Our Energy and Debt Predicament in 2019

Many people are concerned that we have an oil problem. Or they are concerned about recession and the need to lower interest rates.

As I see the situation, we have a problem of a networked economy that is not functioning well. A big part of this problem is energy-related. Strange as it may seem, energy prices (including oil prices) are too low for producers. If debt levels were growing more rapidly, this low-price problem would go away.

The “standard way” of encouraging more debt-based purchases is by lowering interest rates. But we are running out of room to do this now. We also seem to be running out of economic investments to make with debt. If expected returns on investment were greater, interest rates would be higher.

Without economic investments, demand for commodities of all kinds, including energy products, tends to stay too low. This is the problem we have today. Our debt problem and our energy problem are really different aspects of a networked economy that is no longer generating enough total return. History suggests that these periods tend to end badly.

In the following sections, I will explain some of the issues involved.

[1] Our problem is not just that oil prices are too low. Prices are too low for practically every type of energy producer, and in many parts of the globe.

Oil: OPEC oil producers have cut back production because they view oil prices as too low. OPEC reports a cutback in production of 2.7 million barrels per day between November 2018 and July 2019 (from 32.3 million bpd to 29.6 million bpd).

In the US, there has been an increase in bankruptcies of oil producers during 2019, relative to 2018. There has also been a reduction in the number of oil drilling rigs of 17% since the week of November 16, 2018, according to reports by Baker Hughes. These are signs of producer distress.

Natural gas: While recent US natural gas prices have bounced up off their recent lows, as recently as August 8, 2019, we were reading:

U.S. gas futures this week collapsed to a three-year low, while spot prices were on track to post their weakest summer in over 20 years. In other markets, such lackluster pricing would cause investment to retrench and supply to contract.

But gas production is at a record high and expected to keep growing. Demand is rising as power generators shut coal plants and burn more gas for electricity, and as rapidly expanding liquefied natural gas (LNG) terminals turn more of the fuel into super-cooled liquid for export.

Analysts believe the natural gas market is not trading on demand fundamentals because supply growth continues to far outpace rising consumption. Energy firms are pulling record amounts of oil from shale formations and with that oil comes associated gas that needs either to be shipped or burned off.

When we look worldwide, we see that the Wall Street Journal is reporting, “U.S. Glut in Natural Gas Supplies Goes Global.” A chart from that article shows falling natural gas prices in Europe and Asia, almost to the level of US natural gas prices.

Coal: The US Energy Information Administration writes, “More than half of US coal mines operating in 2008 have since closed.” USA Today writes, “Is President Trump losing his fight to save coal? Third major company since May files for bankruptcy.”

China has also been closing coal mines in response to low prices. Its coal production ramped up quickly after it joined the World Trade Organization in 2001, but since the 2012 to 2013 period, production has been close to level. An academic paper talks about a “de-capacity program” undertaken in China in 2016 in response to plunging coal prices and overall financial loss of coal enterprises.

Figure 1. China energy production by fuel, based on 2019 BP Statistical Review of World Energy data. “Other Ren” stands for “Renewables other than hydroelectric.” This category includes wind, solar, and other miscellaneous types, such as sawdust burned for electricity.

Uranium: A recent article says, “Plummeting global uranium prices hit Namibia hard.” Another article talks about the huge amount of capacity that has been taken off-line because of continued low uranium prices. The article estimates that 25% to 35% of global uranium production had already been taken off-line by the time the article was published (May 20, 2019).

Ethanol: According to the Wall Street Journal, the ethanol industry has been losing money since at least 2015, and is now closing ethanol plants in three states. The trade war has exacerbated its problems, but clearly its problems began before the trade war.

[2] The general trend in oil prices has been down since 2008. In fact, a similar trend applies for many other fuels.

Figure 2 shows that oil prices since 2008 have been trending downward.

Figure 2. Inflation adjusted weekly average Brent Oil price, based on EIA oil spot prices and US CPI-urban inflation.

Figure 3 shows that other energy prices have been following a similar price trend to that of oil. This situation happens because energy products are primarily used in finished goods and services of many kinds, such as cars, homes, vacation travel, and air conditioning. If demand for finished goods and services is high, prices for all commodities can be expected to be high; if demand for finished goods and services is low, prices for all commodities can be expected to be low. Thus, it shouldn’t be too shocking that the problem of prices that are too low for energy producers is very widespread.

Figure 3. 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. They are annual averages, so smooth out quite a few smaller bumps.

[3] The situation of prices being too low for many types of energy producers simultaneously is precisely the problem I found back in December 2008 when I wrote the article Impact of the Credit Crisis on the Energy Industry – Where Are We Now? 

