Recession Ahead: An Overview of Our Predicament

Many people have the impression that recessions come from financial missteps, such as the US subprime loan fiasco. If energy is involved at all, the problem comes from high oil prices as supply becomes inadequate to meet demand.

The real situation is different. We already seem to be on the road toward a new crisis; this crisis is likely to be much worse than the Great Recession of 2008-2009. This time, a major problem is likely to be energy prices that are too low for producers. Last time, a major problem was oil prices that were too high for consumers. The problem is different, but it is in some ways symmetric.

Last time, the United States seemed to be the epicenter; this time, my analysis indicates China is likely to be the epicenter. Last time, the world economy was coming off a high growth period; this time, the world economy is already somewhat depressed, even before hitting headwinds. These differences, plus the strange physics-based way that the world economy is organized, explain why the outcome seems likely to be worse this time than in 2008-2009.

I recently explained what I see as happening in a presentation for actuaries: Recession Likely: Expect a Bend in Trend Lines. This post is based on this presentation, omitting the strictly insurance-related portions.

The big thing that the vast majority of people do not understand is how important energy is to the economy. Because of this issue, I started my presentation with this slide:

Slide 3

After an opportunity for discussion, I offered the explanation that the role of food for humans is very much parallel to the need for energy of various types for the world economy. Food provides people with the energy required if they are to have the ability to think, move and speak. Energy products of many kinds enable the activities that we associate with GDP. For example, energy consumption enables machinery to operate and goods to be transported.

Slide 4 – Larger image at this link.

Using data from Smil, as well as more recent BP data, we can estimate how fast energy consumption has been growing over a very long period–nearly 200 years. We can see that the highest energy consumption growth occurred in the 1961 to 1970 period; the second highest growth occurred in the 1951 to 1960 period. These are periods we associate with rapid GDP growth and prosperity.

On the next slide, I show the same data displayed in a different way.

Slide 5 – Larger image at this link.

On this slide, I make two changes in the way the data are displayed:

  1. The increases in energy consumption are split into two components: (a) energy used to support population growth and (b) all other, which I describe as energy used to support improvement in “living standards.”
  2. A different graphing approach is used.

Note that when population growth corresponds to the full amount of energy consumption growth (in other words, at times when there is no red area above the blue area), energy consumption per capita is flat. High growth in energy consumption per capita seems to correspond to rising living standards, as occurred in the 1950s and 1960s.

While I label the “all other” category as if it is simply changes in living standards, there are other components, as well. One breakdown might be the following:

  1. True improvement in living standards.
  2. Additional energy investments required to offset diminishing returns.
  3. Increasing use of energy for overhead items that don’t get back to individuals, such as energy used to fight pollution or to allow globalization.
  4. Efficiency improvements allowing available energy to be more productive.

Efficiency improvements (Item 4) will allow more energy to be available for improvement in living standards, while Items 2 and 3 in the above list act in the opposite direction. We do not know to what extent these items really offset each other. Thus, “All other” = “Improvement in Living Standards” is only a rough approximation.

Slide 6 – Larger image at this link.

We can see from Slide 6 that whenever there is no red area above the blue area (flat living standards or flat energy per capita), adverse events seem to happen.

For example, the US Civil War (1861-1865) came at a time of low energy consumption growth. The Great Depression of the 1930s came during another period of low energy consumption per capita growth. World War I came at the beginning of this period, and World War II came at the end. The collapse of the central government of the Soviet Union in 1991 ushered in a decade of low world energy consumption growth, in part because of the loss of the central currency of the Soviet Union.

The “China Coal” note at the end pertains to the way that China and its coal supply has helped pull the world economy forward since 2001. This benefit seems to be already declining.

Slide 7 – Larger image at this link.

Slide 7 shows China’s energy production by fuel. Coal production (in red) soared after China was added to the World Trade Organization in December 2001. Beginning about 2012, China’s coal production began to plateau. Depleting mines and low prices for coal have kept production flat. Imports can be used as substitutes, to some extent, but it is difficult to keep costs low enough and provide adequate total supply.

With the loss of growth in China’s coal production, its economy has had to cut back. Each year, we read about coal mine closures and miners needing to find new jobs. We know that China discontinued its paper and plastic recycling business as of January 1, 2018. China has also been cutting back on solar subsidies, leading to fewer jobs installing solar panels. All of these types of changes reduce the number of people who can afford to buy high-priced goods, such as new homes, vehicles and smart phones.

Slide 8 – Larger image at this link.

It is becoming increasingly clear that China is being forced to cut back on heavy industrialization because of its coal difficulties. Slide 8 shows automobile purchases for six large economies. China is by far the largest of these economies in terms of auto sales. China’s auto sales began to slide in 2018 and are sliding further in 2019 (about -11%).

If we look back at the time of the 2008-2009 recession, we see that auto sales of the US dropped precipitously. The United States was the country that led the world into recession. The inability of US citizens to buy cars was a sign that something was seriously wrong. Now we are seeing a similar pattern in China.

China has reported that its GDP growth rate has been slightly lower during 2019, but we really don’t know how much lower. The amounts it publishes are too “smooth” to be believed. The actual GDP growth rate is believed to be lower than the recently reported 6.0%, but no one knows by precisely how much.

Figure 8b – CNBC Chart of changes in auto sales by country, based on data through October 2019. (Not part of original presentation.) Source

Figure 8b gives a little more information about recent car sales by country. We can see from this chart that based on data through October 2019, world automobile sales are expected to fall by about the same percentage (3%) in 2019 as during the recession year of 2008. I find this disturbing.

We can also see the huge impact that China has had on keeping world private passenger auto sales rising. The world economy looked like it was headed into recession in January, 2016, when world oil prices were very low, but a spike in China’s automobile sales at that time helped keep total world automobile sales rising and allowed world oil prices to rise from their low point.

In the next sections, I provide some background regarding this story.

Slide 9

Slide 10 – Larger image at this link.

Slide 10 shows the way that I visualize the world economy self-organizing and growing. The economy grows by adding new “layers” of businesses, products, consumers and laws. Unneeded products, such as buggy whips, are dropped from the bottom. Unprofitable businesses close. In some sense, the economy is hollow because of these deletions. It cannot easily go backward because, for example, the support services for widespread use of transport using horses are lacking.

Energy is used to operate all aspects of the system. One part of the system is a self-organizing financial system that helps decide, through wage levels, who gets the benefit of the goods and services that are made. This financial system includes self-organizing interest rates and self-organizing commodity prices.

The most important connection within the economy is the one I show at the center as “Consumers = Employees.” Consumers are very dependent on their wages as employees. If the economy is to continue to operate, workers must receive high enough wages to purchase the goods and services the economy produces. Even the lower-paid workers need to be able to afford food, housing and transportation, or the economy will tend to collapse.

