Why stimulus can’t fix our energy problems

Economists tell us that within the economy there is a lot of substitutability, and they are correct. However, there are a couple of not-so-minor details that they overlook:

  • There is no substitute for energy. It is possible to harness energy from another source, or to make a particular object run more efficiently, but the laws of physics prevent us from substituting something else for energy. Energy is required whenever physical changes are made, such as when an object is moved, or a material is heated, or electricity is produced.
  • Supplemental energy leverages human energy. The reason why the human population is as high as it is today is because pre-humans long ago started learning how to leverage their human energy (available from digesting food) with energy from other sources. Energy from burning biomass was first used over one million years ago. Other types of energy, such as harnessing the energy of animals and capturing wind energy with sails of boats, began to be used later. If we cut back on our total energy consumption in any material way, humans will lose their advantage over other species. Population will likely plummet because of epidemics and fighting over scarce resources.

Many people appear to believe that stimulus programs by governments and central banks can substitute for growth in energy consumption. Others are convinced that efficiency gains can substitute for growing energy consumption. My analysis indicates that workarounds, in the aggregate, don’t keep energy prices high enough for energy producers. Oil prices are at risk, but so are coal and natural gas prices. We end up with a different energy problem than most have expected: energy prices that remain too low for producers. Such a problem can have severe consequences.

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

[1] Despite all of the progress being made in reducing birth rates around the globe, the world’s population continues to grow, year after year.

Figure 1. 2019 World Population Estimates of the United Nations. Source: https://population.un.org/wpp/Download/Standard/Population/

Advanced economies in particular have been reducing birth rates for many years. But despite these lower birth rates, world population continues to rise because of the offsetting impact of increasing life expectancy. The UN estimates that in 2018, world population grew by 1.1%.

[2] This growing world population leads to a growing use of natural resources of every kind.

There are three reasons we might expect growing use of material resources:

(a) The growing world population in Figure 1 needs food, clothing, homes, schools, roads and other goods and services. All of these needs lead to the use of more resources of many different types.

(b) The world economy needs to work around the problems of an increasingly resource-constrained world. Deeper wells and more desalination are required to handle the water needs of a rising population. More intensive agriculture (with more irrigation, fertilization, and pest control) is needed to harvest more food from essentially the same number of arable acres. Metal ores are increasingly depleted, requiring more soil to be moved to extract the ore needed to maintain the use of metals and other minerals. All of these workarounds to accommodate a higher population relative to base resources are likely to add to the economy’s material resource requirements.

(c) Energy products themselves are also subject to limits. Greater energy use is required to extract, process, and transport energy products, leading to higher costs and lower net available quantities.

Somewhat offsetting these rising resource requirements is the inventiveness of humans and the resulting gradual improvements in technology over time.

What does actual resource use look like? UN data summarized by MaterialFlows.net shows that extraction of world material resources does indeed increase most years.

Figure 2. World total extraction of physical materials used by the world economy, calculated using weight in metric tons. Chart is by MaterialFlows.net. Amounts shown are based on the Global Material Flows Database of the UN International Resource Panel. Non-metallic minerals include many types of materials including sand, gravel and stone, as well as minerals such as salt, gypsum and lithium.

[3] The years during which the quantities of material resources cease to grow correspond almost precisely to recessionary years.

If we examine Figure 2, we see flat periods or periods of actual decline at the following points: 1974-75, 1980-1982, 1991, and 2008-2009. These points match up almost exactly with US recessionary periods since 1970:

Figure 3. Dates of US recessions since 1970, as graphed by the Federal Reserve of St. Louis.

The one recessionary period that is missed by the Figure 2 flat periods is the brief recession that occurred about 2001.

[4] World energy consumption (Figure 4) follows a very similar pattern to world resource extraction (Figure 2).

Figure 4. World Energy Consumption by fuel through 2018, based on 2019 BP Statistical Review of World Energy. Quantities are measured in energy equivalence. “Other Renew” includes a number of kinds of renewables, including wind, solar, geothermal, and sawdust burned to provide electricity. Biofuels such as ethanol are included in “Oil.”

Note that the flat periods are almost identical to the flat periods in the extraction of material resources in Figure 2. This is what we would expect, if it takes material resources to make goods and services, and the laws of physics require that energy consumption be used to enable the physical transformations required for these goods and services.

[5] The world economy seems to need an annual growth in world energy consumption of at least 2% per year, to stay away from recession.

There are really two parts to projecting how much energy consumption is needed:

  1. How much growth in energy consumption is required to keep up with growing population?
  2. How much growth in energy consumption is required to keep up with the other needs of a growing economy?

Regarding the first item, if the population growth rate continues at a rate similar to the recent past (or slightly lower), about 1% growth in energy consumption is needed to match population growth.

To estimate how much growth in energy supply is needed to keep up with the other needs of a growing economy, we can look at per capita historical relationships:

Figure 5. Three-year average growth rates of energy consumption and GDP. Energy consumption growth per capita uses amounts provided in BP 2019 Statistical Review of World Energy. World per capita GDP amounts are from the World Bank, using GDP on a 2010 US$ basis.

The average world per capita energy consumption growth rate in non-recessionary periods varies as follows:

  • All years: 1.5% per year
  • 1970 to present: 1.3% per year
  • 1983 to present: 1.0% per year

Let’s take 1.0% per year as the minimum growth in energy consumption per capita required to keep the economy functioning normally.

If we add this 1% to the 1% per year expected to support continued population growth, the total growth in energy consumption required to keep the economy growing normally is about 2% per year.

Actual reported GDP growth would be expected to be higher than 2%. This occurs because the red line (GDP) is higher than the blue line (energy consumption) on Figure 5. We might estimate the difference to be about 1%. Adding this 1% to the 2% above, total reported world GDP would be expected to be about 3% in a non-recessionary environment.