The article mentioned was written in December 2008. If we look back at Figure 2, this was a time when oil prices were very low. I had first noticed a cutback in credit of various kinds (including credit card debt and mortgage debt) in the middle of 2008, about the time oil prices crashed. Later in the year, additional financial problems emerged, including the collapse of Lehman Brothers. Banks became less willing to offer credit to buyers who were deemed insufficiently creditworthy.

In my December 2008 article, I wrote about suppliers in various supply chains not being able to get credit. Without credit, supply chains could not operate. Businesses depending on supply chains were forced to cut back on their purchases. In fact, some suppliers went bankrupt. Workers were laid off in this process; these layoffs added to the lack of buyers for finished goods and services. Energy prices of many types crashed simultaneously because of the lack of demand for commodities used to make finished products of many kinds.

The fix for the problem back in late 2008 was for the US to begin Quantitative Easing. Quantitative Easing lowered longer-term interest rates and allowed more credit to get back to supply chains. By 2011, oil prices had risen to a level that was more tolerable for producers. These higher prices slowly slipped away, especially disappearing when the US discontinued its Quantitative Easing program in 2014.

If a person looks at the late 2008 situation, it is clear that a lack of debt availability indirectly led to low commodity prices. Prices dropped almost vertically when the debt bubble popped. This time, the situation is a little different. We arrived at low prices through the long diagonal black dotted line on Figure 2; this time other factors besides an obvious lack of debt have been involved.

One issue that seems to be involved this time is a shift in relativities between the dollar and other currencies, making energy products more expensive for those outside the US.

A second contributing issue this time is growing wage disparities, as goods are increasingly manufactured in low-wage countries. Low-wage workers (both in developing countries and in advanced economies trying to compete with developing countries) are less able to buy finished goods and services. This contributes to the lack of demand for finished goods and services using commodities of all kinds, including energy products.

[4] In the right circumstances, a rapidly growing supply of cheap energy products can help the world economy grow.

If we look back, there was a period of rapid growth in the world’s energy consumption between World War II and 1980. This was a period of rapid growth in the world economy.

Figure 4. Average growth in energy consumption for 10 year periods, based Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent.

In fact, both population and energy consumption per capita were growing. This growing energy consumption per capita allowed living standards to grow as well (Figure 5).

Figure 5. Energy growth amounts shown in Figure 4, divided between amount that supported population growth (based on 2019 world population estimates and earlier estimates by Angus Maddison) and all other, which I have called “living standards.”

Most people would agree that a major increase in living standards took place between World War II and 1980. New buildings were constructed to replace those destroyed or damaged during World War II. Many people were able to buy cars for the first time. Interstate highway systems were built. Electric transmission lines were built, and oil and gas pipelines were laid. In rural areas, homes were often electrified for the first time. With the aid of energy saving appliances and birth control pills, many women joined the workforce. The US, Europe, Japan, and the Soviet Union all saw their economies grow.

[5] It is striking that the period of rapid energy consumption growth between World War II and 1980 corresponds closely to the long-term rise in US interest rates between the 1940s and 1980 (Figure 6).

Figure 6. Three-month and ten-year interest rates through July 2019, in chart by Federal Reserve of St. Louis.

If interest rates rise, it becomes more expensive to borrow money. Monthly payments for homes, cars, and new factories all rise. Evidently, the US economy was growing robustly enough in the 1940 to 1980 timeframe that US short term interest rates could be raised without much economic harm. The big concern seemed to be an overheating economy as a result of too rapid growth.

The huge increase in interest rates in 1980-1981 put an end to any concern about an overheating economy (compare Figures 6 and 7). Oil prices came back down once the world economy was in recession from these high interest rates.

Figure 7. Historical inflation-adjusted Brent-equivalent oil prices based on data from 2019 BP Statistical Review of World Energy.

[6] Starting about 1980, the US economy began substituting rapidly growing debt for rapidly growing energy supplies. For a while, this substitution seemed to pull the economy forward. Now growth in debt is failing as well.

Figure 8 shows how the ratio of total US debt (including governmental, household, business and financial) has changed since 1946. It becomes clear that once the big “push” that the economy received from rising consumption of energy products began to fail about 1980, the US moved to the addition of debt as a substitute.

Figure 8. Ten-year average increase in US debt relative to GDP. Debt is “All Sectors, Liability Level” from FRED; GDP is in dollars of the day.

I think of debt as being one of many kinds of promises. Figure 9 illustrates that while the total amount of goods and services has been growing, debt levels and other kinds of promises have been growing even more rapidly.

Figure 9. Promises of future goods and services tend to rise much more rapidly than actual goods and services. Chart by Gail Tverberg.