Slide 11

When we look back through the history on Slides 4, 5 and 6, we see that the growth of energy consumption is very important in how economies operate. The theories of Ilya Prigogine explain why this is the case; when adequate flows of energy are available, self-organizing systems are able to grow.

Few economists today include energy consumption in their models, however. Economic theory has grown over time in its own “ivory tower.” Like other academic subjects, it depends on early theories and the process of peer review. The views expressed must also be pleasing to those in power, who would like everyone to believe that politicians, rather than the laws of physics, are in charge.

Slide 12

There are many types of self-organizing systems that grow. They all, directly or indirectly, require energy. Plants and animals of all types are self-organizing systems that grow. Hurricanes grow using the energy that they get from warm water.

Governments grow from the tax revenue that they are able to collect; they use the revenue to buy energy products such as electricity to operate governmental offices, oil to build roads and operate police cars, and natural gas to heat buildings.

The Internet grows through the revenue collected to provide its services. The Internet uses revenue to buy computers (made with energy products) and electricity to operate those computers.

Slice 13

Nearly all 0f the energy we use is hidden. For example, modern food production is very much dependent on energy consumption. Agricultural machines are made using energy products. Soil amendments, including organic soil amendments, are transported using fossil fuel energy. Refrigeration is possible through the use of energy. Hybrid seeds are only possible through energy consumption. Planting seeds by digging with a stick would only use human energy, but such a process would be terribly inefficient.

Slide 14

Slide 15

Most of us can easily recognize today’s goods and services, such as those listed.

Slide 16

Promises of future goods and services act like promises of future energy supplies. This happens because creating goods and services that people can actually use requires energy supplies of the appropriate type.

When people get cash or a check, they expect to use it to buy goods and services. Creating these goods and services requires energy consumption. If there is no energy of the right type available, the goods and services won’t be available to fulfill the promises.

Slide 17 – Larger image at this link.

Promises of future goods and services tend to grow faster than actual goods and services because it is these promises that, in some sense, “pull the economy along.” For example, if a young person gets a loan, (s)he can often buy a new car. The fact that a new car is being purchased leads to more jobs in the supply line leading up to new car production. Or, if a business takes out a loan or sells shares of stock, it can use the proceeds to hire employees. It is these growing wages that keep the system operating.

As long as the economy is growing rapidly, the mismatch between growing debt and actual output doesn’t become apparent. As the economy slows, some workers find themselves working fewer hours. Some businesses become less profitable and lay off workers to try to restore profitability. The catch is, with fewer workers, the economy slows even more. It usually takes more debt, at lower interest rates, to get out of such an economic slowdown.

Slide 18

Slide 19

There is a lot of confusion about prices. “Demand” is what people, through their wages and debt, can afford. As economists tell us, price depends on supply and demand.

In the short term, prices tend to bounce around a lot. The short term buyers of oil are oil refineries. They need to keep their employees busy. If they see a shortage of oil, they may bid up the price of oil to allow their workers to continue to be employed.

Over the longer term, prices of all energy products tend to depend on consumers’ ability to afford finished products, like cars, homes and cell phones. Producing these objects and shipping them takes energy. They also use energy as they operate.

Slide 20 – Larger image at this link.

The various energy prices shown here are simply a few of the many, many energy prices that we see around the world. Strangely enough, prices of all energy products tend to fluctuate together, over the longer term. Prices depend on affordability of end products, such as cars, homes, computers, food and clothing. Our problem since about 2012 has been lack of affordability of end products.

The primary way of raising affordability is by increasing productivity. Increased productivity is made possible by increasingly leveraging human labor with devices that are built with energy and are operated using energy. For example, a worker with a ditch digging machine is much more productive than a ditch digger with only a shovel. An analyst is more productive with a computer and Internet access than with only pencil and paper.

With higher productivity, more goods are produced in total. As long as not too much of this productive output is skimmed off the top (by governments, or by business hierarchy, or to pay for the devices and their fuel), it is possible for each worker to afford more goods and services, raising total demand.

An alternative way of raising affordability is by adding more debt at ever-lower interest rates. This approach tends to make goods such as cars, homes, and factories appear more affordable because their monthly payments are lower. This added-debt approach only works as long as the economy is growing quickly enough. If the economy slows too much, the added debt leads to financial crashes of many types.

Slide 21

Slide 22

Many people think that they know the amount of oil that can be extracted based on the current technology and the assumption that prices will eventually rise high enough to extract all of the fossil fuels that seem to be available. For example, the International Energy Agency has prepared reports in which it shows expected oil availability if oil prices rise to $300 per barrel.

The catch is that even if oil prices can bounce high, it is not clear that they can stay very high. The current price of oil is only in the $55 to $65 per barrel range. A price of $300 per barrel will allow oil extraction using very advanced technology. We don’t have any evidence that oil prices can stay this high because demand comes primarily from wages. Prices cannot stay high without adequate support from wage levels.

Of course, the issue is not just oil prices staying sufficiently high. Natural gas, coal, uranium and electricity prices all have difficulty rising high enough and staying high enough. Commodity prices such as copper and steel have the same issue.

Slide 23

There are many people who say, “Of course, oil prices will rise. Oil is a necessity.” They forget that it is really a two way tug of war between producers getting a high enough price to be profitable and consumers getting a low enough price to be affordable. There will be a winner and a loser.

People also forget that most commodity use is hidden. We see the fuel we buy for our personal vehicles, but there are a huge quantity of oil products required for shipping goods, paving roads, growing food, and for many other uses that we are not aware of. While we might be able to pay a little more to fill our gasoline tank, most of us would not be able to simultaneously pay more for food, transported goods of all kinds and road maintenance.

Slide 24 – Larger image at this link.

Economists often assume that if energy prices rise, wages will rise, as well. If we look at the data historically, however, it doesn’t work that way at all. What happens is the opposite: average wages tend to rise as long as oil prices stay low. Once oil prices spike, average wages tend to flatten out.

The amounts shown on Slide 24 are average wages, computed by taking the total inflation-adjusted wages for the population in total and dividing by population. When oil prices spike, recession soon sets in. The reason why average wages fall is partly because more people become unemployed. Other workers find it necessary to accept lower-paying jobs.

Slide 25 – Larger image at this link.

Many people focus on the run-up in oil prices to July 2008. An equally important point is the fact that the world economy has not been able to maintain these high prices since July 2008. The general price trend has been downward. The cuts by OPEC have not had a material impact.