There are several reasons why reported GDP might be higher than energy consumption growth in Figure 5:

  • A shift to more of a service economy, using less energy in proportion to GDP growth
  • Efficiency gains, based on technological changes
  • Possible intentional overstatement of reported GDP amounts by some countries to help their countries qualify for loans or to otherwise enhance their status
  • Intentional or unintentional understatement of inflation rates by reporting countries

[6] In the years subsequent to 2011, growth in world energy consumption has fallen behind the 2% per year growth rate required to avoid recession.

Figure 7 shows the extent to which energy consumption growth has fallen behind a target growth rate of 2% since 2011.

Figure 6. Indicated amounts to provide 2% annual growth in energy consumption, as well as actual increases in world energy consumption since 2011. Deficit is calculated as Actual minus Required at 2%. Historical amounts from BP 2019 Statistical Review of World Energy.

[7] The growth rates of oil, coal and nuclear have all slowed to below 2% per year since 2011. While the consumption of natural gas, hydroelectric and other renewables is still growing faster than 2% per year, their surplus growth is less than the deficit of oil, coal and nuclear.

Oil, coal, and nuclear are the types of energy whose growth has lagged below 2% since 2011.

Figure 7. Oil, coal, and nuclear growth rates have lagged behind the target 2% growth rate. Amounts based on data from BP’s 2019 Statistical Review of World Energy.

The situations behind these lagging growth rates vary:

  • Oil. The slowdown in world oil consumption began in 2005, when the price of oil spiked to the equivalent of $70 per barrel (in 2018$). The relatively higher cost of oil compared with other fuels since 2005 has encouraged conservation and the switching to other fuels.
  • Coal. China, especially, has experienced lagging coal production since 2012. Production costs have risen because of depleted mines and more distant sources, but coal prices have not risen to match these higher costs. Worldwide, coal has pollution issues, encouraging a switch to other fuels.
  • Nuclear. Growth has been low or negative since the Fukushima accident in 2011.

Figure 8 shows the types of world energy consumption that have been growing more rapidly than 2% per year since 2011.

Figure 8. Natural gas, hydroelectric, and other renewables (including wind and solar) have been growing more rapidly than 2% since 2011. Amounts based on data from BP’s 2019 Statistical Review of World Energy.

While these types of energy produce some surplus relative to an overall 2% growth rate, their total quantity is not high enough to offset the significant deficit generated by oil, coal, and nuclear.

Also, it is not certain how long the high growth rates for natural gas, hydroelectric, and other renewables can persist. The growth in natural gas may slow because transport costs are high, and consumers are not willing/able to pay for the high delivered cost of natural gas, when distant sources are used. Hydroelectric encounters limits because most of the good sites for dams are already taken. Other renewables also encounter limits, partly because many of the best sites are already taken, and partly because batteries are needed for wind and solar, and there is a limit to how fast battery makers can expand production.

Putting the two groupings together, we obtain the same deficit found in Figure 6.

Figure 9. Comparison of extra energy over targeted 2% growth from natural gas, hydroelectric and other renewables with energy growth deficit from oil, coal and nuclear combined. Amounts based on data from BP’s 2019 Statistical Review of World Energy.

Based on the above discussion, it seems likely that energy consumption growth will tend to lag behind 2% per year for the foreseeable future.

[8] The economy needs to produce its own “demand” for energy products, in order to keep prices high enough for producers. When energy consumption growth is below 2% per year, the danger is that energy prices will fall below the level needed by energy producers.

Workers play a double role in the economy:

  • They earn wages, based on their jobs, and
  • They are the purchasers of goods and services.

In fact, low-wage workers (the workers that I sometimes call “non-elite workers”) are especially important, because of their large numbers and their role in buying many items that use significant amounts of energy. If these workers aren’t earning enough, they tend to cut back on their discretionary buying of homes, cars, air conditioners, and even meat. All of these require considerable energy in their production and in their use.

High-wage workers tend to spend their money differently. Most of them have already purchased as many homes and vehicles as they can use. They tend to spend their extra money differently–on services such as private education for their children, or on investments such as shares of stock.

An economy can be configured with “increased complexity” in order to save energy consumption and costs. Such increased complexity can be expected to include larger companies, more specialization and more globalization. Such increased complexity is especially likely if energy prices rise, increasing the benefit of substitution away from the energy products. Increased complexity is also likely if stimulus programs provide inexpensive funds that can be used to buy out other firms and for the purchase of new equipment to replace workers.

The catch is that increased complexity tends to reduce demand for energy products because the new way the economy is configured tends to increase wage disparity. An increasing share of workers are replaced by machines or find themselves needing to compete with workers in low-wage countries, lowering their wages. These lower wages tend to lower the demand of non-elite workers.

If there is no increase in complexity, then the wages of non-elite workers can stay high. The use of growing energy supplies can lead to the use of more and better machines to help non-elite workers, and the benefit of those machines can flow back to non-elite workers in the form of higher wages, reflecting “higher worker productivity.” With the benefit of higher wages, non-elite workers can buy the energy-consuming items that they prefer. Demand stays high for finished goods and services. Indirectly, it also stays high for commodities used in the process of making these finished goods and services. Thus, prices of energy products can be as high as needed, so as to encourage production.

In fact, if we look at average annual inflation-adjusted oil prices, we find that 2011 (the base year in Sections [6] and [7]) had the single highest average price for oil.1 This is what we would expect, if energy consumption growth had been adequate immediately preceding 2011.

Figure 10. Historical inflation-adjusted Brent-equivalent oil prices based on data from 2019 BP Statistical Review of World Energy.

If we think about the situation, it is not surprising that the peak in average annual oil prices took place in 2011, and the decline in oil prices has coincided with the growing net deficit shown in Figures 6 and 9. There was really a double loss of demand, as growth in energy use slowed (reducing direct demand for energy products) and as complexity increased (shifting more of the demand to high-wage earners and away from the non-elite workers).

