Abnormalcy Bias
Off the keyboard of Jim Quinn
Published on The Burning Platform on April 23, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
“The real hopeless victims of mental illness are to be found among those who appear to be most normal. Many of them are normal because they are so well adjusted to our mode of existence, because their human voice has been silenced so early in their lives that they do not even struggle or suffer or develop symptoms as the neurotic does. They are normal not in what may be called the absolute sense of the word; they are normal only in relation to a profoundly abnormal society. Their perfect adjustment to that abnormal society is a measure of their mental sickness. These millions of abnormally normal people, living without fuss in a society to which, if they were fully human beings, they ought not to be adjusted.” – Aldous Huxley – Brave New World Revisited
The political class set in motion the eventual obliteration of our economic system with the creation of the Federal Reserve in 1913. Placing the fate of the American people in the hands of a powerful cabal of unaccountable greedy wealthy elitist bankers was destined to lead to poverty for the many, riches for the connected crony capitalists, debasement of the currency, endless war, and ultimately the decline and fall of an empire. Ernest Hemingway’s quote from The Sun Also Rises captures the path of our country perfectly:
“How did you go bankrupt?”
Two ways. Gradually, then suddenly.”
The 100 year downward spiral began gradually but has picked up steam in the last sixteen years, as the exponential growth model, built upon ever increasing levels of debt and an ever increasing supply of cheap oil, has proven to be unsustainable and unstable. Those in power are frantically using every tool at their disposal to convince Boobus Americanus they have everything under control and the system is operating normally. The psychotic central bankers, “bought and sold” political class, mega-corporation soulless chief executives and corporate controlled media use propaganda techniques, paid “experts”, talking head “personalities”, captured think tanks, and the willful ignorance of the majority to spin an increasingly dire economic descent as if we are recovering and getting back to normal. Nothing could be further from the truth.
There is nothing normal about what Ben Bernanke and the Federal government have done over the last five years and continue to do today. Truthfully, nothing has been normal since the mid-1990s when Alan Greenspan spoke the last truthful words of his lifetime:
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
The Greenspan led Federal Reserve created two epic bubbles in the space of six years which burst and have done irreparable harm to the net worth of the middle class. Rather than learn the lesson of how much damage to the lives of average Americans has been caused by creating cheap easy money out of thin air, our Ivy League self-proclaimed expert on the Great Depression, Ben Bernanke, has ramped up the cheap easy money machine to hyper-speed. There is nothing normal about the path this man has chosen. His strategy has revealed the true nature of the Federal Reserve and their purpose – to protect and enrich the financial elites that manipulate this country for their own purposes.
Despite the mistruths spoken by Bernanke and his cadre of banker coconspirators, he can never reverse what he has done. The country will not return to normalcy in our lifetimes. Bernanke is conducting a mad experiment and we are the rats in his maze. His only hope is to retire before it blows up in his face. Just as Greenspan inflated the housing bubble and exited stage left, Bernanke is inflating a debt bubble, stock bubble, bond bubble and attempting to re-inflate the housing bubble just in time for another Ivy League Keynesian academic, Janet Yellen, to step into the banker’s box. This genius thinks Bernanke has been too tight with monetary policy. It seems inflated egos are common among Ivy League economist central bankers who think they can pull levers and push buttons to control the economy. Results may vary.
The gradual slide towards our national bankruptcy of wealth, spirit, freedom, self-respect, morality, personal responsibility, and common sense began in 1913 with the secretive creation of the Federal Reserve and the imposition of a personal income tax. Pandora’s Box was opened in this fateful year and the horrors of currency debasement and ever increasing taxation were thrust upon the American people by a small but powerful cadre of unscrupulous financial elite and the corrupt politicians that do their bidding in Washington D.C. The powerful men who thrust these evils upon our country set in motion a chain of events and actions that will undoubtedly result in the fall of the great American Empire, just as previous empires have fallen due to the corruption of its leaders and depravity of its people. Creating a private central bank, controlled by the Wall Street cabal, and allowing the government to syphon the earnings of workers through increased taxation has allowed politicians the ability to spend, borrow, and print money at an ever increasing rate in order to get themselves re-elected and benefit the cronies, hucksters and bankers that pay the biggest bribes. None of this benefit the average American, who sees their purchasing power systematically inflated and taxed away. This is not capitalism and it is not a coincidence that war and inflation have been the hallmarks of the last century.
“A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank. It is no coincidence that the century of total war coincided with the century of central banking.” – Ron Paul
As you can see, the bankruptcy of our country and our culture began gradually, accelerated after Nixon closed the gold window in 1971, really picked up steam in 1980 when the debt happy Baby Boom generation came of age, and has “suddenly” reached maximum velocity as we approach the true fiscal cliff. There were many checkpoints along the way where fatefully bad choices were made. They include the New Deal, Cold War, Great Society, Morning in America, Dotcom New Paradigm, Housing Wealth Retirement Plan, Obamacare, and present belief that creating more debt will solve a problem created by too much debt. The Federal Reserve allowed interventionist politicians to fight two declared wars (World War I, World War II), fight five undeclared wars (Korea, Vietnam, Gulf, Afghanistan, Iraq), conduct hundreds of military engagements around the globe, occupy foreign countries, begin a war on poverty that increased poverty, begin a war on drugs that increased the amount of available drugs, and finally start a war on terror that has increased the number of terrorists and pushed us closer to national bankruptcy. The terrorists have already won, as the explosion of stupidity and irrational fear has allowed those in power to acquire more power and dominion over our lives.
Abnormality Reigns
“We live surrounded by a systematic appeal to a dream world which all mature, scientific reality would reject. We, quite literally, advertise our commitment to immaturity, mendacity and profound gullibility. It is as the hallmark of the culture. And it is justified as being economically indispensable.” - John Kenneth Galbraith
When I critically scrutinize the economic, political, financial, and social landscape at this point in history, I come to the inescapable conclusion that our country and world are headed into the abyss. This is most certainly a minority viewpoint. The majority of people in this country are oblivious to the disaster that will arrive over the next decade. Some would attribute this willful ignorance to the normalcy bias that infects the psyches of millions of ostrich like iGadget distracted, Facebook addicted, government educated, financially illiterate, mass media manipulated zombies. Normalcy bias refers to a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster occurring and its possible effects. This often results in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of governments to inform the populace about the impending disaster. The assumption that is made in the case of the normalcy bias is that since a disaster hasn’t occurred yet, then it will never occur. It also results in the inability of people to cope with the disaster once it occurs. People tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.
The unsustainability of our economic system built upon assumptions of exponential growth, ever expanding debt, increasing consumer spending, unlimited supplies of cheap easy to access oil, impossible to honor entitlement promises, and a dash of mass delusion should be apparent to even the dullest of government public school educated drones inhabiting this country. I don’t attribute this willful ignorance to normalcy bias. I attribute it to abnormalcy bias. In a profoundly abnormal society, adjusting your thinking to fit in appears normal, but is just a symptom of the disease that has infected our culture. There is nothing normal about anything in our society today. If you were magically transported back to 1996 and described to someone the economic, political, financial and social landscape in 2013, they would have you committed to a mental institution and given shock therapy.
Even though we’ve been in a 100 year spiral downwards, things still appeared relatively normal in 1996 when Greenspan uttered his “Irrational Exuberance” faux pas that so upset his Wall Street puppet masters. The ruling class had not yet repealed Glass-Steagall (pre-requisite for pillaging the muppets), created the internet bubble, fashioned the greatest control fraud in world history (housing bubble unrecognized by Ben Bernanke), or taken advantage of mass hysteria over 9/11 to begin the never ending war on terror and expansion of the Orwellian state. The citizens, and I use that term loosely, of this country have allowed those in control of the government and media to convince them the situation confronting us is just a normal cyclical variation that will be alleviated by tweaking existing economic policies and trusting that Ben Bernanke will pull the right monetary levers to get us back on course. The stress inflicted on their brains in the last thirteen years of bubbles and wars has made the average person incapable of distinguishing between normality and abnormality. What they need is slap upside of their head. Is there anything normal about these facts?
- The Federal Reserve’s balance sheet in 1996 consisted of $422 billion, of which 91% were Treasury securities. Today it consists of $3.25 trillion, of which only 56% are Treasury securities, and the rest is toxic home mortgages, toxic commercial mortgages, and whatever other crap the Wall Street banks have dumped on their books. Their balance sheet is leveraged 57 to 1 and Bernanke has promised his Wall Street bosses he will add another $750 billion before the year is out. Is there anything normal about a central bank adding twice as much debt to its balance sheet in less than twelve months than existed on its entire balance sheet in 1996?
- The National Debt at the end of fiscal 1996 was $5.25 trillion. It increased by $250 billion that year. The GDP of the country was $7.8 trillion. Our national debt as a percentage of GDP was only 67% and our annual deficit was only 3% of GDP. At the time, the country was worried about these outrageous levels of debt. Today the National Debt stands at a towering $16.8 trillion. It has increased by a staggering $1.12 trillion in the last twelve months. The GDP of the country today is $15.7 trillion. Our national debt as a percentage GDP has soared to 107%. Our annual deficits now exceed 7% of GDP on a consistent basis. Our budgets are on automatic pilot, with the $20 trillion level to be breached by 2016. Is it a normal state of affairs when the GDP of your country rises by 100% over seventeen years, while your debt rises by 320%?
- Total government spending (Federal, State, Local) in 1996 totaled $2.7 trillion, or 35% of GDP. Today total government spending is $6.3 trillion, or 40% of GDP. In 1979, before the belief in government became a religion, total government spending was only 31.5% of GDP (27% in 1965). Are you receiving twice the service from government than you received in 1996? Are you safer from terrorists due to the massive expansion of the police state? Are your kids getting a much better education than they did in 1996? Have the undeclared wars benefitted you in any way, other than tripling the price of gas? Are the higher wage taxes, real estate taxes, school taxes, sewer fees, utility fees, phone fees, gasoline taxes, permit fees, and myriad of other government charges worth it? Is it normal for government to account for almost half of our economy?
- In 1996 personal consumption expenditures accounted for 67% of GDP, while private domestic investment accounted for 16% of GDP and we ran small trade deficits of 1% of GDP. Today, consumer spending accounts for 71% of GDP (despite the storyline about consumer retrenchment), while domestic investment has contracted to 13% of GDP and our trade deficits have surged to almost 4% of GDP. The Federal government has expanded their piece of the GDP pie by 130% since 1996, with the Department of War accounting for the bulk of the increase. Saving and capital investment is now penalized in this country. Is it normal for a country to borrow, consume and bleed itself to death?
- Consumer credit outstanding totaled $1.2 trillion in 1996, or $4,500 per every man, woman and child in the country. Today, the austere balance is now $2.8 trillion, or $8,800 per every man, woman and child inhabiting our debt saturated paradise. The more than doubling of consumer debt would be acceptable if wages were rising at a similar rate. But that hasn’t been the case, as wages have only advanced from $3.6 trillion in 1996 to $7.0 trillion today. With even the massively understated CPI showing 50% inflation since 1996 and 23% more Americans in the working age population (45 million), real wages have advanced by 30%. Using a true measure of inflation, real wages have fallen. Total credit market debt in 1996 was $19 trillion, or 243% of GDP. Today total credit market debt sits at an all-time high of $56.2 trillion, or 358% of GDP. Is it normal for credit market debt to increase at three times the rate of GDP?
- In 1996, personal income totaled $6.6 trillion, with wages accounting for 55% of the total, interest income on savings accounting for 12% and government entitlement transfers accounting for 14%. Today personal income totals $13.6 trillion, with wages accounting for 51% of the total, interest income on savings plunging to 7% due to Bernanke’s “Screw a Senior Zero Interest Policy”, and Big Brother entitlement transfers skyrocketing to 18%. In what Orwellian dystopian society is taking money from wage earners and redistributing it to non-wage earners considered personal income? Is it normal for a government to punish savers and makers in order to benefit the borrowers and takers?
- Prior to the financial collapse and during the mid-1990s prudent risk-averse savers could get a 4% to 5% return on money market accounts. Since the Wall Street created worldwide financial collapse, Ben Bernanke, at the behest of these very same Wall Street banks, has reduced short term interest rates to 0%. The result has been to transfer $400 billion per year from the pockets of savers and senior citizens into the grubby hands of bankers that have destroyed our economy. The prudent are left earning .02% on their savings, while the profligate bankers can borrow for 0% and earn billions by re-depositing those funds at the Federal Reserve. In what bizarro world this be a normal state of affairs?
- Total mortgage debt outstanding in 1996, before the epic Wall Street produced housing bubble, was $4.7 billion. Today, even after the transfer of almost $1 trillion of bad debt to the balance sheet of the American taxpayer, the amount of mortgage debt is an astounding $13.1 trillion. Despite home values rising since 1996, there are 20% of all households still in a negative equity position. Total household real estate equity was 60% in 1996, plunged below 40% in 2009, and has only slightly rebounded to 47% today because Wall Street dumped the bad mortgages on the backs of the American taxpayer. Is it normal for mortgage debt to triple and home equity to plunge in a rationally functioning world? Is it normal when 25% of all existing home sales are distressed sales and another 30% are sales to Wall Street hedge funds like Blackrock?
- In 1996 there were 200 million working age Americans, with 134 million (67%) in the labor force, 127 million (63.5%) employed, and 66 million (33%) not in the labor force. Today there are 245 million working age Americans, with 155 million (63%) in the labor force, 143 million (58%) employed, and 90 million (37%) supposedly not in the labor force. The number of working age Americans has increased by 22.5%, while the number of those employed has advanced by only 12.5%. The population to employment ratio has reached a three decade low as millions have given up, been lured into college by cheap plentiful government debt, or developed a mysterious ailment that has gotten them into the SSDI program. Is it normal for millions of Americans to leave the labor force when the economy is supposedly recovering?
- In 1996 there were 25.5 million Americans on food stamps, or 9.6% of the population, costing $24 billion per year. Today there are 47.8 million Americans on food stamps, or 15% of the population, costing $75 billion per year. Historically, the number of people in this program would rise during recessions and recede when the economy recovered, just as a safety net program should function. According to our government keepers the economy has been in recovery since late 2009. The number of people entering the food stamp program has gone up by 7 million since the recession officially ended. This is not normal. Either the government is lying about the recession or they are screwing the taxpayer by encouraging constituents to enter the program in an effort to gain votes. Which is it?
- The price of oil averaged $20 per barrel in 1996 and it cost you $1.20 per gallon to fill your tank. Oil averaged $85 per barrel in 2012 and currently hovers around $90 per barrel. Most Americans are now paying between $3.50 and $4.00 per gallon to fill their tanks. This result seems abnormal considering the propaganda machine is proclaiming we are on the verge of energy independence. After two Middle East wars, 6,700 dead American soldiers, 50,000 wounded American soldiers, and $1.5 trillion of national wealth wasted, this is all we get – a tripling in gas prices and creation of thousands of new terrorists?
You have to have a really bad case of normalcy bias to be able to convince yourself that everything that has happened since 1996 is normal. Every fact supports the reality that we’ve entered a period of extreme abnormality and our response as a nation thus far has insured that a disaster of even far greater magnitude is just over the horizon. Anyone with an ounce of common sense realizes the social mood is deteriorating rapidly. We are in the midst of a Crisis period that will result in earth shattering change, but the masses want things to go back to normal and don’t want to face the facts. The cognitive dissonance created by reality versus their wishes will resolve itself when the next financial collapse makes 2008 look like a walk in the park. But, until then most will just stick their heads in the sand and hope for the best.
Loving Your Servitude
“Liberty is lost through complacency and a subservient mindset. When we accept or even welcome automobile checkpoints, random searches, mandatory identification cards, and paramilitary police in our streets, we have lost a vital part of our American heritage. America was born of protest, revolution, and mistrust of government. Subservient societies neither maintain nor deserve freedom for long.” – Ron Paul
The most disgraceful example of abnormality that has infected our culture has been the cowardice and docile acquiescence of the citizenry in allowing an ever expanding police state to shred the U.S. Constitution, strip us of our freedoms, and restrict our liberties. Our keepers have not let any crisis go to waste in the last seventeen years. They have also taken advantage of the willful ignorance, childish immaturity, extreme gullibility, historical cluelessness, financial illiteracy and techno-narcissism of the populace to reverse practical legislation and prey upon irrational fears to strip the people of their constitutionally guaranteed liberties and freedoms. If you had told someone in 1996 the security measures, laws, and police agencies that would exist in 2013, they would have laughed you out of the room. Every crisis, whether government created or just convenient to their agenda, has been utilized by the oligarchs to expand the police state and benefit the crony capitalists that profit from its expansion. The character of the American people has been found wanting as they obediently cower and beg for protection from unseen evil doers. The propagandist corporate media reinforces their fears and instructs them to submissively tremble and implore the government to do more. The cosmic obliviousness and limitless sense of complacency of the general population with regards to a blatantly obvious coup by a small cadre of sociopathic financial elite and their army of bureaucrats, lackeys and jackboots is a wonder to behold.
