The Failure of Networked Systems: The Repercussions of Systematic Risk

This is an updated story that originally ran in January 2008. David Clarke's warnings about the risks of failure in highly connected systems have proved to be prescient in light of recent events - Big Gav.

There are those among the Peak Oil community who suspect that we could be facing a failure of our interdependent society that may be sudden, profound, and complete. I have repeatedly said that I am not numbered among them. My opinion is that our way of life will have to change significantly, but slowly. I don’t expect to be clubbing anybody with a femur in any foreseeable future. This opinion is on record in both print and electronic media, and I don’t expect to be issuing a retraction any time soon--but a recent event forced me to admit that I may have to hedge a little.


Our internal network here has been having problems. My email (and more importantly my access to TOD) has been very unreliable over the last two days. The network regularly flicked from "working" to "failed" in the blink of an eye. I was reminded that the speed of collapse in a network is often a function of the natural frequency (speed) of the network, while the breadth of failure depends on a number of factors, including load and the degree of interdependence within the network.

The problem was eventually traced to a problem with one piece of software on one machine on our intranet. The software drivers for the network interface card on one machine were corrupt.

This raised a question in my mind: The Internet Protocol was originally designed to be a robust, reliable, redundant system. How does one piece of software on one machine bring down a network with thousands of nodes?

The answer is easy: Cost efficiencies.

Our Intranet network could have been built to be reliable, but instead it was built to be "efficient". Far from being a network of fail-safe systems, our network is a network of interdependencies. When the system was loaded, a single failure brought the whole system down. "Business Efficiency" has brought our network to its knees for two consecutive days.

I have seen this pattern a lot recently. Last year the power went out in my city. The power transmission system was heavily loaded one afternoon, when a single failure brought the whole system down.

Academics have studied failures of complex systems with interesting results. One of the experiments they did will be familiar to anyone who has ever played with sand-castles as a child. Build a sand pile by gradually adding grains of sand. After a while, avalanches start to run down your pile. Sometimes they are minor, while other times they affect the whole pile. There is seemingly no way to reliably predict the outcome.

However Per Bak, in his book “How Nature Works,” shows that there is an instructive way to look at this question.

There is a critical angle for piles of sand--a level of steepness that the slope cannot go beyond without sand starting to roll down the slope. Imagine that, as you add sand, you colour red all of the areas of the pile that achieve this critical angle (and are thus on the verge of an avalanche). You will notice that the red patches appear as tendrils running down the side of the pile. As you add sand to the pile it gets higher and wider – the pile gets steeper and more little tendrils of red appear. Eventually you will see the tendrils of red start to interconnect.

If you drop a grain of sand on a red area then you will precipitate an avalanche. If the red area is interconnected with other red areas then all these areas will be drawn into the avalanche. If the red area is isolated, then the avalanche will be confined to one red tendril running down the side of the pile.

This basic principal can be applied to my network problem. If one route on the network gets loaded to capacity (i.e. turns red), the system detects that it has reached maximum capacity, and it delays traffic (piles it higher) or switches traffic to other routes (spreads wider).

If the other routes were new, unloaded and redundant parts of the network, then this would not be a problem. But they are not. The other routes are simply other parts of the old, heavily loaded network. Pretty soon all routes are red, and they are all interconnected. So when one part of the network fails, it passes the traffic to another part of the network, which fails and your avalanche starts. With all networks connected, all of them are vulnerable and all fail.

Our network operates at electronic speeds, and it failed with the same rapidity.

Understanding how this happened is critically important. There are four parts to creating the complete meltdown of a network:

1. Create a network by building connections between systems.
2. When a particular part of the network approaches overload (goes red), recognise that this is happening and use the connections you have created to allow you to switch load to another part of the network.
3. Continue doing this until all areas are red.
4. Now add more load.

When we poured sand on our sand pile we allowed the sand to fall randomly, and thus the avalanches seemed random. But once we had the ability to monitor (see our potential “avalanche” areas coloured red), we were able to carefully divert the sand into other areas. This delays the avalanche, but in the long run the avalanche is going to be much worse, because it will occur when all areas are red.

In summary: The ability to measure and monitor the system gives us the capacity to avoid small avalanches in individual areas. However, if we keep adding load without adding capacity we overload the entire network and thus make an all-encompassing avalanche inevitable.

If we can’t add capacity, then it would have been better to allow a series of small avalanches.

A look at the financial markets at the moment might illustrate the same point. When we look at the “sub-prime” issues that are emerging, we see that the market created a series of “Investment Vehicles” that allowed risk to be shared. A complex network of interdependencies was created to share this risk, but capacity was not added to deal with the possibility of default. The various institutions that bought these “Investment Vehicles” thought they were buying assets, not debts. The institutions failed to recognise that they needed to add “capacity” in the form of liquidity equal to the possible value of defaults on this debt. As a result, now that load is being applied (in the form of defaults) it threatens to bring down the entire network, rather than just the single “node” that originated the debt.

[Update, October 2008: In view of what has happened since I wrote this piece in January I should probably mention that, in my view, the natural frequency for the cascading failure of the economic system is quite variable. We have electronically linked systems in some areas, while other areas rely on lawyers and accountants laboriously unwinding CDS and other derivatives by hand. The variability means that contrary to what I was hearing yesterday, this cascade is far from finished.

It is also worth noting that a crash can happen in a fast system, but you may not feel it until it has propagated through a slow system, if these systems exist as part of a chain. For example, credit systems can lock up quite quickly, but you may not feel it until the effects have propagated through transport systems. When credit is unavailable, resellers cannot buy items (such as grain), so it does not go on ships, and does not get delivered--but it will be weeks before you notice the delivery failure. (Baltic Dry is an indicator of shipping rates. As I write this, the Baltic Dry Index is down about 80%. --and we are starting to feel the effects of this downturn.) The speed of impact of a cascading failure is often limited by the natural frequency of the slowest link.]

The critical concept is that monitoring and networking the system allows us to go right up to the edge of disaster, and then move load to another part of the network until it, too, is on the edge of disaster.

Now that the networking effects have been discussed, I would like to push the analogy a bit further and look at how this plays out from a Peak Oil perspective.

Several years ago, sweet light crude oil started getting a bit more difficult to obtain. In response, we stopped talking about “oil” and started talking about “liquids”. The word “liquids” covers Liquefied Natural Gas (LNG), ethanol, heavy oils, tar sands, and an increasing number of other oil-substitutes.

Essentially the part of the network called “Sweet Light Crude” turned red, so we started connecting the "Oil Network" to other networks.

We connected oil to the “food” network by turning food into ethanol. Actually food was already connected because you need oil to make food in the modern world, but now the circle is complete-–previously we used oil to create food, and now we use food (corn, sugar, palm oil, etc) to create oil (or oil-substitutes).

Adding LNG and CTL (Coal-To-Liquid) to the network connects oil to other energy sources. As this connection strengthens and load starts to be applied, a shortage of any of these sources would have an impact in each of the other sources. To some extent, this has already started to occur.

Adding tar sands and various other oil substitutes to the network has made a surprising connection between the environment and oil. This connection takes many forms, but the most interesting lies in the fact that oil substitutes are less efficient than light sweet crude-–much more CO2 is produced for any given amount of work done. This connection is emerging, and could have interesting repercussions. The problem applies to virtually all the oil-substitutes, so the widespread adoption of substitutes (particularly CTL and tar sands) might cause an environmental disaster which in turn would suppress ethanol production and create knock-on effects in other parts of the network.

The financial system has an important role to play in this network. If energy, food and the environment can be considered three portions of the network, then our financial system can be considered to be both a form of network monitoring, and the communication medium that the network uses to pass signals around. Consider the financial system to be similar to the blue cable running out the back of your computer. Your computer’s blue cable isn’t likely to run hot, but our finance system is a network of networks, and it is glowing red. In addition to monitoring and communication, the financial system provides support for maintenance and upgrades of the energy systems, so capacity in the financial system is critical.

When one part of the network develops a problem (say production of LNG suddenly drops), then messages get sent via the financial system (in the form of increased prices), and the other parts of the system accept the load, if they can, by increasing production. When compared to an Internet Protocol network there are many faults in this system. High latency leads to slow responses. Poor monitoring leads to conflicting signals or a failure to detect faults. Bad messages are often not corrected, leading to incorrect responses, and so on.

The speed of a crash

The interesting point to note is that increasing demand past capacity will not immediately “crash” this system. Oil facilities that are working at capacity will not “crash” if demand exceeds the capacity, they will simply continue working at capacity. The crash may come, but it will come because demand heats up the financial system and crashes other systems that depend on finances. Since the oil production system is dependent on other systems, this could conceivably cause an eventual crash. Eventually lack of maintenance will degrade the capacity, but this is a process that occurs over a period of months or years.

Likewise, the process of adding capacity is exceptionally slow. Building CTL or NGL plants takes the best part of a decade.

The oil production system can certainly crash, but it would be a crash in slow motion.

The only part of the system that can crash quickly is the financial system. The financial system provides monitoring, communication, maintenance and upgrades. So a profound, complete crash in this area could conceivably bring down the whole network.

However, could such a financial crash occur? An immediate halt to oil production would require a crash far more profound than the Great Depression. The response speed of our financial system has been improved by linking many of the sub-systems electronically, but there are still a number of choke points, circuit breakers, and sanity checks. The Great Depression emerged over a period of months or years. Even with the electronic linkages in place today, a complete breakdown of our financial institutions is unlikely to happen overnight.

If this system crashes overnight, it will be because the plug got pulled-–a breakdown of society external to the system.

The natural frequency for events in the oil and oil-substitute network is in the range of months at least, or more likely years. Internal stresses cannot cause it to crash overnight.

The Breadth of a crash

The breadth of the crash depends on the degree of linkage and the degree to which each part of the network is loaded. This is where I start to worry.

Oil appears to be at or near peak capacity--exports are dropping. As for the food network--world grain reserves are at historic lows, and expected to drop a little more next year. And the environment? Climate change is clearly with us, indicating that the environment has already gone past its capacity.

When looked at in these terms it appears that the network is already in decline. Each of these three parts of the network is at or past capacity. If a span of years is the natural time-frame for a crash in this system, then it seems quite plausible that we are watching a very broad-based crash of our energy systems--right now.

Our actions in increasing the connections to the food and environment networks will not help, and may simply speed the crash.

The signals indicating the start of a crash would be seen in the monitoring and communication system–-the financial systems. Prices for oil would go up. Which we have seen.... Prices for food would go up. Which we have seen.... We might expect perturbations, volatility, and attempts to “price” the environment.... Hmmmm.


I am forced to concede that a broad-based collapse is a possibility. I still maintain that a sudden collapse is unlikely, but if it is already happening, then it could certainly look sudden when we eventually notice it.

[Update, October 2008: I am still hoping to avoid a sudden, broad-based collapse. Some factors look like they will contribute, while others will mitigate. In many cases, the pace cannot proceed faster than the slowest system in the dependancy chain. In monitoring this situation, look for dependancy connections between systems, and then ask yourself what the natural frequency of the slowest system in the chain is.]


Heres an analysis I sent to some friends last night. This chart is a few days old (I gave up my bloomberg 4 years ago and now have to rely on favors from friends):

Essentially, the world is undergoing a global margin call. Borrowed money in dollars and yen is being repatriated, causing huge rallies in those 2 currencies. At the same time, everything that was 'invested in' with that money is gravitating towards neutral (no longs, no shorts). Most people buy stocks and commodities, and given Peak Oil on the horizon, many have bought energy stocks. These things have gone down the most. The above chart shows the correlation between Euro/Yen cross, the Hedge Fund Aggregate Index, and the SP500 - as I said it is 4 days old. ($/Euro traded below 1.25 earlier this am and Yen hit 110)

The Baltic Dry Shipping index, an indicator of the health of global shipping trade, is down again today, and down over 90% from it's May levels. Below is a brief analysis of the correlations of the TED spread (measure of health of credit market), the Baltic Dry Shipping Index and crude oil (WTI)

I used Bloomberg data for the past 12 months. Over that time, the TED spread had a -.44 correlation (R^2) with crude oil. The Baltic Index had a .31 positive correlation with crude prices. (the TED spread had a -.59 correlation with Baltic Index). Nothing overwhelming. I hypothesize this would also have been the case over longer periods.

However, if I just use prices since July, the TED spread had a -.88 correlation with oil and the Baltic had a .96 !!! correlation with crude oil (Baltic and TED = -.92) I assume the correlation with $/Euro and Euro/Yen would have even been closer to 1 for 1 with financial selloffs. The sheer magnitude of financial capital in relation to real capital was pointed out a long 6 weeks ago in Energy, Hurricanes and Hedge Funds


1)We are having a 6 sigma global margin call. Assets are uncorrelated until they become correlated. This is a perfect example of how our financial and physical systems are all linked and people don't even realize it. Failure of networked systems indeed.

We all know this is due to a global deleveraging of the 2 trillion+ hedge fund capital and other bank selling. It is pretty clear now that repatriated Euro/Yen and Dollar/Euro funding crosses are the main impetus for liquidations:

That on top of new news this am that wall street banks are again tightening margin requirements. It's a small door for a whole lot of elephants.

2)The above is a perfect example of why economics is fatally flawed. Business schools, nobel prize winning economists, etc. have done all their 'analysis' on the longer term historical correlations of interest rates, resources, capital markets etc. (which existed in an environment of perception of perpetual growth, and when notional financial credit/money did not dwarf natural capital). Poof - out of nowhere there are now strong correlations. Just like out of nowhere you see Baltic Shipping Index become 1 for 1 correlated with oil, I expect one day you will see the same thing with ALL financial assets (including treasuries). The Capital Asset Pricing Model will be rewritten (I'm attempting to do just that if I have time)- as all conventional 'assets', (including T-bills, eventually) comprise one abstract asset class, "financial", which is a marker for real assets: Natural Capital (water, energy, land), Built Capital (solar panels, houses, trucks), Social Capital (relationships), and Human Capital (knowledge, skills, etc.).

Economic growth has occured as humans combined a vast energy surplus with creativity, other resources (technology) and iterations (time). There is NO natural law that says stocks will average 10% a year over the long haul. This is a fantasy sold to us by salespeople on Wall St. (good people for the most part, they are just following what they learned in school). The business schools right now represent one of the largest wastes of resources and brain power in our country - other than the statistics and a few neat economic truisms (e.g. comparative advantage), everything they are teaching is based on false premises. Other than IPOs and new stock offerings, commodities speculation, hedge funds, derivatives, and fractional reserve banking by private banks is nothing but abstract wealth without foundation.

I hypothesize (can't prove because I don't have data), that net energy for the global economic system peaked in 1999-2000. (though it is clear that despite new nominal highs, US Coal in terms of BTU peaked in 1998, and this doesn't include the energy cost of extraction)

As direct energy surplus declines, we have to replace it somehow - first from the poor countries and poor people (via rising GINI coefficient) and from the environment. This means approving low income housing loans, deregulating financial markets so that firms can 'borrow' more 'abstract energy surplus' (money), and relaxing of rules and oversight that in times of cheap energy were enacted for a reason. The fiat system is now bankrupt and is playing hot potato. If the potato gets too hot it will lead to war. Archduke Dick Fuld Ferdinand? I kid you not - it is that serious. I hope people making decisions are smart enough to know that we really are still rich (as a planet), but a master plan of spinning our wheels in order to increase abstract digits in the bank (with an obstensible objective of routinely trading them in for short term gratification (which quickly becomes garbage) is neither sustainable, nor in the end, enjoyable. But I expect they will try and solve this using the same tactics that were successful in the past - some sort of Keynesian spending scheme with even lower interest rates, as if that would help. Perhaps they should look at capital flows and if the Central Banks want to intervene, it might help to short the dollar and yen and provide a floor until these hedge fund liquidations are over.

There is still time, but some very uncomfortable choices are going to have to be made. Change the demand system and institutions to be consistent with our evolutionary drivers. Work towards procuring and using energy wisely on both supply and demand side. Build local infrastructure for basic needs. Reslience over efficiency. Redundancy over cheapness.


There's some very interesting thoughts in there which probably deserve a full post, rather than a comment to another interesting post,


Nate:Very detailed and thoughtful reply. The problem I see is that the temperatures I am reading in our economic reactor core are going supercritical. The decision makers and deciders: shrub,paulson, greenjeans and the rest of the congressional keystone cops are dashing around in thoughtless Brownian movement chaos throwing garbage at the wall hoping something will stick. We are living through the death throes of a fatally optimized highly coupled financial system which is undergoing unstable oscillation. None of your suggestions can be implemented in a panic and collapse scenario. Building redundancy into a previously optimized industrial economy is probably not possible without a total or near total collapse IMO. I will give you a Wyoming metaphor: Once you climb on the bull, there is nothing you can do to alter the outcome.

Building redundancy into a previously optimized industrial economy

Redundancy in business is not rewarded via cashflow.

Which is why it is so often provided either by a public authority or by a regulatory requirement on all firms that wish to continue participating in some market segment.

I will give you a Wyoming metaphor: Once you climb on the bull, there is nothing you can do to alter the outcome.

Funny ... good metaphor. OUCH!

Actually, there are things that must be done. The world will spin and things will need attending to for those not on the bull.

-- A safety net needs to be jury- rigged into place. This crisis is serious; people in America will freeze and starve if there isn't some sort of basic care plan put into place. Having the National Guard drive around in circles will not cut it. Our government is failing to perform its duty and officials deserve to be prosecuted for dereliction and gross negligence. The worst may not happen, but it appears that it may. If it doesn't and we have a chance to avoid disaster, preparation for disaster is a good drill. If the worst happens and the economy grinds to a halt it is imperative to be prepared.