What is even more surprising is the fact that the prices of fuels in general tend to follow a similar pattern (Figure 11). This strongly suggests that demand is an important part of price setting for energy products of all kinds. People cannot buy more goods and services (made and transported with energy products) than they can afford over the long term.

Figure 11. Comparison of changes in oil prices with changes in other energy prices, based on time series of historical energy prices shown in BP’s 2019 Statistical Review of World Energy. The prices in this chart are not inflation-adjusted.

If a person looks at all of these charts (deficits in Figures 6 and 9 and oil and energy prices in general from Figures 10 and 11) for the period 2011 onward, there is a very distinct pattern. There is at first a slow slide down, then a fast slide down, followed (at the end) by an uptick. This is what we should expect, if low energy growth is leading to low prices for energy products in general.

[9] There are two different ways that oil and other energy prices can damage the economy: (a) by rising too high for consumers or (b) by falling too low for producers to have funds for reinvestment, taxes and other needs. The danger at this point is from (b), energy prices falling too low for producers.

Many people believe that the only energy problem that an economy can have is prices that are too high for consumers. In fact, energy prices seemed to be very high in the lead-ups to the 1974-1975 recession, the 1980-1982 recession, and the 2008-2009 recession. Figure 5 shows that the worldwide growth in energy consumption was very high in the lead-up to all three of these recessions. In the two earlier time periods, the US, Europe, and the Soviet Union were all growing their economies, leading to high demand. Preceding the 2008-2009 Great Recession, China was growing its economy very rapidly at the same time the US was providing low interest rates for home purchases, some of them to subprime borrowers. Thus, demand was very high at that time.

The 1974-75 recession and the 1980-1982 recession were fixed by raising interest rates. The world economy was overheating with all of the increased leveraging of human energy with energy products. Higher short-term interest rates helped bring growth in energy prices (as well as food prices, which are very dependent on energy consumption) down to a more manageable level.

Figure 12. Three-month and ten-year interest rates through May 2019, in chart by Federal Reserve of St. Louis.

There was really a two-way interest rate fix related to the Great Recession of 2008-2009. First, when oil and other energy prices started to spike, the US Federal Reserve raised short term interest rates in the mid 2000s. This, by itself, was almost enough to cause recession. When recession started to set in, short-term interest rates were brought back down. Also, in late 2008, when oil prices were very low, the US began using Quantitative Easing to bring longer-term interest rates down, and the price of oil back up.

Figure 13. Monthly Brent oil prices with dates of US beginning and ending Quantitative Easing.

There is one recession that seems to have been the result of low oil prices, perhaps combined with other factors. That is the recession that was associated with the collapse of the central government of the Soviet Union in 1991.

[10] The recession that comes closest to the situation we seem to be heading into is the one that affected the world economy in 1991 and shortly thereafter.

If we look at Figures 2 and 5, we can see that the recession that occurred in 1991 had a moderately severe effect on the world economy. Looking back at what happened, this situation occurred when the central government of the Soviet Union collapsed after 10 years of low oil prices (1982-1991). With these low prices, the Soviet Union had not been earning enough to reinvest in new oil fields. Also, communism had proven to be a fairly inefficient method of operating the economy. The world’s self-organizing economy produced a situation in which the central government of the Soviet Union collapsed. The effect on resource consumption was very severe for the countries most involved with this collapse.

Figure 14. Total extraction of physical materials Eastern Europe, Caucasus and Central Asia, in chart by MaterialFlows.net. Amounts shown are based on the Global Material Flows Database of the UN International Resource Panel.

World oil prices have been falling too low, at least since 2012. The biggest decreases in prices have come since 2014. With energy prices already very low compared to what producers need, there is a need right now for some type of stimulus. With interest rates as low as they are today, it will be very difficult to lower interest rates much further.

Also, as we have seen, debt-related stimulus is not very effective at raising energy prices unless it actually raises energy consumption. What works much better is energy supply that is cheap and abundant enough that supply can be ramped up at a rate well in excess of 2% per year, to help support the growth of the economy. Suitable energy supply should be inexpensive enough to produce that it can be taxed heavily, in order to help support the rest of the economy.

Unfortunately, we cannot just walk away from economic growth because we have an economy that needs to continue to expand. One part of this need is related to the world’s population, which continues to grow. Another part of this need relates to the large amount of debt that needs to be repaid with interest. We know from recent history (as well as common sense) that when economic growth slows too much, repayment of debt with interest becomes a problem, especially for the most vulnerable borrowers. Economic growth is also needed if businesses are to receive the benefit of economies of scale. Ultimately, an expanding economy can be expected to benefit the price of a company’s stock.

Observations and Conclusions

Perhaps the best way of summing up how my model of the world economy differs from other ones is to compare it to other popular models.

The Peak Oil model says that our energy problem will be an oil supply problem. Some people believe that oil demand will rise endlessly, allowing prices to rise in a pattern following the ever-rising cost of extraction. In the view of Peak Oilers, a particular point of interest is the date when the supply of oil “peaks” and starts to decline. In the view of many, the price of oil will start to skyrocket at that point because of inadequate supply.

To their credit, Peak Oilers did understand that there was an energy bottleneck ahead, but they didn’t understand how it would work. While oil supply is an important issue, and in fact, the first issue that starts affecting the economy, total energy supply is an even more important issue. The turning point that is important is when energy consumption stops growing rapidly enough–that is, greater than the 2% per year needed to support adequate economic growth.

The growth in oil consumption first fell below the 2% level in 2005, which is the year that some observers have claimed that “conventional” (that is, free flowing, low-cost) oil production peaked. If we look at all types of energy consumption combined, growth fell below the critical 2% level in 2012. Both of these issues have made the world economy more vulnerable to recession. We experienced a recession based on prices that were too high for consumers in 2008-2009. It appears that the next bottleneck may be caused by energy prices that are too low for producers.

