Why we get bad diagnoses for the world’s energy-economy problems

The world economy seems to be seriously ill. The problem is not overly high oil prices, but that does not rule out energy as being a major underlying problem.

Two of the symptoms of the economy’s malaise are slow wage growth and increasing wage disparity. Tariffs are being used as solutions to these issues. Radical leaders are increasingly being elected. The Bank for International Settlements and the International Monetary Fund have raised concerns about the world’s aggregate debt levels. The IMF has even suggested that a second Great Depression might be ahead if major banks should fail in the manner that Lehman Brothers did in 2008.

Figure 1. Ratio of Core Debt Growth (non-financial debt including governmental debt) to GDP, based on data of the Bank of International Settlements.

If the economy were a human being, we would send it to a physician for a diagnosis regarding what is wrong. What really is needed is a physician who has a wide overview, and thus can understand the many symptoms. Hopefully, the physician can also provide a reasonable prognosis of what lies ahead.

Individual specialists studying the world’s economic and energy problems tend to look at these problems from narrow points of view. Some examples include:

  •  Curve fitting and cycle analysis using economic data by country since World War II, as is often performed by economists
  • Analysis of oil supply based on technically recoverable reserves or resources
  • Analysis of fresh water supply problems
  • Analysis of population problems, including rising population relative to arable land, and rising retiree population relative to working population
  • Analysis of ocean problems, including rising acidity and depleting fish stocks
  • Analysis of the expected impact of CO2 production from fossil fuels on climate
  • Analysis of rising debt levels

In fact, we are facing a combined problem, but most analysts/economists are looking at only their own piece of the problem. They assume that the other aspects have little or no influence on their particular result. What we really need is an analysis of the overall economic malady from a broader perspective.

In some ways, the situation is analogous to having no physician with a sufficient overview of where the world economy is headed. Instead, we have a number of specialists (perhaps analogous to a psychiatrist, a urologist, a podiatrist, and a dermatologist), none of whom really understands the underlying problem the patient is facing.

One point of confusion regarding whether today’s oil prices should be of concern is the fact that the maximum affordable oil price seems to decline over time. This happens because workers around the world increasingly cannot afford to buy the goods and services that the world economy produces. Inadequate wage growth within countries, growing globalization and rising interest rates all contribute to this growing affordability problem. To make matters confusing, this growing affordability problem corresponds to “falling demand” in the way economists frame the issues we are facing.

If we believe the technical analysis shown in Figure 2, the maximum affordable West Texas Intermediate oil price has declined from $147 per barrel in July 2008 to $76 per barrel recently. The current price is about $62 per barrel. The chart suggests that downward price resistance might be reached at $55 per barrel, assuming no major event occurs to change the current trend line. Any upward price bounce would appear to leave the price still much lower than oil producers need in order to reinvest sufficiently to allow future oil production to be maintained at current levels.

Figure 2. Down sloping diagonal line at the top of chart gives an estimate of the trend in maximum affordable West Texas Intermediate (WTI) oil prices. The downward trend line starts in July 2008, when oil prices hit a maximum. This high point occurred when the US real estate debt bubble started unwinding. Later maximum points correspond to points when oil prices stopped rising and crude oil reservoirs started refilling. Chart prepared by Amit Noam Tal.

Thus, our concern about adequate future oil supplies should perhaps be focused on keeping oil prices high enough. It takes a growing debt bubble to keep oil demand high; perhaps our concern should be keeping this debt bubble high enough to allow extraction of commodities of all kinds, including oil. Figure 1 seems to show a recent downward trend in Debt to GDP ratios for the Eurozone, the United States and China. This may be part of today’s low price problem for commodities of all types.

Needless to say, climate analyses do not consider the severity of our energy problems, nor do they consider the extent to which there is a connection between energy supply and the ability of the economy to operate as usual. If the real issue is a near-term financial crash that will radically affect future fossil fuel consumption, the climate analysis will certainly miss this event.

The Real Nature of the Limits to Growth Problem

To truly understand the headwinds that the economy is facing, we should be looking at the combined effect of all of the limits that the individual specialists have been studying. We might also include other issues not listed. The 1972 book The Limits to Growth presents an early computer model of how at least some of the limits of a finite world might be expected to play out.