The 1929 stock market crash and ensuing Great Depression was primarily the result of excessively loose Federal Reserve monetary policy during the Roaring 20’s and the unrestrained fraud perpetrated by the Wall Street banks. The 1933 Glass-Steagall Act was a practical 38 page law which kept Wall Street from ravenously raping its customers and the American people for almost seven decades. The Wall Street elite and their bought off political hacks in both parties repealed this law in 1999, while simultaneously squashing any effort to regulate the financial derivatives market. The day trading American public didn’t even look up from their computer screens. Over the next nine years Wall Street went on a fraudulent feeding frenzy rampage which brought the country to its knees and then held the American taxpayer at gunpoint to bail them out. The Federal Reserve arranged rescue of LTCM in 1998 gave the all clear to Wall Street that any risk was acceptable, since the Fed would always bail them out. Just as they did in the 1920’s, the Federal Reserve set the table for financial disaster with excessively low interest rates and non-existent regulatory oversight.
The downward spiral of our empire towards an Orwellian/Huxley merged dystopian nightmare accelerated after the 9/11 attacks. Within one month those looking to exert hegemony over all domestic malcontents had passed the 366 page, 58,000 words Patriot Act. Did the terrified masses ask how such a comprehensive destruction of our liberties could be written in under one month? It is apparent to anyone with critical thinking skills that the enemy within had this bill written, waiting for the ideal opportunity to implement this unprecedented expansion of federal police power. Electronic surveillance of our emails, phone calls and voice mails, along with warrantless wiretaps, and general loss of civil liberties was passed without question under the guise of protecting us. Next was the invasion of a foreign country based upon lies, propaganda and misinformation without a declaration of war, as required by the Constitution. Our government began torturing suspects in secret foreign prisons. The shallow, self-centered, narcissistic, Facebook fanatic populace has barely looked up from texting on their iPhones to notice that we have been at war in the Middle East for eleven years, because it hasn’t interfered with their weekly viewing of Honey Boo Boo, Dancing With the Stars, or Jersey Shore. They occasionally leave their homes to wave a flag and chant “USA, USA, USA”, as directed by the media, when a terrorist like Bin Laden or Boston bomber is offed by our security services, but for the most part they can live their superficial vacuous lives of triviality unscathed by war.
The creation of the Orwellian Department of Homeland Security ushered in a further encroachment of our everyday freedoms. They attempted to keep the masses frightened through a ridiculous color coded fear index. Little old ladies, people in wheelchairs and little children are subject to molestation by lowlife TSA perverts. Military units conduct “training exercises” in cities across the country to desensitize the sheep-like masses, who fail to acknowledge that the U.S. military cannot constitutionally be used domestically. DHS considers military veterans, Ron Paul supporters, and Christians as potential enemies of the state. The use of predator drones to murder suspected adversaries in foreign countries, while killing innocent men, women and children (also known as collateral damage), has just been a prelude to the domestic surveillance and eventually extermination of dissidents and nonconformists here in the U.S. We are already becoming a 1984 CCTV controlled nation. DHS has been rapidly militarizing local police forces in cities and towns to supplement their jackbooted thugs. Obama’s executive orders have given him the ability to take control of industry. He can imprison citizens without charges for as long as he deems necessary. Attempts to control gun ownership and shutdown the internet is a prologue to further government domination and supremacy over our lives when the wheels come off this unsustainable bus.
The last week has provided a multitude of revelations about our government and the people of this country. The billions “invested” in our police state, along with warnings from a foreign government, and suspicious travel patterns were not enough for our beloved protectors to stop the Boston Marathon bombing. After stumbling upon these amateur terrorists by accident, the 2nd responders, with their Iraq war level firepower, managed to slaughter one of the perpetrators, but somehow allowed a wounded teenager to escape on foot and elude 10,000 donut eaters for almost 24 hours. The horde of heavily armed, testosterone fueled thugs proceeded to bully and intimidate the citizens of Watertown by illegal searches of homes and treating innocent people like criminals. The government completely shut down the 10th largest metropolitan area in the country for an entire day looking for a wounded 19 year old. The people of Boston obeyed their zoo keepers and obediently cowered in their cages.
The entire episode was an epic fail. The gang that couldn’t shoot straight needed an old man to find the bomber in his backyard boat. The people of Boston exhibited the passivity and subservience demanded by their government. Since the capture of the remaining terrorist, the shallow exhibitions of national pride at athletic events and smarmy displays of honoring the police state apparatchiks who screwed up – allowing the attack to occur and looking like the keystone cops during the pursuit of the suspects, has revealed a fatal defect in our civil character. We are living in a profoundly abnormal society, with millions of medicated mindless zombies controlled by a vast propaganda machine, who seemingly enjoy having their liberties taken away. Most have willingly learned to love their servitude. For those who haven’t learned, the boot of our vast security state will just stomp on their face forever. We’re realizing the worst dystopian nightmares of Orwell and Huxley simultaneously. This abnormalcy bias will dissipate over the next ten to fifteen years in torrent of financial collapse, war, bloodshed, and retribution. Sticking your head in the sand will not make reality go away. The existing social, political, and financial order will be swept away. What it is replaced by is up to us. Will this be the final chapter or new chapter in the history of this nation? The choice is ours.
“If you want a vision of the future, imagine a boot stamping on a human face – forever.
- George Orwell
“There will be, in the next generation or so, a pharmacological method of making people love their servitude, and producing dictatorship without tears, so to speak, producing a kind of painless concentration camp for entire societies, so that people will in fact have their liberties taken away from them, but will rather enjoy it, because they will be distracted from any desire to rebel by propaganda or brainwashing, or brainwashing enhanced by pharmacological methods. And this seems to be the final revolution” -Aldous Huxley, 1961
Low Oil Prices Lead to Economic Peak Oil
Off the keyboard of Gail Tverberg
Published on Our Finite World on April 21, 2013
Discuss this article at the Energy Table inside the Diner
We have all heard the story about oil supply supposedly rising and falling for geological reasons. But what if the story is a little different from this–oil production rises and falls for economic reasons? If this is the issue, it doesn’t really matter how much oil is in the ground. What matters is if economic conditions are “right” for continued and rising extraction. I have shown in previous posts that oil prices that are too high are a problem for oil importers while oil prices that are too low are a problem for oil exporters. As a result, oil prices need to be in a Goldilocks zone, or we have serious problems, of one sort or another.
As long as the price of oil keeps rising, there is at least some chance the amount of oil extracted each year will keep rising, because more oil resources will become economic to extract. The real problem arises when oil price falls back from a price level it has held, as it has done recently, and as it did back in July 2008. Then there is a real chance that investment will become non-economic, and because of this, oil production will fall.
Figure 1. World crude oil price and production, based on monthly EIA data.The corresponding price in late April is approximately $100 barrel, so is even lower yet.Oil prices play multiple roles:
- High oil prices encourage extraction from more difficult locations, because the higher cost covers the additional extraction costs.
- High oil prices allow exporters to have adequate money to pacify their populations, even if their oil exports have been declining, as they have been for many exporters.
- High oil prices allow funds for investment in new oil fields, as old ones deplete.
- High oil prices tend to put oil importing countries into recession, because it raises the costs of goods and services produced, without raising the salaries of the workers. In fact, there is evidence that high oil prices lower wages (both directly and through lower workforce participation).
- High oil prices make countries that use large amounts of oil less competitive with countries that use less fuel in general, and less oil in particular.
When oil prices decline, it is evidence that Items 4 and 5 above are outweighing Items 1, 2, and 3. This tips the scale in the direction of a fall in oil production.
Debt also affects oil prices. As long as investors have faith that businesses can make money, despite high oil prices, they will continue to borrow to expand their businesses. This additional debt helps drive up demand for goods and services of all kinds, including oil, so oil prices rise. Also, if consumers are able to borrow increasing amounts of money, this also drives up demand for goods that use oil, such as cars. But once the debt bubble bursts, it is easy for oil prices fall very far, very fast, as they did in 2008.
If we look at the 2008 situation, oil limits were very much behind the overall problem, even though most people do not recognize this connection. It was the fact that oil limits eventually led to credit limits that caused the system (including oil prices) to crash as it did. High oil prices led to debt defaults and bank write offs, and eventually led to a huge credit contraction in economies of the developed world. This credit contraction affected not just oil demand, but demand for other energy products as well.
The problems of the 2008 period were never really solved: the lack of growth in world oil supply remains, and this lack of growth in world oil supply continues to hold back world economic growth, particularly in developed countries. We recently have not been feeling the effects as much, because with deficit spending, the problems have largely moved from the private sector to the government sector.
The situation remains a tinderbox, however. The financial situation is propped up by ultra-low interest rates, continued government deficit spending, and Quantitative Easing. In a finite world, debt growth cannot continue indefinitely. But if debt growth permanently stops, and switches to contraction, we would end up in an even worse financial mess than in 2008. In fact, such a change would very likely to would lead to a contraction of “Limits to Growth” proportions.
In this post, I will explain some of these issues further.
The Rise and Fall of Oil Prices in 2008
Figure 2. World crude oil production and Brent oil prices, based on monthly EIA data, with different scale for oil production.If we look at world oil production and price between January 1998 and July 2008 on an X-Y graph, we see that as long as oil demand stayed below 71 million barrels a day, oil price stayed low (Figure 3, below). But once demand started to push above that level, oil price started to rise rapidly, with little increase in production. It was as if a brick wall on oil supply had been hit. No matter how much the oil price rose, virtually no more production was available.
Figure 3. X-Y graph of world of monthly world oil production and price data, based on the EIA data shown in Figures 1 and 2.If we look at an X-Y graph of the non-OPEC portion of oil supply, we see that the situation was even worse for the non-OPEC portion (Figure 4, below). The amount of oil that could be produced at a given price had actually begun to fall back. While in 2003 and 2004, non-OPEC had been able to produce 42 million barrels a day for only $30 barrel, by 2008, non-OPEC could not reach 42 million barrels a day, no matter how high the price. It looked as though non-OPEC had hit “peak oil” production. Geological limits appeared to have the upper hand.
Figure 4. X-Y graph of world of non-OPEC world oil production and price data, based on EIA data.Fortunately, during this period OPEC was able to raise its production somewhat, in response to higher prices, as illustrated in Figure 5, below. Between July 2007 and July 2008, it was able to raise oil production by 2.1 million barrels a day, in response to a $56 dollar a barrel increase in price in a one-year time-period. (The small increase in response to a huge price rise suggests that OPEC’s spare capacity was not nearly as great as claimed, however.)
Figure 5. X-Y Graph of OPEC oil production and price, based on EIA data.What brought about the collapse in oil prices in July 2008? I believe it was ultimately a financial limit that was reached that eventually worked its way to the credit markets. Once the credit markets were affected, individuals and businesses were not able to borrow as much, and it was this lack of credit that cut back demand for many types of products, including oil.
The way this cutback in credit came about was as follows: Oil prices had been rising for a very long time–since about 2003, affecting the inflation rate in food and fuel prices. The Federal Reserve Open Market Committee tried (unsuccessfully) to get oil prices down by raising target interest rates. I describe this in an article published in the journal Energy called, “Oil Supply Limits and the Continuing Financial Crisis,” available here or here. The combination of high oil prices and higher interest rates led to falling housing prices starting in 2006 (big oops for the Federal Reserve), and debt defaults, particularly among the most vulnerable (those with sub-price mortgages). As early as 2007, large banks had large debt write-offs, lowering their appetite for more debt of questionable quality. Total US household mortgage debt reached its maximum point on June 30, 2008, and began to fall the following quarter.
Figure 6. US Mortgage Debt Outstanding, based on Federal Reserve Z1 Report.By July 2008, the financial problems of consumers in response to high oil prices and falling housing prices had transferred to other credit markets as well. Revolving credit outstanding (mostly credit card debt), hit a maximum in July 2008, and has not recovered (Figure 7 below). (July 2008 is exactly the same month as oil prices began to fall!) Non-revolving credit, such as auto loans, hit a maximum in the same month.
Figure 7. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data of the Federal Reserve.Credit issues kept getting worse. The Federal takeover of Fannie Mae and Freddie Mac took place in September 2008, as did the bankruptcy of Lehman Brothers. By late 2008, cutbacks in credit had spread to businesses including all sectors of the energy industry. I wrote an article on December 1, 2008, documenting that credit issues led to lower prices not only for oil, but for coal, natural gas, nuclear, and renewables as well.
The reason why a cutback in credit availability is a problem is because it is very difficult to buy a new car or home, or to finance a new business operation, if credit isn’t available. In fact, the amount a business or family can spend depends on the sum of their income during a period, plus the amount of additional debt they take on during that period. If the amount of debt outstanding is going down, then, for example, old credit card debt is being paid down faster than new credit card is being added, and the amount currently spent is lower.
The Federal Government tried to fix the situation by running larger deficits (Figure 8), starting the very next quarter after oil prices hit a peak and started declining.
Figure 8. US Federal Debt, from Federal Reserve Z-1 Report. (Excludes debt owed to Social Security and other Federal programs.)Oil prices rose again starting in 2009 as demand outside the US, Europe, and Japan continued to grow. By 2011, high oil prices were back. The economies of US, Europe and Japan did not bounce back to the kind of economic growth most expected, because at high oil prices, their products were not competitive in a world marketplace that relied on an energy mix that was slanted more toward coal (which is cheaper), and also offered lower wages.
In 2013, world oil supply is still constrained.
It is easy to get the idea from news reports that everything is rosy, but the story presented to us is painted to look much better than it really is. Production from existing sites is constantly depleting. In order to replace declining production, huge investment must be made in new productive capacity. It is as if oil producers must keep running, just to stay in place.
Part of the problem is that the cost of new capacity keeps escalating. I have called this the Investment Sinkhole Problem. The Financial Times describes the problem as Energy: More Buck, Less Bang.
Cash flow has historically financed much investment. Now we read, Energy Industry Struggling to Generate Free Cash Flow.
Many naive people believe Saudi Arabia’s stories about their “productive capacity” of 12.5 million barrels a day, but their maximum crude and condensate production in recent years has been only been 10,040,000, according to the EIA. Their recent production has been only a little over 9 million barrels a day in recent months, according to OPEC Monthly Oil Market Report.
Iraq is supposed to be the great hope for future oil production, yet it increasingly seems to be stumbling toward civil war.
Russia is now the largest oil producer in the world, with a little over 10.0 million barrels a day of crude and condensate production. According to a Russian analyst,”Gas condensate production is the real driver behind the [recent] growth. Crude oil output is falling and organic growth currently is impossible.”
Figure 9. US crude oil production, based on EIA data. 2012 data estimated based on partial year data. Tight oil split is author’s estimate based on state distribution of oil supply increases.Admittedly, tight oil production has ramped up quickly. But it is an expensive technology, that requires a high oil price, and lots upfront investment. There is evidence that such oil is concentrated in “sweet spots” and these get tapped out quickly. In North Dakota, the earliest area for US tight oil extraction, rig count is down from 203 at the beginning of June, 2012, to 176 at April 19, 2013, according to Baker Hughes. Lynn Helms, Director of the North Dakota Department of Mineral Services gave this explanation, “Rapidly escalating costs have consumed capital spending budgets faster than many companies anticipated and uncertainty surrounding future federal policies on hydraulic fracturing is impacting capital investment decisions.” Meanwhile, North Dakota oil production has recently been flat–perhaps because of weather; perhaps because of other issues as well.
The ramp-up in US crude oil production amounted to 812,000 barrels a day in 2012–very small in comparison to world crude oil needs. World oil production, shown in Figures 1 and 2, is barely affected. In a world with 7 billion people, most of whom would like vehicles, the amount of oil supply being added is tiny.
