and an aberration) and would quickly lead to a deflationary death spiral

6. Baby Doomer says:

7. Third World person says:

here is another sick person in our industrial civilization

who killed 10 million Congolese people

• Third World person says:

here another who is the butcher of Iraqi people

and this one also who is butcher of North-West Pakistan

• SomeoneInAsia says:

I think we would have been much better off with a limited supply of per-capita energy available to all. Enough to enable all your basic needs to be met — and no more.

Because then no one will be able to harness large amounts of energy to engage in acts of mass genocide anymore.

Why are Mao and Polly Potty left out from the gallery of illustrious men above, by the way? I always thought Mao and Pol Pot are so handsome… 😛

• Fast Eddy says:

Not possible.

Perhaps Gail has a link to an earlier article that explains why.

I am too busy loading coal into the Rayburn to get into detail….

• Fast Eddy says:

All because he wanted a colony too!

This is superb https://en.wikipedia.org/wiki/King_Leopold%27s_Ghost

8. “The world isn’t ready for renewable energy yet
“It’s time to prepare the grid.
” … Right now, the habits and patterns of decision-making shaped by low VRE penetration still have inertia, exacerbated by the lingering doubt Trump has imposed on power markets. But there are many reasons to believe that, Trump or no Trump, VRE numbers are going to keep rising at or faster than their current, already dizzying rates.

“The renewable energy future is rapidly becoming the present. Everyone in and around the power sector needs to snap to and get ready for it.”

https://www.vox.com/energy-and-environment/2018/5/18/17359730/wind-solar-power-grid-electricity-managers

Well, a new acronym, “VRE” (variable renewable energy).
Meanwhile, back in real life: no AC power grid gets even nearly half its energy from VRE — did any of these people consider, that without FF, there wouldn’t even be a power grid, or hydro, nuclear, or even VRE?

• Thanks for the link. I quickly discovered that the Vox report is whole lot more “guns ho” on this idea than the Berkley study on which it is based. The Berkley study isn’t trying to figure out the cost of implementing the huge project they are suggesting, or its feasibility. All it is trying to do is see how time of day peaks and valleys in prices would change, and how this would change the relative value of enhancements such as more efficient street lights and air conditioning in office buildings.

It figures out that peak time of day would move to the evening, something we already know from the California experience.

9. Harry Gibbs says:

“…deterioration in international trade flows is already discernible… there are other factors at play, notably the rising price of oil. Both the euro zone and Japan are major importers of energy.

• Harry Gibbs says:

“Surging oil prices are set to add to inflation, with economists warning that higher energy prices could prolong a squeeze on household incomes.

“Oil leapt above \$80 a barrel last week — its highest level in nearly four years — as Donald Trump’s withdrawal from the Iran nuclear deal signalled the return of sanctions on Tehran, and Venezuela’s economic implosion hit exports.

“The boss of Total joined a growing number of analysts and traders last week in speculating that crude could be headed back above \$100 a barrel….”

https://www.thetimes.co.uk/article/soaring-oil-price-set-to-squeeze-households-9z370shq7

• things do seem to be headed in that ”mid 2020s” direction

• Harry Gibbs says:

It is a popular prognosis in these parts. I foresee GFC 2.0 occurring rather more imminently but what happens after that is anyone’s guess. TheBlondeBeast’s posts vis-à-vis the potential elasticity of the financial system are certainly food for thought, although I’m not convinced money creation can prevent paralysis of the system in the event of another shock.

• money is merely a token of energy exchange

energy cannot be created—therefore real money cannot be created

instead we borrow from our future and call it growth—-which is the same as taking out a bank loan to support a business and calling it profit

when we borrow from our future, we are stealing energy from our grandchildren

• Money is a promise of future (or current) goods and services. Promises can be made, but if they are constantly broken, it is not clear how the situation will work out. Venezuela seems to be seeing one possible outcome.

• theblondbeast says:

Another way to say this is that we ALREADY print money. The question at issue is whether we should let private banks do this or if we should do it another way. We already have a planned economy – the one the banks have planned for us. I’m all for free markets – markets free from monopolies, corporatocracy, and excessive rentier behavior.