-- A plan must be developed for a command economy. This is the form of economy that will take the place of our current mess after it's done and a fork is stuck in it. The presumption is the crisis will develope quickly to the point of total collapse because of the amount of debt and unfunded liabilities overhanging the productive part of the economy. In this case the transition to the coammand economy would take place right away.

If the collapse is instead a slow decline, as in the 1930's, the government can attempt the run of ad- hoc remedies that were part of the New Deal or it can cut to the chase and embrace what will work; the command economy.

Paulson, Rubin, Summers, Bernanke et al have about as much chance of setting up a command economy as they do riding saddle bronc. There are records from the Roosevelt administration as well as a few old- timers still alive who could instruct bureaucrats how to set one up and make it function properly. Or, the government can send so people over to observe the Chinese, who have a tightly managed almost- not- quite- command economy.

The goal of the command economy would be three- fold. One would be to insure that everyone has renumerative work and sustain themselves over the transition period. The work would certainly not be war- related as it was in the 1930's and 1940's; there are a lot of infrastructure issues that need fixing, plus the business of survival will require a lot more capital and labor than is visible in our current form of widely distributed production. Second, would be to prepare the transition to the 'post- command' economy, which will be a lot different than what we have now ... and will probably be unfamiliar to anyone except for a few academic economists. The third aim would be to simplify the production cycle and get people in America used to making do with less . This will also be the most effective way to boost energy production. Btu's not used in the moment ... will be available for use later.

An incidental outcome would be the central government would husband ... or grow ... relevance as the result of services provided ... rather than by the exertion of government 'authority'.

Right now, it has diminishing authority and no plan, except for the sort of plan made by bank robbers ...

Is it reasonable to expect that there will be enough remunerative work to employ everybody if real GDP declines year after year? I do not think that is possible. Personally, I advocate a negative income tax to deal with the Greater Depression to come. It would not surprise me if the unemployement rate rises to thirty percent or more over the next dozen years. This will be both cyclical and structural unemployment, and the structural component will be harder to deal with than the cyclical component.

I grow more convinced that it was and remains 1. the size of the global pool of savings, and 2. those who were hired to manage that global pool of savings, that brought us these horrors. Now, with the global money-flood underway, a new wave of capital is hitting the system--even if one believes that a great deal of the former pool either was or is being destroyed. Concentration of influence over the management of the global pool of savings is sort of analagous to previous times in history when political power was over-concentrated, and decisions affecting the whole were made by a few. (this is always the case but at times goes to even stronger extremes).

After the JPY and USD short-covering process peters out, I think we are going to be right back into the heart of the situation that persisted this decade which is that oil is more valuable than currencies, and there will be the multiplier effect of the global money flood starting to hit. This will be exacerbated by the period of time oil spends below 80.00.

As for the system, I conjecture that we are in control of the system and not the other way around, and the system that I identify as being synonymous with modernity is in fact the credit (belief) system which is really just a way of making economic relationships efficient. If we want to dismantle this efficiency and revert to a primitive, payment on demand system than we can do that. I can't imagine why anyone would welcome that or look forward to it. It would at bottom be an enormous waste of energy (time). Local currencies, gold, silver, demanding one's wages at the end of each day, scarce inventories in the food and fuel delivery systems would all be present, in such a reversion.

I am very pro-globalization and have been since I was a teenager and attended an international school and felt the liberation that comes from getting one foot out of my culture. However, I recognize the horrors that have now unfolded from the velocity of capital that is attendant to globalization, and now that the system is massive, it needs more control. In short, I fear that globalization will be rejected in whole, as an emotional reaction, and we will enjoy some benefits but on balance experience alot more darkness in return.


In a world with declining extractable resources, there is no way there can be very much long term debt. Repaying the debt with interest will take too many resources.

In fact, I don't think it is a coincidence that the current debt defaults came at a time in history when oil extraction has flattened. We now longer had the underly resources growing at the rate they needed, to keep up with the debt, plus interest. Admittedly, the poor judgment of many in the lending industry may have hastened the process, but it was just a matter of speeding up the inevitable.

When you equate credit with modernity, I presume you are only looking at very short term debt. Paying wages at the end of a two week period. Paying for goods after they arrive. I can imagine this continuing, but long term debt, and even monetary systems that depend on long term debt, have to be replaced by more appropriate systems to our new more-constricted resources.

I don't think it is a coincidence that the current debt defaults came at a time in history when oil extraction has flattened.

Just a note on the data:

  1. Yearly average production has been flat for 2 years (2006, 2007).
  2. Yearly average production has been down or flat (< 0.1% growth) for 12 of the last 27 years, including every other recession since 1980 (81-83, 91-93, 01-02).

So it's probably not coincidence, but one needs to be careful about assigning causality.

In particular, note that oil production has been increasing for most of 2008. World oil supply is up 1.4Mb/d YTD 2008 vs. 2007 average (also via IEA data). Even with OPEC's just-announced cuts, it's still virtually certain that oil production in 2008 will be a fair amount higher than in 2007; with production data available through Sept, production would need to drop to ~80Mb/d for the final three months of the year to avoid an increase.

Accordingly, these debt defaults have predominantly happened while oil production was increasing. That doesn't mean oil can't be a cause, of course, but it is something that theories need to take into account.

Gross production is almost meaningless now. We care about energy for it's ability to do work. 86 mbpd does not equate to 86 mbpd of last year. It was important while a barrel equaled a barrel. Look at the marginal cost structures now, and disparate items that make up 'oil'. NGPL and ethanol have 60% of BTUs as crude, yet are counted the same. Tar sands get counted the same, yet no subtraction is taken from the natural gas figures, etc. Very little cheap stuff left, and that is what powered the globalization and extreme specialization (import substitution policies).

I can't prove the specifics on net energy (though some should try to), so in that sense it is an unprovable hypothesis, and therefore not science. But connect your own dots - I've been trying to here for 3 years and 99% of people still don't get it. Show me 10-20mbpd of new capacity that costs $10-15 a barrel to replace the 1000:1 EROI of Ghawar and other old depleting fields and I will (happily) change my mind.

Don't forget the relentless increase in population. Outside of major disaters this force is not going to go away. I seriously doubt that the increase in production for 2008 kept pace with world demand from population alone much less if you include any of the secondary issues such as EROEI and Export land etc. I say they are secondary because the primary drivers of the economy are population and resources. Maybe not secondary in magnitude but thats a different issue. No matter what we do we cannot escape from the population issue it will remain.

US population growth is a bit over 1% a year we have to grow our GDP at at least 1% just to stay level. With the changing demographics and baby boomers retiring we probably have to grow and additional 1% at least to provide for the increased elderly population.
Esp given the US medical and insurance system. Medical expenses will become a increasing burden on the system.

Sure everyone can get poorer every year not a problem but that does not stop the pressure from population growth nor its pent up demand.

By any metric available the world is a decidedly poorer place in 2008 vs 2007. Trillions have been lost and the demand has still increased and the amount of available energy per capita has decreased using any sensible accounting for EROEI and energy density.

I seriously doubt that the increase in production for 2008 kept pace with world demand from population alone

Why guess? It's easy enough to check:

Population Growth: 1.2%

EIA Oil Supply Growth: 3.5% (July07 to July08) or 1.6% (2007 avg vs. 2008 YTD avg.) or 2.0% (Jan-Jul07 vs. Jan-Jul08).

Any of those are higher than the population growth rate, meaning that the increase in oil supply in the last year has more than kept up with population growth.

Pit I made a vow not to respond to you but in this case I must.

World population grows every year year end and year out. If in any given year the oil supply growth does not exceed the population growth you have a deficit to balance.

These people don't simply disappear in the years that oil production increases did not meet population growth you have to carry them forward.

Given that 2008 is not over yet lets wait till we see the end of the year we have every indication that production is now dropping rapidly.

In any case

2005 84,561.47
2006 84,521.21
2007 84,407.57

I'm happy to just call these flat so lets assume population increased in 2006 and 2007 by 1.2% this means to reach the same amount of oil per capita we need at least a 2.4% increase in oil production vs 2005.

Including the year of the increase we would need to see 3.6%

I stand by my argument I'd be surprised given this post

Its fairly obvious that the year will not end with a 3.6% increase megaprojects for 2009 is not looking promising although or deficit was shrunk this year it was not eliminated.

However if your serious about this you need to do a bit more work and work population vs oil supply back at least say ten years to get a good grasp on the current status of population vs oil supply.

For example 2004 was 83,104.80

So you had a 1.5% grow and thus 0.3% "extra" oil this year.

2000-2001 it went down.

The simple observation that peak production last time was in 2005 and we only finally broke it in 2008 is sufficient to suspect that oil production as not kept up with population growth.

Feel free to to work the problem correctly and get back with me.
Or cherry pick numbers to make your point.

I would not worry too much about year-to-year rises and falls, differences of a percent or two can easily be made up by more efficiency or waste. We have to look at the general trend.

population, M oil, Mbbl/day oil, pc/yr
1950 2,518 10.42 1.51
1955 2,755 15.41 2.04
1960 2,981 21.03 2.57
1965 3,334 31.8 3.48
1970 3,692 48.06 4.75
1975 4,068 56.49 5.06
1980 4,434 63.86 5.25
1985 4,830 59.12 4.46
1990 5,263 66.78 4.63
1995 5,674 70.42 4.53
2000 6,070 76.92 4.62
2005 6,453 85.46 4.83

And the general trend is that the amount of oil available per person peaked around 1980. Of course these figures are total oil production, not net available - but nobody's been able to produce net oil figures for the world yet.

The other thing to bear in mind is that the places with the largest population growth have actually seen the least growth in oil consumption. The biggest growth in consumption over the 1950-2005 period has come from the low population growth First World countries.

Yeah this is better but you should also bring in GDP growth each year vs population vs oil.

The problem is of course this conflates efficiency claims esp if you start looking at individual countries.

For example in the US we claim that the US has become much more efficient at using oil since the 1970's but this does not include the export of a lot of basic manufacturing overseas. And worse if you start looking at per person GDP growth or oil usage in the countries where manufacturing was exports the demographics tends to hide the truth.

Per capita oil consumption goes up but given that a lot of this is fueled by manufacturing for exports its not near as large a real growth in general wealth in the exporting countries.

Although the per capita oil usage peaked in 1980 the process was set in motion back in the 1970's with the move to pure fiat curriencies coupled with the peak of US production. It just took a bit for US production to decline and oil imports to increase and fiat currency inflation to become noticeable.

These are some of the underlying reasons we are seeing trends out to 100 years start peaking at the same time. The wheel where set in motion a long time ago. And as you showed the path we have chosen was firmly established by 1980.

A particular reason to look at the last few years however is that a tremendous amount of debt has been created to induce growth. In general the worlds GDP has been inflated by a moved into the financial world. So the GDP itself has been heavily inflated by growth in areas that at the end of the day actually remove money from more productive pursuits.

Whats really interesting is that the world does not even really try to compute what I'd call sustainable wealth. And easy metric would be the amount of personal savings in the bottom half of the worlds wage scale adjusted for inflation.

What this fails to address is that most of this supposed global savings is concentrated int sovereign wealth funds and multi-national corporations.

You can question the real savings rate calculations easily.

And further you can question the savings rate for third world countries.

Given that most of the population of these third world countries barely participate in the modern banking system how can Morgan-Stanley talk about how much they have saved ?

One thing I've not found is the actual spread of savings amongst the population in third world countries even though we have tons of information that the wealth is highly concentrated in the top 1%.

No way we can talk about general GDP, oil usage and net savings without dealing with concentration of wealth. In fact in general it looks like overall all thats happened is that the exporting countries have created more extremely rich individuals.

And last but not least what has allowed this charade to continue ?

Assuming since 1980 the worlds gotten poorer outside of the top 1% whats happened ?
Why did we pull this off ?

Turns out that fertilizer was probably the underlying reason for success.
As the world increased its work force by the billion these billions in general are focused on obtaining enough food. We have been highly successful in providing bread for the masses. Also another incredibly important factor thats overlooked in the time honored Roman tradition is the circus.

Not only did these super poor people get access to bread they where also submerged with American entertainment. Real increases in personal wealth amongst the poor was successfully replaced with dreams of personal wealth as seen on TV.

Often overlooked and ignored the combination of food and the modern remote circus ala TV and music and las the internet has resulted in people willingly playing by the rules expecting to get their SUV and McMansion any day. And although in many countries when people are interviewed they publicly decry the sex and violence they perceive through films in America we should probably assume that the reality is quite different and the flood of effectively porn into the third world has acted as a sedative to the masses encouraging them to dream of making it to the land flowing with sex.
The selling of real food and virtual sex to the world by the wealthy is probably and not unsurprisingly the real reason that the warped financial system has worked.
Nothing more then bread and circus's just like the Romans.

Of course as peoples lives really worsen in the sense that the food supply worsens I suspect they will reevaluate their warped view of the American Dream.

Yeah this is better but you should also bring in GDP growth each year vs population vs oil.

I could, but

(a) GDP is meaningless, and

(2) that would go beyond the scope of a comment on an article on a blog, with both comment and article disappearing into obscurity in a week or so.

The rest about savings and the like I consider not much of an issue. Money's just an abstraction, its twins purposes being to make trade easier and act as a store of value - two purposes which don't have to be in the same thing, but in this case are. But what is the purpose of trading and storing value? To give us better lives.

There are not a lot of measures of quality of life. The UN's HDI (Human Development Index) is made up of,

1/3 GDP per capita
1/3 longevity
1/3 education, which is 2/3 adult literacy and 1/3 tertiary enrolment

so even that measure brings in useless GDP, but the other 2/3 I think are a fair measure - if people in general live a long time and can read and write and have a few well-educated ones around them, then probably a lot of other things are going well for the country.


Not only did these super poor people get access to bread they where also submerged with American entertainment. Real increases in personal wealth amongst the poor was successfully replaced with dreams of personal wealth as seen on TV.

Most of the "super poor people" who actually benefited from the Green Revolution have never seen a television, so can't get any dreams from it. Rather, what they saw was in their own communities, some well-off individuals in homes with running water and electricity, meat eaten every day, cars and radios and so on.

And most of the countries with very poor people in them have always had these well-off individuals as examples, but they just assumed things had to be that way. But as democracy has spread, one of the things people have done with their free speech is to demand better lives.

a guest post on this would be most welcomed...

On what, exactly? Email me and let me know.

86 mbpd does not equate to 86 mbpd of last year. It was important while a barrel equaled a barrel.

Perhaps true, but even C+C alone is up well over 1Mb/d since last year. Can you honestly say that those extra 1.2Mb/d of C+C are "fake"?

The fact that oil production honestly and truly grew in the last year isn't a challenge to the notion of peak oil, but it is a challenge to lazy and alarmist descriptions of it that keep mindlessly repeating the same tired, old "plateau since 2005" line.

Yes, there was a plateau, and this year it was broken; new facts require a new argument.

I've been trying to here for 3 years and 99% of people still don't get it.

If that's the case, you might want to take a hard look at the quality of the argument you've been using. I mean that in all honesty - if you believe you have an important point to make and people don't believe you, it's almost always the case that either your argument is bad or your point is.

For example:

Tar sands get counted the same

Of course they do; we're talking about peak oil, not peak energy. You're conflating two significantly different things, which not only undermines your argument for anyone who realizes that, it muddies the situation and confuses people who might actually agree with you.

It would probably be more effective if you clearly and explicitly separated "declining quantities of liquid fuel" from "declining quantities of available energy" as arguments. You may see them as being inextricably linked, but trying to explain everything at once is rarely the most effective approach.

Perhaps true, but even C+C alone is up well over 1Mb/d since last year. Can you honestly say that those extra 1.2Mb/d of C+C are "fake"?

The fact that oil production honestly and truly grew in the last year isn't a challenge to the notion of peak oil, but it is a challenge to lazy and alarmist descriptions of it that keep mindlessly repeating the same tired, old "plateau since 2005" line.

Yes, there was a plateau, and this year it was broken; new facts require a new argument.

Memmel's self-imposed ban on responding to you is well regarded within the context of this poor example of supposed facts and logic.

C+C being up 1.2 since last year, when there was a supposedly intentional 1mb/d reduction by the KSA is meaningless. What does it mean to restrict then un-restrict production? Nothing. It means nothing. That does not represent new supply in any way, shape or form. The discussion you are having is about increases in supply, not resumptions of previous production. If you are attempting to claim you don't understand this, then I call foul.

Oil production grew? By how much? A couple hundred thousand barrels over what was possible already in 2006 and 2007? You are claiming this is a considerable and significant change? Earlier this year, when challenged to do so, the best Aramco could do was 300,000/d of production. That's going to save the world how, exactly?

Your claim that the plateau was "broken" indicates you have no understanding of stats, logic, or both. A 1 or 2% range in production over three or four years capped by a rise over previous peak of around 1% is a "break out" from plateau? No. this is a new absolute peak in production. It is likely well behind 2005 peak in terms of BTUs, as pointed out above. It is not a break of the plateau. To claim that, you would need a rise that is statistically close to or over a standard deviation above the previous peak and have it last a number of years. One year of even a statistically meaningful new peak is nothing but a one-time jump if it does not persist. That is, an anomoly, at best.

Your's is a an assertion with no merit.


He is not suggesting they are fake. Very clearly Nate has stated that he does not believe that EROEI is the same this year as last year or the year before. Thus 100 barrels extracted at a cost of 10 barrels in 2000 versus 100 barrels extracted at a cost of 11 in 2005 versus 100 barrels extracted at a cost of 12 in 2008 are not the same. (I am just making up numbers to show the form of the argument, not the specifics.)

1)yes. More natural gas use would decrease net energy not 'net liquid fuels'

2)I have very much on my plate and should probably post 'comments' less so I can focus on posts.