Many things can go wrong with this system. If the growth in added debt slows too much, we can expect to start seeing financial problems similar to those we saw in 2008. Also, if the level of debt (such as student debt) gets too high, its payback interferes with the purchase of other needed goods, such as a home. If energy providers decide prices are too low and stop producing, then promised Future Goods and Services can’t really appear. Huge defaults on promises of all kinds can be expected. This happens because the laws of physics require the dissipation of energy for physical processes underlying GDP growth.

[7] Since 2001, world economic growth has been pulled forward by China with its growing coal supply and its growing debt. In the future, this stimulus seems likely to disappear. 

Figure 10. Figure similar to Figure 5, with bump that is primarily the result of China’s accelerated growth circled.

China has been financing its rapid economic growth since 2001 with growing debt.

Figure 11. China Debt to GDP Ratio, in figure by the IIF.

We know that low prices for coal have led to flattening production since the 2012 – 2013 period (Figure 1). In fact, part of the reason for the flattening of non-financial corporate debt in recent years in Figure 11 may reflect swaps of uncollectible coal mine debt for equity, removing part of coal mine debt from the chart.

The failure of coal production to grow rapidly puts China at an economic disadvantage because coal is a very low-cost energy source. Any substitution, even imported coal, is likely to raise its cost of making goods and services. This makes competition in a world economy more difficult. And China’s debt level is already very high, putting it at risk of the problems discussed in Section [6].

[8] The world economy needs much more rapidly growing debt if energy prices are to rise to a level that is acceptable to energy producers. 

Debt acts like a promise of future goods and services. Growing debt, plus increases in other types of promises of future goods and services, helps to keep energy prices high enough for energy producers. There are at least three reasons that growing debt helps an economy:

First, increasing debt can be used to build factories, and these factories hire large numbers of people. The factories utilize various raw materials and energy products themselves, raising demand for goods and services. Furthermore, the workers hired by the factories, with their incomes from their jobs, also raise the demand for goods and services. These goods and services are made with commodities. Growing debt thus raises demand for commodities, and thus their prices.

Second, increasing debt levels by governments are often used to hire workers or to raise benefits for the unemployed or the elderly. This has a very similar effect to building new factories. These workers and these beneficiaries can afford more goods and services, and these goods and services are made using commodities. Governments also use some of their funds to build schools, pave roads and operate police cars. All of these things require energy consumption.

Third, consumers can afford to buy more of the output of the economy, if their debt levels are increased. If debt can be structured so that anyone who walks into a car dealership can afford a new car (such as longer durations, lower interest rates, and no down payment), this added debt allows increasing demand for new cars. It also allows increasing demand for the energy products used to make and operate these new vehicles. Furthermore, if new homes can be made more affordable for young people, this works in the direction of adding more mortgage debt.

The Institute of International Finance (IIF) reports that the ratio of world debt to GDP (red line on Figure 12) has been falling since 2016. This falling ratio of debt to GDP no doubt contributes to the low-priced energy problem with which energy producers are now struggling.

Figure 12. IIF figure showing total world debt and the ratio of total world debt to GDP.

Non-debt promises of many types can also have an impact on energy prices, but it is beyond the scope of this article to discuss their impact. Some examples of non-debt promises are shown on Figure 9.

[9] The world economy seems to be running out of truly productive uses for debt. There are investments available, but the rate of return is very low. The lack of investments with adequate return is a significant part of what is preventing the economy from being able to support higher interest rates.

In a self-organizing networked economy, market interest rates (especially long-term interest rates) are determined by the laws of physics. Regulators do have some margin for action, however. They can raise or lower certain short-term interest rates. They can also use their central banks to purchase existing securities, thereby influencing both short- and long-term interest rates. In addition, they can indirectly affect the system by raising and lowering tax rates and by adopting stimulus programs.

Market interest rates, in some sense, tell us how productive investments truly are at a point in time. Years ago, investments that the economy was able to make were far more productive than the investments we are making today. For example, the first paved road in an area had a huge beneficial effect. New roads were able to open whole areas up to commerce. Once an area had been developed, later investments were much less beneficial. Fixing up a road that has many holes in it takes energy and materials of many types, but it doesn’t really add productivity to the system. It just keeps productivity from falling.

After a point, adding new roads or other infrastructure doesn’t add much of anything. This is especially the case if population is level or falling. If population is falling, it would likely make sense to reduce the number of roads, but this is difficult to do, once there are a few occupied homes along a road.

As another example, a car that gets a person from home to work is a great addition if the vehicle allows the person to take a job that he could not otherwise take. But added “bells and whistles” on cars, such as air conditioning, a musical system, sturdier bumpers, and devices to reduce emissions, are of more questionable value, viewed from the point of view of allowing the economy to function cheaply and efficiently.