Figure 3. Base scenario from 1972 Limits to Growth, printed using today’s graphics by Charles Hall and John Day in “Revisiting Limits to Growth After Peak Oil” http://www.esf.edu/efb/hall/2009-05Hall0327.pdf

This early approach reflected an engineering view of the problem, considering expected diminishing returns with respect to resources of all types. Other considerations included likely resource needs based on prior economic and population growth trends and efficiency gains. The Base Scenario shown in the 1972 book (Figure 3) showed collapse taking place about now–in other words, in the early part of the 21st century.

In the time since the 1972 Limits to Growth analysis was prepared, there has been a major discovery relating the importance of energy to the economy. Ilya Prigogine tackled the problem of the physics of thermodynamically dynamic open systems, earning a Nobel Prize for his efforts in 1977. When energy flows are available, many structures, called dissipative structures, can grow and change over time. Examples include plants and animals, hurricanes, stars (they expand in size, then collapse at the end of their lives), ecosystems, and economies. These structures are utterly dependent on energy flows. The economy needs energy in almost the same way that humans need food. Without sufficient energy flows, the world economy will collapse.

It is because of the laws of physics and energy flows that markets are able to set price levels. Indirectly, physics sets the maximum affordable price for energy products based upon the total quantity of goods and services individual workers can afford. These maximum affordable prices may be invisible, but they are very real. Economists may talk about “demand” for energy products, but the real issue is affordability: “Will the laws of physics allow prices to stay high enough to provide the commodities the world economy needs?”

It is because of the laws of physics that debt can play a major role in the economy. Debt can provide time-shifting services if an economy does not have sufficient energy supplies to permit the equivalent of bartering of finished goods and services for new capital goods. Debt can allow future goods and services (manufactured with energy products) to serve as payment for capital goods and other goods purchased using debt. Thus, debt acts as a promise of future energy supplies. These future energy supplies may not, in fact, actually be available at prices that consumers can afford. This is why debt bubbles so often collapse and have a devastating impact on economies.

In theory, the new physics discoveries might also be added to the Limits to Growth model. If this were done, I would expect the downslopes in Figure 3 to be much steeper. Also, the date when the population decline starts would likely move forward, relative to other declines. The actual dates of the declines would of course be expected to change as well, because of updated knowledge regarding resources, population, and other factors.

Including the physics aspect of the economy would lead to many periods when sharp changes take place. When these sharp changes take place, there might be wars, collapsing governments, and epidemics, all causing large numbers of deaths. Debt bubbles might pop, causing deflation and widespread banking problems. These types of events are similar to those that economies have experienced in the past. There is no reason to expect that today’s world economy will have unusual lasting power.

Of course, modeling one piece of the economy at a time, as described at the beginning of this post, leaves out such troublesome implications. Economists tell us all we need to worry about is price fluctuations as the economy substitutes one product for another. If a person has blinders on, perhaps this a good description of the world we live in. Otherwise, the model leaves a lot to be desired.

Implication of the Laws of Physics Being in Charge of How the Economy Operates

Politicians would very much like us to believe that they are in charge. They would like us to believe that adding more technology can solve all of our problems. They would like us to believe that citizens can make a significant difference by voluntarily cutting back on their own energy consumption. They would also like us to believe that countries can cut back on their debt levels without the whole Ponzi Scheme unraveling.

Anyone who has watched bread rise in a bowl can see the implications of growth within a finite structure. It doesn’t take very long for the volume growth of bread dough to exceed the space available. Even if the bread maker pushes the dough back down again, the effect is only temporary. The bread dough quickly rises again to overfill the bowl it is in.

One possible implication of the 2008 financial (and oil price) crash is that we are very close to limits, right now. Regulators can try to fine tune how the economy operates by raising and lowering interest rates (sometimes using Quantitative Easing (QE) in the process), but they are, in some sense, playing with fire. Figure 4 shows the dramatic impact that popping the real estate debt bubble seems to have had in 2008. It also shows the impact that adding and removing QE has had.

Figure 4. Figure showing collapsing debt bubble at the time US oil prices peaked. Figure also shows the use of Quantitative Easing (QE) to stimulate the economy, and thus bring oil prices back up again. Ending US QE seems to have had the reverse effect.