3)You are correct. I try to put too many subjects in one paragraph/post. It is a fault of mine. There are those who can follow it and those that cannot. No matter how eloquent or articulate I become however, the general person will continue to think of things in dollar terms, hence Peak Oil, broadly construed, is an inflationary event, not one that places hard limits on non-energy discretionary economy and propels us along the net energy cliff. The 2 very real impacts IF a net energy cliff is close are 1)price of oil going up more than price of other things (less ability to buy oil) and 2)more and more production coming offline as producers refuse to lose money. I expect for a while, the government will still 'lose' money as an oil producer, even at EROI breaken, as most energy inputs are non-liquid fuel..

4)do you have an opinion on Dollar/Euro situation? Are people in Ireland concerned?

I don't think it is a coincidence that the current debt defaults came at a time in history when oil extraction has flattened. We now longer had the underly resources growing at the rate they needed

Considering that the orthodox view of the current crisis is that the problem is rooted in the boom not being founded in actual value or production (i.e. the increasing house prices that everyone relied on were based mostly in people's belief in perpetually increasing house prices), I need to see some evidence of causation before I'm willing to accept this statement.

Keep reading. Mid-conversation. Large problem. No easy answers.

I probably should have written more, about how I equate modernity with belief relationships--which is made possible by credit. I am using the word credit more broadly. I am using the word credit to refer to any economic relationship that extends over time, and allows for economic behavior to be guided into the future. Crude oil futures curves, 25 year commercial construction loans, student loans, the ownership of fixed income securities by charitable trusts, and universities, and pension funds. Everything from letters of credit that allow for goods to be shipped over oceans, to commercial paper that allows a bread company to meet payroll before they have sold the requisite number of loaves. All of that defines modernity to me. The places that we can visit in the world that have none of these things are not modern. And I would neither want to live in those places, nor would I want to revert to them. So my view is that credit--from Latin, credere, to believe--is what makes modernity possible.

Of course, all ingenious inventions can be degraded, abused, contorted. And oh man, did we ever just commit such atrocities upon the modern credit system. For, it seems that every time humanity finds a way to secure itself a surplus through efficiency or other inventions of productivity, it never knows how to store the surplus. And those put in charge of managing the surplus tend to blow it.



I'm coming round to Gails view on this one because if you think about it we are shortly to experience the mother of all 'Black Swan' events (if you believe in PO). All the current debt structure is based around the future being pretty much as is. We saw what what happended in the financial markets when suddenly things where not what people expected -how much worse will it be when people begin to realize that the very future that enables debt to exist in its present form is taken away?

I'm not a Bond expert but it seems to me that Long Term debt is about to go through the roof. I'm not sure what shorter term debt will do -anyone?

Regards, Nick.

Yes. The current hiding places, USD cash and USD treasuries, and JPY cash, are the next places where the Grim Reaper will come for his pound of flesh. Flows back into JPY and USD are of course temporary covering flows. Those flows are being conducted by those who control a ton of capital either in hedge funds or corporations. In other words, we don't have to wait for individuals to buy back into the USD and JPY, because it's the large stewards of capital who are doing it for them. The USD and US treasury bonds are being bought now at the highest prices either as short-covering or as flight to safety. These too are capitulation trades. They are the opposite side of the selling of assets.

Only those currencies backed by strong balance sheets will survive. The Australian and Canadian Dollars, The Chinese Yuan, The Swiss Franc. The USD and the JPY are garbage currencies, with soaring debt to GDP ratios behind them. They are frankly abused currencies, and they will be trashed once the world is done with them. On balance, I think the EUR will actually come out of this OK. But, I am not as sure about that. It's also possible that oil will get some currency flows.

The key idea here is that a short-covering mania into JPY and USD, and the flight to safety in T-bills at a time when they are being printed into oblivion, are foghorn type warnings that a new phase will unfold afterwards. I would sort of liken it to the tide going out right before the Tsunami hits. You know, you get that strange sucking of the water away from land way, way out. Then comes the major move.

When money leaves the US treasury bond market, it will make the current liquidation from equity markets look like small beer.

I don't look forward to it.


According to the rough estimates of the Global Footprint Network, Australia has a biocapacity of 12.4 ha/capita and a footprint of 6.6 ha/capita, Canada a biocapacity of 14.5 ha/capita and a footprint of 7.6 ha/capita.

So there may be more opportunity to pursue a sustainable export economy to back up the CA$ and A$ than for currencies of biocapacity deficit nations like Japan, the US, and China.

They call anything with living organisms in it "biologically active land." So that both images below are part of our counted "biocapacity".

While both are biocapacity, they're not equal in terms of being able to produce what we humans use in our day-to-day lives. But 1 million hectares of the Mallee are counted as the same as 1 million hectares of Queensland rainforest.

Much of Australia is actually savannah or desert, and even the "good" agricultural land has just a few inches of good soil. It's only been kept highly productive agriculturally by large inputs of energy (in fertiliser, pesticides, etc) and water (rice growing the savannah region of the Mallee).

So really Australia has less than 12.4ha pc it can use. This puts the "biocapacity" deficit countries like Japan - with 67% forest cover compared to Australia's 20% - into perspective. A comparison of biocapacity in area per person makes Japan look bad, and Australia good.

But a comparison of actual biocapacity - the total amount of living things - makes Australia look worse off than Japan. Australia's biocapacity is a lot more fragile than Japan's.

A networked system which is already under some tension is very vulnerable to extra tension. Much of our land is already marginal, a bit of climate change, and...

Please don't burst my bubble Kiashu. *hands over ears*

Well, we can improve our biocapacity. You know, plant trees and stuff. But we're hacking into it rather than trying to build it up.

Like old Japan, those guys with their 67% forest cover, they produce all the timber they need for building and furniture and so on. Most of the timber they import is for paper products. They've built up the biocapacity of their land, at the expense of that in Australia and Malaysia.

So we talk about a "biocapacity trade deficit" - well, in the case of biocapacity, you want to import more than you export! That builds your place up. Japan gets cut off from the world for some reason, okay they have less advertising fliers printed, big deal. They can still build stuff.

But nobody has to have any biocapacity trade deficit or surplus, yet can still build their own country's up. There are things we can do. We're just not doing them. We're a mining country - and one thing we mine is the fertility of the soil. Which isn't much to begin with.

Well, we can improve our biocapacity. You know, plant trees and stuff. But we're hacking into it rather than trying to build it up.

I am not suggesting that Oz has sane policy ... but that at the balance between resource base and population in Oz, there is every chance of doing well if a sane policy is adopted.

And regarding:

Japan gets cut off from the world for some reason, okay they have less advertising fliers printed, big deal. They can still build stuff.

... no, Japan gets cut off from the world for whatever reason, there is a loss in population as people starve. 67% forest cover amounting to 0.05 hectares per person ... that's 500 m^2. 20% forest cover ... heck, 10% forest cover amounting to 3.8 ha/capita is 38,000m^2.

I don't see why Japan would starve. Perhaps you are imagining that forests get in the way of food production? That's what Haiti thought, so they cut them all down and are now eating mud.

Japan is the ninth largest rice producer in the world, they have 2.3 million farmers with an average farm size of 0.8 hectares; most of those farmers use machines and are only farmers part-time. In a crisis situation with Japan cut off those machines wouldn't be fuelled, but many of their other jobs would disappear and they could work full-time with manual labour.

Japan's population is flat and expected to decline (to 95 million by 2050), so they only have to feed 127.4 million people, no more.

They produce 10.97 million tonnes of rice annually, and consume 8.7 million tonnes. Their 10.97 million tonnes produced are enough to supply them with 86kg each annually, which is 825 calories daily.

While this is well short of the 2,000 required, Japan does produce other food. For example, they harvest 4.8 million tonnes of fish (1.38 million tonnes) just from mariculture and aquaculture) annually, or 37.6kg each annually, which adds another 500 calories. And of course they produce 8.25 million tonnes of cow milk, 2.9 million tonnes of potatoes, and so on and so forth.

Like all developed countries, if cut off from fossil fuels overnight they'd have a very hard time with their agriculture. But absent a global war, that's very unlikely. Really agricultural production follows a formula,

Labour x technology x biocapacity = production

If your technology disappears, so long as your biocapacity is strong and you have plenty of labour, you won't starve. It's countries like Australia with relatively low biocapacity, and that threatened by climate change, that would be most in trouble - knock off the technology, and all we're left with is labour.

Which doesn't mean I think we'll starve, either. But I do think that we'd have a harder time than Japan, simply because whatever the Ecological Footprint statistics say, they have greater biocapacity in their country.

On the other hand, if the Japanese find themselves without electricity for all their electronic gadgets then we could see a Japan Armageddon :)

But a comparison of actual biocapacity - the total amount of living things - makes Australia look worse off than Japan. Australia's biocapacity is a lot more fragile than Japan's.

20% forest cover on 7.692m km^2 for 20m would be 7.7 hectares per person versus 67% forest cover on 0.378m km^2 for 127m would be 0.051 hectares/person.

That is not to say that Australia has the water resources to sustainably support a substantially larger population, but the land mass itself of 38.4 hectares per capita means that Australia has opportunities in terms of per capita harvest of solar and wind resource that far exceeds the opportunities of either the immediate neighborhood to the north or further abroad in the East Pacific Rim.

While both are biocapacity, they're not equal in terms of being able to produce what we humans use in our day-to-day lives.

But they both might be:

Bill Mollison - Dry Land Permaculture Strategies 1

Bill Mollison - Dry Land Permaculture Strategies 2

Bill Mollison - Dry Land Permaculture Strategies 3

Also look for Bill Mollison, Globabl Gardener - Dry Lands for download, if you're of a mind.

Permaculture in Action - Greening The Desert


Yes, I said somewhere else in the thread that we can build up our biocapacity.

But we're not doing it, and there's no sign we will be any time soon. I mean, look at the Murray-Darling...

As for Greening the Desert, that's a remarkable project, with remarkable results. But... once Geoff Lawton took off, the project was abandoned. The desert has gone back to being desert.

I'd love to see these things happen everywhere. "Permaculture" is the first word of the subtitle of my blog, after all. But it seems it's not easy for them to happen, and harder still for them to keep on under their own energy once they're going.

Either way, for the immediate future Australia has a large area of biocapacity, but it's very shallow in depth, and overall very fragile.

Either way, for the immediate future Australia has a large area of biocapacity, but it's very shallow in depth, and overall very fragile.

And over the long term, the quality of life will be substantially better if the transition from the current policy regime takes place in ten rather than twenty years, and better still if it takes place in five.

Relative to Japan, however, Australia is quite well positioned, insane current policy stance and all.

Jared Diamond disagrees with the conclusion in your last paragraph. According to Diamond (in his famous book, "Collapse") Australia is one of the most vulnerable to collapse of all high-income nations. Australia has a fragile ecosystem.

Japan will have to import food and energy, no matter what. On the other hand, the big role of nuclear power in generating Japan's electricity is a big plus facture for Japan. Finally, Japan has an unsurpassed reputation for producing industrial goods of high quality.
Under what circumstances would Japan be "cut off" from imports and exports?

Under what circumstances would Japan be "cut off" from imports and exports?

That is a question to pose to Kiashu, it is his argument that due to having 67% forest cover, Japan could continue to build if cut off from imports and exports.

What kind of plausible scenario can anyone build in which Japan is cut off from imports and exports? The only one I can think of is World War III in which there are all-out thermonuclear exchanges between Russia and the U.S. IMO, such a World War III scenario is highly unlikely--maybe one chance in five hundred. Fifty years ago I thought there was a fifty-fifty chance of such a war, but the world has changed a great deal during the past fifty years--in some ways much for the better.

I read it as a statement regarding Japan's potential self-sufficiency, not a statement regarding a likely event. Since you claim that:

Japan will have to import food and energy, no matter what.

... you seem to be agreeing with me and disputing Kiashu, who said:

Like old Japan, those guys with their 67% forest cover, they produce all the timber they need for building and furniture and so on. Most of the timber they import is for paper products. They've built up the biocapacity of their land, at the expense of that in Australia and Malaysia.


... Japan gets cut off from the world for some reason, okay they have less advertising fliers printed, big deal. They can still build stuff.

In Collapse Diamond had a lot to say about Japan and their forest situation as well. In essence Japan now has extensive forests because they use other countries timber rather than their own. It isn't really a sustainable practice because the needs of Japan outstrip their capacity as well.

Australia overall can be pretty much self-sustaining in terms of crops and mineral resources but not oil. Of course, crops can be renewable but mineral resources are finite. This self-sustaining capability is on the proviso that we actually apply some decent sustainability principles rather than the some of the quasi-sustainbility practices we have in place now. (Gunns - I am talking about you.) A lot of our excessive farming practices in the past had to do with crops and animals for export.

At times I am both despondant and joyed at the progress of Australian land use practices. At this stage I am firmly in the category of 'watch this space' and hedging my bets to whether we are actually headed in the right direction. :)

I don't know whether if I was Japan I would be putting my trust into nuclear power. A highly seismic environment and little ability to store nuclear waste will eventually come back to bite them in the long term. Far better for them to take stock in something more mundane but less risky like tidal power.

Australia overall can be pretty much self-sustaining in terms of crops and mineral resources but not oil.

Of course, this is self-sustaining at the current footprint per capita ... given an overly car-dependent transport system, ample opportunity to shift the transport system to a more sustainable level, and with excessive sprawl development, ample opportunity to shift the settlement system to a more sustainable level.

Horne's "run by second rate people who share its luck" syndrome continues in full force, so the biocapacity will be less per capita in another ten years than now, and the longer before policy is reversed, the more materially frugal a sustainable living standard will be ... but compared to China, Japan or even, as long as the food distribution system is so heavily dependent on truck freight, the US, Oz has substantially more leeway to muddle through.

Gregor: Very eloquent. The current situation re the USD reminds me of the housing bubble in that you know it will reverse drastically but you don't know when.

Well put. As of Thursday evening, the US Treasury had issued $559 billion in special Treasury bills and notes to accomadate panic levels of demand. While an argument could be made that new Federal Reserve money is going in a circular path back to finance the Treasury, it is not a closed loop. In other words the Treasury is sucking in a great amount of the world's wealth recently. But before long when the panic wave of dollar buying is over, 1% interest rates earned on a currency that is about to hyperinflate its money supply won't be very appealing.

All the while the money stays ties up in Treasury, it is not being invested in companies around teh world.

So yes, this the tide going out before the tsunami. One can only wonder what will happen when that wave crashes and destroys the financial structures built upon dollars.

... But before long when the panic wave of dollar buying is over, 1% interest rates earned on a currency that is about to hyperinflate its money supply won't be very appealing.

It is too early to tell where the dollar is going to wind up. With all goods falling to 'pawn shop' levels of value, it is hard to see anything of value left for the dollar to reflect.

You'll be able to pick up a Picasso for a song ... can you sing?

Fortunately, confinement of dollars to the corridors of finance keeps them from fueling inflation and the instant reaction of spiraling interest rates.

Unfortunately, confinement of dollars to the corridors of finance keeps them out of the hands of the people in the real world, where they might be turned to productive use.

I'm not sure I can explain this so that it is clear to others, but I feel you have edged towards my core response to the article: I see no limit based on the slowest link. A failure is a failure is a failure. It doesn't matter the nature of the link, only that it is necessary. I.e., it's not an issue of weakest links, but of being irreplaceable.

Credit is irreplaceable. Spending is irreplaceable. Growth is irreplaceable. Trust is irreplaceable. Etc.

It doesn't matter what fails, only that something does.


Except that savings is not a pool. When:

Investment + Debt-financed consumption + (Trade Surplus) + (Government Budget Deficit) is bigger than 0, there is net saving in that period.

That saving is the accumulation of the promises from going concerns financing the investment, and the promises from consumers financing the consumption, and the promises from the Rest Of the World (ROW), financing the ROW trade deficit, plus the promises from the government created when government spends that were not in turn extinguished by tax receipts.

The "pool of savings" is an accumulated pile of promises.

When the evolution of the economy means that those who have made promises are more and more able to make good on them, that is increasing financial robustness.

When the evolution of the economy means that those who have made promises are less and less able to make good on them, that is increasing financial fragility.

Stochastic risks are readily taken into account in fancy financial modelling, because stochastic risks are being realized at an ongoing rate. But systemic risks tend to be realized in clumps.

At the turn of the Century, the US adopted a policy of experimenting with whether firms chasing returns on a time frame of a quarter or quicker would find ways to systematically under-rate systemic risks and so take out as income what should have been retained as prudential reserves ... essentially, stripping buffers out of the system.

CDO's were not regulated, CDS's were removed from regulation by any federal authority and could only be regulated by state authority if they represented actual insurable risks ... that is, only the least problematic of CDS's could be regulated, not the creation of CDS's and their acquisition by those without an actual risk exposure, which allows CDS's to be created that are many multiples of the actual asset at risk of default.

Indeed, in addition to the above essay, should be added systemic risk concentration and systemic risk amplification.

"Trash" tranches of CDO's represent a concentration of systemic risk, by the nature of the junior/senior preference on claims of income from mortgages. But the demand was for investment-grade rated CDO's. So they built CDO's OUT OF CDO's, "second tier" CDO's that use the same Senior/Junior preference claim system to generate "investment grade" quality CDO's out of a pile of trash-grade CDO's. It was financial magic that worked precisely by systematically under-estimating systemic risk, so that the concentration of systemic risk meant that the quality of the supposed investment grade seoncd-tier CDO's were not in fact investment grade.

And then sometimes a third tier was built from the trash from second tier CDO's. Where in case of a "unexpected" (but quite widely anticipated) across the board increase in mortgage default rates, the senior tranches in the third tier would be senior preference claims on zero money flowing in. Oops.

