Through the Looking Glass: Thoughts on the Financial System, Fertilizer Prices, and Our Food System

This is a guest post by Steve from Virginia. Steve is an artist, writer, photographer, horticulturalist and economic dilettante. He has first hand knowledge of fertilizer prices from his work growing orchids. In this post, Steve gives us his interpretation of our current situation.

Our world is changing, but we don’t always understand how. We describe the situation in words, and the choice of words changes how we think about things. In the comments to Sharon Astyk’s Down the Rabbit Hole post, commenter “x” expresses his frustration with the EROEI concept:

This where I am coming from when I criticize abstract concepts like EROEI and other arguments involving abstractions so often posted on TOD. There seems to be an inability to differentiate an abstraction from the real. Energy is seen as real while the concrete forms of energy with all their differences are treated as subserviant to the abstract. . .

There is a paradox: Language annihilates what it describes. It is impossible to escape the subjective; our world is constructed in analog - by us - described to ourselves in our minds with language. The world we inhabit lacks the potency of the real which lurks fruitlessly out of reach. Because of our immersion in language, we have abstracted ourselves. The more 'successful,' the more intelligent, the 'smarter' we become, the less relevant to anything else we become. Behind the facades of 'reality' are more facades. The harder we try to get 'to real', the more elusive real becomes.

In this post, I try to look through some of what is hidden by language with respect to the financial system, and how this is affecting fertilizer prices, which in turn can be expected to affect food supply.

Our money system has seized up. Nobody can figure out what the problems are since they are real; now the tendency toward abstraction is hazardous. At the same time, the problems are abstract. We are less in a 'liquidity trap' than a 'rationalization trap'.

Banks are the focus: banks can print money, and without functioning banks there isn't enough credit available to finance 'growth'. Focusing on the banks is a mistake. Too much liquidity has been funneled into the financial system. First of all, this liquidity is not resuscitating bank credit expansion. The reduction in credit is deflationary. Lack of lending results in job losses. These job losses in turn further reduce credit formation, which results in additional job losses in a vicious cycle.

At the same time, the liquidity in the financial system represents a substantial systemic risk on its own account. So far this risk exists outside of the 'crisis' modeling that is represented in the various bailouts and liquidity injections. The reason this risk exists is because the individuals creating it are blind to risk in general.

There are two, related aspects to this:

Consider for a moment, a large bank either in the US or abroad that is insolvent. This bank has received either 'emergency' liquidity in the form of discount window loans or has 'swapped' bad assets--loans to customers that will not be repaid to the bank--with the Treasury or with a Treasury proxy for government loans. In either instance, the money received from the government/ Fed is a loan, not a grant. Our bank is obligated to pay this money back.

The consequence of our bank's indebtedness to the Treasury is that it is loathe to risk further lending since doing so would risk increasing its upstream indebtedness. In the current deflationary context, the effect is similar to the principal amount of any loan increasing—even liquidity injections or asset swaps increase! In this instance the rate of interest that the Central Bank or the Treasury charges our bank is irrelevant. If the rate of deflation is ten percent a year (or much more if the business of the bank is centered in real estate), the principal will effectively increase by that amount, with whatever interest charged being added to that! The result is our bank is now very 'conservative' ... it will not lend at all, or will only lend to the central bank instead of to outside customers.

This 'Deflation Paradox' is the motive for all the calls by legislators for rules to compel bank lending. Legislators and banks themselves are powerless; an insolvent bank will instead wait for 'other institutions' to lend and cause credit expansion.

Unfortunately, ALL banks are insolvent, as debt defaults mount. There ARE no other banks or institutions that can expand credit by fractional reserve lending, whether in the US or in the rest of the world. The banks are on life support; institutions large enough to effect the GDP of the developed world's massive economies are unable to do so. For any to lend would be suicidal since the new borrowing would rapidly become deflationary liabilities which would in turn propagate downstream. Who would the banks lend to? The new borrowers would simply default. Without 'other banks' with 'other borrowers', there is no engine to propel credit expansion. This is the 'Liquidity Trap'; the government lends, but the lending is 'trapped' within the crippled banking system.

Simply lending to the insolvent banks makes them more indebted to the Fed and the Treasury who are by exchange insolvent themselves. At some point, simple insolvency becomes something absurd or metaphysical; in the language of seizures, 'Grand Mal Insolvency'.