Slide 26

Citizens of the United States, Europe, and Japan are used to thinking of high energy prices as being a problem because they are from countries that require substantial imported energy to maintain their GDP. For example, Greece will sell fewer trips on its tour boats, if oil prices are high. This will have an adverse impact on employment and the ability to repay debt with interest.

If a country is an oil exporting country, low oil prices are an even worse problem. This happens because oil exporting countries tend to earn a large share of their revenue from taxes on the sale of oil. These taxes can be much higher if oil is selling for, say, $120 per barrel than if it is selling for $60 per barrel. These tax dollars are used to provide subsidies to offset the high cost of imported food. They are also used to build industry and infrastructure to provide employment to the population.

If oil prices are too low, oil exporting countries will tend to cut back on oil production. In fact, this has been happening for OPEC for the entire year of 2019.

Similar problems occur if commodity prices of any kind (coal, natural gas, uranium, steel, copper, etc.) stay too low for an extended period. Producers go bankrupt, or they stop production, or they pay their employees so poorly that the employees go on strike. Sometimes, they may even start rioting. Many of the riots around the world today are related to low commodity prices.

Slide 27

Slide 28 – Larger image at this link.

The world experienced spiking oil prices in the period leading up to mid-2008. These high prices caused a recession and much lower prices followed. The chart on Slide 28 gives a somewhat exaggerated view of what goes wrong with high oil prices.

If the price of oil suddenly spikes to two or three times its previous price, both the price of food and gasoline are likely to increase. This change tends to lead to a big shift in a family’s budget. Debt payments, such as for a home and car, are pretty much fixed, so the big increase in food and gasoline prices must be taken out of the budget earmarked for everything else. This leads to cutbacks in discretionary spending such as vacations, restaurant meals, and charitable contributions.

In a short time, there are layoffs in discretionary sectors. Those who are laid off are more prone to defaults on loan payments. The problem soon escalates to a recession, with high unemployment and low oil prices.

Slide 29

Strangely enough, central banks push back against high oil prices as well. They know that high oil prices lead to high food prices. Citizens of energy-importing countries will be unhappy with elected officials if oil and food prices rise. Thus, central banks tend to raise short-term interest rates, as soon as they become concerned about high oil and food prices.

The recession that follows will quickly bring food and energy prices back down. If food and energy prices fall, the low prices will be the problem of the energy producers. Oil exporters will find their tax revenue too low, but the high-price problem of oil importers will be gone.

Figure 29b- Slide from a different presentation, showing the trend in interest rates. Larger image at this link.

You will recall that the rapid energy consumption growth periods were 1961 to 1970 and 1951 to 1960. During these periods, the economy was growing almost too quickly. The Federal Reserve was able to keep raising interest rates, as a way of holding down economic growth. It was not until 1981 that the pattern changed from raising interest rates to falling interest rates.

Since 1981, the US Federal Reserve and other central banks have been reducing interest rates. Lowering interest rates and rising debt levels, as mentioned previously, makes goods appear more affordable because of lower monthly payments. The concern now is that interest rates are about as low as they can go. Central banks no longer have room to offset recessionary tendencies (because of slow growth in energy consumption) by lowering short-term interest rates.

Slide 30

Most people never consider the possibility of low energy prices leading to collapse. It looks to me like this is the danger facing us today. Let’s start by looking back at what happened in 1991.

Slide 31 – Larger image at this link.

When the central government of the Soviet Union collapsed in 1991, the individual republics making up the Soviet Union were left on their own to find new currencies and new trading partners. Satellite countries of the Soviet Union were affected as well. Slide 31 shows that the consumption of many types of resources dropped for many years for the whole area. The low point was not reached until 1998.

Slide 32 -Larger image at this link.

If we look back to see what had happened previously, the Soviet Union was an oil producer and exporter. When oil prices were high in the 1973 to 1980 period, the Soviet Union prospered. But then low prices came along, at least partly because the US Federal Reserve raised interest rates to almost 20% in the 1980-1981 period. (See Figure 29b.)

The long-term low oil prices, in some sense, indicated that the world economy was producing too much oil; some inefficient area(s) of production needed to leave. The Soviet Union may have been singled out by the self-organizing economy because it used energy products in a less efficient manner than other economies. Its adverse outcome may also have reflected the fact that its cost of production was higher, leaving less of the sale price for reinvestment and taxes.

Slide 33

The Soviet Union is an example of what can happen if oil prices stay too low for several years. The central government of such an economy can collapse.

Slide 34

When commodity prices are too low, the economies of countries exporting those commodities are stressed. This is why we see so many uprisings in commodity-producing countries right now. Iraq with its oil has been having protests. Chile, with its copper and lithium exports, has been seeing protests. South Africa with its exports of coal, precious metals and gems has been having riots. With some escalation, any of these low-price situations could lead to an overturned government.

Slide 35

Slide 36

In Slide 36, I give an example of two different kinds of ingredients in a cake:

  1. Ones that are substitutable: the flavoring, which can be vanilla, almond, or something else
  2. Ones that are not substitutable: the flour, which is the energy product

With too small a quantity of flour, all we can do is make a smaller cake. Perhaps we can substitute a different energy product, but electricity most certainly will not do! Some bacteria eat electricity, but humans do not. Substitutability is limited, even within energy products/carriers.

Economists make models focusing on the special case when a material is not essential for the economy. This gives a misleading impression. If they had looked back at what happened when energy supplies were low relative to population growth, as we saw on Slide 6, they could make much better models.

Slide 37

We seem to be sitting on the edge of some form of collapse for at least parts of the world economy, right now.

Without enough energy consumption growth, top-level organizations, such as the European Union, the United Nations and the World Trade Organization, are especially at risk of collapse.

Slide 38

Slide 39

One of our big problems today is excessive wage disparity. High-wage workers rarely have trouble being able to afford homes, cars, vacations, and air conditioning. It is non-elite workers, the ones who have not been able to find high-paying jobs, who have an affordability problem.

The wage disparity problem is an outgrowth of how the physics of the economy works. If there are not enough goods and services to go around, the physics of the economy effectively “freezes out” some of the workers. Under this arrangement, there will be some survivors even if there is not quite enough for everyone. In some sense, the “best adapted” are able to survive. If the inadequate supply of finished goods and services were spread around evenly, there might be no survivors at all.

Slide 41

The thing that is key is that workers need to be able to afford finished goods and services produced by the economy. If too large a share of wages goes to high paid workers, or to owners of robots, there is not enough left over for the “regular” employees.

Slide 42

Many workers have seen their jobs disappear as their employers moved production to another country where wages were lower. Or, jobs can remain, but the wages will fall from the low-wage competition.

Slide 43

US income disparity seems to be as great as it was in about 1930, at the time of the Great Depression.

Slide 44

Slide 45 -Larger image at this link.