And the lack of requirement for an insurable interest to hold CDS's meant that rather than regular insurance that shifts exposure to default, the by-law-unregulated naked CDS's could multiply the exposure to default.

And both were happening at the same time, so that institutions that were supposedly holding all investment grade assets, but in reality were holding a large quantity of chickenshit assets, could have their hidden risk of default multiplied by people taking bets on whether or not they would default. And since CDS's are not regulated as insurance, so there is no requirement that issuers actually have a balance sheet that would be able to cover total CDS exposure even in normal financial conditions.

So strip out storage buffers, add network interconnections, and add failure amplifiers to the system. Its like you start with the diary's network system and then add a process that generates network traffic to attempt to notify everybody that there is a network problem, creating an internally-generated denial of service attack.

IOW, we were creating a system encouraging promises to be made that could not be kept. Once we allowed that, the other side of the liabilities would show up somewhere as savings that people thought they were holding even though the promises were on shaky ground.

Blaming the pool of savings for the problem is like blaming the thermometer for a high fever.

Ecology studies what makes interconnected systems prone to collapse or resilient ... its not like any of this is a mystery. It was just in the short term interests of those handing out as income what should have been prudential reserves and pretending that high yield junk assets were high yield investment grade assets to turn a blind eye and replace what we know about how systems work with market-faith ideology.

So strip out storage buffers, add network interconnections, and add failure amplifiers to the system. Its like you start with the diary's network system and then add a process that generates network traffic to attempt to notify everybody that there is a network problem, creating an internally-generated denial of service attack.

Ouch. So true. The more I delve into it, the more I tremble in fear. And you know what really hurts? It wasn't an accident. The people who did this are not idiots. Some of them did the best they could to minimise risk, but ultimately they weren't paid to minimise risk - they were paid to maximise profit and HIDE risk.

I am very pro-globalization and have been since I was a teenager and attended an international school and felt the liberation that comes from getting one foot out of my culture.

The problem here lies in conflating cultural exchange with trade. In this era of the internet there is no reason - so long as the internet functions and is generally available - that cultural exchange might continue while localization ends much of global trade.


There is a second problem here in conflating trade and flows of wealth.

The Bretton Woods system that preceded the Washington Consensus financial globalisation system saw substantial growth in trade ... and, with systems in place that limited flows of financial wealth in place.

What changed was not the growth in trade, but the growth in financial flows. For "major" currencies, it is normal for more than 90% of balance of payments transactions to occur in the capital accounts.

The term "trade" also conflates trade between different parties, and "trade" with the same party on both sides ... flow of work in progress between subsidiaries of the same corporation. An advantage of trade in terms of economic networks is the ability of trade partners to take a "hands off" attitude to the politics of the other country, with an event disrupting supply in one country leading trade partners to other producers in other countries. However, if the production process is integrated across national boundaries ... which requires foreign direct investment which hinges on financial globalisation ... that "hands off" attitude is no longer an option, and the transnational corporation interferes with political events across multiple nations.

"I am very pro-globalization and have been since I was a teenager and attended an international school and felt the liberation that comes from getting one foot out of my culture."

I think you are confusing globalization; the theory that all economic activity should take place in the physical location which provides the lowest financial costs and greatest ROI, with multiculturalism; the practice of mingling many different cultural groups together and cross-fertilising food, culture and language.

London, I am told, is a good example of a globalised non-multicultural city. Although many cultural groups exists, they do tend to remain static in various fixed enclaves in the city (West Indians, Central Asians, etc etc).

Excellent as usual Nate. Missed you at Charlie Hall's meeting in Syracuse. Had hoped to meet you in person!

Personally I suspect the whole system will crash and we will need to reboot. On what, I'm not sure unless we can isolate and maintain a critical core of energy production and knowledge for the next go-around. But we need to learn all we can from this dynamic, and understanding the relationship between energy, work, and the real economy is vital. Maybe next time we will do a better job.

Question Everything

Human nature means that next go round we will screw it up again except we will do it differently.


I agree with everything you say except for the statement that economics is fatally flawed. Conventional economic ideas are always fatally flawed, because they are always fighting the last war, just as military conventional wisdom is so often flawed because of fighting the last war instead of the current one.

Keynesian economics was radically new in the 1930s, but it was right for the 1930s, while all the classical economics that ruled in 1930 was fatally flawed. Keynes explicitly recognized that his economic recommendations applied specifically to the Great Depression problems and might not be useful in other situations. Well, as Milton Friedman said, "We are all Keynesians now." Indeed we are, and this tends to limit our thinking and steer us away from steady-state economics.

But what you are doing (ecological economics) is still economics. It still looks at scarcity as the foundation of economics, and each and every one of the basic economic ideas apply: Opportunity cost, the production possibility frontier, supply and demand, aggregate supply and demand, the need to account for externalities (preferably with a market-based solution), market failures, including monopoly and asymmetric information.

Thus there is a lot of validity in conventional economics, just as Keynes used a lot of classical economics in his thinking. I came to accept steady-state economics some thirty years ago: My thinking then and now has come from a grounding in conventional economics.

Let's not throw out the baby with the bath water.

And what were the thoughts of Keynes and Friedman on financial fraud-did they feel there should be penalties or should the perpetrators be elevated to positions of high importance? IMO until the tolerance for financial fraud lessens the whole situation is going to get a lot worse-just yesterday Taiwan publicly called Moodys et al a bunch of criminals-the USA can let the grifters run the country but they cannot force the entire world to finance it forever.

Both Keynes and Friedman believed in laws against financial fraud and strict enforcement of these laws. Offhand, I can't think of a single notable economist who has ever said that we do not need firm government enforcement of laws against fraud. Fraud is a market failure, sort of a negative externality, and as such is loathsome to economists.

Even Milton Friedman, who favored minimal government regulation, emphatically endorsed laws against force and fraud; minimal regulation most certainly does not mean no regulation.

Then it is too bad those guys aren't running things right now because the tolerance for high level financial fraud is unprecedented IMO.

Those guys are all dead. Keynes said that we are all ruled by the scribbling of some defunct economist.

Economists never rule. They advise. Typically those in power never listen when economists tell them to raise taxes or to cut spending, hence the long-term inflationary bias that we have seen since 1913.

For at least the past forty years, hundreds of notable economists have urged the U.S. government to put a stiff tax on gasoline because of its negative externalities. All economists recognize externalities and want to get rid of them, because externalities create inefficiency, and economists (except maybe Herbert Simon and Joseph Schumpeter, two of my favorites) hate inefficiency with a fierce passion.

If you want to stop white collar crime at the highest levels, you have to fit the punishment to the crime. Locking up a criminal in a blue collar prison for stealing $200 from a liquor store is not the same as a white collar criminal stealing several million dollars. We have a progressive income tax system in America. Perhaps it is time to have a progressive punishment system as well based on the dollar amount of the crime. A million dollar crime should get you 20 years in prison. A ten million dollar crime should get you life. We also need to come to grips with two levels of incarceration, at least in America. Putting a white collar criminal in a "minimum security facility", also know as a county club prison, is just plain stupid. The damage they do to society is far worse than what blue collar criminals do.

Why should those who commit financial crimes at the highest levels care? The risk to profit ratio looks pretty good from where I stand.

Our inability to deal with high end, white collar crime is the primary reason the world's economy is in free fall. Locking up for life, several thousands of the worst white collar criminals over the last twenty years, those who stole (it's not fraud, it's stealing) the largest amounts of money would have prevented this. Focusing on high end, white collar crime would have forced us to pass more laws we desperately needed to keep pace with our evolving, complex economies. Instead, we chose to grab onto the gravy train and pretend all was well.

The money we needed to help alleviate peak oil, global warming, and famine is simply no longer available. The world's economy will not recover in time. Systems needed to maintain our standard of living will begin to fail. Not so much because of interconnectivity as due to a lack of money to maintain them. Now, my biggest fear is a worldwide pandemic.

We treat a corporation as a legal person when its to the advantage of the corporation ... but refuse to "incarcerate" it when it commits a crime that brings jail time.

Establish a corporate jail ... freeze shareholdings, put the corporation under administration for the length of the jail sentence, and retain any net earnings to compensate the victims.

If Corporations were on the hook for things that were not the fault of individuals, we would see far more vigorous prosecution of white collar criminals driven by corporations wanting to avoid it being a corporate act.

Now, my biggest fear is a worldwide pandemic.

I have written elsewhere that pandemic is now a very real concern. With economic chaos raging and employment uncertain, will people still kill every chicken the next time there is an outbreak of Bird flu? Will MDR TB still be ruthlessly treated with very expensive drug cocktails?

Historically, disease and war have always ridden with famine and death when apocalypse prevailed. For a few brief decades we fought disease to a draw, and we thought the horseman was defeated. Not so.


But what you are doing (ecological economics) is still economics

Don - first of all, I do not subscribe to everything about ecological economics, even though its where my phd program resides. They have gone too far in putting $ values on nature and not far enough exploring human nature and our evolved demand mechanisms. In fact, EE is being slowly subsumed by cognitive neuroscience, evolutionary psychology, and even conventional economics, which are all painting a picture that man as rational actor is the exception not the rule.

Economics plain and simple, is human behavioural ecology applied to a large population that had access to a perceived unlimited energy supply. The 'economic concepts' of value within economics that you point out are more psychological and behavioural than economic. Economics applied to an era of human behaviour when the planet was empty and there were few planetary resource limitations. What will replace it might contain some of the economic 'rules' (e.g. comparative advantage), but will fall under a biology/natural science umbrella.

Agree that economics has some useful observations about human behavior some of the time. But most economic concepts are either based on tautologies (utility is that which is preferred which is utility) and conflated understanding of wide boundary correlation causation. The main difference between walrasian welfare economics and ecological economics is the latter assumes the human system is embedded in a larger system, where the former assumes the environment is part of the human economic system. On that point, I am 100% in agreement with the ecological economists..

Hey Nate, I caught this part in particular: "They have gone too far in putting $ values on nature"

This has been my main beef with Ecological Economics, but my sense (coming largely outside of the academic discussions within the field) is that this is also controversial.

Perhaps given that we are seeing how trillions of dollars can be instantly created by central banks while nature is continually liquidated will lead to further questioning of the validity of assigning U.S. Federal Reserve Note values on what I would argue is actually priceless, i.e., a planet that can reliably sustain thriving populations of organisms that emergently regulate and dampen extremes in the cycles of water, climate and biogeochemical flows.

Does anyone feel like shorting the planet?

Odum describes the flow of money as one of the control feedbacks on production. That the system as a whole has now destroyed the control loop - the implications are hard to wrap my brain around.

I do think - but cannot prove - that the net energy argument is right on target. Declining returns. Isn't that also Jay Hanson's argument? (Plus the biology.)

cfm in Gray, ME

Dollar values on their own are for situations where the various costs and benefits are at the same level of priority.

But, evidently, the "ecosystem services" that are required for the survival of a society must be available in order for the allocation rules in a society, whatever they may be, to have any relevance.

Putting dollar values on "ecosystem services" presumes that they are at the same level of priority as other economic costs and benefits. Now, that may seem to be an improvement over putting them at lower priority, but it is clearly not good enough. Where they are essential to survival of a society, a sane society must place their preservation at a higher priority than dollar valuations.

A first step in that direction is the principle of strong sustainability ... but if we have already overshot, even the principle of strong sustainability may understate the priority of halting and reversing ecosystem degradation.

Jason you're right on target. Others, too, have postulated that at least certain natural resources, most profoundly oil, will eventually be acknowledged as priceless. It is as if, at some point, humanity becomes a tribe in which there's only so much magic dust, for every human being to go around. So much peak oil commentary reaches out haltingly, tentatively, for a way to allocate resources transcending--or predating--price and economics. It's like, oh no, we've just discovered a relatively standalone, self-regulating pricing system won't keep us warm and fed properly; and now warmth and satiety must be negotiated or legislated. People can see we don't have an indefinite, much less infinite, supply of the magic fluid from beneath the earth. And so we might as well regard the trillion or so barrels that remain as lying exposed above the surface, say, in a big pot. Who gets to stick in their straws for how much and--as important as anything--when? Yipes.

The main difference between walrasian welfare economics ...

Note that Walrasian welfare economics is invalid in its own terms ... Walrasian General Equilibrium analysis was shown to be a dead end in the 1970's, utility theory has been known to be invalid as a scientific theory of human behavior since before WWII ... many would say since before WWI ... and despite rationalizations that for predictive purposes it is OK if things work "as if" the utility model was valid, welfare implications of utilitarian marginal analysis requires that the model be an accurate model of human preferences.

So its not necessary to look for reasons to prefer something to Walrasian welfare economics, since Walrasian welfare economics are not valid social science.

Keynes of course said that his recommendations during the Great Depression were for the problems of the Great Depression, but he also argued that his theory of money, employment and interest was a General theory.

The real flaw was in the effort after the war (and Keynes' death) to try to negotiate a cease-fire inside economics departments with a bastard child of General Theory macroeconomics and marginalist microeconomics. That is what gave us the post-war Samuelsonian hydraulic Keynesian economics.

But while the General Theory makes no assumption about natural resources, and can certainly be applied to economies facing serious natural resource constraints, hydraulic Keynesian models tacitly assume unlimited resources, so the "Keynesian policy" stereotypes that people pick up are fatally flawed ... and indeed, that is a big reason why bastard Keynesian/marginalist economics fell over in a heap in the face of the first two Oil Price Shocks.

Marginalist economics must take the viability of the economic system for granted in its analysis, because system viability is not something that can be ensured by marginal optimizations. And any marginal optimization must occur within a given system, so the marginalist economics must also take for granted "the system that we should have".

Therefore, when faced with fundamental questions of economic development and survival of an economy, marginalist economics can only address secondary issues, and is incapable of addressing the main issues.

However, that does not mean that "economics" generically is fatally flawed ... while marginalist economics define economics as applying marginal analysis to a problem, if we define economics as the study of the material provisioning of society, there are a range of approaches to the understanding of economics that provide a line of attack on big questions of economic development and economic survival.

Recall Keynes's short article "Economic Possibilities for Our Grandchildren." He ASSUMED a stable population and ASSUMED that technological advances would continue to enable real economic growth per capita of 2% annualy for about 108 years (eight doublings) from 1930. Now if his assumptions had been true, then his conclusion--that the economic problem of scarcity was solvable in principle--would have been true also.

But Keynes wrote in a world of two billion people enjoying the bounty of cheap and abundant oil. Technology, especially energy technology, has not improved at a rate of 2% per year past the nineteen sixties. (I'm measuring technological advances as Solow does, i.e. as a residual to account for growth that is not accounted for by other factors. However, Solow never worried about Peak Oil.) We had solar energy in the nineteen sixties; we had nuclear energy then, and except for more efficient wind turbines and cheaper solar panels and somewhat more efficient batteries, we have made little progress since the nineteen sixties in energy technology. Keynes never dreamt in his worst nightmares of the Green Revolution and the consequent explosion of the world's population. Nor did he think that oil was a limiting factor to growth, just as limitations in coal production did not halt nineteenth century economic growth. With an undergratuate education in Medieval Latin literature, Keynes never had much interest in engineering or hard sciences such as physics, chemistry, and geology.

To a large extent, for all of us, we are prisoners of our own time, of our own experiences. Keynes's idea that poverty might be eliminated was--in my opinion--correct. But we're not going to be able to rely on economic growth for progress against poverty in the future.

Economic growth is no longer the solution to our problems. It is the problem. (along with population growth)

Recall Keynes's short article "Economic Possibilities for Our Grandchildren." He ASSUMED a stable population and ASSUMED that technological advances would continue to enable real economic growth per capita of 2% annually for about 108 years (eight doublings) from 1930.

They were assumptions that he made when he wrote that piece. But, unlike the Samuelsonian theory that is was people normally meant by "Keynesian Economics" in the US after WWII, his General Theory analysis does not require those assumptions.

Keynes was horrified of the settlement terms after WW1, and could see the chaos os this strategy.
He was right of course.
A letter from Keynes to FDR:

The United States is ready to roll toward prosperity,
if a good hard shove can be given in the next
six months. Could not the energy and enthusiasm
which launched the NBA in its early days be put
behind a campaign for accelerating capital expenditures,
as wisely chosen as the pressure of circumstances
permits? You can at least feel sure that the
country will be better enriched by such projects
than by the involuntary idleness of millions.
I put in the second place the maintenance of cheap
and abundant credit, in particular the reduction of
the long-term rate of interest. The turn of the tide
in Great Britain is largely attributable to the reduction
in the long-term rate of interest which ensued
on the success of the conversion of the war loan.
This was deliberately engineered by the open-market
policy of the Bank of England.
I see no reason why you should not reduce the
rate of interest on your long-term government bonds
to 2%% or less, with favorable repercussions on the
whole by the market, if only the Federal Reserve
System would replace its present holdings of shortdated
Treasury issues in exchange. Such a policy
might become effective in a few months, and I attach
great importance to it.

Economist Arnold Kling's opinion:

I have always thought that the issue of the relationship between financial markets and the "real economy" was really deep. I thought that it was a critical part of macroeconomic theory that was poorly developed. But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men's urge for mathematical masturbation.

Quoted in Intellectual honesty: how much do we know?


According to my spreadsheet, 2006 was the maximum BTU at 23,883 trillion. To me, it looks like a 'rolling plateau' for the last few years. More troubling, the average million BTU per ton is dropping with 2007 being the lowest at 20.5.


BTU per ton:

Of course, a change on the BTU per ton on any type could greatly change things.

Your "a small door for a whole lot of elephants" is a good way to describe the debt pickle we are getting into. A huge table of dominoes has been slowly laid out over the years and the first few are falling.
Historically, we are here:

This mountain of debt will never be all paid back with interest without some kind of severe dislocation in the economy or the structure of the economy.