If we don’t have solvent banks on earth, perhaps we need is an invasion of banks from outer-space. Even this wouldn’t work! The second risk is more dangerous: that the money lent to the banks may actually leak out of the liquidity trap.

Instead of being the intended panacea, the result would be catastrophic. The best way to understand this is to look at a map of the 'Bad Loan Universe', which is the particular universe we humans currently inhabit:

This is what the Bad Loan Universe looks like through a telescope. It's pretty but very dangerous.

My view of the bad loan universe, up close. Click for larger image.

At the center of the bad loan universe is a gigantic black hole: the Federal Reserve Bank. Surrounding it most closely are surrogates for the Fed: foreign central banks, money center banks, credit- card and corporate financing entities such as GMAC, American Express and GE. Outward from the center are more businesses and business-like entities, surrounding and enmeshed in all are the Masses and Workers, people like you and me.

Right now, most of the 'inner ring' has been sucked into the black hole of insolvency. Like all black holes, the more institutions that are sucked into the center, the more powerful the black hole becomes. Some of the second ring entities such as hedge funds, State governments and regional banks have teetered over the 'event horizon' and are now lost to insolvency. Any contact with the black hole expands its ambit. It affects all loans within range. Left unchecked the Black Hole will swallow up the entire universe after making all loans, 'bad loans'.

The mechanism of expanding its ambit is liquidity. Ben Bernanke and his Treasury buddies believe this liquidity--which is fancy term for printed money--will reinflate the universe. What is happening instead is the liquidity contaminates all it reaches; any institution obtaining liquidity--or rumored to need liquidity--is considered to be insolvent. Any bank needing liquidity from the Black Hole will wind up being sucked into it. Since deflation makes the principal of all loans increase over time, this 'Deflation Paradox' makes even good loans held by solid institutions uncollectible!

Deflation and liquidity feed on each other!

The outcome desired above all else by the Fed masters is for the Masses and Workers who make up most of the real universe to take up the Fed's liquidity and spend it ... on cars, houses, luxury vacations, second homes, flat-screen televisions and junk food. If the Fed understood the situation, it would realize the only way to increase desired economic activity is to permit the workers and masses to earn more real money. Unfortunately, this common sense approach is escapes the Fed Masters; they would rather blindly print and lend more and more 'liquidity'.

In this perverse universe, the liquidity remains trapped within the innermost rings. If it should emerge, those closest to the Black Hole would have the first claim on it: first, the money center banks, then the regional banks and corporations, then the smaller businesses and finally to the masses and workers. These last would have the final claim on the trickling liquidity.

That is, if they could or would accept more debt.

The liquidity would stop at the corporations and businesses. Prices of goods and services would increase first. Wages and benefits would increase last if at all. This is the danger, both to the Masses and Workers, and to businesses as well!

Driving this entire process is a mysterious force called 'supply and demand'. When there is a large amount of currency (supply) relative to the smaller amount of goods or services (demand), prices for the goods and services increase. While this is happening, money never reaches the masses and workers who consequently cannot afford to buy the increasingly expensive goods. The businesses are unable to SELL the increasingly expensive goods; the businesses price themselves into Chapter 11.

Businesses either refuse the liquidity and risk insolvency or make use of the liquidity which drives up prices ... and risk insolvency! This 'Heads-I-Win-Tails-You-Lose' mechanism caused many bankruptcies during the Great Depression.

The Masters of the Bad Loan Universe call this liquefaction Re-inflating the Economy. They don't realize they can only inflate PARTS of the economy--the wrong parts. Here, liquidity simply spreads deflation farther and faster.

What is saving us is the liquidity trap.

One place where liquidity is showing up is in higher input prices for agriculture. This is an outgrowth of last summer's ‘commodity bubble' in oil/metal/agricultural goods:

Oil price chart from

The 'partial bubble' affected cost while the means to pay the increased costs swooned. In agriculture, this is flirting with starvation. Fertilizer is essential to farm yields, particularly where soils have been misused or overtaxed. The liquidity trickledown is identical to that described above. A publication of the University of Illinois Extension says the following:

About two months after grain prices peaked in early July (2008), fertilizer prices peaked and then plummeted along a parallel path with grain prices. Wholesale anhydrous ammonia that was once $800+ is now below $200 per ton. Wholesale DAP [phosphorous fertilizer] that was $1,000+ in September is now $350 per ton.