In 2013, the financial problems of the United States, the Euro-zone, and Japan haven’t gone away.
Current high oil prices make the big oil-importing countries less competitive. It is hard to compete with countries with lower average fuel costs, thanks a mix that it much heavier on coal, and lighter on oil. A graph of oil consumption shows that oil is increasingly going to the Rest of the World, rather than the US, EU, and Japan (Figure 10).
Figure 10. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.The countries that see little growth in oil consumption are the same ones struggling with low economic growth. Low economic growth makes debt very difficult to repay. Governments are tempted to add more debt, to try to fix their problems.
Tackling government debt problems in 2013 tends to bring recession back.
The big problem when oil prices rise is that workers’ discretionary income is squeezed, because their wages don’t rise at the same time. This problem can somewhat be offset by deficit spending of governments for programs to help the unemployed, and for stimulus.
Once taxes are raised, or benefits are cut, the old problem of lower discretionary income for workers reappears. Thus, the recession that governments so cleverly found a way around previously, re-emerges.
In 2005, there was a very sharp impact to oil prices when high oil prices indirectly affected the credit system. This time, a big issue is rising government taxes and lower benefits. These are staggered in their implementation, so the effect feeds in more slowly. Greece and Spain started their cut-backs early. The US raised Social Security taxes by 2% of wages, as of January 1, 2013. Later it added sequester cuts. All of these effects feed in slowly, and add up.
With respect to debt, in 2013 we are rapidly approaching the time when this time truly is different.
There has been a great deal in the press about a mistake Rienhart and Rogoff recently made in their book, This Time Is Different. I think Rienhart and Rogoff, as well as economists in general, have missed an issue that is much more basic: In a finite world, debt, like anything else, cannot keep growing. The economy (whether economists realize it or not) depends on physical resources, and these are in limited supply. One piece of evidence with respect to the limited supply of oil is the fact that the cost of its extraction keeps rising. This means that fewer resources are available to be used for making other goods and services.
I show in my paper, Oil Supply Limits and the Continuing Financial Crisis, that lower economic growth rates make debt harder to repay. Reinhart and Rogoff seem to confirm this relationship works in practice. In their NBER paper, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” they make the observation, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”(They did not seem to understand why, though!)
The 2007-2009 recession partially brought the level of debt down, outside the government sector. Government debt has been ramping up rapidly because tax revenues are down and benefits are up (Figure 8).
Figure 11. US Debt by Sector, based on Federal Reserve Z.1 data. (Amounts shown exclude government debt that is not publicly held.)Government debt helps take the place of “missing” debt from other sectors (at least in theory). Now government debt is above acceptable levels. US debt is around 100% of GDP, and growing each quarter.
Without rapid economic growth, only a small portion of the debt that remains can be repaid. If increases in taxes/cutback in benefits leave more without work, a new round of debt defaults can be expected. Student loans are particularly at risk. Business loans maybe a problem as well, especially in discretionary industries. Government debt is likely to be a problem, especially for states and municipalities. Banks may again have financial problems, especially if they have exposure to debt from other countries, or student loans.
I am not certain what will happen to the huge amount of US government debt, if Quantitative Easing ever stops. The same might be said of the debt of all of the other countries doing quantitative easing. Who will buy the debt? And at what interest rate? If the interest rate rises, there will be a huge problem, because suddenly loans of all types will have higher interest rates. Governments will need higher taxes yet, to pay their debts. It will be hard to sell cars with higher interest rates on debt. Home prices will likely drop, because fewer people can afford to buy homes with higher interest rates.
I showed in Reaching Debt Limits what a big difference increases in household debt can make to per capita income (Figure 12).
Figure 12. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report.If debt starts long-term contraction, we will truly have a mess on our hands. Businesses will have a hard time investing. Individuals will have a hard time buying big-ticket items, like cars, furniture, and houses. Demand for all types of goods and services will fall. I showed in my post Why Malthus Got His Forecast Wrong that increasing debt was what allowed rapid growth in fossil fuel use. If debt stops growing and starts shrinking, we will get to see the reverse of this phenomenon.
What is Ahead?
Lower oil prices indicate that demand is declining. (The cost of extraction is not lower!) Lower oil demand seems to be related to poorer earnings reports for the first quarter of 2013, which in turn is at least partly related to the increase in US Social Security taxes withheld, starting January 1, 2013. Nothing will necessarily happen quickly, but by next quarter’s earnings reports, some of the “sequester” cuts will be added to the cuts. Businesses with poor earnings are likely to lay off workers, and those workers will file for unemployment benefits. Gradually, we will see increasing evidence of recession.
It is not clear that this time will necessarily lead to the “all time” switch to long-term debt contraction, but it will bring us one step closer, at least in US, and probably in Europe and Japan as well. Oil supply may not drop very much, very quickly. If we are lucky, demand will bounce back and bring prices back up, as in 2009-2010. But with all of the debt problems around the world, it is possible that a contagion will begin, and defaults in one country will spread to other countries. This is what is truly frightening.
The Future of Money
Off the keyboard of RE
Published April-May, 2010 on Reverse Engineering
Discuss this article at the Economics Table inside the Diner
Note from RE: File this article under “the more things change, the more they remain the same”. What follows is an exchange I had with Toby Russell, a quite brilliant Brit 3 years ago on Reverse Engineering, pondering on the Economic Issues of the day and the Future of Money. We rehearse these questions now on the pages of the Doomstead Diner for a somewhat larger audience, but in all honesty in 3 FUCKING YEARS, not a whole lot has changed here as of yet and the same questions remain to ponder on until they do.
Toby and I had many a great chat on the subject of money, and inside the Diner I will paste a few more of them. With luck, Toby will find his way to the Diner as well, and we can renew, refresh and update the $64,000 Question on the Future of Money in the post-Industrial Economy.
RE
To begin, from my keyboard:
Who ARE the Bond Vigilantes?
Exactly how the monetary system will come apart remains an open question, but more and more each day you see a structure developing for the collapse. It comes in the form of the internal battle between Nation States and those who have “invested” in Nation States in the Bond Market, which in Europe is currently in a Death Spiral that can only be slowed if the Sovereigns “guarantee” the bonds currently being repudiated by whoever it is who buys those bonds. The so-called “Bond Vigilantes”
So who really ARE the Bond Vigilantes, and WHO is the “market”? Its not J6P for the most part, I mean who buys Greek Bonds with their spare change? In aggregate J6P who actually HAS 401K might be buying some of this trash as part of his portfolio, but inr reality most of this trash is bought by the Big Banks as proxies for the Iluminati. Once it starts to go BAD, they want to offload it all onto the balance sheet of J6P the taxpayer, that is what Bailouts amount to.
There is a BIG confusion in using the term “market” when it comes to the dealings of Big Capital. Most people think of the market as the aggregate of what all the people in society are buying and selling, but that is not true at all with respect to sovereign debt. The massive TRILLIONS in debt that are being issued these days by Sovereigns all over the globe cannot be absorbed by the savings of J6P, because the money didn’t exist before to buy it. It really can only be bought by the Big Banks who can Borrow money from the Central Banks at close to Zero Interest. The CB then writes the money into existence and loans it to them.
It’s all a big Circle Jerk, and the end result is it loads up all the bad debts on the balance sheet of the Taxpayer, which the taxpayer cannot actually pay because he is Unemployed and no longer pays taxes, so the Bond Vigilantes/Big Banks drive the interest rate up still higher for borrowing.
The problem is coming to a head now, and it pits varying Pigmen and various arms of Da Goobermint against each other. Neil Barofsky has a plethora of litigation ready to undertake here that will make the little SEC lawsuit against the Squid look like child’s play. T will be undertaken also, because the Political Survival of most of the apparatchiks depend on finding Scapegoats. Besides that, you have lawsuits that will be filed on behalf of States that got fucked by the Banksters along the road as well. Pigman vs.Pigman, the battle begins.
Greece is and remains Small Potatoes in this battle, but what is done here to Bail them out only sets up bigger bailouts for the other Hostages to the Banksters, the rest of the PIIGS. Because their debt is “risky” now, the “Bond Vigilantes” are driving up the debt costs for the other nations also. Which means they also must seek a Bailout. Some pundits think when this hits Spain the market will choke on it, maybe so maybe not. However, its also going to eventually hit the FSofA market after all the weaker chickens have been slaughtered here. Nobody is out there to Bailout the FSofA sovereign, not even the Chinese, because they hold the debt already, into the Trillions. That is their “savings”. No reason to buy MORE worthless toilet paper for the Chinese.
So, the only “out” here is for the FSofA to buy its own debt in perpetuity, issuing more and more paper. Hyperinflation of the money supply, but not necessarily hyperinflation of prices until and unless those newly created dollars start filtering out of the system into the hands of J6P, which is nowhere on the horizon.
The reality here? Goldman Sachs, JP Morgan Chase et al are now engaged in a circle jerk trading with themselves, they ARE the “market”. They can keep propping it up so long as the CBs keep issuing them Interest Free Money to speculate with. Problem is of course, that is just driving the sovereigns into ever deeper bankruptcy.
Eventually one of these sovereigns will crash, and nobody will bail them out. The CDS will trip, and then the House of Cards will crash here. Still has a coupel of layers to go though. They will print the money to Bailout Greece, and probably Portugal and Spain also. When the Debt Tsunami hits the ISSUER of the Debt, the Federal Reserve Bank, then it will come to an end. How long will that take? Based on progress since Bear Stearns of upward Cascade Failure, my guess is 2 years. In the meantime, Volatility is going to be WILD. Very hard to pinpoint what asset class or what Sovereign will be the next target of the Bond Vigilates. However, target them they will, because they have to make a PROFIT here. The only way to do that is to turn the world into their Debt Slaves.
RE
From Toby:
I’m getting very interested in MMT, as I have posted at my blog. What we are really saying when we argue there is too much debt (there is) and this sucker is going down, is that money is the most important thing there is, that nothing can be done about it, someone’s got to pay, and so on. But in reality of course money’s just so much numbers. Ecological issues aside, real wealth is not diminishing, only debt obligations are growing. What do we do about this? Drown in our idea of what money is, or redesign it?
on MMT as well. Many of the concepts we have covered in the past seem to be a
part of this. You seem to favor these days offering up the whole panopoly of
currency forms here, from Demurrage money on the international level to a
variety of state and local currencies all operating at the same time.Clearly, if this was actually operating on the local level commerce would be
quite the bear for your local Convenience Store clerk. You show up at the store
with some of RE’s Moosechips, and the clerk has to check to see first if MCs are
on the list of currencies he is authorized to take. Then he has to check the
daily (hourly?) exchange rate for Moosechips to price out the merchandise
against whatever currency it usually is priced out in. Granted, the Computer he
uses probably could be programmed to do this all automatically and even monitor
exchange rates in nanosecond intervals, but its still going to mean a drawer
full of lots of different notes, and how do you make change?Next problem is exactly how do you save your money? Do you save it in
Moosechips? This is kind of like the problem people who worked for companies
that paid in their own Scrip faced. Its only good for buying stuff at the
Company Store, and when the Company goes outta biz, its worthless Toilet Paper.
Sort of like what will happen when the FsoA goes outta biz on the grand scale.
LOL.
Beyond this, I don’t see how having many forms of currency operating resolves
the Interest problem. People who Loan out money will still expect Interest on
it, elsewise there is no point in loaning it out. With many currencies
operating, the problems you have now of unscrupulous Banskters creating more
notes than they actually have assets to back them up would be even more
intractable than it is now.
Clearly on the International level the Top Level Demmurage Money has to be used
as a settlement form, and a 5% Demurrage is liking saying you have 5% Inflation
all the time. If you aren’t growing faster than that you are gonna be losing
money. Is there room for 5% Growth in our real economy? Considering the Energy
problems we have even BEFORE the Big Spill, I think we would be lucky to keep
the Shrinkage at 5%, which is a total 10% differential between the Demurrage and
the Negative Growth rate.
As bad as our Money problem is, the real problem here for the Industrial society
remains the Energy problem. For the Transportation portion of this economy, its
more than that, its Portable Energy as well. The society needs to be
restructured along lines which require less movement of goods and people around
and a slower pace of life all around. Unfortunately, all the infrastructure we
have built here is built around precisely the opposite concept, and REBUILDING
it now with substantially less Available Energy per capita will be quite
difficult, if not impossible. Of course, a 90% Die Off of the Human Population
would solve the per capita problem by lowering the denominator, but this is not
a concept most people consider a good solution.
My guess here remains that the current monetary system we are using is going to
continue onward here in Epic Fail mode for a while yet to come, exactly how long
I am not sure. Whether it reaches a Critical Point that results in a Sudden
Stop Event or whether it just continues to deteriorate and we all slowly Boil
like Frogs also is open for debate. If/When the Dollar fails completely,
likelihood would be states and local communities will substitute their own
currencies, but even if well managed and temporarily successful all will also
collapse due to the interest problem in a negative growth environment. It
doesn’t matter if you put a Demurrage on the Money of 5% or Inflate the currency
at 5%, it’s the same result in either case. In fact 5% is even more onerous
than the 2% or so Inflation the Fed sets as a Target Rate, so I expect you would
see a monetary collapse even faster than the typical 60 –80 year cycle we see
now.
So, is it all HOPELESS and we are just spinning our wheels here to no purpose?
Well, if the hole they poked in the crust of the Earth down in the GOM keeps
spilling out PUSS here, yes its quite hopeless and worrying about what kind of
money we are going to use in the future is a massive waste of the short time we
have left breathing the last Oxygen the phytoplankton produce for us. However,
on the slim chance that the Bozo Engineers who popped this pimple can plug it up
and we are not currently experiencing the beginning of a new Permian Extinction,
the exercise is worthwhile. Not so much for us in this generation, but for
those a few generations down the line AFTER the great Die Off is finished.
Perhaps we can leave a legacy for them of how they can build a Better Tommorow
and NOT make the same mistakes half a millennia of Capitalism led us into here.
Talk about EPIC FAILURE of an economic system, Capitalism is going out with a
mighty Big Bang here. Yeesh.
RE
they work. It is not about some guys saying accept my MCs because I say
so, or the two of us agree so, but is more well thought out than that.
I’m not going to go into all the details, but there are variants out
there in operation and have been for a while. Time will kill off the
weak ones, and favour the strong, as it always does.As for the demurrage currency, that is global and for investment and
international trade purposes only, not for saving. The demurrage
inspires investment in projects which have long term value. See the
Bernard Lietaer talk: http://vimeo.com/6491175for more details.Interest/usury still acts as it does now on the natinoal currency, as a
kind of vacuum cleaner on fiat national currencies and spur to savings,
so people will get into debt and so on, as the prudent will be able to
save, though the kind of future the changes I hope for would initiate
would change plenty, perhaps even how saving and retirement works. But
when big problems through over indebtedness arise there won’t have to be
any bail outs. Those banks that got too greedy have no leverage on the
sovereign to save themselves with, because the sovereign controls money
supply with the tools laid out in MMT (existing tools actually like
taxation and bond issuance and purchase). Life would still have its
financial ups and downs, but they would not represent systemic threats.
The ride would be a bit smoother.All of this is moot in an energy crisis, as you say, but the viable and
working alternatives to oil are out there (unless that GOM spill undoes
everything — time will tell). Also an absolute necessity is the death
of our lust for eternal GDP-growth and a corresponding transition away
from consumerism. MMT offers an attitude to money which allows us,
culturally, to be more open minded about where value lies. To my mind
real value lies in healthy relationships: ecological, socioeconomic and
societal. Technological unemployment could be embraced too by a more MMT
way of thinking about the economy, which would help us review what we
are alive on this planet for, and the kinds of activities and behaviours
which really make life sustainable and enjoyable.So in the end this is going to be about striking the right balance
(isn’t it always?). It’s not just Joe’s currency versus Jack’s, versus
fiat versus the Terra (Lietaer’s suggestion for the global demurrage
currency), but other things too, outlined above. To me MMT is but one
important plank in all this, though perhaps the first that needs to be
laid down, because the way most people think of money and value, they
seem prepared to let the world go down for money’s sake. That’s plain
stupid, and I don’t want any part of it.Toby
Reaching Debt Limits
Off the keyboard of Gail Tverberg
Published on Our Finite World on March 1, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
If an economy is growing, it is easy to add debt. The additional growth in future years provides money both to pay back the debt and to cover the additional interest. Promotions are common and layoffs are few, so a debt such as a mortgage can easily be repaid.