The relatively insignificant stock market margin debt unwind of 2000-2003, which fueled the bear market then, pales in comparison to the unwind that is beginning. Not only is there much more stock market margin debt this time, it is all mixed in with all the other debt, which is much more massive and all in high distress this time.

The last Great Debt Unwind was, of course the Great Depression. The upcoming Great Unwind may well be something different. Such a different thing is being discussed in high circles. Following the Biblical Israeli practice of Jubilee (cancelling all debt every 50 years) a new debt free world was discussed by Jubilee South clear back in 2005 when all was peaceful in Debt World. I suspect this Jubilee thing will be getting more attention as the elephants really begin running at the small door.

Where did you get your data?

I would love to see that graph extended to sometime before the crash of 1873.


does anybody have a graph of that US coal production in gross BTU's


"The critical concept is that monitoring and networking the system allows us to go right up to the edge of disaster, and then move load to another part of the network until it, too, is on the edge of disaster."

And that most healthy(hardened) part of the system will be levered against.
The disrupting protocol will leapfrog and isolate and/or lever against
the hardened part.

Example: If the US Government succeeds in stopping it's markets from collapse. Those markets will be levered.

"The BIS review is a good way to grasp the dimensions long term monetary expansion has brought upon us. A net risk of $14 TRILLION compares with the annual GDP of the USA. Nobody, absolutely nobody can afford this tab in the case of an unorderly unwinding of this market that is roughly 12 times the size of the global economy. I conclude a lot more paper promises will be burnt in the coming derivatives tsunami. As a reminder, most of these contracts have been moved off balance sheets into under capitalized subsidiaries that profited from the good rating of the parent company. But in case of a default it is this nasty, nasty huge notional amount that becomes a liability.

As the vast majority of these contracts have no market, failure will come in the form of counterparty risk. This makes all the current emergency meeting a bit more understandable if politicians are already aware of the biggest bubble that may find no other way of deflation than a sudden burst. I base my sense of urgency on the rapid growth of the net risk in only one year, rising a stunning 30% at a time when the first signs of the credit crunch appeared."

Several thoughts come to me as I re-read this post:

1. Electricity is very much a part of our current networked system. It is tied in by the financial system as well as its need for fuels and its use of the transportation system to transport fuels. If we have cascading failures throughout the system, we need to expect that electricity will be part of those failures.

2. A major part of the system that is not working, and in fact cannot be expected to work long-term post-peak is long-term debt. Somehow, we will need to build a new banking system (or systems) that does not incorporate long-term debt.

3. Once the long process of collapse is done (or even before it is done), we will have to start rebuilding new networks, using the new monetary system without debt. My guess is that the new networks will be much smaller, less complex, and more local than past networks.

4. We may have false starts rebuilding. If we rebuild too much like the past (for example, monetary system), the new network is likely to fail again.

Q. What is the value of the banking system if it does not provide a return for the service of "telescoping the future into the present"?

Just reread Nates Energy-problem biased post and I'm really finding it difficult to pin the blame soley on Energy at this point. I think the fundamental problem here on Earth is that there are just too many people and it/we can barely cope. We seem to have hit a 'sweet spot' for a small % of Earth Dwellers in the last 50 years or so but now as more and more people aspire to Western Standards of consumption the strain is 'breaking the bank of Mother Nature'...


"...I'm really finding it difficult to pin the blame soley on Energy at this point."

I believe the extraction of alllllll the other resources, which are absolutely tied to energy, must be considered as the magnafier of the net energy constraints and perhaps an additional driver of the economic crisis.

The blame doesn't have to be solely on energy. There were a lot of stupid things done by banks, rating agencies, monoline bond insurers, Fannie and Freddie, and AIG, to name a few.

The corner we have gotten ourselves into is that net energy is not growing the way it was. I would argue that the lack of energy growth was part of what pushed us into our current "hole". Whether or not that is what pushed us in, the lack of growing energy is going to keep us in the hole. Governments think that we can borrow more, and somehow "grow" our way out of the problem. This simply won't work. We are not going to be able to grow the way we have in the past. We are going to see more and more kinds of debt defaulting, as the lack of energy growth and its consequences work their way through the system. As more and more debt defaults, the whole idea of growing our way out will become more and more ridiculous.

For (2), how do we relieve the existing debt? It appears that the goal is to shore up and perpetuate debt, rather than to have bad debt default and be replaced. How can we move past the system that requires debt without addressing the debt itself?

gain access to zero point energy /fusion or some other esoteric energy source that allows you to continually defer paying back into the future.. I guess

you don't pay it back instead the economy contracts and we power down.. its going to happen one way or the other..

+1 for the doomers.. OTOH it isn't TEOTW just TEOTWAWKI..

there's a lot of fat in the system that can be trimmed off and still leave us all relatively stress free.

the danger is the complexity of the problem gets broken down into unintelligible bits that make no sense.. I think this has already mindf**ked many already who don't "get it"

I think the medium term future is going to involve lots of queing

2. A major part of the system that is not working, and in fact cannot be expected to work long-term post-peak is long-term debt. Somehow, we will need to build a new banking system (or systems) that does not incorporate long-term debt.

Long term debt is the moment experiencing the same problems long term debt experiences in the Panic of 1893-1896 ... in the interim, we solved those problems, and then proceeded in a long process starting, in the US at least, in the 1950's, to strip those solutions back out of the system again.

There is no reason that long term debt "cannot work" post-peak. That is confusing the fact that many have entered into obligations they will not be able to meet post-peak with the assertion that nobody could every enter into an obligation that they could meet post-peak.

This is a claim that often comes from a confusion between interest as a claim on a share of gross profits that mistakenly takes interest to be a claim on a share of growth. However, in a steady state, it is quite possible for income to be organized so that there is profit, and if there is profit income, then it is possible to meet fixed debt obligations as a share of profit income.

However, a system with a greater reliance on Preferred equity stakes and less reliance on Fixed Obligations would, indeed, be more resilient ... its preferable for obligations to underperform in the face of stress than for obligations to default.

Put another way, if a responsible mortgage is obtained, then one borrows against future income, not future pay raises. Responsible long term debt is possible. What is not sustainable is the cost of houses, automobiles and medical treatment increasing faster than income.

Quite ... here in the US, we do not have an unsustainable economy because we got into debt, rather we got into debt because we had an unsustainable economy and were trying to push off the day of reckoning.

Looking at the external account deficit of the US under Clinton/Bush:

(I+Cf-S)+(G-T)=(IMPORT-EXPORT) ... Cf being debt financed consumption.

Suppose that the (G-T) had been productive investment in infrastructure, to eliminate the structural dependency of the US on imported oil while it was still as cheap as it would ever be to do so, and the (I+Cf-S) had been strong complementary strong investment, with debt financed consumption less than private saving ... or IOW:

(I - (S-Cf)) + (G-T) = (IMPORT-EXPORT)

The high trade deficits of the 1990's ... which would have been higher trade deficits over the medium term if the government had been able to pursue serious infrastructure investment instead of being trapped in a infantile ideology of budget balancing ... would have laid the foundation for a reduction in the structural deficit and stronger domestic growth.

In reality, domestic investment was less than impressive in the 1990's and even worse in 2000's, and the deficit that emerged in this decade was government consumption for reckless military adventurism, so:

(Cf-(S-I)) + (G-T) = (IMPORT-EXPORT)

meant that the accumulation of financial obligations abroad was clearly not sustainable over the long term.

And note that even though banks "borrow short to lend long", when the system is working normally and banks are sticking to their knitting, the liquidity that leaves one bank ends up at another bank, and then a bank that is short can borrow it from a bank that is long until the random flux and seasonal ebb and flow of liquidity brings it back again.

Banks did not get themselves into trouble by originating mortgages on the terms of the mortgages of 1960 and then holding them to maturity ... they got themselves in trouble by pushing to escape the boring confines of ordinary commercial banking to get into the high return areas of acting as a middleman between customers and capital and other financial markets, earning income, which was then more income to be plowed into magic "high yield, low risk" assets.

And now banks that have liquidity look at how shabby their balance sheets look, and are very wary of lending to banks that need liquidity, out of concern that rather than the normal ebb and flow of liquidity, what the borrowing bank really needs is to keep their head above water hoping to earn enough income to get back to solvency.

I think you may be onto something, Gail, with the idea of a complete debt-induced collapse bringing about a totally new network without debt. Government debt has always been based on the idiotic justification that we will grow our way out of our problems if we just throw enough borrowed money at them. Peak oil is taking away that option. And as for individual debt, well we're seeing what happens when you let idiots run loose with loans.

At some point, there will probably be a halt called to all the shifting around of the problem (from bad private loans, to government confiscation of loans, to out-of-control government debt, to printing currencies into oblivion, to yada yada and so on. This could all end up in a kind of global Jewish Jubilee (where all debts were voided every so many years) and a new monetary network with no currencies and no debt! At least not debt as we know it.

I don't think it would be local networks as you suggest. It would have to be a global network. We've seen what happens when individual countries do stupid stuff with their networks and these networks are woven with the international network. A global governing body would have to make the rules for all to follow.

Books have been written about this. Many say the next wave of this debt problem is the credit card, which was already a problem before subprime mortgages blew up. By the time we're through with this phase, we may all want to say:

"Goodbye Credit Cards: For what do the bells toll? For the simple, convenient Credit Card...this card is subtly, quietly being transitioned...into a Debit Card, which will eliminate all credit" The New Money System

I don't think it would be local networks as you suggest. It would have to be a global network. We've seen what happens when individual countries do stupid stuff with their networks and these networks are woven with the international network.

What we've seen is what happens when individual countries do stupid stuff in the context of globalization, which is the process of removing national controls on the flows of wealth across national boundaries.

What we get is what we got in 1893, in the last age of financial globalization.

We removed floodwalls between national economies in the name of efficiency, and have found out that those floodwalls do in fact serve useful purposes when one large country has been doing stupid things and without the floodwalls in place, major parties in many other economies feel that, in Maggie Thatcher's famous phrase, "There Is No Alternative" to going along.

The Post Keynesians have been warning about these dangers for forty years now.

I'm reading Deep Survival: Who Lives, Who Dies, and Why by Laurence Gonzales. He references Per Bak's work on the sand pile (self-organizing systems) as a demonstration of how accidents happen in wilderness recreation (avalanches).

He says, "Small collapses are common on the sand pile. Large-scale ones are rare. But collapses of all sizes do happen with an inevitability that can be described mathematically as inversely proportional to some power of the size (with earthquakes it's the 3/2 power, which curiously is the same power as the one used to determine the time that planets take to go around the sun: the square root of the cube of the size of the orbit). Similarly, fender benders are common, while sixty-car fatal pileups are rare. But they both happen....Large accidents, while rare, are normal. Efforts to prevent them always fail."

Describing nine climbers falling on Mt. Hood in 2002, with three fatalities, Gonzales says, "Like the sand pile, the system the climbers used was poised at the edge of chaos, in a state of criticality."

The edge of chaos, in a state of criticality...pretty much sums it up, it seems.

Describing nine climbers falling on Mt. Hood in 2002, with three fatalities, Gonzales says, "Like the sand pile, the system the climbers used was poised at the edge of chaos, in a state of criticality."

The performance of the system depends on the edge of chaos, on the state of criticality. John Robb has some posts on it at global guerrillas. Some modern aircraft can't fly without constant feedback and correction; they are unstable. But in a world of energy decline, we need stability more than ever, because things will start failing all over. Operating on the edge makes every failure a bigger deal than it would seem otherwise to be. It makes the network more unstable and creates further cascades of failure - snowball.

cfm in Gray, ME

So our economy is like a forward-swept wing aircraft being flown by a blind imbecile.

Sounds about right ...

Redundancy in a networked system only remains if you aware of the 1st problem that occurs, and fix it before more occur. When I used to troubleshoot on a poorly managed campus sized network that ran allsorts from thicknet to ATM technologies [and gateways to proprietry mainframe systems, routed links to other sites etc], it was not the 1st problem that would break the system ,but the most recent. There would be many weaknesses, non-standard specs, poor firmware etc. Because these where chronic issues, the redundancy/error correction is stretched to its limit before another problem arrives and kicks it over..

You rarely get agreement to fiddle with a critical system that is somewhat working, just to try to investigate improvement.

"You rarely get agreement to fiddle with a critical system that is somewhat working, just to try to investigate improvement."

Add to this:

"In summary: The ability to measure and monitor the system gives us the capacity to avoid small avalanches in individual areas. However, if we keep adding load without adding capacity we overload the entire network and thus make an all-encompassing avalanche inevitable.

If we can’t add capacity, then it would have been better to allow a series of small avalanches."

We must start with a Secretary of Controlled Burns. As in forest fires
which are very similar to the sandpile arguements.

Instead of spending all resources to keep the system intact, controlled burns must be done thru out any system. Regularly. In fact, the system most neglected, or kept running non stop, will be the one most likely to fail.

You rarely get agreement to fiddle with a critical system that is somewhat working, just to try to investigate improvement.

Thanks, this is a point I should make more often.

I rephrase a concept I've come up with about how complex systems crash its closely related to Nates post. I believe that complexity can actually be measured as the ability to compute that is take a input or multiple inputs and produce different outputs. Thus the heart of what we call a complex system is the self assembly of some sort of simple processor. Nates paper covers the network the concept of computational capability covers the nodes. Once a system has enough parts its capable of performing some sort of computation.

To give you and idea what I mean by this consider a simple case of rugged terrain and rain and snow. Erosion actually preforms a interesting calculation as water flows down hill it seeks the lowest energy state. This is what I mean by computation it need not be some sort of fancy AI but even in this simple case we can identify a wide range of mathemantical truths literally computed and modeled in the earth. Fractals, Simulated annealing, chaotic weather etc.

Computation takes place and the system is no longer simple. We use these concepts to create computers to generate computations that have answers. In general these answers are considered correct or the truth but there exists another side to complexity that often ignored.

Complex systems lie. By lying I mean that if you take the basic physical inputs and state of the system and try to predict its future evolution you repeatedly are fooled.
In my simply example of erosion boulders sit on the side of a mountain for thousands of years before suddenly rolling downhill one day. Trying to predict when any particular boulder will roll downhill using any measurable physical value is literally a waste of time. Even this simple system becomes unpredictable based on measuring any of the inputs. Thus computation and complexity generates a sort of self uncertainty principle.

The next step is say to consider such a system under stress say a earthquake hitting a mountain. The earthquake tends to obviously shake out any unstable parts of the system sending the rocks rolling downhill. We cannot predict which rocks of course but timing is not and issue with the forcing. In a sense the lies are exposed but also new lies are created as the earthquake shakes loose the most unstable rocks it moves and unknown number to the edge of stability. And after the transition we end in another different state with unknown stability. In fact we have less information than before since well known boulders have shifted positions any information we collected about the stability of the system before is worthless.

As you can see complex systems esp ones that are stressed are capable of major changes in their internal state that we barely have the mathematical tools to understand much less predict.

And a fairly complex node into the system called a human who is capable of using this uncertainty and expanding it through the use of traditional lies and misinformation and you get a really interesting complex system.

But the major point is these networks are intrinsically capable of presenting a false front or lie if you will. For example if you live in a wealthy neighborhood its almost impossible to predict who is the "fake" money and who is real using traditional measures many of your wealthy neighbors can be at the brink of bankruptcy.

Moving on out into our economic system you can now see that as we stress the system esp given humans are involved the system will intrinsically provide a tremendous amount of false information or lies. Since in general for people who profited from the current configuration of the system are in control we can expect the lies to be amplified by the leadership as they struggle to maintain a false front that nothing has changed keep supporting us. Unstoppable force meets immovable wall.

Looking at oil for example the tar sands, all liquids etc etc are touted as saviours of our world replacing light sweet oil. The reality is tar is tar we can't turn tar into light sweet crude no more than we can turn water into wine. Sure we can do the chemistry in this case but tar is not light sweet we paid a price somewhere and the system is complex enough that no one can actually be sure what the real price is.
The environmental destruction alone will have long lasting and unmeasurable consequences.

I think its important for people to understand this as our system collapses its natural its how things work. The only way out of course is to recognize this and stand above it. In the case of erosion for example we recognized the problem of erosion and certain farming practices and changed ( After the dust bowl ). But we did change. Every once and a while humans do the right thing. In this particular case the other choice was starvation and we had already paid a terrible price for our stupidity.

But it does show that we are capable of bending and learning and living with a complex system we cannot change. We have this same capability today. All we need to do is recognize we live on a finite world and just like erosion we must change and learn to live with the forces of nature.

Will we do it collectively ?

I doubt it with our current leadership and I don't have high hopes for any of the members of the political machine we have developed for the old system. Given what I've said what I see is our system is now amplifying the uncertainty and attempting to use it to achieve dreams of wealth and power that where goals under our old system.

The government in conjunction with the most powerful banks who create this mess has given them extraordinary power that they could have only dreamed of before. The banks that are left are certain that when the dust settles they will rule the world. Riches beyond imagination will be theres. Thats what our leaders are after needless to say they are playing the wrong game and fighting the wrong war.

On the other side of the coin as the powerful fight to rule the world we see our markets become chaotic and fearful. They are no longer looking forward since the cannot see the futures. In particular the oil futures markets has been reduced to work like the future month market its now incapable of acting as any sort of predictor of future prices. Nobody knows the future right and the least capable predictor at the moment for oil is the oils futures market. If you want to know what the price of oil will be your best bet is to watch the spot market.

Given my model we already know some things about the future as others think its still uncertain. Oil production will drop off rapidly from here on out the repercussions of this one even will reverberate for decades. Projects will be halted and not started.
This combined with depletion makes it certain that future oil production will be less than today.