Recessions that are based on prices that are too low for the producer are the more severe type. For one thing, such recessions cannot be fixed by a simple interest rate fix. For another, the timing is unpredictable because a problem with low prices for the producer can linger for quite a few years before it actually leads to a major collapse. In fact, individual countries affected by low energy prices, such as Venezuela, can collapse before the overall system collapses.

While the Peak Oil model got some things right and some things wrong, the models used by most conventional economists, including those included in the various IPCC reports, are far more deficient. They assume that energy resources that seem to be in the ground can actually be extracted. They see no limitations caused by prices that are too high for consumers or too low for producers. They do not realize that affordable energy prices can actually fall over time, as the economy weakens.

Conventional economists assume that it is possible for politicians to direct the economy along lines that they prefer, even if doing so contradicts the laws of physics. In particular, they assume that the economy can be made to operate with much less energy consumption than is used today. They assume that we collectively can decide to move away from coal consumption, without having another fuel available that can adequately replace coal in quantity and uses.

History shows that the collapse of economies is very common. Collectively, we have closed our eyes to this possibility ever happening to the world economy in the modern era. If the issue with collapsing demand causing ever-lower energy prices is as severe as my analysis indicates, perhaps we should be examining this scenario more closely.

Note:

[1] There was a higher spike in oil prices in 2008, but averaged over the whole year, the 2008 price was lower than the continued high prices of 2011.

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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880 Responses to Why stimulus can’t fix our energy problems

  1. Harry McGibbs says:

    “With the stimulus from the late 2017 tax cuts fading, the direct impact of the global economy has shown up in slowing U.S. growth.

    ““This downdraft and trade tensions are now dampening U.S. growth, especially in the more internationally exposed segments of trade and manufacturing, while weighing on corporate sentiment and business investment as well,” the analysts say. International developments, they point out, are not encouraging.”

    https://www.marketwatch.com/story/with-us-stimulus-fading-fed-cant-ignore-stagnant-global-growth-morgan-stanley-argues-2019-07-17

    • Harry McGibbs says:

      “Americans burned through a lot less gasoline and diesel fuel than expected last week, feeding into investor angst over oil demand…

      ““We’re at the heart of summer driving season, so you would expect demand to be at it’s highest right now,” said Brian Kessens, a portfolio manager and managing director at Tortoise in Leawood, Kansas. The big build in fuel supplies is “a little bit concerning, especially if we see this continue in future reports.””

      https://finance.yahoo.com/news/oil-holds-losses-trump-trade-063052328.html

      • A person can look at the weekly product supplied numbers near the bottom of this chart: https://www.eia.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm

        You can also click on the link at the end to get more historical data.

        The last week definitely does look light, especially in terms of motor gasoline consumed. But these weekly numbers do bounce around quite a bit; I am not certain that they are terribly reliable. The prior “Fourth of July” week was high. If this latest week is averaged with the Fourth of July week, then we would have four weeks at a more or less similar level. But that level isn’t very high either. It appears to be down from 2016, 2017, and 2018 levels at this same time. Distillate fuel use (diesel) is also low compared to prior years.

  2. Harry McGibbs says:

    “Global device shipments, including PCs, tablets and mobile phones, will fall this year by 3.3 percent to 2.2 billion units, pulled down by the mobile phone market, according to the latest study from Gartner. The smartphone market alone is expected to decline by 2.5 percent this year, its worst fall ever.”

    https://www.telecompaper.com/news/smartphone-shipments-to-fall-25-in-2019-markets-worst-decline-ever-study–1301137

  3. It's different this time around....NO says:

    Mein Fuhrer…I’ve got a Plan….HAHAHA..Trump will like this one

    “There is no alternative to reducing carbon emissions to zero and keeping the Paris Climate Agreement, but even if without further warming the planet we have already caused serious damage,” Anders Levermann, a climate scientist at the Potsdam Institute for Climate Impact Research who worked on the study, told Earther. “One process that is currently unfolding in West Antarctica caused by a warming of the ocean, is that all of the marine ice of West Antarctica will discharge into the ocean
    PS the so called Paris Agreement INCREASES CO2 concentrations! Small oversight detail sarcasm
    Sure…this will work….making snow will add to the GWP and maintain BAU forever..snicker, snicker

    https://earther.gizmodo.com/scientists-propose-pumping-74-trillion-tons-of-artifici-1836455589/amp

    Boy are we fcked

    • Chrome Mags says:

      The wife and I watched The Blob from 1958 with Steve McQueen last night, and it turns out the blob doesn’t like cold temps. So near the end of the movie they capture it and send in on a military transport plane to the Arctic, and Steve McQueen says, “We’re safe as long as the Arctic remains cold.” and then a big question mark comes up on the screen, and movie over.

      Now obviously we don’t have to worry about a blob from outer space consuming people, but when the plan is to try and replace natural weather with artificial weather, snow in the Antarctic, you know we’re in trouble because it ain’t gonna happen. Just not economically viable especially on the downside from peak oil.

    • The geo-engineering experiment to make snow for Antarctica has a few problems, according to the article:

      The study itself acknowledges that, noting that it would require pumping ocean water 2,100 feet (640 meters) in elevation to the glacier surfaces, desalinating said water, and then blowing it as snow or finding a way to store it long enough to freeze. This would require massive amounts of energy—the study notes the pumping alone would require 12,000 high-powered wind turbines to generate enough electricity—all in one of the harshest, most remote places on Earth. And the study notes, it might not even work, or it could have unintended consequences from dropping global sea levels a few inches due to all the water pumping to completely screwing up ocean circulation patterns.

      • doomphd says:

        just because you can, doesn’t mean you should.