Figure 1. Author’s image of an expanding economy.
The situation is fairly different if the economy is contracting. It is hard to find sufficient money for repaying the debt itself, not to mention the additional interest. Layoffs and business closings make repaying loans much more difficult.
Figure 2. Author’s image of declining economy.
If an economy is in a steady state, with no growth, debt still causes a problem. While there is theoretically enough money to repay the debt, interest costs are a drag on the economy. Interest payments tend to move money from debtors (who tend to be less wealthy) to creditors (who tend to be more wealthy). If the economy is growing, growth provides at least some additional funds offset to this loss of funds to debtors. Without growth, interest payments (or fees instead of interest) are a drain on debtors. Changing from interest payments to fees does not materially affect the outcome.
Recently, the growth of most types of US debt has stalled (Figure 3, below). The major exception is governmental debt, which is still growing rapidly. The purpose of sequestration is to slightly slow this growth in US debt.
Figure 3. US debt, based on Federal Reserve Z1 data,
The growth in government debt occurs because of a mismatch between income and expenditures. There is a cutback in government revenue because high oil prices make some goods using oil unaffordable, causing a cutback in production, and hence employment. The government is affected because unemployed workers don’t pay much in taxes. Government expenditures are still high because many unemployed workers are still collecting benefits.
What can we expect going forward? Will the debt situation get even worse?
I think we can expect that from here, the debt situation will deteriorate. One issue is rising oil prices. While there seems to be a large supply of oil available, it is at ever-higher cost of extraction, because of diminishing returns. (This is even true of tight oil, such as from the Bakken.) Furthermore, I recently showed that not only do high oil prices adversely affect government finances, they also adversely affect wages.1
Figure 4. US per capita non-governmental wages, in 2012 dollars. Non-governmental wages and population from Bureau of Economic Analysis; Adjusted to 2012 cost level using CPI-Urban from Bureau of Labor Statistics
If wages are low, the temptation is for governments to try to create more “spendable income” by increasing debt. This can’t really fix the situation, however. The real issue is increasingly high oil prices, which adversely affect both government finances and wages. Adding debt adds yet more interest payments, adding a further burden to wage earners, and creating a need for payback in the future, when wages are even lower.
Ultimately (which may not be very long from now), the debt system appears likely to collapse. The Quantitative Easing (QE) which a number of governments are now using to hold down interest rates and make more funds available to lend cannot continue forever. While there are claims that QE is a bridge to “when growth returns,” it is seriously doubtful that economic growth will ever return. Inexpensive oil is simply too essential to today’s economy. As oil prices rise, wages fall, and demand for oil is further constrained. Falling wages also reduce demand for debt, as payback becomes more difficult.
How Household Debt Adds to Spendable Income
One thing readers may have not thought about is that it is the increase in debt that adds to a person’s (or company’s) spendable income. For example, taking out a car loan allows a person to buy a car. Paying back the loan over a period of years tends to reduce spendable income. If, in the aggregate, the amount of debt outstanding starts decreasing each year, spendable income is actually reduced below the level of wages, because in total, the balance is being reduced.
If we add the increase in household debt (mortgages, credit cards, student loans, car loans, etc.) to wages, this is the pattern we see historically. (The increase has been adjusted for inflation using CPI-Urban):
Figure 5. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report. *2012 estimated based on partial year data.
The pattern is very much what we would expect, given what we know about recent debt patterns. The amount of debt rose rapidly in the early 2000s, when interest rates were lowered and lending standards relaxed. Some people bought new homes. Home prices escalated, with the higher demand. Many homeowners were able to refinance at lower interest rates. In the process, homeowners were able to “pull out” funds that they could use for any purpose they liked–fixing up the house, buying a new car, or going on a vacation.
By 2008, the party was over. In fact, the amount that was added through debt started decreasing in 2006 and 2007, after the Fed Reserve raised interest rates, in an attempt to choke back inflation caused by high oil prices. I talk about this in Oil Supply Limits and the Continuing Financial Crisis, available here or here.
Increased Government Debt Can Also Add to Spendable Income
In Figure 5, we added the increase in household debt to wages, to get an estimate of spendable income, adjusted for debt. Theoretically, at least part of the increase in government debt might also be added to spendable income, since it is often used (in leu of increased taxes) for programs that benefit citizens. (Some of the increased debt is used for things like bailing out banks, which is of questionable value in raising the spendable income of individuals, so perhaps not all of the increase in government debt should be added in estimating spendable income. Also, increased interest costs related to higher debt amounts would tend to have a dampening effect on spending, if interest rates are not continually dropping, as they have been under QE.)
If we add the increase in government debt (all kinds, including state and local) to the amounts shown in Figure 5, this is what we get:
Figure 6. Amounts shown in Figure 5, plus change in government debt added to the sum of (wages plus increase in household debt). Non-Government debt from Federal Reserve Z1 report, with changes adjusted to 2012 cost levels using CPI Urban. *2012 amounts estimated based on partial year values.
How much did citizens really spend? The Bureau of Economic Analysis tells us that as well, as an item called Personal Consumption Expenditures. We sometimes hear that in the United States, personal consumption of goods and services makes up more than 70% of GDP. In fact, this percentage has been growing since about 1950.
Figure 7. Wages (excluding government wages) as a percentage of GDP and personal consumption as a percentage of GDP, both based on data of the US Bureau of Economic Analysis. *2012 estimated based on partial year data.
Strangely enough, wages excluding governmental wages have been falling as a percentage of GDP during the same period. How can wages be falling at the same time personal consumption is rising? I think that a large part of the answer may very well be “increasing debt.”
If we compare wages to personal consumption expenditures, we find that wages were about 2/3 of personal consumption expenditures at the beginning of the period graphed, but gradually fell to a lower and lower share of Personal Consumption Expenditures.3 If we add a line to Figure 6 showing 2/3 of personal consumption expenditures, the line comes out very close to where we might guess it would, if all of household debt increases, and part of government debt increases were acting to increase personal spending (Figure 8).
Figure 8. Same data shown on Figure 6, plus a line equal to 2/3 of Personal Consumption as shown on BEA Report 2.4.5. also adjusted to a per capita and 2012 cost basis using CPI-Urban.
While there are too many variables to make this comparison exact, it does indicate that the increases in debt levels are of the right order of magnitude to explain what would otherwise be a very strange anomaly.
I might mention, too, that part of the reason that Personal Consumption Expenditures can be rising as a percentage of GDP is the fact that investment has been falling, as businesses move their manufacturing offshore, and as other changes take place. According to the American Society of Civil Engineers, we are allowing bridges, roads, and dams to deteriorate, and not adequately maintaining electrical transmission infrastructure. We are reaching limits on how far we can allow investment to drop, however. In fact, the time is coming when we will need to increase investment, or face loss of some of the infrastructure we take for granted.
Figure 9. United States domestic investment compared to consumption of assets, as percentage of National Income. Based on US Bureau of Economic Analysis Table 5.1.
Where Do Debt Limits Put Us
Even if all debt limits were to do is erase the beneficial impact of debt increases, based on Figure 8, it appears that spendable income (or Personal Consumption Expenditures) would decrease by about 23%, to bring it back to might be expected based on wages.
In fact, reaching debt limits is likely be a messy affair, with some type of change (such as increasing rising interest rates as QE fails, or the US dollar losing its reserve currency status, or huge changes in the Eurozone) leading to changes that affect governments and currencies around the world. It seems likely that trade might be disrupted. Some governments might be replaced, and the debt of prior governments repudiated by the new governments. It is not clear what would happen to personal and corporate debt. In many countries, reform governments have redistributed land and other property. In such a circumstance, neither prior land ownership nor prior debt would have much meaning.
In our current circumstances, we are reaching debt limits because of a specific resource limit — lack of inexpensive oil. Oil is used almost exclusively as a transportation fuel and in many other applications as well (such as construction, farming, pharmaceutical manufacturing, and synthetic fabrics). Expensive oil is not really a substitute, and neither is intermittent electricity. We are reaching other limits as well. Perhaps the most pressing of these is availability of fresh water. Fresh water can be obtained by desalination, but expensive water is not really a substitute for cheap water, for the same reason that expensive oil is not really a substitute for cheap oil. See my post, Our Investment Sinkhole Problem.
The situation of reaching debt limits because of resource limits is a worrisome one, because it is hard to see a way to fix the situation. People often say that our debt problem arises because we have a financial system in which money is loaned into existence, and as a result, requires growth to pay back debt with interest. I am not sure that this is really the problem.
We have been used to a financial system that “works” in a growing economy. In such a system, it makes sense to take out loans on new business ventures. In such a system, money is also a store of value. In a shrinking economy, relationships change. Some loans will still “make sense,” but such loans will be a shrinking proportion of current loans, with long-term loans being especially vulnerable. Money will either need to “expire,” or a high rate of inflation will need to be expected, making interest rates on loans very high. In a shrinking economy, businesses will fail much more often, and workers will more often lose their (fossil fuel supported) jobs.
Some have suggested that new local currencies will fix our problems. I am doubtful this will be the case. The problem may well be that all currencies start being more local in nature. What we may lose is interchangeability based on trust.
Notes:
[1] As background for those who have not read my post The Connection of Depressed Wages to High Oil Prices and Limits to Growth, wages recently have been depressed, in part because fewer people are working. Figure 4 above, showing “Per Capita Non-Government Wages,” provides a measure of how wages have changed. This is calculated by taking wages for all US residents, subtracting wages of government workers, and dividing by the total US population (not just the number working). The average wage calculated in this manner is than adjusted to the 2012 price level based on the CPI-Urban price index. Government workers have been omitted because I am trying to get at the base from which other funding comes. Government wages are ultimately paid by taxes on workers in private companies.
The thing that is striking about Figure 4 is that a similar pattern occurs in the 1973 to 1983 period as the 2002 to 2012 period. Oil prices were high in both periods. (Figure 10, below). In fact, the vast majority of wage growth has occurred when oil prices were $30 or less in 2012$.
Figure 10. Per capita non-government wages, calculated by dividing non-government wages from the Bureau of Economic Analysis by the US population, and then bringing to 2012$ using CPI-Urban price index, together with historical oil prices in 2012$, based on BP 2012 Statistical Review of World Energy data, updated with 2012 EIA Brent oil price data.
There are several reasons why rising oil prices can be expected to reduce the number of people working, or the hours they work:
(a) Discretionary sector layoffs. Consumers find that the price of food (which uses oil in its production and transport) and of commuting is rising. Prices of other goods are also rising. This forces consumers to cut back on discretionary spending. Employees in discretionary sectors get laid off, because of these impacts.
(b) General layoffs. Even outside discretionary sectors, employees may be laid off, if the cost of goods rises indirectly because of a rise in oil price. Often this will be because of higher transport cost, but it could because of another use of oil, such as by construction equipment, or as a raw material. With higher costs of delivered products, companies find that demand falls, if they raise prices sufficiently to maintain profit margins. (This falling demand occurs because some consumers can no longer afford their products.) Businesses find it necessary to scale back the size of their operations–lay off workers and close stores or other facilities. Alternatively, businesses can move operations to China or another low cost site of operation, to reduce costs, but this also leads to layoffs of US employees.
(c) Government layoffs. Eventually the government tax base is reduced, because of a smaller proportion of the population paying taxes. Governments also find a need to pay our more in direct costs–such as more for unemployment insurance, and more for asphalt (an oil product) for paving roads. Governments also find themselves laying off workers.
The effects outlined above can be mitigated to some extent by changes such as moving closer to work and more fuel efficient cars. But experience seems to suggest that even more what happens is that the effects shift from sector to sector over time, as businesses “fix” their problems, leaving them to with wage-earners and governments.
The high price oil situation was mostly resolved in the early 1980s, because other relatively inexpensive oil was available to drill, bringing the price down again. (The new price, at $30 barrel, was still 50% higher than the $20 barrel price prior to the crisis, though.) The availability of new low-priced supplies seems much less likely now, because we extracted the inexpensive-to-extract oil first. We are now reaching diminishing returns. While there seems to be plenty of oil available, it is high-priced oil. This is even true of the new “tight oil” supplies in the Bakken and several other areas.
[2] Government debt in this post refers to all types of government debt combined, including state and local debt. Within this debt, only debt classified as “Marketable” is included. As such, it does not include debt owed to the Social Security system (because contributions that were collected by the Social Security system were spent on something else, and are not available to pay Social Security recipients) or to other pre-funded government agencies. Such debt is a future liability, not affecting today’s spending, so I didn’t add it in. (The Federal Reserve Z1 report also does not include it.) There are, in fact, a huge number of government obligations that are not reflected, such as promises to bail out pension programs and FDIC coverage of bank accounts, because they are contingent in nature. Such programs can be expected to add to the problems we would have, if our debt system should fail.
[3] We would not expect non-government wages to equal Personal Consumption Expenditures, since for one thing, wages of non-government employees leave out expenditures by government employees. They also leave out various derivative amounts, such as expenditures by entrepreneurs, and expenditures of amounts that would be classified as rents and dividends. Changes in savings rates would also play a role.
Our Bonzo Economies
Off the keyboard of Jason Heppenstall
Published on 22 Billion Energy Slaves on February 15, 2013
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Sometimes, it seems to me, the disconnect with the reality that is being reported in the media and the other reality that isn’t getting much attention can make you question your own sanity. I’m talking in particular about the state of the global economy. Not a day goes by at the moment where we don’t hear self-flagellating reports of the state of the economies of Europe, followed up swiftly by news that the US economy is ‘on track’ and ‘growing’.
Why is the US economy ‘growing’ (apologies for the quotation marks, which I find I have to use to denote verbal irony on an increasingly regular basis)? Is it because of the digital mint at the Fed relentlessly churning out computerized funny money? Or perhaps because the Americans have ‘grasped hard realities’ and are ‘taking things in hand’? Who knows? The subtext to all this reporting seems to be that we Europeans are a bunch of idle debt-junkie slackers and the hard-working Americans – led by the charismatic Mr Obama and his nice wife – somehow have chanced upon a magic formula for success.
This is of course all pig-stinking flapdoodle.
Nowhere recently have I heard any mention of energy, except in reference to the fantasy that the US is undergoing a shale revolution and will soon become a net exporter of oil. Of course, these claims don’t stand up to much analysis. The hype surrounding shale gas has brought in so much capital that it was inevitable that there would be a crash in the price of gas, thus rendering any further production uneconomic. As for the claim that the US will become self-sufficient in energy, well, that one might actually be true if demand destruction (called ‘energy efficiency’ by the media) in the home market continues – as it will.
And what portion of this fabled GDP growth in the US can be put down to QE? Injecting digital money into a pool of ‘money’ that is made up of 99% credit is like pouring a glass of clean water into an atrophied fishing lake choked with algae and expecting all the fish to start breathing again. They won’t. The ever clever Nicole Foss put it nicely last week on her podcast interview with Jim Kunstler (listen here) when she compared the whole credit vs assets thing to a game of musical chairs, with one chair for every hundred people. As the music plays, people don’t notice there is only one chair per hundred – they are too busy dancing to the music and having a good time. It is only when the music stops that we realise, and by then it is too late to adopt a policy of loitering next to the only chair as the others dance around you.
QE, it seems, is simply window dressing and it is being used to inflate another stock market bubble. How else to explain the rising stock market despite the falling economic activity (yes, the US experienced shrinkage in the last quarter, although this was immediately explained away by an army of analysts who said it was due to decreased spending on defence – nothing to see here). If the US economy is doing so well, why are asset managers in top Wall Street firms publicly buying shares and proclaiming their faith in recovery, but privately cashing in around seven times that amount and squirreling the money away to somewhere safe? What do they know that the media echo chamber isn’t willing to tell us? It just doesn’t add up.
Of course, we have QE over on this side of the Atlantic as well; indeed it is one of the Bank of England’s favourite policy tools at the moment. Like a doctor in a white suit, the Governor administers doses of QE to the ailing patient and then stands back to watch the result. The media pounce on any sign of improvement in the condition: More Land Rovers sold to the Chinese! Tesco had an exceptional Christmas! The alcohol and gambling industries are booming! [Hey, wait a minute on that last one, says the doctor.]