One the demand side modern man requires food, clothing, shelter, and oil. And the population is growing every day. Its a safe bet that these two situation are going to result in difficult times. It could be in weeks or months at most as I predict or years as other predict but we know for a fact that our current economic crisis has set in motion a near 100% certainty of a serious energy crises in our near future.

Because of the reasons you give it is futile to try to give hard-and-fast explicit predictions of the timing of catestrophic events. One of the smartest men I've ever known saw peak oil coming in 1949 and bought a Crosly car to get a high-mileage vehicle.

My view of the world is that we are most likely in for Leanan's "slow squeeze," but of course with complexity and chaos TEOTWAWKI could be next year or could be a dozen years from now.

I'm just fascinated by how this happens. I actually thing the slow squeeze argument is one that has the lowest chance of happening and same with TEOTWAWKI.

Another aspect of this complexity is that despite the seeming failure of the system its not really failing complex systems by definition cannot fail. The can reorganize and simply to the point that they are no-longer complex or they can change. A no-longer complex event would be not just TEOTWAWKI but something like full scale nuclear war or rapid global warming i.e we can trigger and real extinction event. So for the human species and many others a real end of the world.

The other outcome is not TEOTWAWKI in the sense most people think since the complexity level of the system remains the same but its radically different.

What you will not get if I'm right is your slow squeeze this outcome is impossible.
Extinction is probable but irrelevant in the sense that if it happens then its just a tree falling in the forest with no one the hear it.

Thus the real answer or the outcome we should expect is that the system will remain as complex as it is today but with surprising rearrangements and changes. My example of boulders and mountains and a earthquake resulted in just as complex of a system but a different arrangement. For every connection broken in our current system a new one is formed. This makes sense since the overall levels up inputs or participants in the system has not changed all that much its just their relationships.

Your seeing this is a slow squeeze I disagree on the input side from the big picture if you will I agree the real economy i.e the energy using economy is changing slowly and will continue to change slowly by most metrics. But large scale moves are still possible.

Think of it as rearranging the deck chairs on the titanic. I think your seeing the titanic slowly sinking and not really thinking about the frenetic efforts to rearrange the deck chairs and the outcome of these efforts. Unlike the titanic the movement of the deckchair of the economy can and will cause large scale movements. The network itself ensures that changes will propagate causing other changes. The slow squeeze argument is thus one of the few that can be soundly rejected as being possible.

In fact it only works in the case of a well designed and orderly complex system that can smoothly fold in on itself think about your cheap Chinese umbrella of today and thats a much better example of economy. None of the perquisites for a slow squeeze exist. On the same hand because the total energy of the system is not actually changing all that rapidly outside of if war breaks out the system itself cannot actually collapse suddenly and simplify all it can do is change and change again.

Maybe that is TEOTWAWKI but I doubt it since TEOTWAWKI implies a simpler system and thats not possible. As a simple example the freezing of letters of credit for shipping is causing goods to pile up and turning our JIT into a more robust system as the credit system starts working again for needed goods we will see more stockpiles formed. Thus as change continues the system will also change to become a bit more robust. Smart people will seek local suppliers and start shortening their chain Maybe:)

But this is really nothing different from the traditional problems people face when at war they keep going forward towards their goal even as changes happen radically all around them. I'm using war here in the logistic sense i.e the actual daily grind of fighting a war. Thats the sort of situation thats unfolding as long as the supplies last. Not exactly the slow squeeze I think your thinking of although from the big picture yes its a slow squeeze. For us in the trenches its a violent bloody set of changes with localized extinction events thats not a squeeze.

I was on the phone with two farmers somewhat geographically near to me today about buying commodity products from them directly. I told them to make sure they quote me their actual cost to produce and not what some spot price is on some trading board. We are interested in stability and keeping them in business, not the cheapest food possible in the short term.

We are going to arrange for pick up and local storage facilities. Instead of selling us 25 lb bags of rice, for example, we will purchase 2000 lb bags of rice and store them. Perhaps this will lead to buying several tons at a time as new storage facilities are developed.

I don't trust JIT and will be a bit anxious up until the day a large stockpile of food exists where most people can walk to it. Then I will want a large number of farms that I can walk to being the inputs to that stockpile.

But geeze, this takes a long time to do and it is not like the full force of government is here to help make it happen. Instead, they just spent $40 million on planning for new road construction in order to prop up the JIT system, all the while smirking at any discussion of peak oil.


You are correct; I am looking at things from a macro point of view. Note that TE0WOTAKI has happened several times in the twentieth century in various places--e.g. the German hyperinflation of 1923 caused the impovrishment of its hard-saving middle class and also weakened the upper class. The individual Japanese saw TEOTWAWKI when the Japanese surrendered in 1945.

For those individuals who have now lost their good jobs in the U.S. economy, some of those people will never have a good job again. Their comfortable middle-class lives have ended. They will exist on handouts and menial jobs--extreme and abrupt downward social mobility.
The Panics of 1893 and 1907 put an end to the Gilded age in the U.S.


The macro economic view is a slow squeeze with these various disruptions or micro TEOTWAWKI events.

Given that people are ready and willing to accept a infinite amount of money in the form of Government bailouts regardless of the moral hazard or long term implications. These micro events probably will not turn into a macro collapse over the short term.

Now a bit of predicting the unpredictable.

We have a tremendous amount of long term debt to unwind. I suspect that almost all the money thats going into the economy and not being held by the banks is coming as short term loans at a high interest rate. Loan Sharks make money even in the most depressed economies. This goes along well with what Gail is saying. What this will do is restart business but at increasingly ruinous short term interest rates as business's default anyway. The large gap between short term rates and long term rates will widen and long term borrowing will simply cease regardless of what the Government does.

The more money they shovel into the system the higher the short term default rate and the higher the interest.

Now whats interesting esp for commodities that have a futures market is this natural move if I'm right is going to effectively leave the futures markets abandoned people are going to buy at spot prices as needed at the best credit rate they can get.

Thus supplies esp of consumables are going to change rapidly as shortages develop. Stuff won't ship until people get cash up front which means the buyer has to arrange short term financing. The buyer won't commit until a shortage develops and prices move. Futures markets won't move since its spot shortages that are developing often not even reported. So we are now talking about major price swings in everything not just oil and food. Volatile is the new norm. Obviously this will also cause oversupply in areas that are not actually constrained by fundamentals so companies will seriously misjudge leading to defaults.

We have no real cash so the system cannot stabilize. The new real high interest rates result in money disappearing into the banking system to shore up balance sheets.
This gets to the heart of the matter interest payments now nolonger result in expanding the money supply and the won't forever. The banks go back to the Central banks for loans at zero percent. Then loan short term at high rates and pocket the interest effectively forever as far as we are concerned.

This is the cycle I think we will get stuck in its not quite the cash only cycle or sound foundation we would want but given the short duration of the loans it mimics a cash only society with a nasty side effect that real money is constantly being withdrawn. Its draining cash in exchange for ever more expensive short term debt.

Probably the worst way imaginable to collapse a monetary system thus I'm confident its the choice we will make.

Now back to commodities esp oil. Certainly they will be volatile but oil and food and other basics are the only place that these shortages can result in significant price increases i.e its the only place we are assured that the customer will pay esp after facing a shortage. So eventually money will flow into these areas and the customer will pay whatever they have to. Thus very high spot prices will as I said start to happen. For markets with futures this will force participants back into the futures market but they should reignite. From watching I think gold is at that point now physical gold and the spot market prices are significantly over the paper gold prices.
Assuming this is real we expect the paper gold market to eventually be forced higher.
The big difference is of course gold is not food you can't eat it. But you can see the sort of move to spot market type behavior already for gold.

So again from the highest level whats happening is now the banks are a net drain on the economy pulling money out of the system. The open ended lending by the central banks backstopped by the government transfers all outstanding debts over time to the government while on the street commodity prices skyrocket and other goods that are reasonably short term become spottily available with volatile pricing.

Longer term debt is beyond dead housing cars etc simply gone. Companies will be forced to roll ever shorter duration loans and in this volatile climate either failure to pay or failure to secure a loan will cause companies to blow up. These micro TEOTWAWKI's simply reinforce the fear cycle. The corporate bond market will dry up and blow away along of course all types of non federal local and city and state bonds. This will be replaced with revolving expensive short term credit that periodically will stop revolving. A lot used to pay previous outstanding bond issues little of it actually going to government services.

This is what my crystal ball tells me. Of course since the governments are now bankrupt and borrowing to pay interest the whole thing blows up but believe it or not I think it will take a few years to happen. This may sound crazy but everyone in the game is quite willing to look the other way and allow effectively infinite debt to become concentrated in our governments. It literally in the best interests of all the players to allow the Governments to take on debt till the fall.

Implicitly all the players know the game will be up soon so who cares.
I suspect at some point soon the banks will used the increasing loads of interest to start buying up hard assets thats my guess or it will go as loans to a few key player to start making asset sweeps translating this money into hard assets. They may devalue but who cares the money will be worthless soon anyway. I'd not be surprised to see the government bailout these same people to repay the loans as they go negative.
In any case expect lots of interesting things to happen as the richest and most powerful people try to convert money to assets at the cheapest possible rate pennies on the dollar since they know the assets themselves will still lose most of their value. For example they buy a company for 10 cents on the dollar but they know its only worth 1 cent or less the value of the scrap iron from the structures and land for agriculture.
And around it goes for a few years then ..

And thus ends the 20th century.

Just a couple of observations.

First, in my opinion the price of physical gold will fall to match the price of paper gold. If we are going into a deflationary depression (to which I give a 50% probability), the price of physical gold could easily decline to $200 an ounce or lower.

Second, given complexity and chaos there is just no way to predict the future and have any confidence at all that you will be correct. Our whole way of life could be over by Christmas if there is a major "landslide." On the other hand, business pretty much as usual could continue for another ten years or so. I don't think it can go much beyond ten years, however, because of declining net oil exports.

The way I deal with uncertainty is with a thought experiment. Suppose I don't know whether we are going to have inflation or deflation over the next ten years. What do I do in the presence of this uncertainty? Assume that there is a 50% of inflation and a 50% chance of deflation. Act accordingly. This principle can be applied to a whole philosophy of life: I try to act as if there were a 50% chance of dying tomorrow and a 50% chance of living to age 90 with my brain still functioning and my body still walking around (albeit with a cane). Just accept the uncertainty and plan for both extreme contingencies. Otherwise, one tends to worry fruitlessly about uncertainty.

This is really brilliant.
The way it expands the thesis laterally is insightful, instructive, and useful.

We have no "System Admin" for our network of networks, so we end up with competing fiefdoms that can operate at cross purposes with perfect opacity.

One can imagine that PO is both exacerbated by a financial crash that deprives the industry of capital, and temporarily ameliorated from the US perspective if the low oil price allows Iran to be crushed.

As far as "...facilities that are working at capacity will not “crash” if demand exceeds the capacity, they will simply continue working at capacity," remember that when the US Mint started receiving large increases in orders for its gold and silver Eagles, it simply stopped selling them. IOW, there was a "circuit breaker" tucked into their system about which we could not have known until it was tripped. How many others are there like the NYSE "halts" that we already know about?

This post is one of my favorite on TOD. Thanks for re-running it.

It makes me think of water systems and such ideas as the hydraulic theory of civilization:

Centralized capture and distribution of water requires centralized authority and management, which tends to be highly efficient. Farmers and households become dependent on cheap water and expand accordingly until the system is at its capacity limits. Because the centralized system is so cheap, pre-existing alternatives (e.g., point-of-use wells and cisterns) are dismantled or left to rot.

But eventually something happens to undermine the reliability of the centralized system. Perhaps maintenance is neglected, a natural disaster occurs, climate changes reduce inflow to reservoirs, or warfare leads to breakdowns in infrastructure.

What comes next is a scramble to decentralize, add small-scale, point of use redundancy into the system. But the central authorities may see this as a threat. If people are investing in their own supplies it competes for the pool of investment needed to repair and expand the centralized system. Will the authorities recognize the value of redundancy and encourage it, or fight it and risk having everyone reliant on a single system?

All these dynamics have played out in various ways in various places and right now are happening where I live.

I played Monopoly a lot as a kid and we messed around with the rules. It seems that most of what we see occurring can be modeled with the game. One of most interesting ideas we had was, "Where did the money come from that the bank had?" This led us to the federal reserve system, and we had all sorts of bail outs. We never quit the game because it would be in the middle of a snow storm and there was nothing else to do, but the whole exercise got to be rather meaningless, as it was just this worthless money floating around, while everybody was holed up in New York or Marvin Gardens.
Two books that seem to apply are, Environment, Power & Society by H.T. Odum and Survival of the Wisest by Salk

Just a peripheral thought here.

Don't all these economists (governmental, academic, and otherwise) use computers running sophisticated modeling programs to predict probable consequences of economic events and conditions? These conditions and events would include both real ones taking place in the present time, and theoretical ones in the form of "what if" scenarios. In other words, "If we take a certain action the consequences would probably be what?"

Call it computer assisted precognitive financial radar.

So, if those modeling programs were much good then the current crisis would not have come as such a surprise to those who make it their business to know such things.

Demonstrably, that's not what happened. Events surprised the hell out of them, and continue to do so on a near daily basis.

The flaw could not have been hardware or software, because the systems did run. It's just that they kicked out wrong answers... or no answers at all. So it was a program design thing. They either programed in faulty assumptions or failed to address the right questions or call for the right data inputs. Probably a combination of all three.

The point is this:

A pilot can take off, fly and land just fine if his instruments work, and he has the faith to believe in them. But if either (or both) of those conditions are not true then a crash is inevitable. You can't fly blind for very long.

I think this is happening. How can economists/governments have faith in their "computer assisted precognitive financial radar" when it is so obviously NOT WORKING?

And without their radar how can they fly the economy? If they are not terrified then they should be. They are flying blind.

Sophisticated models? No. Complex models? Yes.

Someone starts with the efficient market hypothesis, and a tacit assumption that the economy is an ergodic system, and uses past price and sales volume of a series of corporate debenture to "correctly price" a Credit Default Swap.

However, sophistication would include respect for some historically grounded conclusions:

1. Capital markets are very efficient under normal conditions, but not under Panic conditions.

2. Unregulated capital markets always hit a Panic sooner or later.

3. The economy is not an ergodic system.

Ergo, the "correct price" of the CDS is not valid in the case of a financial panic, and the amplification of exposure to the risk of a corporate debenture default by issuing CDS liabilities exceeding the total exposure of the corporate debentures themselves is an incremental step in the direction of financial fragility.

So the more CDS's are written, the more likely it will be that the computed price will be catastrophically flawed.

"Sophisticated" in this case is a marketing phrase, not a description ... more descriptive would be "complex naive models".

The assumption is that the interdependent nodes are networked together for mutual benefit. There are winners and losers but in general the network grows, there are even 'sysadmins' who reassure us that all is well, or will be well.

We see now though that there is a Shadow Network, a parasitic subnet which has tendrils in all the major nodes. This ShadowNet has its own command and control systems and is actively feeding, for only it's own benefit.

When our network is no longer of any use it, or major parts of it, will be discarded, leaving the parasite with vast stored resources with which to survive.

Our network diagnostics are useless, we only need consider how vultures fight over a carcass.

A systemics failure model, which is very insightful.

There are two major parts here in the US that are not addressed: the behavior of the people and the health care system which has long been a sacred cow. Any speculation on how those two will react?

Though I write for the car business, my area of expertise centers around psychology/sociology/group dynamics.

Though I'm a new member, I've been reading The Oil Drum for a number of months.
Kudos to you all.

How robust are your pension systems?

Our pension systems are not robust at all. My own pension comes from the Minnesota Teachers' Retirement association, and it is underfunded since stocks started to go down a few years ago. I hope it does not have much in the way of Mortgage-Backed Securities, but I do not know. My inflation adjustment is limited to two and a half percent per year. At least Social Security is giving me a 5.8% cost-of-living adjustment.

Most pension plans are in much worse shape than mine is. It is a good thing that I have children to take care of me when I become old and feeble and it costs $100 to buy a loaf of bread.

"It is a good thing that I have children to take care of me when I become old and feeble and it costs $100 to buy a loaf of bread."

So the moral of yoyur story is have lots of children.

Yes, it is in my self-interest to have lots of children. Also it is in society's best interest, because the more smart, well-educated and healthy people we have working, the better. Who do you think is going to pay for your retirement (assuming Social Security still exists when you retire)? My children and grandchildren, that is who.

And to whom will you pass on your soup-making skills and your philosophy of life? To your daughters and sons, assuming that you have some.

In the U.S. the quality of the population is just as threatening as the increasing quantity of people. Women with a college degree average one child each. Women with a master's degree average about half a child each, and for Ph.D. women the number is even lower. High-school dropout women average several children each, and the younger they drop out, the more kids they have. I know it is politically incorrect to talk about the problem of dysgenic breeding, but I don't give a flying fig for political correctness.

Also it is in society's best interest, because the more smart, well-educated and healthy people we have working, the better. Who do you think is going to pay for your retirement (assuming Social Security still exists when you retire)?

But, but, but...irrespective of the political correctness angle, that still seems like an unsustainable Ponzi scheme. And I don't mean "unsustainable" in the customary ridiculous cutesy academic 'we know everything there is to know so we can plan now for all of eternity' sense, I mean it in a more immediate "during the lifetimes of said grandchildren" sense.

Women with a college degree average one child each. Women with a master's degree average about half a child each, and for Ph.D. women the number is even lower. High-school dropout women average several children each, and the younger they drop out, the more kids they have. I know it is politically incorrect to talk about the problem of dysgenic breeding, but I don't give a flying fig for political correctness.

The interesting point to me, in what you've stated, is the question of what kind of localized societies will rise from the ashes when all is said and done.