If we look at historical world energy consumption by fuel, we observe that it has been rising the vast majority of the time. The little dip that we see about 2008-2009 occurred at the time of the Great Recession. It doesn’t take much of a cutback in energy consumption to cause a major problem.

Back at Slide 20, I remarked,

The primary way of raising affordability is by increasing productivity. Increased productivity is made possible by increasingly leveraging human labor with devices that are built with energy and are operated using energy.

The world economy requires growing energy supply, of suitable kinds, to operate. If the quantity of energy available is reduced, productivity is likely to nosedive. This is true even if the reduction is intentional and seems to be for a good cause, such as reducing CO2 emissions.

We seem to be heading for a contraction in energy supplies now because of continued low energy prices. Fossil fuels are, in some sense, leaving us, whether we like it or not. World coal production has been flat to falling since 2012. IPCC scenarios assume a very different  pattern: Fossil fuel use, especially coal, will grow indefinitely, presumably because of high prices and improved technology.

Many people are hoping that wind, solar, and hydroelectric will someday replace fossil fuels. I consider this highly unlikely because all three are made using fossil fuels. Furthermore, these “renewables” in total represented only 10% of world energy supply in 2018. The 10% is divided as follows: wind, 2%; solar, 1% and hydroelectric 7%.

Slide 46 – Larger image at this link.

There clearly is a correlation between GDP growth and energy consumption growth. China with its growing coal use was pulling the world economy along, especially in the 2002 to 2012 period. Recently, it has lost much of this ability.

In my opinion, Trump’s tariffs are not the cause of our current trade problems. Tariffs seem to be enacted whenever growth in energy consumption per capita is very low. Tariffs were enacted both immediately before the US Civil War and at the time of the Great Depression. The problem is that jobs that pay well indirectly require significant energy consumption. When growth in energy consumption per capita is low, it becomes impossible to find enough jobs that pay well for everyone. Tariffs are used in an attempt to keep jobs that pay well at home.

Slide 47

We don’t know quite what will happen. The closest analogy is the Great Depression of the 1930s. More financial problems seem likely. In fact, they could escalate quite quickly. More strikes, such as those currently going on in France, seem likely. The situation is likely to play out a little differently in various countries.

The physics of the situation seems to try to keep some parts of the system operating, if at all possible. But, as mentioned at Slide 10, the self-organizing system deletes parts of the economy that are no longer needed. We no longer have an economy that can operate with horse and buggy, for example. We can’t just “go backwards” to an economy of an earlier era.

Slide 48

We are already seeing changes in this direction. Hong Kong’s protests are in the news practically daily. Germany is experiencing job layoffs. We know that in an interconnected world, a recession that starts in one large country is likely to eventually affect much of the rest of the world.

Now we are in a waiting period, waiting to see what happens next. Major changes seem likely over the next five years, but they could happen much sooner.

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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638 Responses to Recession Ahead: An Overview of Our Predicament

  1. KM says:

    The chart that shows the critical point where interest rates change from postive to negative in the 1980’s is one of the most interesting charts you have published. It is precisely at this moment that the human population breached the sustainable carrying capacity of the planet in terms of ecological footprint analysis. This is also the moment where ‘approximatley’ linear growth in excess claims to underlying biophysical wealth went properly exponential. Wow!

    Gail, Thank you. Your

    • 1980 is also the point that Ronald Reagan was elected U.S. President. We were already aware that we had an energy crisis. Jimmy Carter had made that point clear in his famous sweater speech.

      Reagan was the first divorced man to be elected president. In many ways, he was not as “nice” a man as the presidents before him. The change sort of reminds a person of Donald Trump’s election. Reagan’s wife consulted her astrologer regarding when he should sign bills into law. People clearly wanted a change from the nice Jimmy Carter.

      Debt, especially the use of debt as leverage for financial purposes, rose rapidly when Reagan was in office. Basically, added debt was used to try to pull the economy forward faster than it would normally grow. GDP is based on goods and services added during a period. It doesn’t matter whether these goods are all purchased on credit. By greatly ramping up debt, the economy looked like it could afford a lot more than it could otherwise. The US began importing a lot more small vehicles from Japan in this period, I believe. This helped Japan’s economy grow. Imports also grew from other countries, I believe.

      You say,

      It is precisely at this moment that the human population breached the sustainable carrying capacity of the planet in terms of ecological footprint analysis. This is also the moment where ‘approximatley’ linear growth in excess claims to underlying biophysical wealth went properly exponential.

      Do you have a link to show where this happens?

      • Robert Firth says:

        Sigh

        We passed the sustainability point in about 1900. We were saved from famine only by Fritz Haber and his nitrogen fixing process. This bought us about two centuries of time, which we used to displace sustainable agriculture with unsustainable, eventually worldwide. We are at the bitter end of that road, also.

        • The fact that we are dealing with a Ponzi Scheme makes it hard to pinpoint a time when humans were ever sustainable. My impression was been that the calculation have been done in such a way as to make it look as though, with some effort, we could become sustainable. This is clearly nonsense.

        • Wow! Someone who actually understands the meaning of “sustainability.” Congratulations.

          The global food supply – with China and India moving from manure to NPK fertilizers this past decade – is now 95% dependent on NPK. NPK fertilizer and food management chemicals are dependent on petroleum/petrochemicals and a stable petroleum economic paradigm.

          While we all hate the environmental impacts of the petroleum industry and noxious ICE exhaust fumes – we are no where near renewable energy sustainability and probably won’t be in two decades. With petroleum depletion economics scheduled to rear it’s uncompromising ugly head in about two decades – the global economic/energy non-sustainable house of cards will crash.

          We had all should hope someone figures out fusion before then – and hope even harder that fusion energy is a lot less expensive than any of our current sources. Because that’s about the only thing that will change what is coming from our increasing energy deficit.

          • Xabier says:

            No truly sustainable farming society without a very high mortality rate, and lots of animal dung. Period.

          • Robert Firth says:

            Thank you, Durwood. But I owe most of it to John North, at one time Reader in the History and Philosophy of Science at the University of Oxford. He always tried to elucidate the impact of science (and the consequent technology) on the human world.

            He believed (as I do) in the hierarchy displayed on the Portico of the Library of Celsus. Knowledge is the lowest step; then come Understanding, Virtue, and finally Wisdom. And I sometimes think we have been descending that scale ever since the Hellenistic Age.

        • Xabier says:

          ‘The bitter end’: only by treading the Path of Thorns do we arrive at Enlightenment.

          • Robert Firth says:

            Duhkha, Samudaya, Nirodha, Marga I believe are the four Stations of the Trail. And yes, on balance I agree.