Unfortunately for the Bank’s surgeons, there is also Doctor Death, standing there in the shadows with his vial of hemlock which he drips into the patient’s ear muttering ‘Don’t worry, this will only hurt for a little while …’ in his sinister voice. Yes, the chancellor, George Osborne is busy making sure the patient never gets out of bed again with his relentless thumb-screw turning austerity measures, designed to placate the sleeping dragon that is the City of London.
Because if and when this dragon awakes, turns a cold eye over the economic landscape and decides to flap lazily into the sky and find another mountain in another country on which to roost, the true shambles of the UK economy will be revealed to all. Having off-shored a lot of the productive economy back in the 70s and 80s and de-skilled the work force to such an extent that most people can now only operate computerised systems to service the debt-strangled consumers of the fabled ‘service economy’ the only things keeping the economy afloat are a massive property bubble and North Sea oil.
But property bubbles aren’t exactly a sensible way to conduct business and North Sea oil and gas, as we all know, are running out fast. How many years left? Not many, that’s for sure. Economic policy makers are tying themselves in knots trying to find a solution to this unsolvable predicament. Interest rates are already so low they just can’t lower them further, boosting manufacturing won’t work because it tends to involve using energy that increasingly isn’t available – and anyway nobody can afford the capital – and so boosting the money supply with QE and tampering with the exchange rate are the only feeble instruments left in the tool shed. What they are praying for, of course, is that the magic Knight of Growth will ride in to save the day on his horse like a Findus ready-made lasagne in a just-in-time delivery system.
But, and here’s the downer, growth of the type we have been led to expect just can’t happen in a world economy where oil hovers at around $100 a barrel. With our entire way of life predicated to run off abundant and cheap oil, we are like flies gazing longingly at a glowing light bulb but finding our feet well and truly stuck to a strip of fly paper. Alas, this is the situation we find ourselves in, and there will be a lot of angry buzzing around us for the foreseeable future.
Of course, there’s a lot of talk about switching to new forms of energy, from wind power to thorium reactors to shale gas, in order to maintain the wasteful energy-intensive lifestyles we think of as normal. Each one of these energy plans is fatally flawed for various reasons, and in any case, switching an economy from a highly concentrated form of energy to a lower one a) Has never been done before b) Is prohibitively expensive in terms of money, energy and capital and c) Would take a minimum of several decades – or maybe up to a century if you go for a long-shot gamble with an unproved technology like thorium reactors. This doesn’t mean we shouldn’t try to salvage some form of electrical energy, but we should have started the transition thirty or so years ago, and there is still no serious talk of doing so, so we can reliably expect the lights to be going out over the next handful of years.
In fact, the policy measures pronounced by finance ministers and presidents day in, day out, remind me so much of a toy dog I had as a child. He was made of plastic, with clockwork innards, and had rough polyester fur glued onto his injection moulded body. His name was Bonzo, and if you turned a key in his belly he would emit a mechanical yapping noise and his little plastic legs would make him scamper forwards until he reached a wall or other immutable obstacle, where he would invariably fall over, the yapping noises growing ever weaker as he spent his mechanical energy on the useless task of spinning around on his side and barking.
The UK chancellor George Osborne is almost exactly the same age as me, with only a couple of weeks separating us. Sometimes I can’t help but wonder whether out mothers shopped at the same toy shops, and whether Mr Osborne also had a Bonzo dog like mine. If so, perhaps the young George (or Gideon, as he was called in those days) sat in his cot staring at the spinning, yapping mechanical dog and somehow the image became ingrained in his world view and manifested itself decades later as economic policy.
It’s the only logical reason I can think of for the endless slew of ‘stimulative’ measures he is coming up with in the face of the sitting room wall of declining net energy. Expect more of the same until the key stops turning.
There’s Only One Way To Read Business Insider – Stoned
Off the keyboard of Chartist Friend from Pittsburgh
Published on Chartist Friend From Pittsburgh on December 30, 2012
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The world didn’t end on the 21st, but in retrospect the key word in that prophecy was “end”, not “world”. Something was bound to come to an end at that time, and for me it turned out to be my pill-popping, binge drinking ways. When practically every week you hear a new story about a friend getting a DUI and you’ve managed to accomplish nearly three decades of partying without getting one yourself, that brief moment of clarity arrives in between buzzes where the thought enters your head that maybe your guardian driving angel isn’t going to put up with your crap forever and it’s time to slow down. As in stop. It’s a dead end.
My increased mental acuity is causing me to fully acknowledge what a crime it is when someone rips off your work without any credit or attribution. It’s even worse when the articles your work appears in are a total joke.
http://www.businessinsider.com/how-to-fix-the-deficit-in-one-simple-chart-2012-12
http://www.businessinsider.com/closing-the-deficit-is-painless-2012-12
The chart I sent to the author illustrates a key economic correlation that exists between federal government debt and the unemployment rate.
The author, who decided to reprint my work without any attribution, has written two articles so far in which a disguised version of my chart is used to make a highly simplistic point that fails to make any sense:
- “The answer there is, once again, improve the employment picture (i.e., increase growth).”
- “Want to get the red line down to its historical range closer to 22 percent of GDP? Improve the unemployment rate! This makes total logical sense, of course, since lower unemployment implies reduced spending on all kinds or programs.”
- “The deficit has been driven by unemployment, which means … Closing the deficit is painless. It’s not about belt-tightening, it’s about putting more people to work, which is something that everyone loves.”
- “The bottom line is that pain and belt tightening are associated with higher deficits.”
No, the bottom line is that pleasure does not exist with pain; booms don’t exist without busts, and any person writing about the economy who fails to address the wavelike, Yin-Yang nature of the business cycle does not deserve to be read except by readers who are completely stoned.
Your Chartist Friend’s theory of Curvilinear Wave Analysis will ultimately be proven to be the technical master key for unlocking the trend analysis of the markets. The business cycle will be renamed the business curve.
Simplistic sine wave charts like this
will eventually be redrawn to detail the full wave structure of the business curve: a top or bottom reversal that revolves around a key support or resistance trendline, a break through that line, a correction that pulls the wave back to that line, and finally a continuation of the trend in the direction of the breakout or breakdown
This head & shoulders like wave structure appears over and over again on stock charts, index charts, FRED charts, etc. If you understand the pattern and then apply Curvilinear Wave Analysis to the unemployment rate – federal government debt correlation chart, there’s only one conclusion you can arrive at: the UNRATE is going higher; USDEBT is going higher along with it, and there’s not a goddamned thing Obama, the Fed, Business Insider or the Congress can do about it.
All you can do is short the fuck out of the stock market and prepare for massive economic contraction
Model City…
Off the keyboard of Steve from Virginia
Published on Economic Undertow on December 15, 2012
Unknown Photographer, Jacob Farrand house on Woodward Avenue between Sloat and Trinity streets in Detroit (1881). Burton Historical Collection @ University of Michigan Library.
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People say California is a good model for the rest of the country, it is “The Place Where The Future Happens First!”
Detroit is a much better model than California: it is the place where the future happened a long time ago. Persons seeking that ‘Mad Max’ dystopia — where law and order is very much a sometimes thing, where the house next door is a burnout and the neighbors down the street are dope-addled zombies — need look no further than the ex-Motor City.
How it got this bad in Detroit has become a point of national discussion. Violent crime settled into the city’s bones decades ago, but recently, as the numbers of police officers have plummeted and police response times have remained distressingly high, citizens have taken to dealing with things themselves. In this city of about 700,000 people, the number of cops has steadily fallen, from about 5,000 a decade ago to fewer than 3,000 today. Detroit homicides — the second-highest per capita in the country last year, according to the FBI — rose by 10 percent in 2011 to 344 people.
…Average police response time for priority calls in the city, according to the latest data available, is 24 minutes. In comparable cities across the country, it is well under 10 minutes.The number of justifiable homicides, in which residents use deadly force in self-defense, jumped from 19 in 2010 to 34 last year — a 79 percent rise — according to newly released city data.
The city with the highest murder rate in the US is New Orleans, another post-future model. More information about world homicide rates can be found in the UN Global Study on Homicide in 2011. Places with highest homicide rates are third-world hell-holes such as Venezuela, Jamaica, Honduras and El Salvador, districts of northern Mexico adjacent to the US border and south-central Africa. These futures are a step or two down the ladder from Detroit into the energy abyss.
A consistent theme in this letter has been the connections between items that may seem to be far removed from each other but are actually linked at the very core. If you push on one end you get a reaction in what would seem to be the most unlikely spots. Today we explore the connection between the fiscal deficit and energy policy. Everyone in Washington is starting to “get religion” about wanting to fix the deficit, with serious thinkers on all sides acknowledging that there must be reform and a path to a balanced budget. Burgeoning healthcare and Social Security costs are rightly pointed to as the problem, and entitlement reform will soon be front and center. But the fiscal (government) deficit in the US cannot go away unless we also deal with the trade deficit. As we will see, it is a simple accounting issue, and one based on 400 years of accepted accounting principles. And dealing with the trade deficit in the US means working with our energy policy.The trade imbalances among the partners in the eurozone are at the heart of the problems there as well. And while we will get back to Europe in a few weeks (remember when we seemed to be focused on Europe and Greece for months on end?), today we will explore the trade problem from a US perspective. Happily, this problem, while serious, does have a workable solution. And it might even happen in spite of government policy, though if a proactive energy policy were developed, it could ignite a true economic renaissance.
Mauldin carries on telling readers how friendly tycoons are going to save us all with huge reservoirs of crude oil:
I have been wanting to explore the implications of the shale oil revolution. Old oil fields are wearing out, as peak oil advocates point out. Where can we find the huge and cheap-to-exploit oil fields to replace them? Hasn’t all the easy oil already been found?
Because language is infinitely malleable, words can mean or imply anything the utterer wishes them to mean. Hasn’t all the easy oil already been found? What is ‘easy oil’? What does ‘easy’ mean: “Easy for me, hard for you?” Mauldin does not use the word affordable, nor does he mention costs. Over the course of five-thousand two hundred words the consumption side of the energy equation is never discussed … this is surprising/misleading because our crisis is the direct product of consumption. Decades of industrialized, highly-efficient guzzling of the cheapest, easiest fuels have bankrupted us! Because of our incredible ‘success’ we must now deploy unorthodox extraction techniques that might indeed be ‘easy’ but are unaffordably costly. Can anyone see anything wrong with that?
If cheap and easy have bankrupted us … what will expensive and difficult do?
Mauldin invests many words on the US trade imbalance, noting:
Not Everyone Can Run a Surplus … we are spending more for energy even as we use less of it, and that drives up our trade deficit. Let’s see why this matters. As long-time readers know, I have often written about how you cannot balance private and government deficits without a positive trade balance. Let me quickly review.It is the desire of every country to somehow grow its way out of the current mess. And indeed that is the time-honored way for a country to heal itself.
No country has ever ‘grown’ itself out of debt or a debt crisis. Debts have been repudiated or restructured. Countries have abused foreign exchange, waged war and conquered or have been destroyed. Governments have bankrupted creditors or sent them to the gibbet. They have stalled for time until able to take on orders-of-magnitude greater debts from new- or the same creditors … thereby refinancing existing obligations.
In a global economy all the creditors have been tapped. There is no new source of credit except Bankers from Mars.
The increase of debt masquerades as growth. The US appears to grow which allows more debt to be taken on to create the appearance of still more growth which in turn enables additional debt. Right now the Establishment lies about growth in order to take on more debt. This scam of ‘growth-to debt-to growth-to debt’ is all there is to industrial prosperity … along with fuel-wasting garbage that breaks down and is thrown out in a few years. Unlike real output of goods and services which is constrained by thermodynamics, debt has no limits as long as the increases can be supported with good ‘progress’ stories.
Frakking and ‘shale oil’ are part of the narrative that serves to generate loans for energy tycoons. ‘Energy Independence’ is the empty abstraction that is offered as the narrative’s objective. Business customers and ordinary citizens are required to repay the debts … and their children and grandchildren.
But let’s look at an equation that shows why that might not be possible this time. We have here another case of people wanting to believe six impossible things before breakfast.
Good grief … the narrative is complete with Mauldin ‘folksy-isms’.
Let’s divide a country’s economy into three sectors: private, government, and exports. If you play with the variables a little bit, you find that you get the following equation. Keep in mind that this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong. Domestic Private Sector Financial Balance + Governmental Fiscal Balance – the Current Account Balance (or Trade Deficit/Surplus) = 0.
This is correct but not particularly relevant. America’s current account is not a problem. America creates its own dollars as needed, the oil sheiks recycle their imported US dollars back into the US economy. The imbalance that really matters is at home, at the end of Americans’ driveways:
These machines are not farm tractors or delivery vehicles, they are not used for work, they are luxuries, a drug, a form of crack cocaine. What they earn is zero, their cost must be met with debt, the cost of the fuel they consume is also met with debt, so is the cost of the infrastructure that these machines require. If the individual users are unable to obtain the needed credit then the economy as a whole- and the state must obtain it in the individual’s place. Otherwise, the consumption components of the string economy are deprived of funds. This credit starving process is underway, even as the cost of debt has become unmanageable. While frakking costs are extraordinary, the consumption side debts are galactic! Realistically, nobody/nothing can hope to repay them.
The consumption side is a money-loser. Sez Mauldin: “Play with the variables a little bit, you find that you get the following equation. Keep in mind that this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong:”
The Cost of Fuel + The Cost of Credit Needed to Pay for Both Fuel and Fuel Use/Waste Infrastructure – Returns on the Use of the Fuel = 0
Right now, returns are juiced with credit otherwise the process would have failed a long time ago. The means to set a price is also the means to meet that price. If a price is bid by access to credit, the consumers must have access to the same credit to meet that price. In model cities such as Detroit where the consumption side started losing purchasing power in 1929 the consequences of rationed credit are obvious: welcome to the death spiral, where costs race ability to meet them into the basement!
The banality of future world: the Woodward Avenue location in 2009. The towers at the rear of the photo are abandoned as are other structures in the area.
The best way to look at the peak oil dilemma is to ignore physical production — which has little to do with anything — and to consider the City of Detroit as the model customer for all of John Mauldin’s newly frakked crude oil. The shattered city filled desperately impoverished people is somehow supposed to afford more costly fuel when it can barely afford what it has now.
Energy products can be obtained but only if someone’s grandmother is gunned down inside her house by a gang of dope-crazed teenaged hoodlums. The reason for the hoodlums has been the success of industries in pauperizing the city. Either consumers must become richer or costs of fuel-plus-credit must decline. Since the trend — as seen in the model city — is for consumers to become impoverished the outcome is for costs to be unmet and the production/credit side to be de-funded …
When customers cannot afford fuel it remains in the ground. Right now, Detroit — that model for America’s future in today’s present — cannot afford cops. It cannot afford firefighters, it cannot afford basic services. It has been bankrupted by the short-term success of its own consumption tycoons … hard to see how it can pay for high cost petroleum!
“We got to have a little Old West up here in Detroit. That’s what it’s gonna take,” Detroit resident Julia Brown told The Daily. The last time Brown, 73, called the Detroit police, they didn’t show up until the next day. So she applied for a permit to carry a handgun and says she’s prepared to use it against the young thugs who have taken over her neighborhood, burglarizing entire blocks, opening fire at will and terrorizing the elderly with impunity.“I don’t intend to be one of their victims,” said Brown, who has lived in Detroit since the late 1950s. “I’m planning on taking one out.”
The Detroit model of house-bursting brigands is scalable: for the country to afford energy products Congress must rob grandmothers in their own houses by absconding with their retirements.
Fuel Costs + Credit Costs – Returns on Fuel Use = 0.
The implications of this little formula are profound. As with current accounts, the sum of costs and real ability to pay are always zero. As returns on fuel use are negligible, fuel and credit costs must decline … and they are. Underway right now is the desperate, last stand pillaging of what remains of the world’s wealth to obtain fuel and credit, every bit wealth is up for grabs. The real cost of fuel and credit must fall to what the fuel and credit users can afford. Looking at Detroit, the affordable amount is very small indeed.
The question is whether there will be any fuel available and the affordable price? Time will tell.
The String Economy…
Off the keyboard of Steve from Virginia
Published on Economic Undertow on December 9, 2012
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After five years of ‘The Great Financial Crisis’ there is a sense of relief as Christmas approaches. There is nervous talk by central bankers and economists, but also hope of ‘recovery’and a following new period of prosperity … tomorrow.