Another type of investment is education. At one point, a high school education was sufficient for the vast majority of the population. Now additional years of schooling, paid for by the student himself, are increasingly expected. An investment in higher education can be “productive,” in the sense of helping to differentiate himself/herself from those with no post-secondary education. But the overall level of wages has not been rising enough to compensate for all of the extra education. It is the growing complexity of the system that is forcing the need for extra education upon us. In a sense, the extra education is a tax we are required to pay for having a more complex system.

The need for pollution control might be considered another kind of tax on the system.

Our hugely expensive health care system is another tax on the system. After paying the cost of health care, workers have less funding available for buying or renting a home, raising a family, food and transportation.

[10] Since 1981, regulators have been able to prop up the economy by reducing interest rates whenever economic growth was faltering. Now we have pretty much run out of this built-in source stimulus.

Many observers have noted that central bankers are running out of tools to fix our economic problems. The lack of room to take down interest rates can be seen in Figure 6.

Figure 13 shows that long-term patterns of reductions in interest rates (darker bands) have happened previously. These reductions in interest rates came to an end because they couldn’t go any lower, given inflation expectations and likely levels of defaults. We seem to be facing a similar situation today.

Figure 13. Chart from the Financial Times showing historic interest rates and periods during which interest rates fell.

According to Figure 13, there have been three periods of falling interest rates in the last 200 years:

  • 1817-1854
  • 1873-1909
  • 1985-2019

In the gap between the first two periods of falling interest rates (1854 to 1873), the US Civil War took place. This was a period of very poor return on investments. Somehow it ended in war.

Immediately after the second two periods of falling interest rates (after 1909), the world entered a very unstable period. First there was World War I, then the Great Depression, followed by World War II.

Now we are facing the possibility of yet another end-point for the take-down in interest rates.

[11] The total return of the economy seems to be too low now. This seems to be why we have problems of many types, ranging from (a) low interest rates to (b) low profitability for energy producers to (c) too much wage disparity. 

All of the problems listed above are manifestations of an economy that is not producing sufficient total return. The laws of physics distribute the problem to many areas of the economy, simultaneously.

A person wonders what could be ahead. We seem to be reaching the end of the line regarding the takedown of interest rates, as shown in Figure 13. If a takedown in interest rates is possible, it acts as a relief valve for some of the other problems the economy is facing, including too much wage disparity and energy prices that are too low for producers.

In Section [10], we saw that when the relief valve of lower interest rates had disappeared, wars and depressions have taken place. We can’t know the precise outcome this time, but our current situation doesn’t look good. Will we encounter wars, or a serious depression, or financial problems worse than 2008? We can’t know for certain. Or will we somehow find a way around serious problems?


This entry was posted in Financial Implications and tagged , , , , by Gail Tverberg. Bookmark the permalink.

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.

1,325 thoughts on “Our Energy and Debt Predicament in 2019

  1. Another potential relief valve is lowering taxes and regulation. Imagine the potential energy unleashed if income taxes were cut 50% across the board tomorrow. Like lowering interest rates, it could buy us decades of time. If we are discussing negative interest rates today then no income taxes in the future cannot be a crazy idea.

  2. excellent article… sort of what I was hoping for, an energy+debt article…

    I especially want to comment on this:

    “[11] The total return of the economy seems to be too low now. This seems to be why we have problems of many types, ranging from (a) low interest rates to (b) low profitability for energy producers to (c) too much wage disparity.

    All of the problems listed above are manifestations of an economy that is not producing sufficient total return. The laws of physics distribute the problem to many areas of the economy, simultaneously.

    A person wonders what could be ahead.”

    I think there is a clear answer to why the “total return” is too low, and that would be that the world has now passed the peak of net (surplus) energy… which means we are in a new situation, different from any other past crises, and even very substantially different from the 2008/2009 crisis…

    if this is true (and I very strongly think so) then there is no solution for the problems of debt, interest rates and wages…

    our networked system means that debt has been manageable because of growing energy supplies… everything in our economic system is relative to energy supplies… with decreasing net (surplus) energy, debt becomes increasingly unmanageable…

    if world energy is in a state of permanent decline (I strongly think this is true) then “what could be ahead”?

    probably a state of permanent recession, or worse…

    whatever is ahead, it is a new situation never before faced by world leaders…

    all attempts at economic growth now will probably end in failure…

    it’s an exciting new world!

    • You have described the situation perfectly. It is a “too little net surplus energy” problem.

      The EROEI people have not understood what too little net surplus energy really looks like. They have not understood how to calculate where the economy is, relative to an energy surplus. They have developed false methods of calculating EROEI on renewables. They seem to add to the problem, rather than being able to provide true solutions.

      The EROEI folks mostly come at this issue from an energy alone or ecological basis (return on a fish’s labor). Most of them have no understanding of debt, or the financial system, or the fact that energy prices might not rise as the cost of energy production rises. In fact, the overall average EROEI may need to rise over time, to keep the system operating, but no one, to my knowledge, has considered this issue.