By raising interest rates, regulators could easily send part, or all, of the world’s economy to a financial crash that is worse than 2008’s. Or the economy could again reach limits, by itself, with just a little economic growth. In some sense, the world economy is very close to filling the bread bowl, as it was before the 2008 crash pushed it back down.

The World Economy Is Reaching Limits in Many Areas Simultaneously

Many people believe that we are reaching limits in at most a few areas of the economy, such as “running out of oil.” The evidence suggests that because of the networked nature of the economy, we are really reaching limits in many places, simultaneously. The following represent some problem areas:

(1) Too Low a Return on Labor for Workers Whose Jobs Are Easily Exportable. With globalization, workers are indirectly competing with workers around the world regarding who can produce goods and services most cheaply. They are also competing with computers and robots that can easily replicate their functions. The net impact is a world where a large share of the citizens find themselves living at a level not much above the subsistence level. In more developed countries, young people may live with their parents longer and may delay having children almost indefinitely, because wages are not keeping up with living costs. Many studies have shown rising wage disparity. In some ways, the wage disparity now seems to be as bad as in the 1930s.

Figure 5. U. S. Income Shares of Top 1% and Top 0.1%, Wikipedia exhibit by Piketty and Saez.

(2) Interest Rates. Interest rates are the lever that economists like to adjust upward or downward to try to stimulate the economy or push the economy downward. Short term interest rates, up until about the end of 2015, were at the level they were at during the Depression of the 1930s.

Figure 6. Monthly average 3-month term treasury bill rates in chart prepared by FRED. Amounts shown through October 2018. Grey bars indicate recessions.

Raising interest rates is like adding a little more dough to the already over-full bread bowl. With these higher interest rates, borrowers need to pay more for monthly payments, making the strain on their finances even worse than it was previously. Figure 6 shows that raising interest rates very often creates a recession. In fact, the Great Recession of 2008-2009 seems to be the result of an increase in short term interest rates. This time we are being told that the increase will be gentle, but if the bread bowl is already overly full (in the sense that affordability of the output of the economy is already way too low, for many workers), what difference does “gentle” make?

(3) Return on Capital Investment/Added Debt. Falling long-term interest rates between 1981 and 2016 seem to be an indirect reflection of falling long-term return on capital investment. If capital returns had been higher, there would be more demand for debt, forcing interest rates up to levels closer to where they had been when the economy was growing more quickly.

Figure 7. Monthly average 10-year US Treasury interest rates in chart prepared by FRED. Amounts shown through October 2018. Grey bars indicate recessions.

Another way we can look at how productive the addition of debt has been is by comparing the debt increase each year with the GDP increase (including inflation) each year. We use current year GDP as the denominator in both calculations. Figure 8 shows the indications for what the Bank for International Settlements calls “Core Debt” (that is, Total Non-Financial Debt, Including Government Debt).

Figure 8. Dollar Increase in US Core Debt as % of GDP, shown beside GDP dollar increase, as percentage of ending GDP. Amounts based on FRED data.

Comparing the red and blue lines on Figure 8, GDP rose fairly reliably in the pre-1981 period, as the amount of core debt rose. The core debt increases tended to be higher than the GDP increases, but not a great deal higher. Thus, the US ratios on Figure 1 could be close to 1.0 in early years.

Once interest rates started falling after 1981 (see Figures 6 and 7), core debt growth and GDP growth greatly diverged. I expect that quite a bit of this change was related to asset price inflation as interest rates fell. With lower interest rates, assets of all types started becoming more affordable. Thus, a greater number of buyers could be expected, driving up prices of assets of all kinds, including homes, stores, and factories. Owners of these assets could “take the equity out” as prices rose and could use the equity to purchase other goods and services. In theory, these activities might somewhat stimulate the economy. Figure 8 suggests that the benefits of these activities with respect to the “goods and services” portion of the economy (red line) were slight at best, however.

Figure 9. Dollar Increase in US Financial Debt as % of GDP, shown beside GDP dollar increase % of ending GDP. Amounts based on FRED data.