Study after study have shown that the more empowered women are in a given society, the less children are born. The examples you noted dovetail perfectly with that. Younger, less educated women who have very little control over their lives are baby factories, while women more able to guide their own destinies opt to have far fewer offspring.

Will the post-collapse societies around the globe require a large number of children to man the fields? What will that mean for women's rights, etc.?

This probably isn't very relevant to the current discussion, but it just came to mind. I guess it behooves us all to start speculating about the nuts and bolts about how our local societies will function once the globalization model is no longer viable.

Agricultural societies tend to be heavily patriarchal with a low status for women. They also, at least in lands dominated by Christianity and Islam, tend to worship a single patriarchal God. If we go back to agriculture as the basis for our economy, then the prospects for the education and empowerment of women is bleak. Freedom for women seems to have post-industrial society as a prerequisite.

In hunting and gathering societies the status of women is relatively high, because they have a lot of freedom, and they contribute more to the food supply (in terms of calories) than the men do. How do men control women when they are a mile or two from home gathering berries and tubers and whatever? Answer: you can't.

The typical agricultural society keeps women at home as baby factories.

I completely agree. The fact that the advent and aftermath of PO will probably have a catastrophic effect on women's rights all around the globe is a topic that I haven't seen broached anywhere yet.

I can scarcely imagine how westernized women who are used to daily jaunts to the mall will react to being little more than chattel property.

If we go back to agriculture as the basis for our economy, then the prospects for the education and empowerment of women is bleak.

If we go back to traditional forms of agriculture, the future is bleak for everyone. I am surprised people discuss the issues before us and take them seriously, but ignore those that will determine whether you live or die, let alone society.

I mean to say, even a cursory overview of natural farming techniques disproves your basic thesis: farming equals slavery for everyone, but especially women. It is an absolutely false assumption that is based on the assumption that permaculture, natural farming, et al. are just fairy tales. They are not. If anything, they take far less time and effort than traditional methods and will unburden practitioners of some of the load. Consider the many hours not spent tilling, for example.

In the end, if the changes we eventually go through do not include more intelligent and eco-friendly forms of food production, we are wasting our time. And if our assessments of the future don't start including new realities rather than bogus prejudices and assumptions, it's going to be very difficult to make the transition.

Farming need not equal bondage to the land.


It is a good thing that I have children to take care of me when I become old and feeble and it costs $100 to buy a loaf of bread.

I have Gen Y Kids in their 20s.

Based on what I see from this generation I do NOT expect any support from them in my old age.

The classic short story "The Machine Stops" by E.M. Forster (1909) is a great parable for our time. A future globalized society becomes dependent upon a distribution network for basic goods and communications all powered by a reactor in France.

Read about how the people react as the machine starts not to work so well anymore:

If the financial system is analogous to a pile of sand, then the tax cuts for the wealthy that have been the mantra of the Reagan "Revolution" have served to pile the income onto the top of the financial sand pile.

As more and more income and wealth accumulates at the top and less financial sand accrues nearer the base, the financial sand pile becomes ever more unstable.

As some point which appears to have been reached the weight of the ever increasing financial sand at the top causes the pile to collapse. IMO this happens since the concentrated wealth at the top is forced to lend to the ever smaller financial base of the pile in order to earn a return.

It only takes a few defaults near the bottom of the financial sand pile to bring the whole edifice down to a sustainable angle of repose.

Clearly this analogy, if it is valid, implies that the amount of financial sand is still the same. All that has happened is that the top of the financial sand pile has been redistributed nearer the bottom. If this is the case those nearer the bottom should not be as upset by the collapse as those near the peak of income/wealth distribution since they have less distance to fall to reach a stable situation.

However, those nearer the top, will experience a dramatic decline in income/wealth before reaching a stable location in the pile. Some may fall all the way to the very bottom of the base.

Few analogies are completely true since analogy is a weak form of argument unless the things compared are very much alike, but this one does shed some light on what may be happening.

The sand pile is a beautiful example, but not a perfect analogy.
For one, avalanches occur on the surface, not within the sand pile.
For another, our economic system trickles up, not down.
Money and power concentrate at the top, not the bottom.
In a crisis, the middle gets bashed, and the lower slide into misery.
When the lower become unruly, some of the middle take control of the
insurrection, the upper gets whupped and concessions are made toward
the lower and the middle, and the cycle recycles.
Except that this time around, there are too many people eating off
the same cabbage patch.
I think a glitch is coming, and I am certain that it will involve
a huge die-off. I am scared to think how it will come to pass.
We have a history of attaching weird and interesting narratives
to our conflicts of interest.

"The Internet Protocol was originally designed to be a robust, reliable, redundant system. How does one piece of software on one machine bring down a network with thousands of nodes?

The answer is easy: Cost efficiencies."

I am a network engineer. The answer is that you have an awful IT Manager and a poor Network Architect. There is a lot of affordable ways to build a very redundant and robust Network infrastructure. The rest of the post is interesting, but to be honest, it is a very bad kick off.

I think you're missing part of the point. No matter how many affordable ways there might be to build redundancies and robustness, there will be many more Bean Counters getting raises, or at least honorable mentions, for saving another 0.1¢ by pressing the system to - or through - the wall. That sort of race to the bottom scales indefinitely no matter who the technical people might be. The system would still be overloaded to the edge of chaos even if a top-notch router cost just $1...

And the people who can build a robust network relatively frugally are not necessarily as cheap as the ones who can put on together that works "under normal conditions" at least cost.

I agree.

The problem was eventually traced to a problem with one piece of software on one machine on our intranet. The software drivers for the network interface card on one machine were corrupt.

Unless it's a very small company this type of failure lasting a few days just shouldn't occur. If there's a dedicated systems and/or network manager then they are not doing their job.

Modern switched ethernet networks are cheap and can easily be configured with a certain amount of redundancy (although this was not the problem this time) at almost no extra cost - just a few more cross connections. In addition any decent network technician should have been able to isolate the problem in a few seconds by looking at switch traffic and shut down the offending port instantly.

If it's a very small company with no dedicated network technicians then consider getting a networking company in to advise on what you can do to reduce the risk of further multiple day outages in the future.

Btw, in a summary of the external/internal network interconnects at a UK university, some equipment was marked as (say) "redundant router". The head librarian (a bean counter) asked why the university just didn't sell all the equipment if it was multiply redundant...

Another great article on TOD. It is so refreshing to see a group of highly intelligent people coming together to discuss important issues overlooked by nearly everyone else. I only wish the world were run by the people here. Perhaps after the crash we will at least partially return to management based on logic and foresight.

A thesis similar to the one in this essay was given by Taleb and Mandelbrot in this recent interview:

PAUL SOLMAN: In the book, Taleb wrote, "The increased concentration among banks seems to have the effect of making financial crises less likely. But when they happen, they are more global in scale and hit us very hard. True, we now have fewer failures, but, when they occur, I shiver at the thought."

NASSIM NICHOLAS TALEB: The banking system, the way we have it, is a monstrous giant built on feet of clay. And if that topples, we're gone.

Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding of its properties.

PAUL SOLMAN: But there's been complexity before. There has been overextension of credit before. We've had crashes in American history many times before. We're a resilient system. Won't we pull out of it?

NASSIM NICHOLAS TALEB: Let me tell you why it's not like before. Look at what's happening. The world is getting so fragile that a small shortage of oil -- small -- can lead to the price going from $25 to $150.

PAUL SOLMAN: A barrel.

NASSIM NICHOLAS TALEB: A barrel. A small excess demand in an agricultural product can lead to an explosion in price.

We live in a world that is way too complicated for our traditional economic structure. It's not as resilient as it used to be. We don't have slack. It's over-optimized.

PAUL SOLMAN: What do you mean by "over-optimized"?

NASSIM NICHOLAS TALEB: Let me tell you what is happening in the ecology of the banking system. They're swelling to large banks, OK, because it's vastly more optimal to have one large bank than 10 small banks. It's more efficient.

This was a brilliant post by Nate - and a worthy discussion to follow it. I am impressed and grateful.

Thanks everyone.

Interesting analogy. To push it maybe too far:

How do you know when an area of the financial sand pile has turned red? You need visible failure i.e. bankruptcy or Ch11.

What do you do when an area turns red? Stop putting on more sand i.e. cut investment in that area.

How do firms stop themselves turning red? Insurance.

So it's insurance that spreads the overload and binds small red failures into large red catastrophes.

Moral: If you take on an investment, you must be forced to take on the risk as well, or at least enough of the risk to hurt you, so that you will be prudent in investing.

What you have described there Big Gav is exactly what caused the US telephone collapse in the 80's (I think the 80's), where one line of code in a router overload handling routine terminated with an END command rather than initiating a pass it along routine. As the command was only seen in an extreme overload situation the system ran successfully for some time before the triggering situation occurred. The end result was a rolling shut down that took 5 days to fix. A similar fallover occurred with the US power failure where an electronic gate disc in Canada collapsed and created a power surge that shut down a huge chunk of the US north eastern power grid.

This is my concern for the internet access to software served from remote locations. For me, I need to have sufficient software and data to be individually productive when internet connection is unavailable. In my business I have programs and data independently available in multiple locations.

That failure was brought to us by our old friends at Swigital Ditch in Plano. Later part of Alcatel. Then Alcatel-Lucent. Mostly gone now.

Times will be interesting for telecom services in an era of relocalization.

Actually (making sure credit goes where it is due) its aeldric's (David Clarke's) article - not mine.

Having worked insurance forever, it is pretty clear to me that insurance or the appearance of insurance, papers over a lot of problems. We have a number of bond insurance companies. Many of them have gotten into financial difficulty. I expect the situation to get worse. I think people expecting bond insurance to actually provide protection are kidding themselves.

We also have the FDIC, and the Pension Benefit Guarantee Corporation. Neither of them have much actual money to back up their insurance. The will depend on the government issuing more debt to pay their claims. The equivalent programs in almost every other country have the same problems.

Credit Default Swaps (CDS) are another form of insurance. This is a big part of what got AIG into trouble. More supposed insurance, that the government is now trying to prop up.

The government is trying to bail all this "insurance" out. In a world with continually escalating defaults, at least in part because of peak oil, this can't work.

Credit Default Swaps (CDS) are another form of insurance.

... except the majority of CDS, legally, aren't insurance. You must have an insurable interest to obtain insurance ... the majority of Credit Default Swaps are naked swaps, issued to those playing speculative games or looking for indirect hedges.

It was naked swaps that were explicitly ruled out of regulation in Phil Gramm's deregulation law (the famous one that set up the Enron loophole).

The availability of CDS at a lower cost than insurance, and for things you could not normally insure against, was rationalized in all sorts of ways. But in reality, regulated insurers had to meet standard on how they managed their portfolios against their risk exposure, and those selling CDS did not. Without having to have prudential reserves, they could offer the "cover" more cheaply ... at the hidden cost of far higher counterparty default risk.

Several years ago, sweet light crude oil started getting a bit more difficult to obtain. In response, we stopped talking about “oil” and started talking about “liquids”.

I think this is an important issue: Too many people still keep clinging desperately to the sinking ship instead of looking for more sustainable solutions.
Our valuable money is being spent to drill, drill, drill out the last remainders of the traditional fuels - and no one notes how the EROEI is going down (I am still waiting for the big message running through all media announcing a suprisingly huge amount of oil - according to seismical data in complex a two miles deep pre-salt oil shale formation in the deep sea off the Antarctica coast...)
All the time and money lost on this desperate battleground will be missing for developing really sustainable energy sources and resource efficiency.

If our ancestors would have been as conservative clutching to the old technology of horse-drawn carriages and kept listening to the coachmen lobby they'd had a hard time to get ahead from this prototype:

Trevithick's steam car

The thesis seems to be that the utilisation of globally intertwined networks - economic/credit, oil, food, etc. have exceeded capacity - or at least run up towards capacity - and that a failure in one or the other is mainfesting the current meltdown in various systems. This phenomena applies to traditional systems, characterised by specialisation of effort and allocation of resources to the best economic return. This has given us the mass market, mass production, mass distribution, etc. Networks operate on sources and sinks, and the sinks of our mass market economy include the burgeoning land fills, houses too big for practical use, multiple cars for a driver/family, goods that get bought and never get used, excessive travel, excessive green house gases, obesity, etc. As the traditional system has broken down due to exceeding capacity, it is naturally righting itself as personal consumption declines to what is necessary vs what is wanted, driving prices down including oil, transport, food, media, etc. Prices will continue to drop, and we will see dramatic job losses as companies and individuals shed not only their consumption, but their fixed costs of production.

The traditional system has been failing for some time, and the "new" economy or "alternative" lifestylers have been forging a new way of managing as they foresee declining resources and increasing costs. A key driver has been a revolution in another traditional system not mentioned in this discussion as yet - the system of communication and media. The world's most powerful and enduring brands largely came into being with the advent of television. This media rewarded the largest early adopters and their brands - which still represent the most profitable elements of their brand portfolios. A few years ago it was estimated that $1billion was required to launch a new brand nationally in the US. The scale and control of television, radio and print media created a massive entry barrier. The internet has of course changed all that. With unlimited capacity, the internet has allowed producers and consumers direct access to each other at minimal costs, and the enablers such as ebay, social networking sites like utube, fedx and others have facilitated an accelerating uptake. Decreasing costs and increasing portability of devices (PCs, mobile phones, ipods, etc.) also enable this revolution.

This new communication system is in turn helping to foster the rise of the "new" economy that undermines traditional systems of specialisation and mass market distribution. The rise of craftsmen in areas such as gardening, clothing and toy design, car and furniture refurbishment are impacting the businesses based on traditional mass market mechanisms, just as the "new" media of the internet is decimating traditional media channels. How long will it be before solar and wind power undermine mass distribution of electricity and vehicle fuels?

We are likely to see a redistribution of mass to local market economies, and while we call this a "new" or sustainable economy it will just be a pendulum swing back to where we came from. I suspect we will not need to swing too far back before the current melt down corrects, and personal consumption comes into balance with system capacities and costs.

With the internet, as long as it remains relatively free and open, hopefully we will become permanently less reliant on the global systems that have so dramatically failed, but I suspect we have a lot of pain before we arrive at a new equalibrium.

We have to keep electricity going to keep the internet going. At this point, electricity in the form we have it today is not a given. It is part of our whole networked society. This is an obstacle we will have to deal with--hopefully we will be successful.

Definitely-OTOH look at the electricity situation in a "growth" economy like India-they will be lucky to pull through the next 20 years, so in this regard NA is doing OK.

many high-speed instability/crash situations have long been visible in computing and communications.

1) Computing: quite often, one can add usage to a system, and response time may degrade only slightly, up the the point where some tipping-point gets crossed, and the system performance either develops wild oscillations or "falls off the cliff". One can see this even in deskop PCs when memory usage gets high enough, but it's been seen for at least 4 decades in bigger systems.

2) Communications (telephony): "The Boston Astrologer Syndrome".
This dates from the 1960s or earlier, before the existence of automatic "choke networks."

In the old days, if you had a radio/TV show, and wanted to have people call in, you were supposed to contact the phone company well beforehand, because if too many people were all calling the same number:

- each attempted call would tie up resources (switches, trunk lines) along the path to the desired number.
- each person would end up getting a "slow busy" signal, but meanwhile, tieing up gear, thus affecting other people, to the point that one couldn't even do a local call.
- phone networks tended to be hierarchical, and in New England, everything eventually homed on Boston.

Supposedly, an astrologer in Boston blurted out the station call-in number ... and within 30 seconds, the telephone system in New England was *down*.

Llater, "Choke networks" were used to quickly give "fast busy" signals to calls heading in the direction of a congested area of the net, i.e., they cut calls off before they tied up much equipment.

This was in the long-ago days when one company in US (Bell System) essentially did most of the network engineering and was pretty serious about service quality measures, busy-hour analysis, etc.

Of course, packet-switched systems (like the Internet) fix the circuit-switch problems, but then have ones of their own.

Google: Victoria's secret webcast OR
webcast superbowl overload

There are surge-times when you don't want to live anywhere near the wrong server farm.

You are missing the point here. The Bush Administration was the "controlled burn." The financial system might have been good for another decade or two, but by then it would have completely exhausted the resource supplies. To top it off, they crashed the system of overt social control, the world's biggest military. Consider the alternative; We spend the next decade in denial as to where everything is headed, as our economic overlords gained ever more control over the government. Remember the same people who say we shouldn't have to pay taxes, go and borrow as much as possible when we put them in control. What if someone said you didn't really have to pay for your house and could just borrow money on it? Eventually it isn't your house anymore. Same with the government. While we shmucks are spending our tax cuts on new televisions, the rich are buying government bonds. Eventually they would own the government, military and all. Thank George W. Bush for running that train off the track.
Here's an idea. The world's governments are rapidly nationalizing the world's banking system. Rather then a few large private banks, or one monolithic national bank, break the system up and distribute it to all levels of government, with small community banks incorporated for every county and town. Medium sized ones for cities and states and some large national banks as part of the federal government. That way they operate at the level which the profits are generated and feed it back into building the infrastructure of the community. Separate communities then compete to provide the best services for their people and businesses. Poorly run communities would lose population and business.
Remember money is no longer based on an underlaying commodity, but on the tax base of the government which licenses it. Since taxpayers are responsible for maintaining a functioning medium of exchange, than they should get the profits from administering it. There are lots of public functions, roads, schools, courts etc., that work quite well and there is no outcry to privatize them for the simple reason that profits cannot be squeezed out of them readily. Why can banking also be a public function?
A better analogy of a complex system, than a sand pile, would be a convection cycle. The economy is rising assets and precipitating benefits. If nothing precipitates, other than a trickle, you get large storm clouds of marginally productive wealth hanging over a parched economy.