      • Rodster says:

        And yet Dane Wigington from the popular website http://geoengineeringwatch.org has substantial government data and evidence to support that these programs are currently deployed and have been for many decades.

        • Perhaps it is the scale that this group is considering changing. We know that China wants nice weather for popular events. It can use cloud seeding to change when and where the rain falls, for example.

          • Rodster says:

            Dane Wigington posted an article awhile back on his website that yes, China is also manipulating the weather. In fact they took credit for creating a snowstorm in Beijing back in the mid 90’s, seeral people died.

            He also notes the wacky weather taking place with perfectly spherical baseball or grapefruit sized hale. Iran has accused the US of weather warfare and the UN has issued a ban on climate engineering and weather warfare. So yes, i’m in agreement with Dane Wigington and he has posted those Gov’t reports on his website along with the several hundred US Patents pertaining to climate and weather modification and guess who he found owns most of those patents? US Government Defense Contractors like Raytheon, Lockheed Martin and a few others.

    • MR. Bongo says:

      A small fleet of 107 power satellites with a an output of 14.7 giga newtons squared would produce the power for this project easily.

    • Rodster says:

      Ya know, in this “nutty” world where everything is manipulated to keep the Ponzi Scheme from collapsing, I don’t doubt the Dow could hit 35,000. I wouldn’t even discount that a 35,000 Dow is being on the conservative side.

      When you have negative news come out and the Dow keeps pushing higher and higher. It just makes you put things in perspective what a joke our globalized financial, monetary and banking system are. The only way to really make money today is via the illusionary Stock Market.

      • GBV says:

        I’ve followed Armstrong for some time, and am always puzzled by his wandering explanations. He seems like an idiot savant that stumbled onto some deep truth or cosmic answer that even he cannot fully understand nor explain…

        Yet, I appreciate his analysis (which he always insists is not just his opinion) – if you can decipher it from his sometimes-incoherent ramblings and excessive use of “you have to understand”, “people don’t understand”, “it’s a complete joke”, “et cetera” – as it is different from most of the other “analysis” proffered by “analysts” in the mainstream news and online blogosphere. Focusing on capital flows (i.e. flow rates) as opposed to actual market events is actually intriguing, and for whatever reason it is a concept that seems to make sense to my collapse-addled brain (i.e. understanding flow rates is of more predictive value, as they directly contribute to the occurrence of the very economic/societal events most of us seem to try to predict… perhaps a better predictive model than using those very same economic/societal events to predict future economic/societal events?).

        In the end I’m sure the long-time collapseniks like Gail, Nicole Foss, Orlov, JMG, etc. will end up being proven in the long run (most of them being pretty “macro” in their views, with Gail probably being the most analysis / detail-oriented of the bunch). But I think the “long run” might be longer than I first assumed, and the DOW might make it’s way up to 35,000 before said “long run” is completely realized…

        (Side note: Armstrong predicts that hegemonic power will shift away from the West in 2032, which may be a prediction that is analogous to the idea of -somewhat-immanent societal collapse that so many have come to believe here on OFW).

        Cheers,
        -GBV

        • If I recall – interpret it correctly, Dr. Tim at Surplus mentioned ~2024 onwards as window opening for Emerging Markets (aka China) finally facing full frontal nudity, ehm full spectrum end of any growth, hence in effect throwing the whole global into the abyss..
          This peculiar twilight zone of ~2025-2030 has been pinpointed as serious threshold by several authors already.

          • GBV says:

            Indeed. But to be fair to Mr.Armstrong, I’m pretty sure I’ve seen copies of his Economics Confidence Model (ECM) dating back to the late 90’s / early 2000’s that were identifying those timelines, and he has been consistent about them since then. Perhaps some of those authors have done the same, but I’m not sure to be honest…

            Cheers,
            -GBV

        • MR. Bongo says:

          “In the end I’m sure the long-time collapseniks like Gail, Nicole Foss, Orlov, JMG, etc. will end up being proven in the long run ”
          Well a doomster only has to be right once.
          The dysfunction is palatable on so many systems. Political. Economy. Environment. Social. Not to forget the pandora’s box that all of them are dependant on. ENERGY. I hope your right and this side freak show keeps on until after I am gone.

    • I finally got around to reading this. I found reading the transcript more interesting than I expected. I haven’t been a person who has tried to forecast the stock market, and I haven’t followed people in that business. So, I had never heard of Martin Armstrong. He has a lot of recollections about past stock market ins and outs that I had not been aware of.

      I thought it was interesting that Armstrong considers private debt safer than government debt, because private debt actually has assets associated with it. Of course, there has to continue to be a use for those assets, for them to continue to have value. But I agree that government debt is quite iffy. In fact, Armstrong says,

      And I strongly advise everybody, do not own any municipal bonds, state bonds. The Fed US treasuries are probably good still for another two to three years. After that, forget it.

      I am wondering whether if Federal Treasuries are no good, other securities will really hold their value? Isn’t there a problem with this assumption. We need a lot of government services to continue, I would think.

      I can almost see the idea of the Dow escalating to a very high point. All of the various money managers around the world need a place to get a decent return. If bonds aren’t yielding much, and are providing negative yield in Europe and Japan, then the available money will head toward whatever is available. If the financial system will stick together, perhaps this kind of thing could happen.

      I think of being able to determine the value of a stock as a/i, where “a” is some measure of its yearly future after-tax earnings or dividends, and “i” is the available interest rate. Of course, if “i” is 0 or negative, this makes no sense. If 1/0 is undefined, then 35,000 is as good a value for the Dow as any, in a few years.

      • For one thing, if the balkanization proper comes to the US, mind you it could be this very next deeper recession/GFC II round, yes it’s ~lower but nevertheless existing probability (or rather postponed later) then this train of thought is correct. As nobody would be interested in FUSA treasuries in situation of ‘democratic socialism’ (lukewarm communism) faction of Democrats taking over several USA states-regions (and taking with them part of federal allocated resources locally available), and other members of the union wanting to continue and upscale their ‘conservative – private property’ way instead..