      What the world really needs is growing per capita net energy consumption (return on human labor). Taking away high EROEI energy products and substituting lower EROEI energy products in definitely counterproductive. Interesting people in “solutions” that are not scalable doesn’t work either.

      • Jon Elster is Norway most acknowledged social scientist, since 1995 Robert K. Merton Professor of the Social Sciences ved Columbia University, New York. In this interview he tells that if he had been younger he would have tried to make his career studying the climat crisis. This are his reasons (worth using your Google translater):
        «Den forener tre interessante ting. Det er den største utfordring verden har stått overfor, det er jo ikke så lite. For det andre teoretisk, betydningen av usikkerheten i disse fremskrivningene. Og, for det tredje, det normative: Hvor mye skal vi diskontere fremtidige generasjoners nytte for å finne nåverdien? Var jeg ung, ville jeg satset på dette!
        – Det politiske er en fjerde dimensjon. Tenk deg nå at nasjonene skjønner at noe må gjøres og setter seg ned for å fordele utslippsrettigheter. Hvilken fordeling skal de velge? Hvert land vil kunne påberope seg et plausibelt normativt kriterium som tilfeldigvis passer med deres egeninteresse (eksempelvis fattige land som mener det det urettferdig hvis de må kutte like mye utslipp som vestlige land som allerede har nytt godt av fossildrevet vekst, red. anm.). Det er jo det som skjer allerede. Å bli enige i forhandlinger hvor alle kan påberope seg prinsipper, det er veldig vanskelig. Det er vanskeligere enn hvis alle nakent forhandler for egne interesser, for da er det ikke et så stort tap å komme til noe kompromiss. Men har man et prinsipp, da kan man ikke gå på kompromiss.»

        And then he tells about what could be a solution:

        «Elster forteller at han har sans for et løsningsforslag som er blitt lansert av en krets av amerikanske toppøkonomer: Høy skatt på fossile produkter kombinert med en en høy importavgift på varer fra land som ikke har tilsvarende fossilskatt. Inntektene fra disse skattene skal så fordeles jevnt mellom borgerne. Dette kan fungere, mener Elster.»
        So also Elster seems to believe in the feasibility of a substitution from FF to RE, and at least in this interview he is not asking questions about the constraints and limitations with the economic models this policy recommendations rest on.
        The full interview in norwegian behind a paywall:

        • Just another academic with non-feasible solutions. Taxing this or that won’t help. All nations want to use more energy. To reduce sea oh two emissions one must use less energy (since renewable energy is just an extension of fossil fuels).

          Simple as that. That’s why discussing “solutions” to glowball worming problems is futile.

          • It is not futile as it seeks to focus more power to the government industrial mass production complex. The new green deal is such a device.

            You are sorely mistaken if you thought it was about caring about our beloved earth. It’s a scam, like all the other smoke and mirrors shoved out from the lackeys and rulers of old consumerism culture.

        • The economic system requires energy to create GDP. In fact, the economic system requires fossil fuels to create so-called renewables. This approach will lead to a high tax on imported renewable devices. In fact, it will lead to a high tax on practically everything. It is a move toward autarky. President Trump is putting tariffs on some goods from other countries, but this proposal would seem to add a lot more tariffs.

          I expect that the prices of fossil fuels would fall even faster, and the system would collapse more quickly, with this proposal.

        • The thing I forgot to point out previously when I answered this is the fact that foods are the prime example of goods that require fossil fuel inputs for their modern production. In fact, there are huge supply lines in many, many areas associated with food production and delivery:

          Machines of all kinds that do the many tasks associated with farming
          Computers to operate all of this machinery
          Irrigation equipment
          Refrigerated trucks
          Cooking equipment for food

          Needless to say, cows and other ruminants produce methane emissions, so are part of the global warming issue as well.

          If Elster’s plan really were to be followed, it would mean that pretty much all imported food would need to be highly taxed. Devices used in the local production of food would also be taxed heavily. I don’t see this plan as having any chance of being popular with people whose wages are not going to rise, to offset all of this effort.

    • These energy drinks are not really good for people, but they don’t realize this. Or maybe they just don’t care.

      It is not just the “Red Bull” energy drink, but plain old “Coca-Cola.” I am not aware that the caffeine is a huge problem. It is the sugar and the carbonation, and the lack of fiber and correct nutrients. Our bodies are not designed to operate on this kind of beverage. We need boiled water, or tea, or water diluted with a little wine (to kill the microbes). Or even a little beer isn’t all that bad.

      • I think the carbonation may be beneficial as those little bubbles help alkalize the body and improve the oxygenation of the blood—according to a book I’ve been reading on the wonders of sodium bicarbonate. It can cure a rainy day, apparently.