It’s always tomorrow: where this recovery is going to come from or what will drive it nobody really knows, It is just taken on faith that a recovery is certain to arrive because recoveries have always arrived in the past. “Why not?” the economists ask, “It’s never different this time!”
The sense of security is misleading and unsettling. We are like a person wearing a sweater with a thread caught on something, we are walking away … Pulling the string does not blow up the sweater or cause it to crash. The sweater diminishes without our being too much aware of it. There is little drama, only a Great Unraveling. Instead of a strong economy, we have a string economy, the pulling of which is invisible to economists.
(Unknown photographer) Fairy-tale palaces for the well-to-do in the Paris of the Midwest, on Alfred Street in Brush Park in Detroit in 1881. It was all a fantastic dream, a stage-set for Victorian manners and unimaginable prosperity without end, a gilded age, the product of the settlement of the far West, of the overreaching railroads and steamships … and of millions of highly skilled immigrants from Europe.
Brush Park was a psychedelic dream-scape of hundreds of extravagant, gilded mansions, with hundreds more throughout the city: not so much an idea but an escape from the necessity of having to think about anything at all. It was as if the prosperity wasn’t real but needed physical manifestations, each more outlandish than the next … to reassure those with the most that most was indeed what they had.
What the most have today is an irksome and uncertain non-crisis, a fake. Relief resides entirely in the form of central bank credit. These banks offer trillions in low-cost loans to both governments and the finance industry so that these establishments might dodge the consequences of the gigantic debts they have already taken on. There is no gilded palace on Alfred Street for this debt for it must squirreled away out of sight. Managers hope that ordinary citizens will ignore the creaking colossus until it is safe to set it loose again, debt giving rise to still more debt against a renewed backdrop of ‘growth’.
The only gain from the central bank lending/hiding strategy is a reduction of the interest cost and an escape from accountability. Both the reduction and the escape are temporary: the banking sector receives the benefits of interest reduction while the costs are shifted to the citizens. Escape keeps finance scoundrels out of jail until the statute of limitation expires. Nothing is done to reduce the overall debt burden, indeed nothing can be done! Modernity and industry both require a constant increase of debt and cannot tolerate any decrease. ‘Growth’ is a measure of the increase in debt and therefor a measure of wealth! Without the general increase of wealth it is impossible for tycoons to gain more beyond what they already have. In a debt-constrained world, one tycoon can only gain when other tycoons lose. It is a pitiless world indeed that sets one tycoon against the others.
Any increase in debt must take place in the private sector because wealth cannot exist unless it can be extracted at great pain from the citizens. This is because money, wealth and debt are all interchangeable claims against the non-tycoons’ vanishingly small allotment of time. A tycoon can always obtain more money but no human can gain more time: for wealth to have meaning it must be worth what is dear to everyone, not just tycoons! To be a tycoon is to have a great surplus of others’ time.
Debt repayments must therefor be extracted from the public, the higher the cost to the public the more useful/satisfying wealth is for the tycoon … being a sadistic libertine is a characteristic which enables an individual to become a tycoon in the first place.
Sadly, the private sector is unable to increase its supply of debt as there is already too much debt for ordinary economic activity to manage properly. Enter the central banks, which lend in the place of the private sector. Inflationists cry that this is horrible, like beating a dog with a curtain rod … Having the central banks or the government write checks to tycoons simply will not do, it’s bad manners, the payments do not represent wealth, in fact do not represent anything. The certainly do not represent anyone’s time.
This concern is misplaced for two reasons. One is because lending to tycoons is what central banks do constantly: lending-plus-sadism is how tycoons get to be that way. Second, because the absence of real money is considered to be temporary. With the loans offered by the central banks, there is certain to be more private sector credit made available … tomorrow.
There is no inflation because the central banks do not really replace the private sector, they only fake it. Whatever amounts of credit the central bank offers is less than what is retired or destroyed by private sector deleveraging. Even as the central banks’ expand their balance sheets, the private sectors’ balance sheets contract … without the efforts of the central banks there is no credit to be had with dire consequences all around!
The governments could issue currency without borrowing and use it to retire some of the debt. This would not add to the supply of money because retiring the debt would extinguish newly-issued currency at the same time. The governments so far have refused to do this. Bankers would object … as would the tycoons who desire to extract wealth from the workers’ bloodstreams, not from the government. The government could issue sufficient currency so that the supply of money expands enough for the tycoons to gain more of it. Having the government write checks to tycoons simply will not do, it’s bad manners, etcetera …
Meanwhile, the Establishment attempts to prop up key men everywhere around the world by any means necessary. Any institution that is deemed to be ‘systemically important’ is supported with the ordinary citizens’ credit … except for those things the same Establishment deems worthy of being blown up by drones or commandos. Non-key institutions such as Detroit and other American cities are abandoned to molder then collapse.
The citizens mutter, they are under a cloud that grows longer and darker with each pull of the string. Unemployment relentlessly increases, there are rumors of ‘austerity’ to be added onto the thermodynamic variety that emerges from diminished energy availability. The establishment has only one tactic: to add more debt, which has typically increased since the beginning of the industrial revolution. Debt has become non-productive, we have the unraveling sweater economy as a consequence … there needs to be another approach.
We are caught between what we want and what we need. We want it all, we feel entitled: we are like children. We cannot help ourselves. The yarn is pulled and the sweater becomes very small, the bottom is now at our armpits. We know there are steps that we must take … we must stop pulling the string … but we refuse to take them.
Alfred street in 1993 (Unknown photographer for City of Detroit). The house behind the car is the third house from the left in the top photo. Modern Detroit, a first-world slum:
Slums are a product of modernity just the same as automobiles and jet airplanes. They are economically segregated areas, places where society’s losers are swept. Modernity washes its hands of the slum-dwellers then moves onto other business … the creation of more slum dwellers. Slums are the end product of social Darwinism, the necessary ‘yin’ to business success ‘yang’.
More success = more slums. Failure of the process also = more slums. Modernity asserts that it eliminates poverty. Slums stand as evidence that modernity creates poverty. More modernity = more poverty.
As with Mumbai and Nairobi, so goes Detroit and other slum-cities, the product of- as well as destination for industrial prosperity.
Detroit was undone by the extraction of time from tens-of-millions of Americans by Detroit’s auto- and other business tycoons. At the end of the day, America had no time for Detroit. The stock market crash of 1929 and the following Depression ruined many of the old Detroit families. The manors were sold or divided into apartments or configured as rooming houses for auto workers. Others were demolished and replaced with cheaply built stores, shabby institutional buildings or parking lots. In 1935, the immense Brewster-Douglass public housing project for the ‘working poor’ was built at the far end of Alfred Street, just out of range of this photograph. War production saw the city filled with hundreds of thousands of job-seekers and factory workers who required housing. Many of these job-seekers were Negroes from the American south. Blacks were undesirables in nearly every Detroit neighborhood. As a consequence, housing was very expensive in neighborhoods where they were allowed to settle, much more so than for whites who could live anywhere in the city. Housing for blacks was also in far more advanced states of decay. Tension between races exploded in 1943 with a city-wide race riot that killed 34, with thousands arrested and soldiers patrolling the streets.
After the war, whites who could fled the city for the ballooning suburbs, a period of migration that lasted for decades. Cities are made and broken by flows of capital and human beings. Detroit originally grew and took form from the incoming tide of European immigrants who built in the manner and with the materials they were familiar. The craftsmen who built the fairy castles were replaced with unskilled agricultural workers looking to toil in the expanding automobile factories, these workers had no background or interest in city-building. They needed a paycheck, the city would take care of itself.
Instead, big business ‘took care’ of the city. Beginning in 1908 came the machines: the city was steadily made over as an auto habitat. It didn’t take much: Detroit’s street plan was laid out before the automobile — the width of the streets and boulevards and vast spaces anticipated it. The distances were too great for walking, often there was no ‘place’ to walk to. Starting in the 1950s and 60s, the city was divided by superhighways. the Chrysler and Edsel Ford freeways were built north and east of Brush Park, flattening the commercial districts and cutting off neighborhood from the rest of the city … by 1970, after another race riot, the Brush Park neighborhood was abandoned to street criminals and drug addicts. The fairy palaces grew furry and gray with rot, they collapsed or were demolished one at a time, the housing projects were also abandoned then stripped. Today there are a couple of dozen occupied houses in this neighborhood, the rest is weed-covered vacant space dotted with gaping ruins and some low-quality replacement housing and commercial buildings.
Not just Detroit: the machines overran neighborhoods and commercial districts in cities all over the country, this happens to be Buffalo, New York (Atlantic) James Howard Kunstler calls this the suicide of Midwest American cities, instead it is inadvertent suburbanization. The post-auto density and the form of building within the cities is identical to that of the surrounding suburbs. Replacement construction in places like Brush Park is identical to that of the suburb: quickly constructed low-rise apartment complexes or ‘pods’ of identical, cheaply designed and built vinyl-sided shacks.
Brush Park- Alfred Street by way of Google. It is only a matter of time before these ‘new’ buildings go the way of their predecessors. There is no reason for anyone to care about them, any more than they did for the housing projects or the fairy palaces.
Nothing in the Brush Park neighborhood or the rest of the city was made to withstand the test of time, the appeal of the place was narrowly immediate and instant. There was no ‘greater place’ that the original neighborhood could be an indispensable part of. Detroit was a collection of unrelated buildings and occupation districts. The Park was created as a ghetto, a place of confinement for rich people who had no choice but to look at each others’ wealth every day and become bored with it. The vast endeavor could never be re-purposed into anything other than a self-referential institution, the same as an insane asylum or a water tower. There was nothing transcendent, every building was a single-function enterprise, created to mandate/channel behavior.
No doubt there are many who could rebuild the entirety of Brush Park as it was … as a museum piece. The Federal government could certainly do it for the cost of one mile of urban freeway. The fashion impulse that made the place possible 140 years ago no longer exists. Americans have nothing in the way of tools that would give such a project form other than nostalgia and wonder over building and design skills that were common in the late-nineteenth century but no longer exist. We don’t know how to create engaging urban spaces and we don’t know how to inhabit them. We have forgotten how to be Victorian merchants. We know how to get in our cars and drive.
Which is why we cling to the immediate present so desperately, we really don’t know how to do anything else. For us to learn is too dangerous because we don’t have the luxury of time, it has been stolen by the tycoons! By the time … we find out what danger we are in it will be to late to do anything about it.
The Golden Blind Spot
Off the keyboard of Monsta666
Discuss this article at the Economics Table inside the Diner
It is often said by people who support gold backed currencies that the chief weakness of fiat currencies is it encourages governments and central banks to issue excess amounts of money/credit. While this fact is true it would be a mistake to think this is the main reason why currency devaluation occurs. This is because the issues of overleveraging are primarily problems that stem from the private sector as most money generated in the economy comes from COMMERICAL banking and NOT central banking. In fact depending on sources or the countries in question the amount of money/loans generated as a result of fractional reserve system can be 97% or perhaps even higher if one includes other complex financial instruments such as derivatives in the total money supply.
This excessive money creation can lead to catastrophic results to the national currency if no measures are taken to limit this over expenditure. This over expenditure is present in all monetary systems both fiat and gold based currencies because each system operates with a fractional reserve system. The fiat currency maybe marginally worse because the central banks can encourage even more overleveraging as none of the new money issued by the central bank is bound by gold reserve requirements. This component of money creation only constitutes a small part of total money creation however despite assertions you may hear from Ben Bernanke.
Still, despite this relative small amount of money generated through QE or simple naked money printing this form of money creation can lead to some significant results. As this new money is issued it will enter the commercial banks and due to the process of fractional reserve banking this money can be multiplied creating further inflation in either the real economy or various asset classes such as houses or stocks. In fact this process is called the money multiplier effect in Monetary economics and this is one reason why this practice is promoted by Keynesian economists who wish the governments to issue some money as this printed money will be multiplied by banks by loaning this money out to its customers. Problem is, in this current recession many banks instead of lending have hoarded this money since there are no real returns on investments that can be made from these loans. Instead most of that money is gambled in the biggest casino in the world which is the stock/bond market and since there is quite a lot of excess money floating around this excess cash has the tendency of generating bubbles with overvaluations in stocks such as Facepalm.
But let us go back to the topic at hand which is the issue of currency devaluation. This process has occurred many times in the past even during the eras when countries followed the gold standard which we should note: is a point often forgotten by many people advocating a return to the gold standard. It should be remembered that the US suffered numerous financial crises in the 19th century when it did follow the gold standard, the most notable being the 1873-1879 Long Depression. Indeed this depression was known as the Great Depression until this event was supplanted by the Great Depression of the 1930s. All of which occurred during an era when all the major currencies of the world followed the gold standard.
The causes of this Long Depression are – like the great depression of the 1930s – are still debated among economists but the general problems would appear to share striking similarities. Like the 1930s depression the Long Depression came at a time shortly after a major war, increasing globalisation and most important of all excessive credit creation by the commercial banks. In the case of the Long Depression this was the American Civil War while the Great Depression had World War 1. Such wars meant that the central governments issued an excessive amount of credit to fund the war effort and this excessive spending came despite the fact the gold standard places heavy penalties on countries that do not practice fiscal restraint. This scenario of excessive credit creation coming through war would then spur further credit creation once the main commercial banks got hold off this money. In fact the money created by those banks would be a multiple of the amount of money the government printed. In any case, these wars times should be noted for the fact it is one of the few instances where governments are prepared to risk mortally damaging their currency by money creation. We need to remember they are creating money on two levels: one by direct money printing or QE and then the subsequent process of this money being multiplied by the commercial banks. This behaviour of excessive spending under this circumstance can apply to whatever monetary system is applied be it gold or fiat based currency system. This excess spending and subsequent credit expansion by commercial banks also result in the formation of various bubbles.
To say the Long Depression was caused by excessive war spending would not tell the whole story however. To not mention the next point would be to neglect raising another commonality between the two eras. That is, the immediate period after the civil war was a boom period for the US economy (which again is repeated in the roaring 1920s). This boom in both cases occurred because of an expansion in the money supply. In the case of the 1860s this money expansion came about due to the government and major private companies investing heavily in railroads. Much of those railroads were financed by loans, bonds and subsidies which in many cases were backed by the US government. These cheap loans created overinvestment in the industry and eventually lead to a bubble forming (or overcapacity). As it became clear many of these rail companies could never pay back their loans this caused many banks to fail which eventually culminated with the failure of the major banks of Jay Cooke and Henry Clews which brought the financial sector to its knees. The resulting recession would last six years and growth was below normal until after the 1890s.
Again this period of recession and sluggish growth shares a similar similarity to the Great Depression. So why bring up the point of the Long Depression and Great Depression? I think the point to take from all these events is that despite being on the gold standard (in the case of the 1870s the gold and silver standard) banks and corporations found ways of overleveraging the monetary system and the main method was by employing the system of fractional reserve banking. When those loans could not be paid back it resulted in large scale defaults which almost caused the destruction of the financial system. Now it can be argued that since a fiat currency encourages more spending (as currency is no longer bound by reserves of gold) then the magnitude of the problem will be that much greater so the level of defaults required to bring the system into balance would be greater but then the argument becomes one of a matter of degree.
The main issue I see with the gold standard – despite assertions to the contrary – is it is not immune to reckless spending. Reckless spending can come through poor lending practices and these practices have a particular tendency of loosening during WAR TIMES and BOOM TIMES. In the case of war the risk of financial collapse is acceptable to fight the war while in the case of boom times the perception of risk becomes distorted so market participants take out excessive loans thinking the risk of failure is lower than reality. This human behaviour must be accounted for when suggestions of moving to a gold standard system are ushered.
If one wants to assure there is no risk of financial mismanagement then one needs to get at the root of the problem and that is one of leverage. Every major currency in existence today follows a debt based fiat currency system with many of the commercial banks operating with a fractional reserve system. This system of fractional reserve banking is not well understood by most members of the public but most of the loans/money generated through the system comes about through here. This point is important as it is the leveraging that ultimately causes the instability in the monetary system NOT whether the currency is backed by gold or promises (as is the case in fiat).