      • GBV says:

        Not sure if this video will be helpful or not:

        Armstrong basically covers everything he discussed in the Chris Martenson interview, but he seems a bit more clear this time around.

        Cheers,
        -GBV

      • GBV says:

        Whoops, also wanted to add to something you wrote, Gail:

        I thought it was interesting that Armstrong considers private debt safer than government debt, because private debt actually has assets associated with it.

        I think in previous videos or articles I’ve read from Armstrong, he elaborates about his views on public vs private debt, pointing out that when a private firm defaults at least you have a grievance/resolution mechanism in place within the system (i.e. the law, which is maintained/enforced by the government/public sector). But even if public sector debts were associated with assets, when a massive default occurs the mechanisms in place to grieve/resolve the issue tend to go out the window (or are corrupted in favour of government/public sector interests).

        And who is going to compel the government/public sector to give you what you’re “legally” entitled to? Or, as the old saying goes:

        You and what army?

        Cheers,
        -GBV

      • Joe Smith says:

        Governments have no assets? Since when?
        Are roads, bridges, buildings, sanitation systems, reservoirs, parks, museums, government land, parking lots, schools, universities, prisons, defense equipment, etc…not assets?

        • Yes, governments have assets. In recent years, governments have increasingly been trying to sell off some of these assets to others (for example, college dorms owned by outside organizations, rented directly to students) to reduce their need to borrow to build and maintain these systems. They also collect money on an ongoing basis for the use of these assets (examples: toll roads; museum charges; park charges; college tuition).

          There is a clear limit to how much of the services that governments perform that they can outsource. The contractors that they hire to perform these services seem to go bankrupt. Carillion, a major UK contractor hired for this purpose, has had serious financial problems. I believe that there are other examples elsewhere. The contractors can’t charge enough for their services (because of wage disparity, too low wages for many) to perform the services that are being outsourced to pay for their costs. Because of this problem, the sale of these assets becomes a huge problem. The assets really have no value to an outside owner unless the owner can at least at least cover the cost of operation, plus the owners monthly debt payments.

          Of course, there is also the issue of ongoing maintenance of the assets and building more similar assets. These problems may be left with governments.

  4. Harry McGibbs says:

    “…there is one crucial detail that is overlooked: the slowdown in trade started well before the recent eruption of protectionism. That suggests we cannot blame our current woes on the trade wars alone…

    “Companies need hefty amounts of working capital to run their supply chains, and about two-thirds of this typically comes from their own resources, with the other third coming from bank and non-bank finance.

    “During the pre-2007 credit boom it was easy for companies to find working capital and trade finance. But, since then, the crisis banks have reined this in. This is partly because post-crisis regulations have made it more costly for western banks to supply such funding, but also because banks’ resources have been hit by the debilitating impact of ultra-low interest rates and the flattening yield curve.

    “Currency swings also hurt. About 80 per cent of trade finance is supplied in dollars, and trade invoicing tends to be dollar-based, too. This means that dollar strength tends to affect the ability of companies in emerging markets to finance supply chains…

    “…the research suggests that the pre-2007 credit bubble not only created a house price boom, but also helped create a trade and GVC bubble, too.

    “Third, insofar as this bubble has now burst, it seems unrealistic to expect that the world will recreate that global trade surge anytime soon — even if, by some miracle, the US and China suddenly end the trade war. This is not a comforting message. But it is the new reality to which the G7 has to adapt.”

    https://www.ft.com/content/f44093f0-a934-11e9-b6ee-3cdf3174eb89

    • Harry McGibbs says:

      “Central banks in Asia and South Africa lowered their interest rates Thursday, joining a global easing bandwagon that started earlier this year in the Asia-Pacific region and is expected to include the U.S. and Europe within weeks.

      “The latest moves, by central banks in South Korea, Indonesia and South Africa, underscore the global nature of the brewing rate-cutting cycle, as policy makers attempt to ward off signs of weaker economic growth. With economies and financial markets interconnected, expectations of lower interest rates by the Federal Reserve and European Central Bank have given central banks in emerging markets scope to lower rates and prop up their economies.

      ““I think this will provide further impetus for Asian central banks in their easing cycle ahead,” said Prakash Sakpal, an economist at ING Bank.

      “Since April, New Zealand, India, Malaysia and the Philippines have lowered rates. China’s central bank has taken a number of measures to encourage lending to small businesses, and investors expect it to reduce benchmark rates if the Fed lowers its rates.

      https://www.wsj.com/articles/global-easing-cycle-gains-momentum-as-central-banks-cut-rates-11563460048

      • Harry McGibbs says:

        “The MSCI Emerging Markets Index of equities fell even though central banks in South Korea, Indonesia and South Africa all cut interest rates on Thursday. On top of that, their foreign-exchange rates all strengthened along with the broader market for currencies of countries with developing economies, which is not what one would expect in an easing cycle…

        “The truth is, it’s getting harder to ignore the big-picture risks facing the global economy.”

        https://www.bloomberg.com/opinion/articles/2019-07-18/another-notch-for-central-banks-have-no-ammo

        • Harry McGibbs says:

          “Freight volumes are falling precipitously within the US and across much of the world as economic slowdown spreads, hitting levels that typically mark the onset of recession. The US rail transport group CSX Corp suffered its biggest share price drop since the Lehman crisis after slashing its outlook on Wednesday. The stock has fallen 12pc over the past two days.”

          https://www.telegraph.co.uk/business/2019/07/18/global-freight-slide-nears-recession-levels-trade-war-damage/

          • The situation overseas is very bad as well, according to the Telegraph article

            Cass said its European Airfreight Index fell to minus 7.9pc last month, while the data from the Pacific Rim is even worse. “Air freight volumes in Asia suggest that the region is on the verge of, or is already entering, a recession,” it said.

