Why are we seeing so much violence recently? One explanation is that people are sympathizing with those in the Minneapolis area who are upset at the death of George Floyd. They believe that a white cop used excessive force in subduing Floyd, leading to his death.
I believe that there is a much deeper story involved. As I wrote in my recent post, Understanding Our Pandemic – Economy Predicament, the problem we are facing is too many people relative to resources, particularly energy resources. This leads to a condition sometimes referred to as “overshoot and collapse.” The economy grows for a while, may stabilize for a time, and then heads in a downward direction, essentially because energy consumption per capita falls too low.
Strangely enough, this energy crisis looks like a crisis of affordability. The young and the poor, especially, cannot afford to buy goods and services that they need, such as a home in which to raise their children and a vehicle to drive. Trying to do so leaves them with excessive debt. If the affordability problem changes for the worse, the young and the poor are likely to protest. In fact, these protests may become violent.
The pandemic tends to make the affordability problem worse for minorities and young people because they are disproportionately affected by job losses associated with lockdowns. In many cases, the poor catch COVID-19 more frequently because they live and/or work in crowded conditions where the disease spreads easily. In the US, blacks seem to be especially hard hit, both by COVID-19 and through the loss of jobs. These issues, plus the availability of guns, makes the situation particularly explosive in the US.
Let me explain these issues further.
 Energy is required for all aspects of the economy.
Many people are concerned today with the low price of oil. Others are concerned about slowing or stopping COVID-19. Is there any way forward?
I gave a few hints regarding what is ahead in my last post, Economies won’t be able to recover after shutdowns. We live in a world with a self-organizing economy, made up of components such as businesses, customers, governments and interest rates. Our basic problem is a finite world problem. World population has outgrown its resource base.
Some sort of economy might work with the current resource base, but not the present economy. The COVID-19 crisis and the lockdowns used to try to contain the crisis push the economy farther along the route toward collapse. In this post, I suggest the possibility that some core parts of the world economy might temporarily be saved if they can be made to operate fairly independently of each other.
Let’s look at some parts of the problem:
 The world economy works like a pump. Continue reading
We have learned historically that if we can isolate sick people, we can often keep a communicable disease from spreading. Unfortunately, the situation with the new coronavirus causing COVID-19 is different: We can’t reliability determine which people are spreading the disease. Furthermore, the disease seems to transmit in many different ways simultaneously.
Politicians and health organizations like to show that they are “doing something.” Because of the strange nature of COVID-19, however, doing something is mostly a time-shifting exercise: With quarantines and other containment efforts, there will be fewer cases now, but this will be mostly or entirely offset by more cases later. Whether time-shifting reduces deaths and eases hospital care depends upon whether medical advances are sufficiently great during the time gained to improve outcomes.
We tend to lose sight of the fact that an economy cannot simply be shut down for a period and then start up again at close to its former level of production. China seems to have seriously overdone its use of quarantines. It seems likely that its economy can never fully recover. The permanent loss of a significant part of China’s productive output seems likely to send the world economy into a tailspin, regardless of what other economies do.
Before undertaking containment efforts of any kind, decision-makers need to look carefully at several issues:
- Laying off workers, even for a short time, severely adversely affects the economy.
- The expected length of delay in cases made possible by quarantines is likely to be very short, sometimes lasting not much longer than the quarantines themselves.
- We seem to need a very rapid improvement in our ability to treat COVID-19 cases for containment efforts to make sense, if we cannot stamp out the disease completely.
Because of these issues, it is very easy to overdo quarantines and other containment efforts.
In the sections below, I explain some parts of this problem.
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.
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.
 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.