Suppliers indicate that a “perfect storm” occurred with the economic collapse, large pipeline stocks of high priced product, and a late fall that prevented typical rates and volumes of application. The credit crunch diminished South American demand, and when US grain prices fell, so did the demand for fertilizer at any price. So fertilizer storehouses are full of unsold products, some of which has a very high price attached to it. Unfortunately for farmers, the closer they are to the fertilizer the higher the price of the product. If retailers are forced to cut prices, they will lose substantial amounts of money on their inventory, but Schnitkey says there are incentives for farmers to delay purchases in the hope prices decline.

Fertilizer prices rose to the stratosphere because the Fed- inflated a commodities bubble; legacy prices for fertilizer makes its use prohibitive in 2009 and into the future. The yields of 2008/9 were good. With expensive fertilizer languishing in warehouses, what will yields look like in 2010? How will farmers overseas afford expensive fertilizer?

Will Ben Bernanke be held accountable if farm yields fall and people starve as a result?

The best thing for the US government to do (and at the cheapest cost to the Masses and Workers and their grandchildren) is to listen to Nassim Taleb and Nouriel Roubini and prosecute the malefactors, then quietly get rid of all the stimulus packages.

Never happen! That's too common sensical for the Masters of the Bad Loan Universe.

Thanks Steve! You have some unique insights!

It seems like the high cost inventory problem, and resulting high prices for the consumer, may be affecting other things besides fertilizer. For example, food prices at the grocery store don't seem to be dropping all that much. Also, people are reluctant to sell their homes at today's lower prices, because they bought them for higher prices, and feel that that somehow they are worth that much. Do you see these as issues?

The legacy high prices - houses, cars, hardware, food, etc - they are absolutely an issue.

Taking place is a tremedous drop in individual and collective purchasing power. Purchasing power is declining to 'cash value' of productive labor. The scary issue is whether it is 'American productive labor' which is bad enough ... or 'Chinese productive labor'. The equilibrium value of productive labor has no bottom right now ...

At some point I need to explain economic dimensions and the multiple characteristics (personalities?) of money.

There is an increasing disconnect between yesterdays' debt- inflated high prices and tomorrow's purchasing power. Something has to give. Prices will decline. Trade volumes and ranges will be reduced. There will be defaults and bankruptcies. There are structural overcapacities and these must be brought into alignment with utilization (demand), which is continuing to decline. A lot of this is beyond understanding, even beyond the desire to understand. People have been living 'inflation' for their entire lives, their parents' lives. There is no experience, no well- developed instinctive grasp of deflation. Solving the excess inventory of real estate for instance will require demolishing millions of houses. Bringing supply and demand into equilibrium is a pitiless process.

What you've noticed at the grocery store and on the street simply amplifies the deflationary forces. The food issue is an aggravation in the US, but in many countries unaffordable food is destabilizing. Social order collapses, not just the money train.

A lot of people are expecting (hoping) that credit creation can be re- ignited - that is the expedient solution. This is the misguided faith in the effectiveness of government. If credit creation could be enabled in a reasonable period, purchasing power would increase along with it. Higher prices would be supportable.

Unfortunately, all of these hopeful people are wrong. Hope borders on desperation; if buyers are not found for the goods at high prices, the high prices paid upstream will render the hopeful ones insolvent ... all hopelessly insolvent.

The bad loan universe keeps on growing ...

I think the discontinuity of the loan situation is hard for us all to grasp. Lending, and even increased lending makes sense as the economy as growing. Once we hit resource limits, long term debt no longer makes sense. Taking long-term debt out of the system is almost like deflating a balloon. All of the systems look and act differently. (Medium term debt also, very short term is probably not at issue).

Without long term debt, I would expect the amount of capital expenditures to drop to a fraction of what they were previously (partly because of the price drop, leading to lower cash flow, and partly because of the unavailability of debt to finance capital expenditures).