        Perhaps the biggest downside of energy drinks or Coca Cola are the sugar and, even more so, the high fructose corn syrup that many of them contain. One of my neighbors has a 35-year-old daughter who is hooked on sugary drinks, and she has ballooned up to the proportions of a baby seal.

        And even the non-sugar ones that contain artificial sweeteners are going to do the body harm. Sparkling water with a slice of lemon and perhaps a dash of vodka is far healthier.

        • Thank you, Tim.

          When I was 17, my paternal grandmother died of diabetes. In those days there was no effective medication (insulin would not be synthesised until 1978) so she had been bedridden for several years.

          It was obvious that, with a fair degree of probability, I carried the gene. So I stopped eating sugar? No: it took me about three years to kick the habit, but from then on, no sugar in coffee, tea, soft drinks (which I also mostly avoided), and no desserts. Well, maybe one dessert a month, just to remember the taste.

          So, every morning unsweetened grapefruit juice (rich in potassium), diluted 1 for 1 with sparking mineral water (rich in magnesium), bottled at an Alpine spring first used by the Roman Empire and pretty much sustainable. And, of course, wine.

          Yes, it was hard, but perhaps one reason I’m still here.

            • Exactly, Gail. Which is why, upon moving to Singapore, I stayed within walking distance of work, and walked every Sunday also (yes, it was a six day working week)

  3. “Another shadow financier in India has defaulted on a debt repayment, signaling the nation’s yearlong credit crisis is far from abating.

    “Altico Capital India Ltd., a non-banking finance company that focuses on lending to the real-estate sector, didn’t pay 199.7 million rupees ($2.8 million) of interest on borrowings from Dubai-based Mashreqbank PSC, Altico said in an exchange filing on Thursday.”


    • The Altico Capital article also says:

      Altico’s default puts a spotlight on India’s property sector, which has been one of the main recipients of funding from shadow lenders, who are struggling to survive a funding crunch. Moody’s Investors Service said earlier this month that a pullback in lending by non-bank lenders against property may result in defaults at small- and medium-sized enterprises.

      India’s year-old credit woes began after the shock default by the IL&FS Group in 2018, and many mortgage lenders are struggling to roll over debt.

      The danger is that other lenders will cut back on the loans they are offering. A lot of mortgage loans are temporary. They need to be “rolled over” to a new loan regularly. (US homeowners do not run into this much, but US businesses do, and property loans of all types run into this problem, around the the world run into this problem.) If property values go down, then there is an issue if the full amount of loan should be extended. The temptation is to “extend and pretend.” Maybe the value dip will be temporary.

      If new buyers cannot find loans, it is almost certain that property values will drop.

  4. “The declining economic outlook and increasing political pressure are pushing central banks into more aggressive unconventional monetary policies.

    “Simultaneously, fears are growing that such steps, especially negative interest rates, actually threaten the stability of the financial system. They risk setting off dangerous feedback loops in credit markets and the real economy, where the second and third-order effects are difficult to anticipate or control.”


    • “Mark Haefele, chief investment officer at UBS Global Wealth Management, also has doubts about the ECB’s firepower.

      “The ECB has committed to keeping rates at current levels or lower until it sustainably achieves its inflation target. But the effectiveness of forward guidance rests on central bank credibility. The ECB’s inability to achieve its inflation target a decade after the global financial crisis may undermine its credibility.””


      • “Mass-selling German newspaper Bild on Friday accused European Central Bank President Mario Draghi of “sucking dry” the bank accounts of Germany’s savers, a day after the ECB cut interest rates deeper into negative territory…

        ““Banks could soon pass on lower interest rates to even more customers,” Joachim Wuermeling, a board member of Germany’s central bank, the Bundesbank told Focus magazine.”


          • The problem as described in the “unseen” article you link to is

            Bond prices continue to go up, up, and away, making hedge and pension fund managers happier than a pig in Schmitt – a rural farming town in Western Germany.

            The danger here, however, is not that institutions continue to make money on negative yielding debt.

            What’s so hazardous is that if the ECB’s plan works and a European revival finally arrives, all that negative yielding debt will soon turn positive.

            And a yield increase of only 2% would gouge corporate bond holders (mostly institutions at this point) with downright ruinous 50% losses.

            The longer the yield, the bigger the change. Thus, a 50-year bond would have an especially big swing.

            • Gail, the “rule of thumb” here is the number 72. If you do the math, you find that if interest rates rise to 2%, then a 50 year bond at 0% will lose 70% of its value overnight.

            • Fun! Of course, I expect that those buying them are expecting that interest rates will continue to fall.