To gain a good idea how a fractional reserve works it is best to find out how the system started in the first place. That way we can learn it simply and not be baffled and confused with all the mumbo jumbo that some smarty pants will put in front of us to confuse us. All these terms and convoluted descriptions are just smoke and mirrors to make the public feel intimidated and not ask further questions about the fraud being committed right in front of their eyes. Notice how no one actually teaches how monetary systems actually operate in school? Anyways, I digress and let us focus on the topic at hand.
The fractional reserve system originally came about when early bankers would help store pieces of gold bullion for various customers. To make transfers more convenient the early banks would issue notes which allowed the customer to redeem their gold. This meant people did not have to travel back and forth with gold bars which was a major drag (literally) not to mention quite dangerous. After sometime however the banks realised that customers would only trade these notes instead of exchanging gold directly. In fact those notes became a form of ad-hoc currency and it became apparent that the more notes that were issued the more money would be generated which meant more profit to the banks. So the banks began the path to the dark side by issuing more notes than they held in gold reserves. Thus it was the beginning of the fractional reserve banking and as the name implies, the banks only hold a fraction of the total deposits in reserves.
Once the banks had found that most people did not take out money or gold from their deposits creating excessive notes posed no real risk of them being found out or going bankrupt. However this practice did lead to the issuing of more money which while fraudulent benefited the upper class massively as it allowed them greater means to spend, invest – and most important – lend money to various major public projects. It should be remembered that most major public projects cannot pay for themselves and such projects can only be financed through debt. To see more information on this matter please refer to the three part Large Public Work series.
These extra loans also had the effect of extracting more wealth from its subjects via interest payments from the extra loans generated from this operation. As a result even though this form of fraud became known to the government it was not outlawed. Instead laws were made to limit the amount of risk such practices posed to the overall financial system. From this point onward the financial system developed extra complexity but on a fundamental level they all operate on the same premise. To many this is really a legalised system of fraud and one wonders how the general population would behave if it learnt the truth of the matter and how money really works. It is this fact why all banks are vulnerable to a bank runs because if people run to the banks in mass to collect their deposits the bank would soon become bankrupt due to lack of reserves.
In light of these facts if one wishes for stability then one needs to confront the fractional reserve system. If a person does wishes for total stability then the reserves must equal 100% of the currency available. Any leverage will create some instability and the more leveraged it becomes the greater the resulting instability. It should be noted however that the fractional reserve system – despite its obvious flaws and shortcomings – has one big advantage. This method of generating excess cash has a great effect in delivering growth for the general economy which was a great BOON to an ever expanding industrial economy. In fact if one looks at the term capitalism the main objective of this system is to acquire capital. This can be through actual assets or cash and since fractional reserve banking delivers on this objective one can see why it is so prevalent in modern economic systems. However as noted by many others this growth cannot go on indefinitely and in a contracting economy excessive credit creation can quickly become a bane to society. In fact one can easily say a fractional reserve system would not be fit for purpose for an economy that is continually contracting. In fact it would be catastrophic.
Still, one should not forget that this system must be removed if one wishes for future stability. What needs to be understood however is if one does wish for complete stability with full fractional reserve banking then one must confront several problems most of which are considerable; by moving from a fractional based reserve system to a fully backed reserved system it would mean a large percentage of the total money supply be removed or large amounts of new capital must be acquired. To take the former option of money/credit destruction would mean a massive almost total deflationary event. In other words, all current assets would lose nearly all their value. In addition since all existing loans will still remain the same in nominal terms then a massive deflationary event will mean the value of those outstanding loans would rise massively in real terms leading to large scale defaults which would create further havoc on an already overstrained system. These defaults, which are likely to be considerable, if not total, would reduce the money supply further still. In short this solution could not provide an acceptable method of returning to a fully backed reserve system.
The other option highlighted in the paragraph above is to increase the amount of capital or reserves in the system. The easiest way of achieving this feat would be through some means of issuing non-debt based money which would basically amount to a form of debt jubilee. This process of money generation would however, if left unrestrained, lead to massive inflation as a large amount of money would be spent on non-essential purchases. Even if laws were put in place to force consumers to pay back all existing debts before the money could be used for other activities it would result in a large scale deflation event as a lot of the existing debt based money is wiped from the system. This solution however would not result in larger scale defaults mentioned earlier as those debts would be expunged from the system. It should be noted that such a move would directly harm the banks as they would lose nearly all their assets and as such they could be forced into bankruptcy. Furthermore the other biggest losers would be the financial elite who hold most of the world assets. Since these people and organisations have the most influence in this current system it seems fanciful they would implement a plan that damages their interests the most. This solution has numerous proponents most notably economist Steve Keen (see 19:00 of the video).
For this solution to have a lasting effect however it would need to put a full reserve banking system in place after the debt jubilee is issued otherwise the system will fall into the same problems of excessive debt.
If such a system of full reserve banking were developed it would then lead to another problem which is a lack of growth of debt that is required for modern banking to operate. Without debt accumulation it is hard to see how banks could generate sufficient profits to remain viable. If banks do not possess the ability to create money through loans then the only income they could derive would be from service charges from holding deposits. The other possibility would be to use those existing deposits for lending to businesses and corporations who would then pay the banks with interest through means of expansion. However such a system could not operate unless there is an expansion of the money supply by a central bank or by the banking sectors growing at the expense of other industries. In any case such a system would sacrifice much growth and could still face some potential dangers in currency devaluation.
It would seem that while a transition to a more sound system is favourable it cannot realistically occur until there is a large-scale reduction in the existing money supply, loss of capital by some other means or large scale debt jubilees of which the outcome is unlikely to come and even if implemented will lead to large scale bankruptcies and possible supply-chain contagion as result of this.
One also needs to consider the possibility of a society that can be happy with a non-growth economy which would be basically be enforced by applying a full reserve banking system. This question needs to be considered under the light of growing populations and the three desires of greed, power and competitive nature of man. What are the chances some expansionary monetary system will be devised to cater to such basic desires and realities facing man in the future?
An Optimistic Energy/GDP Forecast to 2050, Based on Data since 1820
We talk about the possibility of reducing fossil fuel use by 80% by 2050 and ramping up renewables at the same time, to help prevent climate change. If we did this, what would such a change mean for GDP, based on historical Energy and GDP relationships back to 1820?
Back in March, I showed you this graph in my post, World Energy Consumption since 1820 in Charts.
Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent. The biofuel category also includes wind, solar, and other new renewables.
Graphically, what an 80% reduction in fossil fuels would mean is shown in Figure 2, below. I have also assumed that non-fossil fuels (some combination of wind, solar, geothermal, biofuels, nuclear, and hydro) could be ramped up by 72%, so that total energy consumption “only” decreases by 50%.
Figure 2. Forecast of world energy consumption, assuming fossil fuel consumption decreases by 80% by 2050, and non fossil fuels increase so that total fuel consumption decreases by “only” 50%. Amounts before black line are actual; amounts after black lines are forecast in this scenario.
We can use actual historical population amounts plus the UN’s forecast of population growth to 2050 to convert these amounts to per capita energy equivalents, shown in Figure 3, below.
Figure 3. Forecast of per capita energy consumption, using the energy estimates in Figure 2 divided by world population estimates by the UN. Amounts before the black line are actual; after the black line are estimates.
In Figure 3, we see that per capita energy use has historically risen, or at least not declined. You may have heard about recent declines in energy consumption in Europe and the US, but these declines have been more than offset by increases in energy consumption in China, India, and the rest of the “developing” world.
With the assumptions chosen, the world per capita energy consumption in 2050 is about equal to the world per capita energy consumption in 1905.
I applied regression analysis to create what I would consider a best-case estimate of future GDP if a decrease in energy supply of the magnitude shown were to take place. The reason I consider it a best-case scenario is because it assumes that the patterns we saw on the up-slope will continue on the down-slope. For example, it assumes that financial systems will continue to operate as today, international trade will continue as in the past, and that there will not be major problems with overthrown governments or interruptions to electrical power. It also assumes that we will continue to transition to a service economy, and that there will be continued growth in energy efficiency.
Based on the regression analysis:
- World economic growth would average a negative 0.59% per year between now and 2050, meaning that the world would be more or less in perpetual recession between now and 2050. Given past relationships, this would be especially the case for Europe and the United States.
- Per capita GDP would drop by 42% for the world between 2010 and 2050, on average. The decrease would likely be greater in higher income countries, such as the United States and Europe, because a more equitable sharing of resources between rich and poor nations would be needed, if the poor nations are to have enough of the basics.
I personally think a voluntary worldwide reduction in fossil fuels is very unlikely, partly because voluntary changes of this sort are virtually impossible to achieve, and partly because I think we are headed toward a near-term financial crash, which is largely the result of high oil prices causing recession in oil importers (like the PIIGS).
The reason I am looking at this scenario is two-fold:
(1) Many people are talking about voluntary reduction of fossil fuels and ramping up renewables, so looking at a best case scenario (that is, major systems hold together and energy efficiency growth continues) for this plan is useful, and
(2) If we encounter a financial crash in the near term, I expect that one result will be at least a 50% reduction in energy consumption by 2050 because of financial and trade difficulties, so this scenario in some ways gives an “upper bound” regarding the outcome of such a financial crash.
Close Connection Between Energy Growth, Population Growth, and Economic Growth
Historical estimates of energy consumption, population, and GDP are available for many years. These estimates are not available for every year, but we have estimates for them for several dates going back through history. Here, I am relying primarily on population and GDP estimates of Angus Maddison, and energy estimates of Vaclav Smil, supplemented by more recent data (mostly for 2008 to 2010) by BP, the EIA, and USDA Economic Research Service.
If we compute average annual growth rates for various historical periods, we get the following indications:
Figure 4. Average annual growth rates during selected periods, selected based on data availability, for population growth, energy growth, and real GDP growth.
We can see from Figure 4 that energy growth and GDP growth seem to move in the same direction at the same time. Regression analysis (Figure 5, below) shows that they are highly correlated, with an r squared of 0.74.
Figure 5. Regression analysis of average annual percent change in world energy vs world GDP, with world energy percent change the independent variable.
Energy in some form is needed if movement is to take place, or if substances are to be heated. Since actions of these types are prerequisites for the kinds of activities that give rise to economic growth, it would seem as though the direction of causation would primarily be:
Energy growth gives rise to economic growth.
Rather than the reverse.
I used the regression equation in Figure 5 to compute how much yearly economic growth can be expected between 2010 and 2050, if energy consumption drops by 50%. (Calculation: On average, the decline is expected to be (50% ^(1/40)-1) = -1.72%. Plugging this value into the regression formula shown gives -0.59% per year, which is in the range of recession.) In the period 1820 to 2010, there has never been a data point this low, so it is not clear whether the regression line really makes sense applied to decreases in this manner.
In some sense, the difference between -1.72% and -0.59% per year (equal to 1.13%) is the amount of gain in GDP that can be expected from increased energy efficiency and a continued switch to a service economy. While arguments can be made that we will redouble our efforts toward greater efficiency if we have less fuel, any transition to more fuel-efficient vehicles, or more efficient electricity generation, has a cost involved, and uses fuel, so may be less common, rather than more common in the future.
The issue of whether we can really continue transitioning to a service economy when much less fuel in total is available is also debatable. If people are poorer, they will cut back on discretionary items. Many goods are necessities: food, clothing, basic transportation. Services tend to be more optional–getting one’s hair cut more frequently, attending additional years at a university, or sending grandma to an Assisted Living Center. So the direction for the future may be toward a mix that includes fewer, rather than more, services, so will be more energy intensive. Thus, the 1.13% “gain” in GDP due to greater efficiency and greater use of “services” rather than “goods” may shrink or disappear altogether.
The time periods in the Figure 5 regression analysis are of different lengths, with the early periods much longer than the later ones. The effect of this is to give much greater weight to recent periods than to older periods. Also, the big savings in energy change relative to GDP change seems to come in the 1980 to 1990 and 1990 to 2000 periods, when we were aggressively moving into a service economy and were working hard to reduce oil consumption. If we exclude those time periods (Figure 6, below), the regression analysis shows a better fit (r squared = .82).
Figure 6. Regression analysis of average annual percent change in world energy vs world GDP excluding the periods 1980 to 1990 and 1990 to 2000, with world energy percent change the independent variable.
If we use the regression line in Figure 6 to estimate what the average annual growth rate would be with energy consumption contracting by -1.72% per year (on average) between 2010 and 2050, the corresponding average GDP change (on an inflation adjusted basis) would be contraction of -1.07% per year, rather than contraction of -0.59% per year, figured based on the regression analysis shown in Figure 5. Thus, the world economy would even to a greater extent be in “recession territory” between now and 2050.
Population Growth Estimates
In my calculation in the introduction, I used the UN’s projection of population of 9.3 billion people by 2050 worldwide, or an increase of 36.2% between 2010 and 2050, in reaching the estimated 42% decline in world per capita GDP by 2050. (Calculation: Forty years of GDP “growth” averaging minus 0.59% per year would produce total world GDP in 2050 of 79.0% of that in 2010. Per capita GDP is then (.790/ 1.362=.580) times 2010′s per capita income. I described this above as a 42% decline in per capita GDP, since (.580 – 1.000 = 42%).)
Population growth doesn’t look to be very great in Figure 4, since it shows annual averages, but we can see from Figure 7 (below) what a huge difference it really makes. Population now is almost seven times as large as in 1820.
Figure 7. World Population, based on Angus Maddison estimates, interpolated where necessary.
Since we have historical data, it is possible to calculate an estimate based on regression analysis of the expected population change between 2010 and 2050. If we look at population increases compared to energy growth by period (Figure 8), population growth is moderately correlated with energy growth, with an r squared of 0.55.
Figure 8. Regression analysis of population growth compared to energy growth, based on annual averages, with energy growth the independent variable.
One of the issues in forecasting population using regression analysis is that in the period since 1820, we don’t have any examples of negative energy growth for long enough periods that they actually appear in the averages used in this analysis. Even if this model fit very well (which it doesn’t), it still wouldn’t necessarily be predictive during periods of energy contraction. Using the regression equation shown in Figure 8, population growth would still be positive with an annual contraction of energy of 1.72% per year, but just barely. The indicated population growth rate would slow to 0.09% per year, or total growth of 3.8% over the 40 year period, bringing world population to 7.1 billion in 2050.
Energy per Capita
While I did not use Energy per Capita in this forecast, we can look at historical growth rates in Energy per Capita, compared to growth rates in total energy consumed by society. Here, we get a surprisingly stable relationship:
Figure 9. Comparison of average growth in total world energy consumed with the average amount consumed per person, for periods since 1820.
Figure 10 shows the corresponding regression analysis, with the highest correlation we have seen, an r squared equal to .87.
Figure 10. Regression analysis comparing total average increase in world energy with average increase in energy per capita, with average increase in world energy the independent variable.
It is interesting to note that this regression line seems to indicate that with flat (0.0% growth) in total energy, energy per capita would decrease by -0.59% per year. This seems to occur because population growth more than offsets efficiency growth, as women continue to give birth to more babies than required to survive to adulthood.
Can We Really Hold On to the Industrial Age, with Virtually No Fossil Fuel Use?
This is one of the big questions. “Renewable energy” was given the name it was, partly as a marketing tool. Nearly all of it is very dependent on the fossil fuel system. For example, wind turbines and solar PV panels require fossil fuels for their manufacture, transport, and maintenance. Even nuclear energy requires fossil fuels for its maintenance, and for decommissioning old power plants, as well as for mining, transporting, and processing uranium. Electric cars require fossil fuel inputs as well.
The renewable energy that is not fossil fuel dependent (mostly wood and other biomass that can be burned), is in danger of being used at faster than a sustainable rate, if fossil fuels are not available. There are few energy possibilities that are less fossil fuel dependent, such as solar thermal (hot water bottles left in the sun to warm) and biofuels made in small quantities for local use. Better insulation is also a possibility. But it is doubtful these solutions can make up for the huge loss of fossil fuels.
We can talk about rationing fuel, but in practice, rationing is extremely difficult, once the amount of fuel becomes very low. How does one ration lubricating oil? Inputs for making medicines? To keep business processes working together, each part of every supply chain must have the fuel it needs. Even repairmen must have the fuel needed to get to work, for example. Trying to set up a rationing system that handles all of these issues would be nearly impossible.