The Bush Administration was the "controlled burn." The financial system might have been good for another decade or two, but by then it would have completely exhausted the resource supplies.

Certainly not ... much of the specifics of the Panic of 2008 were established at the end of the Clinton administration, and the general model was already in place before then ... Bubbles Greenspan was the second most important person in government for quite a long time before Bush came along.

Indeed, the Dot Com crash and rapid reflation (but quite long delay before then end of the employment-recession) is reminiscent in some ways of the relatively small and brief British Panic of 1890 that preceded the Great Panic of 1893-96.

There is no way that the deregulated financial system established in the 90's would go twenty years before a Panic hit. It may be quite a time since the experiencing the instability of that kind of financial system, but at one time that experience was all too common.

Yes, the problem is much larger than the Bush Administration. If Gore had won, he wouldn't have gone to war with Iraq and would have kept a tighter regulatory rein on the markets. The result would have been that the Republicans would still be in control of the legislature, the military industrial complex would further under the sway of far right neo-con, religious fundamentalist influences and the banking system would not have fallen on its face yet, but grown more influential. I hope history will view Bush and co. as more of an inoculation against real fascism, rather than the imminent precursor of it. They failed to make the trains run on time, a la Katrina.

Financial panics are an economic reset button and we needed one before we got to the even larger ledge of total resource depletion, which is where we are headed. Maybe this will be the wake up call, maybe it will be the first stumble in a long trip down. Time will tell.

Yes. The Democrats in US in a more efficient, more competent, more regulatory environment would only grind the planet into a finer grade of gray goo. This is the argument for the fast crash as opposed to the slow burn; it will be easier to pick up the pieces - they will be bigger - after the fast crash. Logically it makes sense. But then when I walk out on the street, I can find no hint of evidence. Easter Island was probably a bi-partisan endeavor.

cfm in Gray, ME

It seems highly likely that the level of median income would have been higher when the recession started, the US balance of trade would be in better shape without a voluntary invasion of Iraq, and infrastructure investment to enable a reduction in exposure to oil prices would have reduced exposure to oil price shocks ...

... but none of that would have prevented a Panic. The "fundamental" that made a Panic inevitable was the wrecking of regulatory authority to prevent a state of financial fragility combined with the disinclination of many regulators, the Fed among them, to intervene and wear the blame for a possible slowdown in GDP expansion. Once we recreated a Gilded Age approach to financial system regulation, we recreated conditions for a Gilded Age style financial panic. The only thing that was in doubt was what would end up being the trigger for the Panic.

And there's no reason to expect Gore would have changed the fundamental Clinton strategy of sacrificing on financial system deregulation to buy the support of "socially liberal" Wall Streeters. Indeed, given his gross pandering on Social Security and a focus on energy and climate change, he might have been even more inclined to pander to Wall Street than Clinton had been.

Here's a little chart I've been following which illustrates the intimate connection between oil and finance. The 3Q08 GDP will be out shortly and will add another red bar, with more to come.

That graph reminds me of this graph, showing differential profits between the oil industry and the rest of the Fortune 500 (and the point at which wars in the middle east start). You could probably do an interesting overlay of republican vs Democrat administrations over it too.

From here.

The Differential Profits graph reminds me of a graph of the returns expected from a mine.

As the mine reaches the end of its life, the returns must rise because investors need to recover their money over a shorter time horizon.

Perhaps the market has anticipated Peak Oil since 2000 already.

According to this graph the world already ended in 1993. The rest of the image is your invisible secret.
Please don't forget to add width="100%" to the image link and / or a weblink to the original image.
(I don't understand why TOD doesn't include support to img in its formatting options.)

Here is a template that works:
a href="" title="dummy"><
img src="" width="100%" alt="dummy" />

(I added line breaks here to disable the code)

I right-click and Copy Image the images, then paste them in Paint. They usually come out full size, and it's easy to alt-tab between the image in Paint and the text in Firefox.

The image looks OK here - in Firefox3 (sharp, full width) and in IE7 (a bit pixelated, but not cut). A screen resolution issue? Try this:


What does the alt="dummy" do?

I read Benoit Mandelbrot's the (mis) Behavior of Markets several years ago ... I think he was fairly prescient in describing risk and market misrepresentation of risk

certainly his book influenced my sense of doom in the market starting in 2006

oh well lots of really bright people NOT associated with free market 'true religion' were saying this.

A. Greenspan was NOT one of us

I see the point of the article, that one part of a system, say a part of the financial system can break down, then cause other parts to follow. However, if you view each of the parts of a system as a collection of spinning wheels, with the speed of each wheel reflective of that parts speed at delivering its service or goods to the whole, then the whole system is composed of a series of interconnected spinning wheels. As one wheel slows or stops spinning, it causes a drag on the other wheels most closely interconnected, and the drag affect spreads outward to other wheels in the whole system.

However, based on the idea of spinning wheels as an apt analogy, once a wheel stops, it attracts attention from those people most affected by its stoppage, and measures are taken by those empowered to do so, to get that wheel spinning again. But, as a stopped wheel begins to slowly spin again the other wheels around it are still being dragged down because the spin rate is so slow.

Yet, in the long run, as long as measures are taken to get the wheels of the financial system spinning again, the entire system will at some juncture begin to move in unison again at a good clip. I think we are beginning to see that happening now, with the news today that real estate sales were up 5% over the same month one year ago.

The problem in the Depression was that measures to get the wheels spinning again were unknown, and thus took many years to get the spin rate up again. History taught us hard lessons in that debacle, so what you see now is quick action being taken almost daily to get the wheels moving again.

Fear not. It might be a downturn, or even a slight recession, but certainly not a depression. Now get in the game and buy super low, and then sell high later and make a killing like I plan to do.

The question is, when is "super low" upon us? DOW 3000? 1000?

It for sure isn't DOW 8000!

What ever happened to those "Dow 36,000" guys anyway ?

Someone call TechCentralStation and ask them how they feel their predictive track record stacks up...

Can I just say that in 100 comments on failure in networked systems "Dryki" is the only one to use the term feedback.

How can you really attempt to understand complex network system failures if you don't concentrate squarely on feedback loops? The critical component in such unexpected failures is not straight interconnections and linear chains of cause and effect - its positive feedback loops and the tipping points where negative loops and damped loops become positive.

A run on a bank (to take a current example) isn't so destructive because confidence is lost. Confidence is lost in financial organisations every day. A run only happens when the market is 'jittery', some trigger event happens, some investor withdraws funds, OTHERS SEE THIS AND ACT SIMILARLY, and the positive feedback loop kicks in to kill the bank.

To stop these large scale network failures you don't need to concentrate on interconnectedness as such - you need to concentrate on positive feedback loops and where/how they develop. Breaking those loops can be sufficient to stabilise the system.

So less chains, more loops.

That's why the systemic risk concentrators and systemic risk amplifiers (CDO's and CDS's) played such a pivotal role. Where ordinary insurance with prudential reserves acts as a buffer, CDS's with exposure many multiples of the asset at risk of default and with no requirement for prudential reserves to cover payment mean that there are massive positive feedback amplifiers in place that did not exist twenty years ago.

Here's some "feedback". A 5 gallon glass carboy - I wanted another because I suspected such things might be getting "scarcer" and having a spare seemed prudent - is now $40 at The Hop Shop. Imported from Italy, of course. All I wanted to do was put up some hard cider - a 300 year New England staple.

Think of the intervening chains - letters of credit, international trade, industrial finance (because otherwise the carboy would be US made). Fuel prices directly are not relevant. That carboy is expensive (relative to what a carboy used to cost) because we have tapped out the planet, not because of the price of oil.

But don't get me wrong. We have tapped out the planet because of the price of oil. The price of that carboy is not a direct consequence of Peak Oil, but a secondary consequence.

This is the sort of stuff I've been spending my money on of late. Mattocks. Wire fencing. 20 Penny galvanized nails - have you seen what they cost now??? Even good baking trays (fit in my solar dryer). Everything I think I need, I buy in double or triple quantity if I can. Maybe I've lost it, but I'll have beer, cider and enough NPK for a while.

Now, on to the third order consequences - where the "police" takes my beer. Perhaps if they like it, they will protect me.

cfm in Gray, ME

Incredibly good work! Very poignant analysis - this is a systems problem, it must be attacked with systems methods.

My view is that oil itself is the spiderweb thread which has tied everything together and allowed the load to be redistributed. Since, via plastics and such, so many things are made of oil directly, and since cheap energy enables many otherwise inefficient processes to be economical, society has compensated for one situation after another that rationally ought to have caused a shortage in any number of key products. Food, rubber, wooden containers, the list is nearly endless. Energy is the great substitute for everything else, and we've been using that to stave off shortage, like running up an avalanche. Run a little slower and it will all be in the red.

One of the prime characteristics of chaotic systems is that inputs have amplifying outputs. Investment banking is such a system: highly interconnected, non-robust, operating at the edge of functionality. When one part started collapsing, the whole system went down.

Regular banks, especially local or regional ones, are not chaotic, but linear systems. In general, they do not operate on the edge of functionality. They are robust and have redundancy.

Farming is also a robust, non-chaotic system. I know that many commentators on TOD believe that agricultural collapse is imminent; however, farming occupies such a small part of the population that few people have real world experience of it. Farming is highly adaptive, creative, risk averse, self-reliant and able to tolerate disappointment. One of the last systems to fail would be agriculture.

I know that many people feel that agricultural subsidies are a driving factor of the system, but subsidies are a tiny part of cash flow and the decision making process. Climate, soils, markets, crop rotation and infrastructure are the primary determiners of crop selection. When evaluated from a true value position, primary subsidy flow has been from producers to consumers through the production of cheap food, freeing up consumer cash flow to be spent on other items. The high prices of last year barely reached the level of average prices, adjusted for inflation, for the decade prior to the Nixon Administration's decision to reduce grain prices and redirect American agriculture toward an export focus.

The rapid rise and fall of commodity prices is indicative of chaotic dynamics entering what is essentially a linear system. That was made possible by the Enron Exemption that allowed non-material participators of the commodity supply chain to be involved in trading on the futures markets. Many of these operatives did not know what they were doing. As a result, commodities ended up on a roller coaster ride. There will be more caution shown in the future as a result of this experience.

Just because farming as a subsystem remains functional does not necessarily mean it will continue to receive sufficient inputs from the I-NPK industry or provide adequate outputs to the food distribution chain. A farmer could reasonably decide not to grow crops at a loss, and optimize his survival, but still doom 100 others to starvation.

Yes, but the failure of farming will be toward the end of the chain of failures, not at the beginning of the chain. Fuel use is really quite low and could be produced on-farm; P and K are mined and shipped by rail; Haber-Bosch N synthesis primarily uses natural gas but can be done with electricity. If farming has collapsed, then the rest of society will already have collapsed.

After the big shakeout of the mid-1980s, farming adapted itself to Depression Era commodity prices (measured in constant dollars) and survived. Farmers became very good at systems analysis and controlling inputs, since they had no real control over outputs.

In the US industrial agriculture adapted itself to subsidies (which adapted to industrial agriculture). You are probably correct that when the shelves are bare at the supermarket, it won't be because of the farmer. Still, I don't think the farmer is a separable from industrial agriculture and the shelves will, nevertheless, be bare. Your boundary conditions - isolating the farmer - don't make sense. There are all sorts of above ground factors that interfere.

cfm in Gray, ME

Now also Bloomberg picked up this topic. It is a worthwile read as it has similarities to the mechanism of denying Peak Fossil:

`Out of Control' CEOs Spurned Davos Warnings on Risk
Oct. 24 (Bloomberg) -- Once upon a time, the World Economic Forum was the ultimate Wall Street jamboree.

Now, in the riptide of the worst financial crisis since the Great Depression, WEF officials and delegates say many of the chief executive officers who gathered in Davos, Switzerland, over the last five years didn't listen to warnings from their peers. Davos organizers also say they failed to play tough with the financial-industry bosses, opting to accept their funding and let them turn Davos into a rave-up for Wall Street excesses.

``The partying crept in,'' says Klaus Schwab, the 70-year- old WEF founder and executive chairman. ``We let it get out of control, and attention was taken away from the speed and complexity of how the world's challenges built up.''

The fallout has left the WEF riddled in buyer's remorse, with officials throughout the organization asking what they have wrought and, like Wall Street, whether they offered too much of a good thing.

Schwab says the delegates treated him like ``Cassandra'' whenever he questioned the logic of their wisdom on asset-price bubbles in housing, stocks and other financial instruments.

WEF Chief Operating Officer Kevin Steinberg says the vast sums of money that rolled in from Wall Street celebrities for marquee billing in Davos contributed to complacency among forum organizers and often obliged them to publicly massage the viewpoints, wishes and status of their superstar guests.

``We catered to what the financial leaders wanted: solo speaking slots, luxury hotels and VIP treatment we wouldn't afford anyone else,'' Steinberg, 38, says. ``We gave them a soapbox. It was all political. We try to minimize the politics, but can't.''
``But the financial community didn't listen,'' Schwab says. ``They were told that any serious look at the economic fundamentals showed that we were in an unstable situation. It was denial, total psychological denial.''
In the ``Why Do Brains Sleep?'' meeting in 2007, a cadre of eminent psychologists and psychiatrists explored whether financial leaders got enough rest and ``what that tells us about the quality of their decision-making.''

To spur delegates into addressing financial-market alienation, a session in 2004 was held to discuss whether extraterrestrials had taken control of Wall Street: ``Have Extraterrestrials Made Contact With Government Leaders?''

The ruse didn't work...

Again, all this reminds very much to the crash of 1873.

So reading all comments it sounds like fast crash instead of slow grind?

Generally so, though even with a "fast crash", your position within the vehicle will play an important role.

The systemic failures impacting a networked society were dramatically shown by the collapse of the Soviet Union on North Korea. See:
Drawing Lessons from Experience; The Agricultural Crises in North Korea
and Cuba -- Part 1
Why Changing the Way Money Works is the Key, to Resolving Peak Oil Challenges, by Dale Allen Pfeiffer, Contributing Editor for Energy

Modelling future oil production, population and the economy, Laherrère, Jean. ASPO Second international workshop on oil & gas, Paris, May 26-27 2003.

North Korea had highly industrialized agriculture dependent on subsidized oil from the USSR.
With the Soviet Union's collapse, N. Korea lost its subsidized oil from the USSR and most of its income from exports to the USSR. With little hard currency, oil imports dropped. The military kept most of that leaving farmers some 10% of previous allocations. Spare parts for tractors dropped. Fertilizer production dropped for lack of diesel to take coal to the fertilizer factories. Major floods compounded the problem.
Petroleum imports dropped from 110% to 70% relative to 89-90. Agricultural production dropped from 100% to 72%. See Laherre Fig 98.
About two to three million people died of starvation in North Korea between 1994 and 1997 due to the consequent major drop in agricultural production.

It is critically important to develop alternative fuels ASAP. Providing 100 million bbl/day of alternative fuels nominally at $100,000/bbl will require $10 trillion investment ASAP. Diverting funds into carbon sequestration will starve funds from providing alternative fuels.

Projecting from the experience of North Korea and Cuba, insufficient investment into alternative fuels and fertilizer will results in hundreds of millions of people dieing for lack of food.

Another way of looking at network effects -- Conservation of Catastrophe reposted from DailyKos in May 2007

A few years ago, the historian William McNeill enunciated the law of Conservation of Catastrophe. The law states that solutions to one crisis lead the way for some equal or greater disaster in the future. This law may point to a future disaster in the Global Economy. Before going further into implications for the economy, I will give some examples of the law.

Forest Fires.

For over a hundred years the US Forest Service has aggressively doused any forest fire as quickly as it could. Small forest fires, usually ignited by lightning, which used to be very common are now rare. This allowed a century's worth of debris to accumulate on the forest floor -- making them into tinderboxes. Now we are seeing large uncontrollable fires fed by this debris.

More on floods, warfare, the electric grid and the global economy below.


Flood control levees along our rivers have reduced the floods that were common every springtime. The former flood plains are now covered with homes and businesses. The levees have another effect, by confining the rivers they raise the level of the rivers during flood season. When there is a very wet season, the confined rivers go high enough to flood over even the best levees, leading to widespread flooding of areas that were not originally in the flood plain.

The Electric Grid.

For the past 50 years we have been linking our once separate local electric power grids together to allow them to swap energy and avoid blackouts when a power plant fails. It works, blackouts are rare. However when they do happen, they cover not just a city or a state, but a whole region for long times.


Someone (I cannot recall who) quipped that the main purpose of civilization is to prevent men from killing each other and raping women. Stone age men killed each other at a rate now only seen in our worst neighborhoods. Now almost all of us can walk outside in relative safety. Then there is the another other effect of civilization -- large scale war with widespread killing and rape.

The Global Economy

After the great depression, the US and the world implemented a set of financial reforms designed the prevent a repetition. These worked, for the past 70 years there has been no widespread economic collapse. Local collapses, such as the Asian economic crises, were contained within their region. Here comes the big question. Will we have an economic version of Conservation of Catastrophe in the future? -- thousands of published book reviews.

Conservation of catastrophe has been applied a bit sloppily in this essay.

There is a difference, for example, in putting out the small wildfires that would deplete the combustible material and sustainably harvesting the excess combustible material (but returning the nutrients). Conservation of catastrophe applies in the first case but not the second.

The New Deal era regulatory reforms did not result in the storage of catastrophic energy; instead it was the Reagan era and later undoing of those reforms that allowed catastrophic energy to build into the current collapse.

Applying lots of credit and encouraging deficit spending to stave off an economic collapse that has been building since Reagan, however, did store catastrophic energy. It didn't prevent the inevitable collapse it only delayed it and made it worse.