              Whenever the US – China relationship starts looking a bit better, interest rate starts to rise again. When it goes downhill, interest rates fall. Derivatives are particularly subject to problems when there are fast changes.

    • Somehow, more money is needed in the everyone’s hands. Lower interest rates aren’t really doing this. They aren’t encouraging people to buy more cars, for example.

      • More paper wealth doesn’t help either, the only way to realize it is to sell and then the asset is gone, dividend paying stocks are great if purchased well.
        My understanding is there are fewer companies listed today than say twenty years ago, the only way to have the same income the next time the seller sells is for the stocks to appreciate in price, this assumes the overall wealth remains constant as with a bond. E.g. if a person has eleven stocks and sells one for ten dollars, the remaining ten need to increase in value ten dollars total, the next sale of one stock leaves nine stocks which need to increase in value by the value of the stock sold, this quickly gets out of hand.

        Dennis L.

        • I got curious and looked up what the World Bank data said about the total value of shares of stock for various countries and country groupings. This is what they showed, as the sum of total value, as a percentage of GDP.

          The conclusion a person comes to is that it depends a whole lot on when a person invests. Japan’s big run-up in value came before 1989. (That is when Japan’s debt bubble started collapsing.) The US’s big run up in stock market values came before 1999. (1999 is when oil prices were lowest. It also marks the end of the growth of the share of the population with jobs.) The Euro Areas’s big run up in value came before 2000. (The year 2000 was the year of peak oil extraction for Europe.)

          This chart shows that the value of the Euro Area’s stock are far lower than those of Japan and the USA, as a percentage of GDP.

          It is also possible to look at the US$ value of shares of stock. Currency relativities will make a big difference in that chart.

      • Gail, lower interest rates don’t work with prudent people. They lower the future value of peoples’ savings, so prudent people save more to make up the difference, and therefore spend less.

        The only effective ways to put more money into everyone’s hands are first, to redistribute wealth, which won’t happen. Falling house prices, for example, are a good thing because they are a transfer of wealth from richer (sellers) to poorer (buyers), but this is anathema to Modern monetary theory.

        The second way is to create more real wealth to back the money, but again MMT deprecates this route, because it teaches that debt magically creates wealth. It also offends people who believe that debt makes the world go round, in spite of some six hundred years of “letters of credit” telling them the opposite.

        But surely, to close the loop, not buying a car does indeed leave more money in the hands of the non buyer, to be spent on things more important that getting faster and more expensively from point A to point B. I’m well aware, for example, that the money I didn’t spend on a car would have funded three taxi rides a day for ten years. And the money I didn’t spend on them funded books, music, holidays, and visits to my distant children.

        • Falling housing prices are likely to lead to huge debt defaults, however, as people who are forced to move find that the remaining balance on their loan is greater than the equity in their home. Businesses have exactly the same problem. It is my impression that mortgage loans for businesses seem to need to be renegotiated every five years or so, to reflect the changing interest rate and property value situation. If prices are rising or even flat, there is no problem. But if property values are falling, then there is a need to cover up the problem, to the extent possible. For a while, lenders tend to “extend and pretend.” But at some point, businesses close or something else happens to make it clear that the debt is not really payable.

  5. “The world hasn’t seen such staggering numbers of people fleeing violence, persecution and desperation since World War II — and countries that had offered safe harbor are beginning to turn them away…

    “The vast majority of displaced people flee not to wealthy Western countries, but to their neighbors. It’s there that efforts to curb protections are most acutely felt…

    “Turkey hosts more refugees than any other country.”


    • “German Chancellor Angela Merkel’s government is watching with alarm the growing number of migrants reaching the Greek islands from Turkey.

      “The swell of asylum seekers crossing the western Aegean Sea is a sign of trouble in the arrangements hashed out with Turkey that eventually staunched the flow of arrivals during the crisis of 2015 and 2016. A new influx, even if nowhere near the same scale, has the potential to stir up trouble for Merkel…”


    • A wise man once defined overpopulation as the situation where human numbers are destroying human values. We are well beyond that point, and countries are (at last) beginning to realise that their hospitality is simply destroying their own values.

      • This assumes that those values actually is something more than savagery hidden behind the veil of industrial civilization.

        Nobody knows how to establish and to maintain a functioning society with its connectedness and welfare without the enormous prosperity being shoved down our collective spoiled throats.

        The slightest hint of despair and people resort to nihilistic instant gratification and debauchery to cover for their lack of meaning in, and of spiritual life. There is nobody who cares the slightest in a purely individualistic society.

        Obedience of the rule of law only masks this inherent degradation of culture. The transformation of man to the worker drone is complete.

        • Kowalainen, please permit me to disagree. I shall cite but one example: the systematic and organised gang rape of children.