GDP and Population History Back to 1 AD
Angus Maddison, in the same data set that I used back to 1820, also gives an estimate of population and GDP back to 1 AD. If we look at a history of average annual growth rates in world GDP (inflation adjusted) and in population growth, this is the pattern we see:
Figure 11. Average annual growth in GDP in energy and in population, for selected periods back to the year 1 AD.
Figure 11 shows that the use of fossil fuels since 1820 has allowed GDP to rise faster than population, for pretty much the first time. Prior to 1820, the vast majority of world GDP growth was absorbed by population growth.
If we compare the later time periods to the earlier ones, Figure 11 shows a pattern of increasing growth rates for both population and GDP. We know that in the 1000 to 1500 and 1500 to 1820 time periods, early energy sources (peat moss, water power, wind power, animal labor) became more widespread. These changes no doubt contributed to the rising growth rates. The biggest change, however, came with the addition of fossil fuels, in the period after 1820.
Looking back, the question seems to become: How many people can the world support, at what standard of living, with a given quantity of fuel? If our per capita energy consumption drops to the level it was in 1905, can we realistically expect to have robust international trade, and will other systems hold together? While it is easy to make estimates that make the transition sound easy, when a person looks at the historical data, making the transition to using less fuel looks quite difficult, even in a best-case scenario. One thing is clear: It is very difficult to keep up with rising world population.
Manufacturing Money
Off the keyboard of RE
Discuss this article at the Economics Table of the Diner
Recent data brought to light by Zero Hedge shows a significant Credit Contraction in the Shadow Banking sector of the money supply. In his recent Banking Bits & Pieces article on Economic Undertow, Steve from Virginia once again hammers down on the fact that Central Banks don’t really “Print Money”, rather what they do is make loans against some kind of “collateral”.
From Steve:
‘Money printing’ is inaccurate and false: central banks cannot create new money, they are balance sheet constrained. They cannot lend without collateral. They cannot lend above the ‘face price’ of the collateral, which is almost always another loan. What central banks do is shuffle the custody of loans between agents, moving up or down the yield curve in the process. The central bank can offer credit as long as there is ‘good’ collateral offered by the private sector lenders. Without the good collateral — exhausted resources are not useful — the banks cannot lend.
Steve is for the most part of course correct here. The Central Banks do not really create money, it is in fact created in the Private Sector first by Commercial Banks in making Loans to the Biz Community for projects/ideas deemed Worthy enough to hopefully eventually pay off these loans complete with the Interest Charge attached to them. At least that is how it works in the world of Small to Medium Size Biz, not so true in the Grand World of Conduit Biz.
Conduits are Biznesses like the Railroads, the Electric Grid and the Telecommunications Network. In order to build such large scale Conduits, Credit has to be extended on a MASSIVE scale, and only a few people are ever deemed “Credit Worthy” enough to get those kinds of loans. The way they get them is through issuance of Bonds, all underwritten by TBTF Banks the very same people are in control of. As a result, these folks have a virtually unlimited supply of “Capital” to work with to build or create any sort of Network/Conduit they would like to build.
Since the Age of Coal at least, all of these Conduits have been extremely Energy consumptive, and as Steve also often points out, are never truly “productive”, but always subsidized by the further issuance of Credit. In order for people to buy the services that say the Electric Grid or the Telephone network provide, still MORE loans are issued out, more ” Money” created. This money then flows back inward toward the Central Conduit structure, but it really never is enough to pay off all the costs involved and the Interest Charges on the originating loans to build said infrastructure. Thus eventually, all such things as Railroads and the Electric Grid get dumped into the Public Sector as the costs of maintaining them and paying off their debts exceed the cost of the revenue they bring in. By this time of course, those who built them to begin with have extracted as much personal wealth as possible from the venture, and protected themselves from the BK of the company as a whole through the legal construct of the Corporation. His Railroad goes Belly Up, but JP Morgan walks away a few Mega Bucks richer afterward.
In order to keep the whole game rolling along, further loans have to be issued in order for people to continue to buy the Services they have become accustomed to of easy Transportation, easy Communications and Lights that go on at the Flick of a Switch. The Debt Overhang of course becomes ever larger all the time and evermore of this debt gets shifted to the Public Sector which essentially has become DEPENDENT on all these sytems along the way.
See, once Railroads are BUILT, nobody wants to go back to Teamsters and Wagon Trains pulling Freight, once Electric Lights are available, nobody wants to go back to Gas Lights or No Lights. Once the Internet is built, nobody wants to go back to the Telegraph. PROGRESS!
Problem here is of course, all that Progress carried with it endless and ever increasing debt load and energy requirements to maintain. All possible to do as long as the system as a whole was growing and the energy to maintain it all came cheap. Combine increasing cost of accessing energy along with a debt load shovelled onto the Public dime over decades and in fact a couple of Centuries if you go right back to the Railroads, and eventually here you run up against the situation that those in charge of Credit Creation STOP issuing it to just about everybody, except the occassional Bubble Company like Facepalm. Unlike the Railroads though, that Conduit is so patently STUPID it didn’t last 5 minutes in open trade.
So what is likely to occur here with imploding Credit availability at even the HIGHEST levels of the Supranational Corporations and the Nation-States? Sandor, one of the regular Commenters on EU and a Lurking Diner made the following analysis of the situation:
Sandor wrote:
In response to dolph and many others that insist inflation will prevail by pointing to the past, be aware that current conditions do not resemble those of Germany 1929 or the Holy Roman Empire or even Zimbabwe. This kind of reductionist thinking is a symptom of a desire for easy answers aka ‘perceptual flattening’. What Steve is pointing out in this post is that deflation is happening in the shadow banking system, to an extent which is significant and difficult for the central planning authorities to combat. Most money is created by commercial banks through extension of credit. If loans cannot be effectively serviced in aggregate, debt-deflation will happen.
The current policy of monetary LTRO/QE/Twister is basically a giant rollover/duration extension. They are not printing money. They are extending and amplifying duration risk, aka ‘buying time’. Peak credit is tied into peak EROEI. Inflation is no longer a given outcome at an energy extraction ceiling, even if that is the tendency of humans throughout the brief period of modern societies. Predicting the demise of the USD and all fiat currencies is quite fashionable on the fringe blogs, but there does not appear to be enough gold and silver alternatives to go around. Fiat currencies are flawed, but are far more practical than lugging around metal everywhere or bartering for everything. There are further steps that will probably be taken in order to combat the specter of ‘deflation’ including outright USD devaluation (debt restructuring), negative nominal interest rates and/or demurrage currency. These may appear ‘inflationary’ on the surface but are rather symptoms of fighting deflation. They are new monetary medicines to ‘stimulate’ a preference for goods/services over cash in a flagging patient that is already resistant to all the old drugs. Do 80 year old men need Viagara? Is there a point in the life cycle of a nation where it’s OK to consume less?
I suppose the debate comes down to what happens when the doctors reach the end of their rope and all the experimental drugs have been tried. The ‘West’ are at/near quasi-deflation now, and the extreme resistance to it makes it appear that inflation is going to be unleashed in a deluge any day now. But there are relative price limits of energy and food at which the global economy can function at present rates of demand. These limits, and the limits of present technology on the rates of resource extraction effectively govern how much ‘inflation’ will actually happen. Inflation happens when demand expands because more people have an income that supports more consumption and the servicing of debt. These conditions are on life support in the US/Europe/Japan, on the edge of rolling over into negative.
Whether or not and for how long the USD and US/German Bonds are a good (deflation) bet is a policy timing issue. It is important to clarify the discussion going forward to note that this question and the inflation/deflation question are related yet technically distinct. The world has seen a massive and unprecedented inflation/credit expansion from 1947-2008. It’s an open question whether ultra long-term debt restructuring will give rise to massive inflation. When it’s coming from very high levels of aggregate demand like Japan, Europe, US/Canada, it seems unlikely, short of currency devaluation, which amounts to a haircut for the creditors and would only serve as a temporary spur to wages and prices. And while initially nominally inflationary, such a move would only serve to choke off credit further, a deflationary outcome in a monetary system based on debt and interest. Given the instability of human psychology, the political cult that ‘something is better than nothing’, and the precarious balance of resource distribution networks, it seems likely that we will revisit both extremes in the next 12 years.
Again, for the most part I agree with Sandor’s analysis. On the Central Banking level, the CBs are exchanging “Cash for Trash“, accepting a lot of worthless Collateral in exchange for fresh injections of Cash. This provides some liquidity to the TBTF Banks, but they aren’t any more Flush than they were before, and they still have no Credit-Worthy Borrowers to lend to for the most part. So the Money distribution to the society pretty much stops at this very high Wholesale level. Overall this creates deflationary pressure through the system, and it is showing up mostly inside the Shadow Banking system. There is still speculation ongoing in the Commodities markets by the Prop Desks of the TBTF Banks and some Price Inflation there as a result, however medium-long term that cannot hold up as Money Distribution to the End Konsumer continues to be restricted. Restricted how? By AUSTERITY measures of various sorts, which include all sorts of things like Public Payroll cuts, reduced Pensions and Private Sector Bankruptcies.
Gold Bug Wet Dream
I also agree with Sandor that the current dynamic will lead to more experiments with money creation, including Demurrage and Currency Devaluation, but at least as far as the latter one is concerned you have to ask “Devaluation with respect to WHAT?” All the major currencies are valued with respect to Each Other, with the Dollar providing the Benchmark Measure as World Reserve Currency. The only thing the Dollar really can devalue against is the Oil it serves as a proxy for, and that is going to happen organically regardless. It might also devalue against Gold if Gold is sought after as a “Safe Haven”, but poor distribution of Gold and Limited Quantities of it make it an unlikely future Currency. So you STILL have Deflationary pressure here regardless of Devaluation and regardless of transition to PMs. None of these techniques makes any more money Circulate in the real economy, which continues to be starved for Cash.
Demurrage Currency and non-debt Money like Greenbacks could put some money back into circulation, but the Distribution Mechanism for them remains a bit Mysterious at this point. In Lincoln’s time, Greenbacks mainly got issued to pay for the War Effort. Hiring Soldiers, paying Arms Dealers, that sort of thing. Without a vast ramping Up of the Military effort here, who would Da Goobermint issue Greenbacks to, and for what?
The system at the moment regardless of the Currency chosen still depends first on the Wholesale Level Money Distributors of the TBTF Banks, and then below them the smaller Commercial Banks which distribute money in the form of Loans to many Biznesses. Here in the FSofA, there really is no alternative Money Distribution system to this. Only if Da Goobermint undertakes a Massive Make-Work project might they do Retail Distribution of Money on the kind of scale required here, and generally speaking the only such Make-Work project Da Goobermint will undertake in such a situation is WAR. A successful War Effort holds the promise that you can extract some Profit from those you defeat in the war if you are successful with it. In the case of WWII, the post-War extraction method was to create a bunch of Debtor Client States to the Industrial Monopoly held mostly at the time in Anglo-Amerikan and Kraut hands, all through the same Banking Interests and families that made the original Bretton Woods Agreements. They got a 70 year long Wealth extraction scheme going with that one in the aftermath of WWII.
What remains quite unclear resultant from the current Spin Down is exactly what type of Wealth extraction scheme might be undertaken to try to pay off the costs of the next Global War for Dominance of the Monetary System? Even Slave Labor cannot pay its own way, much less pay off outstanding debts of the losers of the next Global War, which in reality will be EVERYBODY. Rebuilding all the stuff which gets destroyed THIS TIME with a Marshall Plan just won’t happen, the Cheap Energy to do that with just not is there anymore to do it with ALREADY, and in the aftermath of such a Global War a good deal less will be available. Much energy will be Konsumed just to fight the War, and beyond that much if not most of the infrastructure required to extract such energy will have been DESTROYED.
The Georgia Guidestones
It’s a Morton’s Fork no matter how you cut it here, nobody can Win, everybody will Lose no matter what. The best you can hope for is to Cut Your Losses. Global Thermonuclear War including the exchange of MIRV equipped ICBMs betwen the major powers which have them is the worst scenario for a rapid destruction, and one can only HOPE that is not undertaken. Next down the list would be a Global Extermination campaign undertaken by the Illuminati to eliminate a significant portion of the population through Biological Warfare/Pestilence Propagation. A Georgia Guidestones type scenario. Further down the List of Bad Outcomes is Global Warfare which though not Thermonuclear everywhere, still so destroys the current infrastructure that we get a Rapid Devolution to Mad Max. Down the list after that one are Global and Independent Civil Wars virtually in all Nation–States, which set Brother Against Brother, and likely end up in the type of Multiple-Orkin Man scenario I see as a high probability outcome. Note that this is FOURTH down the list of Bad Outcomes.
Over on the OTHER SIDE of the the Bell Curve of Probabilities are the GOOD outcomes like a vast new Energy Source is accessed, or En Masse the Societies all over the Globe move quickly toward developing Sustainable Systems which will replace the ones failing now as we speak through “Conservation by Other Means“, a term coined by Steve on Economic Undertow. This basically represents the Economic Triage of entire Societies off the Oil Jones as they are cut off from the Life Blood of Credit with which to buy said Oil. Lowest on my list of Probabilities is that Jesus Christ will descend from Heaven to General the War Effort of Good vs. Evil here, or that Aliens will emerge from Underground Cities to Duke it Out either with each other or J6P.
Outcome Number 4 appears to me to sit in the Central Portion of the Bell Curve as the Highest Probability Outcome.
Large societies become Highly Dependent on Money Manufacturing to run the various complex systems that evolve. In the past, that included large trading networks run by folks like the Babylonians and the Romans as well, all based on the Ag Production of those societies and Conquest of ever larger portions of the surface of the Earth, eliminating competing Hunter-Gatherers along the way. When these systems failed, said societies got overrun by “Barbarians”, basically the “Uncivilized” portion of the population of the Earth still extant out there at the time. The transition to Industrialization took even the basic Ag Society and rendered that one Uneconomic, since of course an Industrialized Farm could produce so much food so much cheaper than the non-Industrialized one. The further systems created to run said society all are even MORE dependent on functioning MONEY than the Ag Society was. In such an Ag based society, even after the failure of the Monetary System, it was possible to revert to Barter for a while until things calmed down, with fairly restricted losses to total population, on the Biblical Percentages of around 25% of Total Population taken out by the Four Horsemen of the Apocalypse.
Revelation 6:8 And I looked, and behold a pale horse: and his name that sat on him was Death, and Hell followed with him. And power was given unto them over the fourth part of the earth, to kill with sword, and with hunger, and with death, and with the beasts of the earth.
The Industrial Society is not so Gifted with the relatively quick transition back to a Barter Economy that the basic Ag Society. is. What is truly “productive” Work has become extremely Abstract in the Industrial Economy. MOST of the population in the IE works in jobs that only are marginally important to survival at best, and almost all of those jobs are dependent on vast Energy consumption as well. Taking a society OFF of the Oil Jones is not much different than going Cold Turkey off of Heroin. It can’t be done without a whole lot of PAIN, and even after experiencing said Pain there is no guarantee you will survive the transition.
For the most Powerful Nation States, none of them will go “Quietly into this Good Night“. All will struggle to maintain some sort of functioning Monetary System, Greenbacks are possible, Demurrage is possible, SDRs issued by the BIS are possible, Hell even Gold is possible here as the Deep Panic really sets in. In my estimation, none of them can work, in the end because of a Fundamental Principle Nature always Obeys in our Frame of Reference, which is that you CANNOT MAKE SOMETHING FROM NOTHING. Whatever the Money is, it must represent Resources which are actually THERE. If the resources relative to the total population base are NOT THERE, no money of any sort can represent them.
There is still Oil out there, and there is still a lot of good arable land as well. However without vast changes in methodology, what is left of the resource base cannot match the population base. I am well aware of other means and methods for Food production, Peter here on the Diner details how Hydroponics can be used for copious food production in the absence of Fossil Fuels. Diner A. Gelbert in his article in the Waste Based Economy series also detailed possibilities for energy production that might be pursued, but the fact is they are NOT being pursued and it is unlikely they will be in anywhere near sufficient time to pick up the slack from Lost Oil Energy production. We had the CHANCE to stop this Runaway Train probably last time in the late 60s to early 70′s with the Back to the Land Movement, but that was undermined and coopted out of existence by vast Debt Expansion.
The only possible result here now is massive CONTRACTION, and no Monetary Policy can stop that, because you CANNOT MAKE SOMETHING FROM NOTHING.
RE