Direct government spending (money printing) represents redistribution. At any given time 100% of the money represents 100% of the goods and services – it’s a question of who controls how much of the volume of money which dictates what percentage is spent vs saved/invested. Policies which in effect change the allocation can prop up demand. Deflationary problems are aggregate demand problems, so this works. We certainly can produce more, given the unemployment and underemployment rates, and the low workforce participation.

We can only borrow from the future in terms of real resources because there is no such thing as “future energy.” All the matter/energy which exists already exists now in the present. Our options include (1) disperse energy faster, (2) disperse energy MUCH faster, (3) collapse. Our grandchildren, if they exist, will do the same thing we do – consume what they produce at the time. The question is whether they will be able to produce what they need at the time. This means they need energy resources, materials, capital and education. To the extent we can guarantee more of these we help them out.

There is no escape from our predicament – but a different approach to money creation through financial system changes can definitely keep the system together for longer.

• theblondbeast says:

When the U.S. government wants to pay Lockheed Martin \$100B for missiles, the Treasury instructs the Federal Reserve to press some computer keys and debit the electronic bank account of Lockheed. We tell a great many “stories” about money culturally, such as that the government has to tax in order to spend. But in reality the money given to Lockheed was created ex-nihilo and entitles them to exchange money for goods and services, such as paying their employees.

If the real economy cannot produce the extra goods and services this new money demands, inflation will obtain.

If the real economy can produce the extra goods and services then eventually all this \$100B will wind up (a) in a savings account, or (b) taxed away – requiring new money to be created to allow the game to go on.

The only question is whether banks should create the money as they do now by loaning it into existence or whether the governments should create money more directly.

• theblondbeast says:

@Gail

Thanks for the correction on taxes. I meant to say FICA – social security, medicair, medicaid. The unemployment insurance is the same thing, but a much lesser culprit. All these programs misrepresent reality. They drive lower present consumption in the promise of future consumption. The problem is this is a MORAL agreement and has nothing to do with physical reality – in that nobody is setting aside or planning for future resources to be available. The money doesn’t matter – it can only be a symptom of an underlying resource problem which is being misrepresented.

• FICA is just another tax that adds in with all of the others, as far as I am concerned. So are Medicare taxes.

I know that you think that we can just print more money, with no problem. But I don’t think that that is the way it works in practice. Government spending is backed up by some combination of taxes and sale of government securities. The government cannot simply cut off these funding approaches and substitute more printed money (or pay for goods with checks with no tax or bond backing). The value of the dollar would drop precipitously. There is a difference between countries that have their own sovereign currencies and others, but not as huge a difference as you make it sound like.

Banks can loan money into existence, but doing this still leaves an outstanding debt/bond. This is to a significant extent also true for governments.

• theblondbeast says:

It’s mainly the elasticity of the real economy. If production really can’t be increased without other physical sacrifices (such as we can’t drill more oil without sacrificing building construction because of steel scarcity effecting prices). The financial sector is as elastic as we want it to be, given that we create the money from nothing.

• Harry Gibbs says:

“The financial sector is as elastic as we want it to be, given that we create the money from nothing.”

TBB, but its healthy functioning is also contingent on human intangibles like trust and confidence, which we saw evaporate with startling speed in 2008. Can those be restored in the event of a worse crisis? Will the central banks be sufficiently imaginative and morally decent to pass emergency liquidity on to consumers this time rather than flushing it through privileged banks? What will happen to a nation’s currency and borrowing costs if it is perceived to be remunerating its workers via, say, tax rebates when their actual productivity is stagnant?

This is David Korowicz’s view from his ‘Trade Off’ paper:

“Central banks, the only party capable of responding [to another catastrophic GFC], would be left with the option of recapitalising the world. That is, all critical insolvent countries and banks-because they would effectively been tied to the same platform. For example, the Fed and ECB would have to guarantee every liability across much of the insolvent global financial system. In the end the only backstop a central bank has is the ability to print infinite money, and if it has to go that far, it has failed because it will have destroyed confidence in the money.”

Wouldn’t we see countries go full Weimar/Venezuela in rapid domino-fashion?

• theblondbeast says:

@Harry Gibbs – the best way to restore trust, in my opinion, would be for governments to demonstrate to their citizens that the government will not allow banks to control the economy at the expense of the citizens.