Without the ability to roll over long term debt, there will be a huge number of bankruptcies, and after the bankruptcies, a huge number of people without work. It will not be possible for big companies that go out of business to be replaced by other big companies, without long-term debt. Instead, their likely replacements are likely to be much smaller, less debt dependent local companies, or just people supporting themselves growing food or providing a service.

People talk about a U or V shaped recession, but they don't really understand how dependent our current society has been on long term debt, and the growth of long-term debt.

"Once we hit resource limits, long term debt no longer makes sense."

Apart from a temporary shortage of natural rubber, due to a rapid increase in demand for large tires( mainly natural rubber), what resources, that cannot be substituted have reached limits?

From your other posts you seem to be saying that WHEN we reach resource limits long term economic growth will stop and therefore long term debt no longer makes sense.

In the last year economic growth has stopped except in China and a few other countries, but that doesn't mean this will be permanent because based on your argument, we have NOT reached any major resource limits, YET, so long term debt still makes sense.

When we do reach a permanent shortage of oil, the issue is; can this be replaced by other energy resources and if not will this prevent long term economic growth. I am not trying to minimize the big problems peak oil will cause, but pointing out its not a forgone conclusion that oil cannot be replaced( by other energy resources), or that conservation cannot allow declining oil use and economic growth, or that economic growth must have greater use of natural resources.

Hello Neil1947,

Your Quote: "we have NOT reached any major resource limits, YET, so long term debt still makes sense."

[Source: UN FAO] One billion, or 1/7th of World population, of the hungry and starving Overshoot would disagree with your assessment:

Recall my posting series on Ft Knox: 'fake wealth' of gold bullion stacked outside to form machine gun bunkers to protect the 'real wealth' of seeds & I-NPK hoarded inside.

EDIT: Job specialization is only possible when a food surplus exists.

'fake wealth' of gold bullion stacked outside to form machine gun bunkers to protect the 'real wealth' of seeds & I-NPK hoarded inside.

That's called 'having your priorities straight.'

60years ago famine was wide-spread in the Indian sub-continent and China. Food was rationed in Europe. Today because of the green revolution and declining birth rates, the US and EU pay farmers not to grow food, famine is now confined to isolated regions experiencing civil wars or failed states. Even in the US, today some people are hungry, and some people are homeless but its not because the US doesn't grow enough food, or has a housing shortage, its because of poor allocation of resources.

Its telling that your link and photo's were dated 1994.

We have already hit the wall on growth, and it is growth that is needed to pay back debt with interest.

Part of this is the lack of growth in world oil supply. It is even worse than this in the US. Our total per capital energy use peaked back in 2000:

There are other limitations as well. Fresh water is in increasingly short supply as well.

Because of reaching these limits, we are now not growing fast enough to pay back debt with interest, and that is what is causing this whole credit unwind. It is clear our fossil fuel consumption will not be going up in the future, because imported fuels are becoming a bigger and bigger percentage of the total, and we are running a huge balance of payments deficit with the current level of imports. If we were making high valued goods with these fuels, we could export them and use them to pay for the fossil fuels, but we aren't. This is a graph showing the same information as the top graph, but split between US produced fuels and imports. (Nuclear energy is US produced using mostly imported fuel.)

If we should start reducing our coal use, we will really see a quick decline in total energy availability, because renewables are very small, and unable to ramp up on the scale needed to replace the coal lost. (Wind and solar are part of the "other" grouping.)

Okay, this is what we have. A two horse race.

In Lane One is a horse representing looming resource shortfalls.

In Lane Two is another horse representing an existing surplus of stuff and a lot of flat broke people who have too much stuff already.

If Gail's horse wins, we humans have big, big problems. Humans don't do shortages. We don't have to. We've never had to except here and there, for reasons of disaster, flood, earthquage, war or some other short- termed incident. When confronted with a shortage we alleviate it. We don't even have to tools to understand how shortages work. I'm not kidding. All our economics is designed to manage surpluses or to try to resurrect dead businesses after a deflation. The last time there was a long- term shortage was during the last ice age. Large areas of planet Earth were uninhabitable. The closest economic reasoning attempting to deal with shortage management is from Herman Daly. He calls for zero- economic growth. I don't know. I can't even see supply- demand working without some level of surplus ... forget about credit. I don't like Gail's horse. It's too scary.