            Asian air freight dropped to minus 8.6pc, with the biggest shocks hitting Hong Kong, Shanghai and Incheon airports. “Even more alarming, the inbound volumes for Shanghai have plummeted. This concerns us since it is the inbound shipment of high value/low density parts that are assembled into the high-value tech devices that are shipped to the rest of the world,” it said.

            I also looked at the report from Cass itself, with respect to the poor shipping results. Among other things, it says:

            Consistent with disappointing housing starts (down -10.8% in February, down -8.4% in March, down -4.0% in May, and down -5.3% YTD) and lackluster auto sales (down as much -4.3% in April and -1.0% YTD), spot pricing in transportation has declined dramatically. Especially in trucking, spot pricing has reached levels below contract that will drive weakness in contract pricing and eliminate, or at least significantly reduce, all capital investment other than maintenance cap ex. This puts further downward pressure on growth in coming periods.

            • Harry McGibbs says:

              So, to recap:

              In the first half of 2019:

              Global car sales were down 6.6%.

              Global device shipments were down 3.3%.

              Freight volumes are indicating the onset of recession.

              Global manufacturing PMI was 49.4 in June, down from 49.8 in May (sub-50 indicates contraction).

              Most unsettling. Let us hope the easing we are now seeing from central banks around the world proves at least somewhat effective, and these various trade disputes don’t ramp up too nastily or we could find ourselves in Fast Eddie territory.

              Speaking of trade disputes, even Islay is not immune. Whisky (along with tourism) is the backbone of the local economy and it looks as if Trump is about to slap tariffs on it:

              “A spokesperson for the Scotch Whisky Association told the BBC: “Exports of Scotch whisky to the US have been zero tariff for 20 years, so it is disappointing that Scotch whisky has been drawn into this dispute.”

              https://www.bbc.co.uk/news/business-48837360

            • Good luck with the tariff dispute!

              I suppose that it saves fuel if US citizens buy our own locally made whiskey. Also, in theory, it slightly helps US jobs.

    • Apparently, GVC or “Global Value Chain” is a new buzzword.

      The World Trade Organization has a report out called:

      Global Value Chain Development Report 2019: Technological innovation, supply chain trade, and workers in a globalized world.”

      The Foreward starts out:

      “There are different ways to analyze the global economy. One is to view it through the lens of growth and structural change in individual economies, developed and developing. A second is to use the lens of global value chains (GVCs), the complex network structure of of flows of goods, services, capital and technology across national borders. Both are useful, and they are complementary to each other.”

      Thus, when the article quoted in the Financial Times article says, “the research suggests that the pre-2007 credit bubble not only created a house price boom, but also helped create a trade and GVC bubble, too,” he is saying that when commodity prices were high, it looked like more value was being added in Emerging Markets and elsewhere around the world than when commodity prices dropped.

  5. Harry McGibbs says:

    “A cash crunch at one of China’s best known conglomerates is getting worse as the company said it will not be able to pay its upcoming dollar notes. China Minsheng Investment Group Corp.’s offshore unit said in a filing that it won’t be able to repay the principal, as well as the interest on the 3.8% $500 million bond due August, after considering its liquidity and performance.”

    https://www.bloomberg.com/news/articles/2019-07-19/chinese-conglomerate-debt-woes-deepen-amid-repayment-uncertainty?utm_source=google&utm_medium=bd&cmpId=google

    • This is a default of a big conglomerate in the private investment sector of the economy. If the chart I showed yesterday from the WSJ is half-way correct, the default should not be surprising.

      The actual numbers behind the chart were available by hovering over the online version of the WSJ article (available at China’s State-Driven Growth Model Is Running Out of Gas, WSJ, July 18, 2019 https://www.wsj.com/articles/chinas-state-driven-growth-model-is-running-out-of-gas-11563372006). The indications seem to be that sales in the Private Investment Sector are down 25%, between 2016 and 2018. There have been earlier articles about the Chinese government not lending to the private investment sector, leading to a need for this sector to scrounge for loans wherever they can find them. Instead, the Chinese government in recent years has lent only to its inefficient group of government-owned companies. Defaults on loans to Chinese government owned banks are a whole lot easier to hide that defaults elsewhere.

      According to a cryptic footnote that went with three different WSJ charts, the source of the private sector investment numbers seems to be either Goldman Sacks or CEIC data. I wrote to the author of the WSJ article yesterday, questioning the numbers. He said,

      “Hi Gail, apparently there are occasional sampling problems with the Chinese data used to form a basis for the sales the chart cites. So in all likelihood nominal sales did not fall; but it’s probably still the case that private have lost share to state firms.
      Greg”

      My guess is that the Private investment Sales numbers came off of the data that can be purchased from CEIC data. They are as right or wrong as the database is. They certainly are frightening, however.

      • Harry McGibbs says:

        Very unnerving. A Chinese slowdown has so many knock-on effects and a hard landing is unthinkably awful.

        “…the Chinese were the biggest foreign buyers of American homes. Chinese buyers accounted for $13.4 billion in real-estate purchases, or roughly 17% of all sales to foreign buyers… [But] despite representing nearly a fifth of all real-estate sales to foreign buyers, Chinese demand shrank dramatically from the previous year. In 2018, Chinese buyers accounted for $30.4 billion in home sales.”

        https://www.marketwatch.com/story/led-by-the-chinese-foreigners-are-buying-31-fewer-american-homes-2019-07-17

        • China has been restricting the amount of funds that can be taken out of the country for years, so at some point we should expect the share of homes bought by the Chinese to fall. Trump’s tariffs are not helping the situation either.