Your questions about nations in general apply differently. It depends a lot on whether the nation is in charge of their currency or not (i.e. eurozone, currencies pegged to the dollar, etc.).

A lot of the hyper inflation issue is about damaged productive capacity and/or foreign exchange problems (printing money to exchange for foreign currency to pay off debts in foreign currency.) All of this to say there are many problems with these solutions – it’s just not accurate to say the problem is government spending. Private debt is a huge problem and there is no way out of it in the current banking system. If our problem is lack of aggregate demand to support prices then we need to get purchasing power to citizens. Some easy ways to do this are to stop taxing them and to spend government money on projects which make the nation more competitive – such as infrastructure.

This is only a problem if for instance spending on infrastructure drives oil prices to the moon because our underlying problem is actually a productivity problem based on energy – i.e. we can’t work any harder or produce any more. I think it’s more accurate to say we have a huge excess capacity and are simply facing lack of aggregate demand.

• it isnt possible to have productivity without energy input

and we must have infrastructure in order to process that energy

the energy contained in a barrel of oil is of no use if it stays in the barrel—we have to burn it, one way or another.—–that way we create employment

governments borrow/spend to keep themselves in office….they have no choice.—we demand it.

if they parachute money to we plebs, then if there’s insufficient energy-rich goods to spend it on, you will have hyper inflation because money itself will be seen to have depleting value—thus pushing inflation higher

• Harry Gibbs says:

Thanks, TBB. Those are interesting insights.

“…the best way to restore trust, in my opinion, would be for governments to demonstrate to their citizens that the government will not allow banks to control the economy at the expense of the citizens.for governments to demonstrate to their citizens that the government will not allow banks to control the economy at the expense of the citizens.”

Call me a jaded, old cynic but I am not overly optimistic that this will happen.

• Fast Eddy says:

Of course it won’t happen…. the El der s exert their power by controlling the financial system… thus the banks including the central banks… are paramount…

Instead of the Federal Reserve – a private company – why not have this role carried out by the government? With responsibility to elected officials?

That is a rhetorical question…

• theblondbeast says:

@ Norman:

“if they parachute money to we plebs, then if there’s insufficient energy-rich goods to spend it on, you will have hyper inflation because money itself will be seen to have depleting value—thus pushing inflation higher”

Agreed on all points you made in your reply – this practice is limited functionally. The question is whether there is sufficient productive capacity or not. If there is, then this scheme will work and we can kick the can down the road. But I hardly think that increasing purchasing power by 1% would cause hyper inflation. I would say the diminishing returns will definitely happen. There is just no need in reality to let private debt be the thing which takes us down.

• if there was sufficient production capacity/demand then we workers would be fully employed producing ”stuff”

as it is, there isn’t. which is why there are people employed in cashpassing (my terminology)

if you use Detroit as an example, there used to be 1.6m people supported by car production

now theres half that and cars are produced by robots, but robots dont buy cars–shoes–food, or anything else

so you have a hollowed out economy

ok ………right now the robots deliver cheapish cars….but only to people on a slightly higher prosperity level

what they dont realise is that the ”hollowed out economy” is beneath their feet—and is certain to collapse

as to private debt—that is part of our ”forward momentum”—ie–i paid off my mortgage years ago, but my grandkids havent….so they expect energy input to run atthe same rate for the next 25 years or more.

it wont, so the debt system will collapse

• theblondbeast says:

@Norman

The demand for labor is different than the demand for goods and services. The parasite cash-passing is a symptom of our policies, which can be changed, to employ people and bolster demand for goods and services produced by all these fancy robots.

Saying that any measure to prop up consumption leads inevitably to hyperinflation ignores the fact that we’ve generally been trying to create inflation for years, and failing, because of how much people are saving and how much is being taxed away.

We don’t have any ultimate solutions to our conundrum – but that doesn’t mean there are no practical steps we can take to extend our system.