Figure 9 shows Financial Debt amounts corresponding to the Core Debt amounts shown in Figure 8. At first glance, it appears that Financial Debt (blue line ) has provided no benefit whatsoever for the Goods and Services part of the economy (red line). But clearly the bankers who created these financial products benefitted from the income they received from them. So did the low-income home buyers who bought homes that they could not really afford in the early 2000s. Home building was stimulated, and inflation in home prices was stimulated. Banks benefitted by being able to transfer their problem home loans to unsuspecting buyers. Whether this whole arrangement had any net benefit to the economy, other than to create pseudo-solutions for people who could not really afford the homes they were purchasing, is doubtful. But when the economy is near limits, strange solutions to stimulating the economy are attempted.

(4) Commodity Prices. If we have a supply problem with one kind of commodity, we likely have a supply problem with many kinds of commodities at the same time. The reason why this happens is because the prices of many types of commodities tend to move together, in response to general market conditions. This is why the US government talks about inflation in oil and food prices as a separate category of Consumer Price Inflation.

If prices for commodities are generally low, as they have been since 2014, this means that commodity investors have received low rates of return for several years. With low rates of return, producers of many commodities have cut back on reinvestment. With inadequate reinvestment, supply crunches are likely to occur across a broad spectrum of commodities simultaneously. A recent Wall Street Journal article says, Supply Crunch Looms in Commodities Markets. The article mentions copper, zinc, aluminum and nickel. Other articles talk about oil in a similar fashion.

The question becomes, “Can consumers bid up the prices of all of these minerals sufficiently, to encourage enough reinvestment to solve the world’s commodity supply problem?” Food prices would likely need to be bid up as well, because oil is used heavily in the production and transport of food.

It was possible to bid up commodity prices in the 1970s, because the economies of the United States, Europe, Japan, and the Soviet Union were all growing rapidly. Also, women were joining the labor force in large numbers. It was possible to bid up commodity prices in the 2002 to 2008 era, because China and other Asian nations were rapidly ramping up their demand for goods and services of all kinds.

Figure 10. China energy production by fuel plus its total energy consumption, based on BP Statistical Review of World Energy 2018 data. The difference between the production figures shown and the black line consumption total is imports.

Now we are facing a much different situation. China is in much worse shape than most people recognize because its coal supply seems to have passed peak production. This has happened because the cheap-to-extract coal is mostly depleted, making it unprofitable to increase coal production without significantly higher prices. Imported coal and natural gas are expensive options. China also has a serious debt problem.

Because of China’s problems, the country will necessarily need to cut back on manufacturing, road building and home building in the years ahead. (This would happen, with or without Trump’s tariffs!) For some minerals, China currently represents over 50% of the world’s demand. China is the largest oil importer in the world. It is doubtful that China can make major cutbacks in its use of commodities without lowering prices for many commodities worldwide.

Persistence of Outdated Models

We are dealing with a situation where a large number of people suspect, at least vaguely, that the world economy is like bread dough about to outgrow its bowl, but this is not an issue anyone really wants to quantify. Everyone wants solutions; they don’t want a better delineation of the problem. Repeated publication of climate change forecasts is, in a sense, a denial of the possibility that we may be facing resource limits that are close at hand. Such publication is saying, in effect, that the closest limit that citizens need to worry about is the climate limit.

Also, the reliance of researchers on the past work by others in the same field tends to reinforce what are essentially incorrect models. Cross-pollination across fields is difficult, given the technical nature of today’s academic research. Furthermore, it becomes increasingly difficult to properly model a situation that is very complex and depends upon non-linear interactions.

Putting All of These Issues Together

The focuses of today’s narrow research can give a surprisingly distorted overview of where the economy is. A few areas in particular stand out:

(a) The choice of the word “Demand” instead of “Affordable Quantity” makes it sound like the buyer has more control over purchases than he really does. Growing demand seems to depend on continually increasing debt. This is the reason for the debt bubble problem.

(b) Framing the energy problem as “running out of oil” makes it sound like searching for substitutes will be a fruitful area for solution. Because of the affordability issue, this search is futile unless the substitutes are truly cheaper, when all costs are considered. Declining availability of many minerals because of persistently low commodity prices could be an issue as well.