          The fewer buyers, the less demand for homes. We should not be surprised if prices for homes fall on the West Coast and other areas where Chinese buyers have recently made up a substantial share of buyers of homes.

  6. Tim Groves says:

    It’s fifty years since Buzz Aldrin went to the moon, and anyone who says different had better watch out for that famous right hook. This is a musical tribute of sorts.

  7. Hubbs says:

    It’s just those pesky divergent shadows from multiple light sources on the set that they forgot to airbrush out of the pictures for decades
    Should we be celebrating the 50th anniversary -or mourning the dawning of the age of the mega conspiracy?
    Funny how once the Soviet Empire collapsed there was no more need or desire to “revisit” the moon or to figure out how to deal with the deadly lethal Van Allen radiation belt.

    • It just demonstrates fully the social gullibility-conformity of the human ape species, it had to be aussie/nz ‘teenager’ out of all science buffs to dig out from the archives the gems like those mere orbital flight ‘heroes’ fixing long distance Earth appearance picture transparencies on the inside of the module cabin and at the same time shading the strong sun on the rest of them.. ground control adjusting commands of the camera scene in the audio etc.

      I don’t blame ‘I want to believe my daddy and childhood dreams’ individuals anymore, simply each of us has got his defense filters on, some could grasp the OFW message to some degree, others partially or not at all, .. it’s quite similar.

    • doomphd says:

      then how do you suppose they got all those Moon rocks? or do you think that they faked those, as well?

      as Norm would say, the problem with going to the Moon is all it has to offer is rocks. no gold, or slaves to exploit. it’s all about hubris and hopium, which sells for awhile.

  8. It's different this time around....NO says:

    We got to get our $$$ someway, somehow….Oh, here’s an idea
    https://finance.yahoo.com/news/florida-woman-fined-100-000-101646606.html
    The Supreme Court ruled in February that local governments can’t impose excessive fines. The decision is among the first constraints by the federal government on how much money cities and states can charge people for everything from speeding to overgrown lawns. But the court did not say what should be considered excessive, leaving local governments and residents with a question: How much is too much?
    Fines are a reliable source of revenue for cash-starved cities, and have become a big – and rapidly growing – business for local governments. States, cities and counties collected a total of $15.3 billion in fines and forfeitures in 2016, according to the most recent financial records collected by the U.S. Census Bureau. That’s a 44% jump from a decade earlier
    The Supreme Court’s decision should be a wake-up call for local governments that trap people in a never-ending cycle of debt, said Lisa Foster, a former Justice Department official who runs the Fines and Fees Justice Center, a New York-based advocacy group. But the ruling has not reined in some of the most aggressive practices, in Dunedin and elsewhere.Dunedin officials declined to be interviewed but insisted through a spokesman that the fines they impose were neither excessive nor abusive. Dunedin’s code enforcement policies are meant to “protect the integrity of neighborhoods and the quality of the community,” spokesman Ron Sachs said.
    City and county records show that at least 33 homeowners owed the city $20,000 or more in fines as of May. That tally does not include dozens of bank- and company-owned houses with hundreds of thousands of dollars worth of code violations. In some cases, the fines seem to have more to do with aesthetics than public safety.
    The city fined a man nearly $30,000 because of a “chronic” overgrown yard.
    It fined a couple $31,000 for fixing their roof without a permit after a tree fell on it during a hurricane.
    “They’re using a shotgun to kill a mouse,” said Bill Prescott, who was fined $43,000 because of an inoperative car and a pile of dried leaves in his front yard and plants that grew over the street. Prescott, who lives with his wife in Tallahassee, said he became ill last year and couldn’t make the long drive to Dunedin to maintain their second home. Fines of $250 a day piled up without his knowledge, Prescott said.
    “It just leaves me scratching,” he said.

    No, it’s gonna leave you BROKE…this is just the start of fleecing the average citizen to support a bloated government.

    • Tim Groves says:

      Here in Japan, the Land of the Free and the Home of the Samurai, we can let the front lawn grow as long as we like, or even cultivate pumpkins on the driveway. The landowner has the right to create an eyesore on their land that upsets the entire neighborhood if they so desire. And the neighbors have a wide array of options: get upset about it, put up with it in a spirit of maintaining social harmony, or ignore it.

  9. It's different this time around....NO says:

    Remember the Five and Dime Store….Well it’s now
    https://amp.cnn.com/cnn/2019/07/19/business/dollar-general-opposition/index.html
    Dollar stores are everywhere. That’s a problem for poor Americans
    By Nathaniel Meyersohn, CNN Business

    Although the US economy has strengthened in recent years, dollar stores’ popularity has endured. Wages for a vast number of Americans have grown only modestly. People living paycheck to paycheck have been a boon for dollar stores, and the chains have also reached higher-income shoppers looking for discounts.
    “While the economy is doing very well, our core customer continues to struggle,” Dollar General chief executive Todd Vasos told analysts last year. The company’s core customers earn around $40,000 a year or below, $20,000 below the median income.
    Dollar General caters mainly to low-and-middle-income customers in rural and suburban areas. Dollar Tree targets suburban, middle-income shoppers, while Family Dollar focuses on lower-incoe urban and rural customers.
    Dollar General looks to build stores in rural areas where a big box retailer or grocery store is not within 15 or 20 miles. Around 75% of Dollar General stores are in towns with 20,000 or fewer people, and the chain has its biggest footprint in southern states. (Dollar General has more stores in Texas alone than Costco and Whole Foods do combined nationwide.)

    Dollar stores can open quickly in new areas because they are small and have lower operating costs than grocery stores. Dollar General stores are 7,400 square feet on average, compared to 40,000 square-foot supermarkets. And stores, which employ just a handful of workers to stock aisles, are cheap to run

    Family Dollar has gone downhill in recent years and hate to go there.
    Without a doubt, a lot of hidden inflation with shinkflation of products.
    This is not going to end well….

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