        • Duncan Idaho says:

          Yep, Haber has doubled the population (at least).
          http://people.idsia.ch/~juergen/haberbosch.html
          “Their Haber-Bosch process has often been called the most important invention of the 20th century (e.g., V. Smil, Nature 29(415), 1999) as it “detonated the population explosion,” driving the world’s population from 1.6 billion in 1900 to almost 8 billion today.”

          That game is coming to an end- the possibilities are endless, but none good.

      • KM says:

        Page 86-87 of the following link for Ecological Footprint (Dr. William rees). https://www.zoology.ubc.ca/~ally.member/zoo502/Speaker_PDF/Rees_FatalSuccess.pdf

        The long term global total “money and debt equivalents” chart I cannot source right now. If I recall, either you had posted it in one of your articles or Nicole Foss had done when she used to write for the Automatic Earth. What I distinctly recall is that the section of the global money supply chart with smallest curvature that rougly partitions the exponential into a “flat line” and a “vertical line.” superimposed over the approximate range at which global ecolgical footprint carrying capacity was breached. When humanity hit hard limits to real growth in terms of global carrying capacity, we started rapidly creating excess claims to underlying real wealth, and effectively reallocated 30 years of global annual gdp (1.5 quadrillion) of virtual demand from the future, and reified it in the present.

        That interest rates reached a critical point at this same juncture is amazing. No doubt this is also the juncture where marginal returns of socioeconomic complexity also reached a critical point and started to trend negative. It seems that every complex civilization that has collapsed has engaged in reallocationg excess claims on wealth from the future as a terminal attempt to deal with ecolgical carrying capacity overshoot.

        • Niko B says:

          I have just finished reading William Catton’s Overshoot (actually listened to it read by Michael Dowd). Some fantastic insights on our predicament. One profound observation is that we humans went from hunter-gatherers to agrarians and we are back to being hunter-gatherers, today we hunt and gather fossil fuels.

          I highly recommend the book.
          download link for pdf

          https://monoskop.org/File:Catton_Jr_William_R_Overshoot_The_Ecological_Basis_of_Revolutionary_Change.pdf

          soundcloud reading

          • Robert Firth says:

            Agreed, highly recommended. And go on to his “Bottleneck”, also one of the treasures in my library.

          • “today we hunt and gather fossil fuels.”

            Interesting idea!

          • Artleads says:

            Wasn’t there always an energy source to gather? At one time it was slaves. Or land?

            Had been thinking of the new hunter gatherer age as one of using what was most easily available. If the natural and fossil fuel resources are no longer cheap or abundant, would that foreclose on discarding whatever energy resource was embedded in human or natural resources? It seemed that if you can’t make anything substantially new, you can only gather what is already in place.

        • KM,

          I wonder if this is the graph you are thinking of. It shows Total US Debt (including debt carried as bonds, besides bank debt) divided by Gross Domestic Product (GDP). GDP includes whatever inflation there was in each year’s reported growth.

          The Debt to GDP ratio is quite flat until 1980. Then it “takes off.” It stops in 2009 and heads back down again.

          This is a chart of the year by year percentage increases in both total US debt and total GDP. (In other words, the percentage change in both the numerator and the denominator.)

          You can see that prior to 1980, the two lines track each other fairly closely. After 1980, the blue debt growth line soars above the GDP growth line. Part of the problem is that the red GDP growth line is lower compared to prior to 1980. Adding lots of debt doesn’t seem to help very much.

          Since 2009, both debt growth and GDP growth are lower.

      • Wolfbay says:

        The nerve of president Carter suggesting even mild conservation by wearing a sweater and lowering the thermostat. Austerity won’t fly politically until it’s forced upon Americans.

      • tehodler says:

        I don’t remember the sweater speech but I remember the Moral Equivalent of War speech https://en.wikipedia.org/wiki/Moral_Equivalent_of_War_speech as the one where Carter called for conserving gasoline, turning down thermostats, and funding the National Renewable Energy Laboratory. Both speeches were in the first half of 1977 and I might be conflating them.

        1980 was the year I became politically aware, the year I read 1984 by Orwell, and the year I turned 18 in November. It was not a happy time for me. I was pretty sure Reagan was bad news. I was right.

        Sensitive, self-aware kids turning 18 now have it worse. I did what I could. It wasn’t much. Mostly, I refused to participate in the fossil-fueled orgy of consumption and I didn’t have kids. I did a few other things but once I saw the insides of the USAF, I knew I was never going to have a career in the aerospace industry.

  2. MG says:

    The Slovak government plans to fight glbl wrmng with raising various taxes, among others on diesel.

    https://finweb.hnonline.sk/ekonomika/2056813-diesle-mozu-prist-o-svoju-klucovu-prednost-vlada-chce-aby-nafta-zdrazela

    I guess that this is another reason for the depressed oil prices.

    • Right. Helps push the economy of Slovak down, relative to that of other countries.

      • MG says:

        But if the countries with the favourable climate, water supplies etc. raise the taxes, they push into problems the oil exporters with the harsh environmental conditions.

        The losers are always the oil exporting countries with the worse environmental conditions, as they need more imports in exchange for oil.

        I think we can not say that this will push the economy of Slovakia down. Maybe the authors of this proposal count with lower prices of oil due to the falling demand. Moreover, if this is made by all major oil importers who are important exporters of goods and food, the problem is on the side of the oil exporters, who need imports.

        If OPEC cuts oil production and the oil importers raise taxes, what happens? OPEC or some other oil exporters who need imports of goods and food must pump more or lower the oil price. Is that not so?

        • If countries cut fossil fuel production for any reason whatsoever, I am concerned that the current debt bubble will collapse and a large share of the world economy will start collapsing. Raising taxes is a way to start the downward cycle. Japan raised general taxes on October 1. This would also tend to have an adverse impact. The US is going the opposite direction, more and more debt.

  3. Kowalainen says:

    I wonder how much of the energy production is being cannibalized by the production needs itself, and what is left to power the real economy.

    In the worst case scenario there isn’t any real net energy available for the economy if a lions share of it gets consumed in the extraction, transportation and refining processes.

    Any thoughts on this Gail?

    • “In the worst case scenario there isn’t any real net energy available for the economy if a lions share of it gets consumed in the extraction, transportation and refining processes.”

      There is a little truth to this, but the story is over-emphasized. Early in my post, I say

      While I label the “all other” category as if it is simply changes in living standards, there are other components, as well. One breakdown might be the following:

      (1) True improvement in living standards.
      (2) Additional energy investments required to offset diminishing returns.
      (3) Increasing use of energy for overhead items that don’t get back to individuals, such as energy used to fight pollution or to allow globalization.
      (4) Efficiency improvements allowing available energy to be more productive.