If my horse wins, we have a prolonged depression. The structural surpluses are too persistent. 'Selling' them simply transfers them to someone else. Managing the surpluses is costly, Eventually that cost will be ruinous. Even at this future point the economic costs or potential costs of the surpluses will weigh on markets. Yes, markets. We have enough stuff to last generations. That stuff will be pressed into markets with fervent hope that it can be sold and 'consumed'. There will be credit, but no one will want it because nobody will have any money.

So ... which horse will win? I'm pulling for my horse because the silver lining of a prolonged depression would be a reduction of pressure on the resource base. Not all enterprises will be bankrupt. Some thinking will allow new ways of organizing our stuff. If Gail's horse wins, we will be in the desperate position of having to invent a new kind of social structure in an instant. I don't think this can be done, frankly.

I think the biggest problem is industrialization. It's been around for three hundred or so years and it has never lived up to any of its promises. It was supposed to employ the (then) thousands of unemployed and unskilled and provide inexpensive products so that all might have use of them. Industrialization has failed at both. It has been modified, adjusted, improved upon, re- invented, shifted in locale from England/Europe to America to China and the rest of the world and it has still failed ... and fouled the Earth in the bargain.

It's time to declare the end to the industrialization, mass production experiment. Consider Adam Smith's eighteenth century pin factory:

Smith observed that some number of specialized workers, each performing a single step in the manufacture of a pin, could make far more pins in a day than the same number of generalists, each engaged in making whole pins.

"One man draws out the wire, another straightens it ... a third cuts it, a fourth points it, a fifth grinds it on the the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper."

Adam Smith was a man of his time; so little concern did he have for the conditions of the workers that this is given no mention. It was here where that one man would labor at his task in stupifying monotony for ten or twelve hours a day, sixty or more hours a week, for as long as he could endure the work or the abuse of his master, that he could not change his task, that he could be discharged for any or no reason and be replaced by another, even a child, that if he was injured he would be turned out to starve or survive by any means if he could.

Also consider that the making of pins prior was the first task of silversmiths' apprentices. That a lively apprentice would soon learn other arts and some would become master silversmiths. A constant influx of apprentices meant a constant flow of pins. The pins made by silversmiths were heirlooms and carefully kept, not junk swept into cracks in the floors to skewer some person's foot.

Now, we have dull and infinite numbers of cheap goods, that depress our markets ... as they did exactly the same in Adam Smith's day ... and people with no skill who cannot accomplish anything. There are no apprentices and no masters, either.

There is a shortage ... of interesting and useful things for all the people to do.

The opportunity is coming to cast off the machines and abandon mass production. Returning to an artisanal system will take time but the production of goods by hand will give our markets less quantity and better quality. There will be pride in accomplishment. Art will increase overall. Our useful skills - doctoring, science, math, economics will continue, the useless skills will disappear; marketing, advertising, money management. More skill in the workforce will translate into more wealth in the pockets of the skilled. This and the end of manufacturing surpluses will end the money market deflation.

I don't put this as 'the' answer but is is a possible approach. Keep in mind, helicopters and Ferraris are made by artisan methods. It's the sweatshops and industrial meat 'factories' we need to get rid of.

Otherwise, Gail's horse will win.

We don't even have to tools to understand how shortages work. I'm not kidding. All our economics is designed to manage surpluses or to try to resurrect dead businesses after a deflation. The last time there was a long- term shortage was during the last ice age. Large areas of planet Earth were uninhabitable. The closest economic reasoning attempting to deal with shortage management is from Herman Daly. He calls for zero- economic growth.

I keep on running across this observation and it seems like a real group-think dead-end. As you say, economists don't deal with shortages well.

I read occasionally about the work of H. Hotteling (a Fulda native) on exhaustible resources, but that seems the extent of it.

Yes, economists don't deal with shortages. Even here on TOD virtually all of the thinking seems to depend on conventional economic understanding - one that sooner or later falls back to growth and no limits. Problem is, we are past the limit and into decline. It's not something that can be addressed at a micro-economic level - and I'd class a "stimulus" package as micro. Energy limits put all other overdrawn resources past the limit. Limits mean debts will never be paid back. All the economic models blow up. As do social contracts on which economics depends (and vs). Macro would include the Great Economy - nature.