          This was almost unknown in the West, but is now prevalent in, for example, the UK, Germany, and Sweden. And everyone knows who is doing it: the “refugees” those countries foolishly admitted. This is not a matter of wealth or prosperity, it is indeed a matter of basic human values: values those societies respected and enforced, but that the invaders did not respect, and that those who had opened the gates to those invaders did not enforce, because they deemed their reputations and ideology more important than the safety of the people.

          The Romans knew better: “Salus populi suprema lex”. And they did indeed maintain a functioning society, between the two poles of welfare (“annona”) and crucifixion. I do not approve of the latter, but I have two granddaughters, and if anyone violated them, I would hammer in the nails myself.

  6. “The Trump administration may begin issuing 50-year “ultralong” bonds next year as the government seeks new ways to finance ballooning deficits and tries to take advantage of low interest rates.

    “Treasury Secretary Steven Mnuchin said on Thursday that he had been studying whether there was sufficient market demand for a 50-year bond, which would overtake the 30-year bond as the longest-term debt that the government issues.”

    • “The finances of U.S. farmers continued to deteriorate, with 2.32% of all farmland loans in arrears at the end of June, up from 2.15% a year earlier and the highest share since 2013.
      Default rates on other agricultural loans accelerated to 1.82% from a recent low of just 0.77% back in 2015 and the highest since 2011.

      “The other troubling trend was the increasing delinquency rates for credit cards and other consumer loans, which have been gently but consistently rising since 2015.”


      • Farming is another type of energy production that is not sufficiently profitable for those doing it.

        Some of the problems come in the growing gap between what the consumers and what comes back to the farmers. Part of the problem comes from growing epidemics that are “taking out” pig production in China and other areas. Another part of the problem has been the poor weather. We have come to count on “no problems,” but if we look back through history, problems are very much to be expected. This is part of the reason for stockpiles and for relatively high interest rates. Defaults are very much to be expected, in the whole scheme of things.

        • I have heard this more than once and around my farm there are many Amish whom I never see hurry and who wave at everyone who passes. One farmer does appear to be more progressive than some of the rest, he harvests, plants, etc. with three real horse power instead of two, a 50 percent increase. Horses are of course under the right circumstances self repairing and self replicating.

          Dennis L.

    • And the price of the 50-year bond will be leveraged even more than that of the 10- and 20-year Treasury Bonds by changes in interest rates. So the 50-year bond will help feed interest rate speculation, I expect.

  7. Pingback: Our Energy and Debt Predicament in 2019 – Olduvai.ca

  8. If we take 37 years of declining interest rates, plus or minus one year, as graph 13 suggest, we have until 2021-2023 before T.S.H.T.F.. For me personally, it’s already starting. I’ve always been a fast learner, in this case I wish I was behind the curve.

  9. Very good article. Fig 2 says it all. Each high oil price episode on the trend line is like a heart attack or stroke for the financial system and the economy. I wonder though what will happen to Chinese oil imports when oil production declines due to low prices

    My latest post

    Peak oil in Asia: where will the oil come from for the Asian Century?

    • China cut back its oil production in response to low prices. That is why its peak came.

      According to most models, a large share (40% ?) of future “demand” for oil consumption growth seems to come from China. Once China’s growth in oil consumption levels off, world oil consumption will begin falling. In fact, this may already be happening.

        • “While China country was able to meet its energy requirements by producing 4 million barrels per day (mb/d) from domestic oil fields twenty-five years ago, last year the ratio of foreign oil dependency reached 70 percent…

          “…the Chinese government has been pushing its state-controlled energy companies to increase production from domestic oil fields to reduce dependence…

          “After the implicit request from the Central Government, the three energy giants [Sinopec, Cnooc, and PetroChina] showed their intention to invest a cumulative $77 billion or 517 billion yuan in domestic upstream activities. The economic rationale behind these investments is weak given the maturity of the oil fields in question and their relative depletion.”


          • The one thing that can China can do to influence oil company’s spending is new investments is likely to be to change how it is taxed. Countries generally tax oil companies heavily. If China decided to back off on taxes for oil companies, (“give it preferential treatment”), this can make a big difference regarding what it can afford to spend on new development.

            When I helped write the paper “An oil production forecast for China considering economic limits,” the big thing that made a difference regrading when China’s oil production began to decline was the price of oil. But lowering the tax rate could help as well. This is an indirect subsidy. Often, taxes on oil companies are structured so that the amount of tax falls as the price of oil falls. This way the government is the one that is primarily disadvantaged.

    • I should add, you really have nice charts in your post. I especially like this one.

      China and India both are having huge problems right now, particularly in the area of car sales, but in other areas as well. A huge share of world growth in import demand comes from these countries. As they start having financial problems, they cut back on their imports. This is what drives the low prices, and the belief by OPEC nations that they need to cut back on their production.

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