(c) If limits are being reached in many areas simultaneously, incentives for countries to co-operate seem likely to go downhill quickly. Bullies who claim to be able to obtain a bigger share of the shrinking total supply will tend to be elected.

(d) The physics tie between energy and the economy makes major energy consumption cutbacks virtually impossible, without risking economic collapse.

(e) Adding technology isn’t really a solution to the debt problem, because it tends to make the affordability problem worse. The problem is that while adding technology seems to lead to more employment for a few elite workers, it tends to displace lower-wage workers at the same time. The spending of lower-wage workers is really needed if adequate demand for commodities is to be maintained. Additionally, the ownership of the technology-related capital goods tends to be concentrated among the elite; this further shifts wealth from the non-elite to the elite.

The long term prognosis for the world economy seems pretty grim, when all of these issues are put together. Defaulting debt and a resulting collapse in asset prices of all kinds is of particular concern. The default of subprime housing debt was an issue in the US at the time of the Great Recession; the next round of defaults is likely to start elsewhere. Debt defaults could start fairly soon, perhaps in the next 6 to 12 months. The more hostile political situation we have been seeing recently seems to be evidence that limits are close at hand.

 

 

 

 

 

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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2,136 Responses to Why we get bad diagnoses for the world’s energy-economy problems

  1. Harry McGibbs says:

    “Moves by Chinese companies to guarantee each others’ debt have left the world’s third-largest bond market prone to contagion risks — making it all the tougher for officials to follow through on initiatives to sustain credit flows…

    “…now that China is going through a record run of debt defaults, the links pose the risk of a daisy chain of distress. Price moves are reflecting that.”

    https://www.hellenicshippingnews.com/chinas-chain-of-debt-guarantees-looms-as-systemic-danger/

    • Harry McGibbs says:

      “South Korea’s manufacturing capacity utilization was 74.3% in the third quarter of this year, the lowest since the Asian Financial Crisis of 1998. In addition, its capital expenditure fell 19% from a year earlier in September, which is close to the decrement recorded during the 2008 global financial crisis. Besides, the number of unemployed persons topped one million for nine months in a row until that month, which was the largest since 1999.”

      http://www.businesskorea.co.kr/news/articleView.html?idxno=26704

      • Harry McGibbs says:

        “The scandal erupting at Nissan, following the arrest of its chairman Carlos Ghosn over allegations of financial misconduct, is far from the first crisis to hit Japan Inc. The allegations against Mr Ghosn – the boss of the Renault-Nissan-Mitsubishi strategic alliance – could have a seismic effect on the global car industry. But Japan has, in recent years, dealt with a number of high-profile corporate scandals.”

        As an aside, look at how Ghosn’s character is writ large on his face – the very embodiment of malevolent greed!

        https://www.bbc.co.uk/news/business-46267868

        • Somehow, this kind of “crime” doesn’t seem all that bad/unexpected. I know that the President of Kennesaw State University was let go (or decided to retire a bit earlier than originally expected) because he had obtained a special deal with the Office of Advancement (that handles financial gifts from Alumni) to collect some of his supposed post-retirement benefits while he was still working. And we know about any number of “purchasing managers” who were let go, because they were getting kick backs from some of the companies that they chose to do business with.

          • Fast Eddy says:

            Apparently Carlos 10 million dollar per annum income (lower end of the scale for auto CEOs) was just not enough…..

            Poor Carlos had to raid the company coffers… you know … to make ends meet….

            Let’s shed a collective tear for Carlos boo hooo!!!!

  2. Fast Eddy says:

    Ice Age Update

    Temps are now revised DOWN to 0 tonight https://www.metservice.com/towns-cities/queenstown

    Those f789ing frost fighting windmills in the vineyards will be firing up at 2am driving me f789ing bonkers yet again ….

    My fruit trees are not going to like 0.

    • Ed says:

      Oddly symmetric here the temps for Thanksgiving Day (Thursday) high 23, low 10 (-12 to those drifting from her majesties ruler), this is far below seasonal.

      • Fast Eddy says:

        I wonder what it will take for the DelusiSTANIS to acknowledge that they have been made fo.ols of….

        Don’t feel badly … I was a fo.ol too … for many years….