      The Energy Returned on Energy Investment calculation is sort of a measure of one type of diminishing returns. In other words, it is part of Item (2) in the list above.

      We can break down Diminishing Returns in Item 2 into at least the following pieces:
      (a) The problem of needing more of food, as population grows, but arable land does not. More intense agriculture is needed, often with irrigation and trucked in soil amendments.
      (b) The problem of needing more fresh water, as population grows. Often desalination is needed. Then appropriate minerals need to be added back in.
      (c) The problem of needing more metals and other minerals, from ever more depleted mines, as population grows.
      (d) The problem of needing more fossil fuels, to keep up with the rising population.
      (e) The Energy Returned on Energy Invested Issue, which is usually just defined “at the wellhead.”
      (f) Energy consumption beyond the wellhead, related to fuels.

      I think EROEI only applies to (e). In fact, it badly measures this for so-called renewables, because there are so many hard-to-measure components.

      For natural gas and coal, I expect the big costs are the delivery costs.

      Another gripe I have about EROEI is that it doesn’t measure different “kinds” of energy correctly. Oil is a high-valued energy product. Intermittent electricity at best substitutes for coal or natural gas. These are much lower valued. It makes no sense to waste a high-valued product in producing a low-valued energy product. Without an amazing amount of storage, we should not be considering intermittent electricity as “electricity.” It is some sort of low-valued intermediate product.

      • rilygtek says:

        If I get you correctly, the energy “losses” from the wellhead to the consumer might be substantial and the world oil production increase might not end up in the economy since it is cannibalized to sustain a flat or declining net energy delivery to the economy?

        Could this be a part of the explanation for the stagnation of real economic growth, as most of the work it is supposed to deliver is dissipated in the energy production process itself?

        • It is part of the story. So is a growing world population, and the need for more resources of all kinds for a growing population. For example, agriculture needs to be more efficient to get more food from the same amount of arable land. And as Niko B says, that population would like a more resource intensive lifestyle.

      • Niko B says:

        It is not just population growth, it is also that the population is striving for a more resource intensive lifestyle. Homo sapiens is really Homo colossus (W. Catton).

      • Robert Firth says:

        Thank you, Gail, a clear and comprehensive presentation. One other factor I would add in though, is life cycle cost. I believe wind power already has a negative total EROEI, and this is currently manifesting itself in the high cost of maintenance and repair of the installations themselves and the huge infrastructure they require, much of which has to be built out into some remote and difficult parts of the planet. Add the cost of decommissioning and restoration of the landscape, and the whole thing looks unaffordable.

        Solar power has, on paper, a positive EROEI, but that excludes the immense cost of cleaning up after the pollution required for their manufacture, and the probably larger, but unknown, cost of cleaning up the pollution the installations themselves will inflict on the environment. It may seem a good idea to put solar panels on your roof, but if you end up poisoning your children and grandchildren, what is the benefit? Atoms and molecules that can convert sunlight into electricity are, by simple quantum mechanics, also chemically active, and are largely foreign to the biosphere; which is to say, poisonous.

        • Thanks! I agree that clean-up costs after the fact need to be included as well.

          They also need to somehow have battery backup included, or alternatively, they need to get a very substantial haircut for only a fraction of the intermittent electricity being truly useful to the grid.

          Unfortunately EROEI is not amenable to dealing with the pricing problems that intermittent renewables cause, other than by adding enough backup batteries (many days/months worth) so intermittent renewables can compete fairly with other generation. This alone would bring EROEI down to an unacceptable level, I expect.

  4. MG says:

    The Czech Republic pushes on the acceptance of the nuclear energy on the EU level in order to meet the climate goals.

    https://spravy.pravda.sk/ekonomika/clanok/535789-rakusania-chcu-vetovat-podporu-eu-jadrovej-energetike/

    https://www.reuters.com/article/us-czech-nuclear/czechs-must-build-nuclear-plants-even-if-in-breach-of-eu-law-says-pm-idUSKBN1WV1OG

    “We have to push it through, even if we were to breach European law,” Babis told the European committee of the lower house of parliament.

    “Energy security is our priority and there is no way around it.”

    • Energy really is needed; wind and solar don’t work. But nuclear takes a long time to build, especially with all of the safety features wanted in some parts of the world.

      There are limits on uranium as well. One of them is that we have a hard time getting the price up high enough to keep production up.

  5. Tim Groves says:

    Meanwhile, young Koizumi-kun gets a slap on the wrist in Madrid for politely and apologetically refusing regrettably to commit Japan to economic death by seppuku—further disemboweling its energy policy by abandoning coal.

    MADRID (Kyodo) — Japan was given a second “Fossil of the Day” satirical award from an international conservation group Wednesday after the country’s environment minister failed to commit to the phasing out of coal-fired power generation in a speech at a U.N. climate conference.

    The nongovernmental organization Climate Action Network said Japan “rejected yet another opportunity…to end financing for coal,” after Environment Minister Shinjiro Koizumi said at the Madrid meeting, “I’m afraid I cannot share any new development on our coal policy today.”

    Despite mounting international criticism, Japan has been promoting coal-fired power projects — one of the causes of global warming — at home and abroad, and providing backing to projects in developing countries. Tokyo’s reliance on fossil fuels has increased since the 2011 Fukushima nuclear disaster, with most of its nuclear power plants remaining idle.

    Tokyo maintains coal is a cost-effective power generation solution, and that new technology installed in place of aging, less efficient power stations can help countries reduce their overall emissions.

    “Japan’s continued conduct and support for dirty coal is an international embarrassment. Let us say: ‘How dare you, Japan?,'” said CAN, a network of over 1,300 groups in more than 120 countries working to limit climate change.

    On Dec. 3, a day after the climate conference opened in the Spanish capital, Japan received its first Fossil of the Day award as its industry minister Hiroshi Kajiyama voiced a plan at a press conference in Japan to stick to using coal-fired plants, running counter to a global shift toward coal-free power.

    The second fossil award also recognized Japan’s failure to upgrade its goal to cut heat-trapping gas emissions under the 2015 Paris climate agreement. The country has kept intact its target of a 26 percent cut in emissions by fiscal 2030 from fiscal 2013 levels.

    “Japan should have stepped up to signal more ambition by committing to enhance their climate plans by 2020 and support poor countries engage in climate action and deal with impacts,” CAN said. “By missing today’s opportunity, Japan yet again failed to respond to the climate emergency.”

    In his speech, Koizumi said, “Of course, I am aware of global criticism, including on our coal-related policies.” The minister said he took U.N. Secretary General Antonio Guterres’ call last week to stop “our addiction to coal” as a message to Japan.