For instance, unemployment insurance taxes. In the U.S. we have these taxes deducted from our paychecks which supposedly fund unemployment payments. This only makes sense under a gold standard. This program is already actually pay as you go. There is no need for the government to collect said tax other than to reduce consumption and avoid inflation. Taxes are destroyed upon receipt, yet we act as if physical dollars are being squirreled away in some vault for a rainy day. They are not – it’s silly traditions which serve to moralize class issues into a perfectly ordinary function of government (i.e. “nobody should get free unemployment payments if they didn’t pay in.”) This might be a moral truth – but the fact remains that no dollars were ever saved anywhere. It’s just a social convention.

“We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.” FDR

It’s a scam to moralize class resentment. We can knock this off and let poor people consume more – until there is no more. The question is – can production increase?

• I don’t think that unemployment taxes are taken out of paychecks in the United States. Perhaps they are somewhere else.

Businesses pay a very small unemployment insurance tax (\$42 per employee per year), but the cost is not passed on to employees. https://ows.doleta.gov/unemploy/uitaxtopic.asp

• theblondbeast says:

@Gail – I think we’re actually pretty close. I don’t think there is no risk to fiscal expansion. There is certainly the risk of inflation, social revolt risk, and the risk that if governments were given more freedom to spend they would act more irresponsibly, forex issues, petro dollar issues. I also think the prospects for growth are very low no matter what we do – meaning that the ability to increase production without energy price spikes is very low. I just don’t think the risk is so high that we should voluntarily go into depression for fear of inflation.

We’re the first to have the energy problem, but not to have the debt-destroys-demand problem. This has been a big issue throughout history and the way past societies dealt with it is by some way of clearing the private debt based on government proclamation or intervention. This has often helped postpone problems.

If our case is that without debt, people would consume more, driving up oil prices rapidly, then collapsing demand, then we are really out of wiggle room and are in the midst of an inchoate collapse.

Maybe this is an elaborate way of saying I’m not optimistic, but given the lack of alternatives I think it’s worth a shot.

• When the only debt is to the government or the king, it is possible to clear the private debt by debt jubilees.

When the debt is acting as “assets” to insurance companies, pension plans, and banks, this doesn’t work well at all, as far as I can see.

We need the energy growth to keep the system going. In societies that collapsed, the problem was falling energy per capita, after the population of an area reached the carrying capacity of a piece of land. This is the chart I have shown previously.

As long as world energy consumption was rising rapidly enough, say until the mid-1970s, investment could truly add more leveraging for human labor. Workers were able to afford more cars, homes, and the economy could truly grow. Since that time, the developed part of the world has been struggling with stagflation. China and India seem to be using government spending/debt as job creation programs. Greece, Spain, Italy, and the UK haven’t done that as much, I don’t think. The US has a lot of excess spending already, thanks to its ability to always import far more than it exports. Its jobs program seems to be aimed at the military, healthcare, and education. I suppose the US could spend more, but I think it (along with all of the issues we are seeing now) would send world interest rates up, disrupting the system.

• jupiviv says:

I think the first stage of collapse will begin circa 18-20, i.e the next great recession/depression. The nature of the recovery from that stage will define how soon or how bad the next stage will be. If it goes well, a decade or two more of BAU/quasi-BAU is possible. If not, the mid-2020s will be very interesting.

• i agree

but there are so many wildcards in play

• Harry Gibbs says:

Insufficient investment in oil exploration looks likely to feed through the system as constrained supply within a year or two and prices will want to go up much higher, which is going to make life very interesting. It’s either going to exacerbate an existing financial crisis or precipitate one.

When the crisis does occur, the questions then are: can the central banks keep on top of the panic? Can they act effectively and co-operatively rather than in the national self-interest? And if they do safely negotiate the immediate aftermath, how much can they then do to re-stimulate a global economy that has suffered a larger deleveraging of debt under tighter energy constraints than it did in 2008 and which, I would guess, is even more bereft of trust and confidence? Perhaps they can but I am far from convinced that there can be any kind of recovery.