  3. Harry McGibbs says:

    “A growing homogeneity in business models and strategies among U.S. large banks may worsen overall risk in the financial system, warned Kevin Stiroh, the head of supervision at New York Federal Reserve… ” If all firms are effectively the same, they could become ‘systemic as a herd’ and susceptible to the same shocks in a way that leaves the aggregate provision of financial services more volatile…””

    https://www.reuters.com/article/bc-finreg-banking-increasing-systemic-ri/increasing-similarity-in-banking-raises-concern-for-systemic-risk-u-s-fed-official-warns-idUSKCN1NO1LH

    • Harry McGibbs says:

      ““Buying the dip has not worked in 2018 for the first time since 2002,” Morgan Stanley equity strategist Michael Wilson said in a note to clients Monday. “Such market behavior is rare and in the past has coincided with official bear markets (20 percent declines), recessions, or both.”

      “The strategy worked even during 2008 and 2009, the height of the Financial Crisis, Morgan Stanley said. But a key factor makes this cycle different, according to Wilson: Quantitative easing is turning to quantitative tightening. The Fed is now reducing its balance sheet while the European Central Banks and Bank of Japan taper their own quantitative easing programs.”

      https://www.cnbc.com/2018/11/19/this-chart-is-proof-buy-the-dip-is-dead.html

    • No kidding! We know that the people who work on the models used by different insurance companies/banks migrate from company to company. There is a lot of cross-fertilization regarding what is in the models. Also, there is a lot published about what seems to be important. A big increase in stories about things getting bad all over will eventually cycle into models that indicate a “sell” order for practically everything. Such a cycle can’t end well.

  4. Yoshua says:

    The flat earth society proudly announces that they now have members all around the globe.

  5. Baby Doomered says:

    Alberta MLA says marijuana legalization could lead to communist revolution

    https://globalnews.ca/news/3889241/alberta-mla-says-marijuana-legalization-could-lead-to-communist-revolution/

    • jupiviv says:

      No one really wants to bust his asz paying for McMansions, shoes for waifu and edgily nihilistic self-esteem. Smoking weed makes that fact more obvious.

    • Yoshua says:

      Come on! Dope heads are too lazy to start a revolution!

  6. jupiviv says:

    Looks like the good folks who are 100% long Bitcon will have to make do with lumps of coal this Christmas.

    • Duncan Idaho says:

      BTC-USD
      4,694.79
      -114.83(-2.39%)

      • Fast Eddy says:

        “If you significantly slice through a level like US$6,000, people don’t have a lot of protection below it – and then you see a lot of stop-loss selling which exacerbates the move,” said Marc Ostwald, global strategist at ADM Investor Services International in London. “It doesn’t help that we have a genuinely risk-averse environment, with equities and credit under pressure.”

        https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12163628

        It also does not help that CCs are a massive ponze…. for the life of me… I don’t understand how this does not keep cratering right down to zero….

        If I were holding any of this stinky rubbish … and was sitting on a decent profit …. I’d be dumping it as fast as possible right now….

        The writing is on the wall….

  7. Yoshua says:

    If corporate BBB rated bonds turn into junk and and lose value while the yields go up, then the corporates can no longer borrow money to buy back their own shares to keep the stock market bubble going…and then it’s good night?

    https://pbs.twimg.com/media/DsaN4IMXQAEt5pX?format=jpg

    • I think that part of the issue is that companies with good bond ratings depend on a whole chain of suppliers. Those supplier often have poor bond ratings. If they lose their supplier chain, the companies with good ratings are in just as poor shape as those with junk ratings.

      • Dennis L. says:

        Or, they purchase the key supplier for penny’s on the dollar and increase their profit margin consolidating their industry. Modern information technology seems to facilitate this growth and AI makes management much easier as global maximums become easier to find. “Them that gots get.”

        Dennis L.