    “A growing number of people in Japan, including myself, believe further climate actions must be taken,” Koizumi added. He pointed out Tokyo has reduced greenhouse gas emissions for five years in a row, claiming only two countries — Japan and Britain — among the Group of Seven major economies achieved that.

    The environment minister said Japan is “taking concrete actions towards decarbonization” but they are “overshadowed by the criticism on our coal policy.” He went on to say, “I came to Madrid to change that perception…We are fully committed and Japan will deliver.”

    On Japan’s reception of the fossil award, Koizumi later told reporters it was “no surprise” because he failed in his attempts to review Tokyo’s position on promoting exports of coal-fired power plants to developing countries.

    “I wanted to do something about exports, but failed to present a new stance. We will continue discussions (on the matter),” he said.

    The fossil award is presented almost daily during the climate conference and Brazil also received the disparaging award Wednesday partly because President Jair Bolsonaro criticized Greta Thunberg, a 16-year-old Swedish environmental activist, as a “pirralha,” or brat in English.

    • MG says:

      “I came to Madrid to change that perception…We are fully committed and Japan will deliver.”

      The only way Japan can deliver is with returning to nuclear.

  6. Herbie R Ficklestein says:

    I Pledge to reduce my emissions to Sell by the year 2040! Honest..

    Greenwashing Concerns Soar as Companies Vow to Clean Emissions
    Laura Millan Lombrana and Jeremy Hodges
    BloombergDecember 12, 2019, 12:00 AM EST

    Mahindra Group is watching out for eye-catching announcements that may not be backed by actions as it screens companies to invest in. The Indian conglomerate has stakes in businesses looking to solve issues related to climate change, including electric car makers or companies that turn food waste into natural gas.
    “Some companies say they are carbon neutral today, but then I’m sure it’s not because their carbon emissions have come down but because they’ve possibly figured out a way to offset,” said Anirban Ghosh, chief sustainability officer at Mahindra Group. “That doesn’t solve the climate problem entirely. If you don’t work to bring down emissions, I don’t think we’ll win the war.”
    Part of the problem is the lack of a mechanism to monitor pledges and hold companies accountable, said Morgan from Greenpeace.
    “Until these companies are proactively engaging to change laws in their countries to go to zero emissions, these commitments are not very relevant,” she said
    GRETA and team are on the watch..
    Shell, ExxonMobil Corp., Chevron Corp., BP and Total SA, could be found liable for harm caused by climate change.
    At the UN talks, Shell’s vice president of new energies, Duncan van Bergen, was met by dozens of young activists from Fridays for Future. They had painted large eyes on the palms of their hands and had one slogan: “We are watching

    Oh. That should work….sarcasm

  7. Herbie R Ficklestein says:

    Let’s get EVERYONE on board….with lots of Cash….that always does the trick!🤑
    Belfium EU Green Deal
    European Commission President Ursula von der Leyen gives a press statement on the European Green Deal at the European Commission headquarters in Brussels, Wednesday, Dec. 11, 2019. In her bid to lead the EU toward climate neutrality, European Commission president Ursula von der Leyen wants to put up 100 billion euros (dollars 130 billion U.S.) to help member countries that still heavily rely on fossil fuels transition to lower emissions. (AP Photo/Francisco Seco)

    To get everyone on board with her plan to combat global warming, European Commission President Ursula von der Leyen wants to put up 100 billion euros ($130 billion) to help EU nations that still heavily rely on fossil fuels transition to lower emissions.
    Von der Leyen, who took office this month at the helm of the European Union’s powerful executive arm, has made the fight against climate change the top priority of her five-year mandate. The first woman ever to lead the commission, she has pledged to make the EU the world’s first carbon-neutral continent by 2050 as part of the “European Green Deal” she presented Wednesday.
    The commission hopes the fund will help EU nations that stand to be hit the hardest financially by the transition to cleaner industries. Among them, Hungary, the Czech Republic and Poland, which rely heavily on coal-fired power plants, have yet to commit to the EU’s goal of having net zero emissions of CO2 by 2050
    https://news.yahoo.com/eu-offer-billions-help-poorer-113120684.html

    Sure, I Pledge also… where’s my cheque?

    • Tim Groves says:

      It seems to me the the principle of obliquity is being successfully pursued. For best results, don’t aim directly at your target, but instead aim at something else that will indirectly result in your target being achieved. T

      his can be an effective strategy when you want to implement a policy, to effect a change, win a game of football, or in many instances simply to get from A to B.

      In addition, letting on about what one’s actual targets are is often counterproductive.

    • Robert Firth says:

      Sigh. Another politician with zero understanding of elementary game theory. Her policy is quite simple: reduce your carbon emissions and the EU will tax you; fail to reduce your carbon emissions and the EU will subsidise you. No prizes for guessing what the result will be.

  8. Harry McGibbs says:

    “The Daqin line, China’s busiest coal freight railway, saw shipments plunge by 7.95% year-on-year to 35.41 million tons in November amid weakening domestic demand for coal, according to a Tuesday report by its operator Daqin Railway Co. Ltd.”

    https://www.caixinglobal.com/2019-12-11/shipments-drop-on-chinas-busiest-coal-railway-101493186.html

    • Harry McGibbs says:

      “There was carload unit growth going into 2006 [US rail]. Then the pattern began to fall—into the Great Recession of 2007-2008. Since then, there have been only two brief growth periods—2009-2012 and 2014-2016… The biggest single decline in carloads took place in the coal sector.”

      https://www.railwayage.com/freight/class-i/missed-signs-of-a-freight-rail-slowdown/

      • Harry McGibbs says:

        “The last coal-fired power plant in Wales [UK] will go dark on Friday afternoon with nearly 170 jobs expected to be lost in the following months… The UK plans to wean itself off coal by 2025.”

        https://www.telegraph.co.uk/business/2019/12/11/wales-last-coal-power-plant-go-dark-friday/

      • I looked up US coal production in the EIA data. On a volume basis, US coal production peaked in 2008. This was back when all energy prices were high.

        On an energy basis, US coal production peaked back in 1998. Actually, there were a lot of years that were pretty close. It looks like 2008 was the last year that volume could sort of be kept up.

        At least part of the declining coal production seems to be “Peak Coal” in the United States. Some of the “bad press” for coal may be sort of a sour grapes kind of reaction. Coal is leaving us; we really didn’t want it anyhow.

  9. Harry McGibbs says:

    “The U.S. budget deficit rose by 2% last month to $209 billion, another step in a journey back toward $1 trillion-a-year budget shortfalls… “November is the second month of the government’s 2020 budget year…

    “The Congressional Budget Office is forecasting that the deficit for 2020 will hit $1 trillion and will stay above $1 trillion for the next decade. The country last ran annual $1 trillion annual deficits from 2009 through 2012 during and after the financial crisis…

    “So far this budget year, the government is running a deficit of $343 billion, up 12% from a year earlier.”