• in 05 i was convinced collapse would come within 10 years

it didn’t—for me

but of course in 07/8 we had the depression, and in 2010 the arab spring, then the chaos of the mideast got worse because of it—so for millions of people it did come within that decade.

arab leaders behaved like our western leaders will behave come crunch time…….violently

all a matter of standing back and taking the long view

the uk is now a major oil importer instead of exporter—but our elected leaders still think we are earning a living from oil

we’re not

as our energy feeding tube shuts off, the uk will be reduced to poverty.

when?—the 2020s will see our decline steepen, into oblivion by 2040/50 at the latest. Everyone will think they have the answer—few will admit the truth

I have been able to proff myself a little against catastrophe….but not i fear my grandchildren’s catastrophe. Which of course troubles me greatly

• Fast Eddy says:
• Harry Gibbs says:

“…all a matter of standing back and taking the long view.” Indeed. What is a few years in the life-span of a civilisation?

• Tom says:

Jay Hanson who was way ahead of the curve on this thought back in 2007 that collapse would occur in 15 years +/-10. That would put us on track for around 2022.

10. Harry Gibbs says:

“The dollar has also been helped by the fact that traders can’t see many appealing alternatives. A slowdown of economic growth in Japan and Europe have stopped these central banks from tightening monetary policy. This puts America’s economic recovery further ahead, and widens the gap between central banks’ policy stances, which comes together to makes the dollar more attractive as a higher-yielding currency versus major counterparts like the euro or yen.”

https://qz.com/1283594/currencies-like-the-turkish-lira-and-argentinian-peso-are-being-battered-by-the-rising-us-dollar/

• Harry Gibbs says:

” Early on the evening of Friday, May 11, Argentina’s most-powerful corporate executives rushed over to the official residence of President Mauricio Macri on the outskirts of Buenos Aires.

“The peso had just plummeted 6 percent against the dollar for a second straight week and the small group — which included a billionaire, a real-estate mogul and the local head of Fiat SpA — had been summoned to discuss the steps being taken to combat what had quickly turned into Argentina’s latest crisis…

“Within minutes of their arrival, a heated exchange broke out that left a frosty tension between the two sides which has only deepened in the days since. The problems began, according to three people present that evening, when some of the CEOs spoke up to express concern over the central bank’s decision to boost benchmark rates to 40 percent.

“They were immediately silenced by two Macri aides — Deputy Cabinet Minister Gustavo Lopetegui and Industry Minister Francisco Cabrera. Don’t worry about rates, the two officials insisted. Focus instead, they told their guests, on expressing support for the government at a difficult time; that’s why the meeting had been called. A government spokesman declined to comment on specifics of the conversation.

“The message had been sent: Toe the line or keep quiet. It would be delivered again and again in subsequent days and understood clearly by executives, big and small, all across the country. Almost none of the nearly two dozen companies and banks contacted by Bloomberg News was willing to comment on the record about how their business was being affected by the financial crisis.”

• Harry Gibbs says:

“Turkey has already entered an economic crisis and can expect a “massive” fall in the value of the Turkish lira by the period after the June 24 elections “at the latest,” Turkish daily Cumhuriyet quoted economist Russell Napier as saying. After years of steady decline, the lira’s fall has accelerated sharply in recent weeks, repeatedly hitting record lows against the dollar and leading losses in emerging markets on Monday.”

• Harry Gibbs says:

“Any rise in interest rates could spillover into mortgage payments, taking the wind out of the property market, analysts said.”

• Even a rise in the short term interest rate (brought on by the US raising its short term rates) can work its way through to the mortgage market, because banks depend on the difference between (a) the rate they charge for mortgage and other loans and (b) the rate they pay to get deposits, for a big piece of their earnings.

Interest rate increases seem to spread around the world, whether intended or not.

• Harry Gibbs says:

“The weakest aspect of a housing bubble collapse is the currency board system and the short selling of Hong Kong stocks and the currency. This could push up the Hong Kong local interest rates to an unreasonably high level which in turn would result in a hard landing for the economy and create massive unemployment.

“In view of the angry attitude of local residents towards the local and central governments, there is the possibility of protests on the streets which could create panic.”

https://seekingalpha.com/article/4176135-hong-kong-housing-bubble-foreign-exchange-rate

• jupiviv says:

Dollar preference (cf. Steve from Virginia) in action.

• I expect that part of the favorable result of the US, relative to the rest of the world, is the result of the shale oil and gas that it has been producing. A whole lot of countries are stuck trying to import more and more energy products. They are doing badly.