  8. MG says:

    ‘Forget real estate. You can’t afford it anyway’: Monopoly for millennials triggers outrage

    “Millennials, generation snowflake, or the ‘no house, no money, just avocado’ young people who brought you hipsters, are now being derided by toy giant Hasbro with its new edition of every capitalist’s favorite board game Monopoly.”

    https://www.rt.com/news/444097-millennial-monopoly-triggers-outrage/

    • Dennis L. says:

      Hmm:
      The aging Eskimo, the iceberg and the polar bear come to mind.
      Millennials will be the majority of voters, they ccan hange the laws, make student debt dischargeable by bankruptcy, which means the owners of that debt(many of whom are the “mature” generation”) lose their wealth, make more resources available for the young and life is as it always has been. The major source of negative cash flow for governments is not welfare, but pensions, e.g. SS and medicare. If it is not paid, things change, laws can be changed, the budget balances, and the metaphorical polar bear begins the cycle anew. Or as Gail likes to say, “The per capita changes.” The trick is to be in the right per capita.

      Dennis L.

      • MG says:

        I can agree with you that a different generation of pensioners is comming: the ever poorer pensioners. Finally, without the profits, there are no pensioners.

      • Without pension dollars, demand for goods and services drops considerably. A major cutback in pensions would likely send the economy into recession. It would be like a big tax hike, but affecting a relatively poor group.

    • Chrome Mags says:

      One twitter response was, “Every time you pass GO you pay rent on your properties.” LOL!

      • MG says:

        The properties owned by the pensioners and rented by the millenials constitute another tax for the millenials.

  9. Sven Røgeberg says:

    Ugo Bardi about war and piece:
    «Power laws are typical “emergent phenomena” that take place in complex systems. They are the result of the dissipation of accumulated energy that occurs not gradually but in bumps. The quintessential system that behaves in this way is the “sandpile” that Per Bak used as a representation of the condition that he called “self-organized criticality.” Fascinating in a mathematical model, these bumps can be deadly in the real world. Earthquakes, landslides, avalanches and more phenomena involving natural disasters tend to occur following power laws.

    These results confirm Tolstoy’s intuition: wars are not the result of ideologies, religions, mad rulers, or the like. They emerge out of a social network as a result of the way the system is connected. That doesn’t mean there are no causes for wars: they are the result of accumulated capital that needs to be dissipated in some way. Wherever there is an unbalance in the accumulation of capital, the excess will spill from the more endowed side to the less endowed one. In a sense, war is the offspring of capitalism, but capitalism is just another emergent phenomenon of complex societies. In short, wars are not caused by a lack of resources, they are caused by an excess of resources.»
    https://cassandralegacy.blogspot.com/2018/11/should-we-prepare-for-new-world-war.html?m=1

    • I am not sure about, ” In short, wars are not caused by a lack of resources, they are caused by an excess of resources.”

      There is a difference between:
      (1) Resources now, which can be dissipated
      (2) Future resources, which are perceived to be a problem.

      When resources are high cost to extract, but prices cannot be raise high enough to cover these high costs, wages for workers tend to fall too low. (This is what happened before WWI and WWII.) Starting a war has multiple impacts:

      (1) It raises wages of non-elite workers, because debt is normally used to finance the cost of war. This debt makes it back into the economy as wages, to a significant extent. Some of the debt may be used directly to buy energy products.

      (2) The higher wage of the non-elite workers with this debt helps raise energy prices, keeping production going during the war at least.

      (3) Some of the new debt may also directly be used for buying energy products, thus helping to raise energy prices, and help keep the system going.

      (4) Longer-term, there is a chance that some benefits may be won, so that the country is better off.

      I don’t think that Ugo understands the role debt plays. Governments typically borrow money for wars. This is what allows the bump.

  10. Chrome Mags says:

    https://www.scmp.com/economy/china-economy/article/2174195/us-china-trade-war-raises-risk-financial-market-flash-crash

    “The effects from the US-China trade war and mounting costs of doing business for companies are fuelling investor fears of the likelihood of a “flash crash” in financial markets, analysts have warned.
    The deteriorating climate, they said, would force cash-strapped firms to offload assets quickly and reduce debt to buffer profit declines next year that could be brought about by the trade war. But these risks would be magnified by the rise of artificial intelligence-driven electronic trading as automation speeds up financial transactions, allowing them to be conducted across multiple markets at the same time. Any macroeconomic data shock that forces abrupt forecast downgrades for economic growth and corporate earnings could lead to rapid, violent market moves or “flash crashes,” analysts said.”

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