    • Harry McGibbs says:

      “The Federal Reserve left borrowing costs unchanged at its last policy meeting of the year on Wednesday… Policymakers lowered the benchmark interest rate three times this year, to a target range of 1.5% to 1.75%, which appeared to help stabilize an outlook that had become increasingly uncertain.”

      https://markets.businessinsider.com/news/stocks/federal-reserve-interest-rate-decision-unchanged-signals-pause-in-2020-2019-12-1028756431

      • Harry McGibbs says:

        “Home Depot… cut its sales forecast for 2020, signaling to investors that there could be weakness in the housing market ahead… The disappointing 2020 forecast comes amid reports that the US housing market is poised to slow in 2020.”

        https://markets.businessinsider.com/news/stocks/housing-market-slowdown-home-depot-cuts-2020-sales-outlook-2019-12-1028755342

        • Harry McGibbs says:

          The U.S. economy may be chugging along this holiday season, but according to a new survey of CFOs by the Duke University/CFO Global Business Outlook, 52% of CFOs of U.S. companies expect a recession next year. Another 24% predict that recession to hit by mid-2021.”

          https://www.forbes.com/sites/howardgensler/2019/12/11/cfos-see-recession-looming-but-remain-optimistic-according-to-latest-quarterly-duke-survey/#7b94fdaf61f2

          • It is interesting to compare the US percentage expecting recession next year (52%) with the reported percentages from other countries:

            U.S. CFOs, according to the survey, are actually less pessimistic about recession than their counterparts around the world. In Asia, 79% of CFOs believe their countries will be in recession by next October. That number is 77% in Africa, 67% in Canada and 55% in Latin America. In Europe, only 49% of the CFOs expect a recession by the end of 2020.

            Africa, Canada, and Latin America are all quite resource dependent. Low resource prices are a problem in these areas. It is not surprising that they expect recession.

            Europe tends to be more service oriented, so it can hope that the low resource prices will continue to be a benefit to it. Its recession prediction percentage is 49%, which is below the US. It seems like several of the countries are already at the edge of recession, however. The sample size is not very high in Europe. It may make a difference where the CFOs are from.

        • Saying that comparable sales (in the same stores) will be up 3.5% to 4.0% doesn’t sound all that bad to me. Inflation is low. This still assumes a fair amount of growth. In theory, if there were a lot of growth, Home Depot would be adding stores.

          US Population is reported by Federal Reserve of St. Louis to be up about 0.6% per year now. The US birth rate keeps falling. At the same time, the big growth is in the Over 65 age group. More of them will be downsizing–moving in with children, moving to smaller spaces, or even moving to assisted living. It is hard to believe that the number of people needing new residences is growing by much. Old residences need to be upgraded or replaced, of course.

      • At the same time, Credit Suisse’s research department is forecasting QE4 by yearend. The problem seems to reflect a combination of new banking rules, not enough Treasuries in circulation because of QT, and the high stock market/high bond market (due to low bond yields).

        According to the newsletter linked above:

        If carry makes the world go ‘round, and reserves make carry possible…
        …the day we run out of reserves would be the day when the world would stop spinning.

        In fact, an inadequate quantity of securities considered suitable for reserves is expected to be the problem at December 31, when banks all need to fix up their balance sheets to prepare for year end statements that meet regulatory rules that have become more and more onerous (my view, not Credit Suisse’s). If there is an inadequate quantity of securities to be used for reserves:

        Treasury can’t fund the deficits and pay its bills, dealers can’t fund their Treasury inventories or their clearing accounts to make markets, and the world can’t fund to get the U.S. dollars to pay for goods or to roll their FX hedges.

        One of the problems is new Basel III rule, which are intended to provide wider margins to cushion banks, if they are in danger of falling into bankruptcy.

        Another problem area is the reserves required under the Globally Systemically Important Bank (G-SIB) scores. When stock prices are high and interest rates are low (leading to high bond prices) the need for these reserves is especially high.

        The problem is that there aren’t enough of these reserves available, especially because of US Quantitative Tightening.

        If I were a regulator, I would be inclined to say, “We goofed with these regulations. While they sound good in theory, they are likely to be absolutely impossible to carry out in practice.” So, rather than QE (or maybe in addition to it), I would postpone/rethink the regulations. Basel III struck me as counterproductive, years ago, when it was still being proposed. G-SIB requirements sound pretty onerous too.

        The note sounds reasonable to me. The financial markets may run into severe turbulence at yearend.

        • Ano737 says:

          When you don’t regulate them enough, they gamble, engage in fraud, etc. requiring massive and ever growing bailouts to save the system. When you do, you get less economic activity. Which would you prefer?

        • Harry McGibbs says:

          Another article flagging up potential end of year problems in the repo market:

          “The $2.2 trillion repurchase agreement market – part of the inner workings of the U.S. financial system – is facing what could be another strain as the year comes to a close. That could have wider implications than just Wall Street.

          “Whether [the Fed’s intervention] will be enough to offset the traditional year-end strains will be tested next week, when companies will again face tax obligations while $78 billion in Treasury supply will also need to be settled. At the year-end there is also typically a reluctance by banks and fund managers to lend, which can leave borrowers struggling to raise cash.”

          https://www.reuters.com/article/us-usa-fed-repo-tools-explainer/repo-is-wall-streets-big-year-end-worry-why-idUSKBN1YG1UE

          • Zerohedge has an article out about the situation as well. “Massive… Huge… Largest Ever”: Fed Will Flood Market With Gargantuan $500 Billion In Liquidity To Avoid Year-End Repo Crisis

            The article describes a whole list of extra repos to be offered, spanning the time over yearend. In total, they add up to $500 billion. One summary is this:

            What the Fed means is that in addition to expanding the sizes of its “turn” overnight repos to $150 billion, the Fed will conduct a total of nine term repos covering the year-end turn from Dec 16 to Jan 14, 8 of which will amount to $35BN and the first will be $50BN, for a total injection of a whopping $365 billion in the coming month.

            Whether this will be enough is a good question, in my opinion. The market could need a lot more than this.

            This is a chart from the article, as well. In total, it does away with all of US Quantitative Tightening.

    • With lower oil and gas prices, it is not surprising that reserves need to disappear, for virtually everyone.

      This report tells us that a big share of the write-down was Appalachian natural gas. Part of the write-down related to “its LNG project in Canada.”

      In other words, this write-down is pretty much entirely natural gas. None of it is in the Permian Basin.

      There do need to be write-downs, but where?

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