Current thinking is in a group-think dead-end. An economy, philosophy and social contract built around limits is an entirely different paradigm - entirely alien.

cfm in Gray, ME

So between you and me and a few others, we have our own "group-think" enclave here. An alien nano-group, so to speak.

Humans don't do shortages. We don't have to. We've never had to except here and there, for reasons of disaster, flood, earthquage, war or some other short- termed incident

Talk about someone disconnected from reality by language, what planet are you from? Or maybe you figure humans have only a been around 6000 to 10000 years--in which case well maybe those 'fictitious' humans don't do shortage.

Humans do shortages very well and have for their entire time on this planet. We have competed with plenty of other creatures who also dealt with shortages regularly and survived right along side of us. If there weren't shortages life would likely have never got past the bacteria stage and I imagine Earth's biomass might be some huge exponent Jupiter's total mass by now. Come on you grow things, every life form deals with shortages.

We have just been borrowing heavily from the future of late and that could leave us recent borrowers quite short quite soon. Humans do shortages, large, complex civilizations don't (managing surplus is what they are all about). And humans do language. That is our reality.

It really comes down to what percentage of our population it takes to get our food to us. Right now it is low here and very high in Sudan. A different mix of energy, water and other inputs and we will see how it shakes out.

On your right, ladies and gentlemen, there is an apple tree out in a meadow.

When the apple tree reproduces itself, it does not make the 'replacement number' of apples; 1.7 apples per year, it produces thousands. Most of these fall and rot on the ground, some are eaten by animals and the seeds are thus spread all over the meadow. The thousands of apples are a surplus.

In order to compete for sunlight, the cherry tree produces thousands of cherries. The walnut tree hundreds of walnuts. The oak produces millions of acorns. All of these are surpluses. When the tree die, there are many more replacements for each kind of tree in the meadow. The excess trees are surplus. The dead trees are 'digested' by microbes and the 'waste' that is excreted is added to the soil of the meadow. This addition is a surplus.

The trees make extra leaves than what they need. The grasses make excess seeds and excess stolons. Insects make excess swarms.

In the ocean a pair of fish will produce thousands of offspring. Most are eaten by the surplus offspring of predator fish. A pair of chickens will produce fifty offspring in a year, a pair of robins will produce four new robins, rabbits will produce fifty new rabbits, wolves and lions will produce four or five new cubs ... all of these are surplus. A surplus is necessary because the predators - diseases and other animals - will eat a certain amount and an excess OVER that 'consumption' is required by the species - any species - to carry forward into the future.

If there is a surplus of lions vs the number of wildebeests available, the surplus of lions will be driven off by the rest. The time, effort and risk of consuming the surplus wildebeests is balanced by the surplus nourishment each wildebeets constains. This 'supply - demand' process is a form of natural market. Our markets are mimics of this natural surplus management system.

The sunlight striking the earth is a surplus. This is captured by plants that die and decompose at the bottoms of seas. This then becomes coal or oil; it is surplus ... captured surplus sunlight.

In the meadow twenty thousand years ago there were some maize plants. A band of humans stopped and ate some of the maize. When they had eaten their fill, they moved on. In the meadow there were many other maize plants the humans did not see, hidden by the other plants and trees. Because they were not seen does mean the did not exist. The following year the humans returned and ate more maize; the surplus created by preceding years' 'hidden' maize plants as well as those germinated and grown from seeds held in human waste. Because of the diversity of the meadow; the trees and the other plants ... all producing surpluses themelves ... the surplus of maize was concealed.

Because nature has concealed surpluses for tens of millions of years - and is good at it - and humans are not quite so good at seeing them means these surpluses tend to hide in plain sight.

At some point, a band of humans cut down all the trees and tore up the 'weeds' and planted the meadow completely with maize. There was then a very large surplus of maize. The large surplus needed to be managed otherwise no maize would be planted for the following harvest; "We have plenty of maize already!"

A maize broker was hired and maize storage created and debt collateralized by maize. 'Spot' maize and maize futures were traded overseas ... securities written against the maize and swaps brokered. Soon enough the traders and brokers became insolvent and required a bailout from the government ... in maize, of course. That finally caused the whole maize enterprise to collapse.

The problems are surplus problems, not shortages.

Shortages have the one generation of animals eating the one generation of plants and that is the end of the story.

There is entropy and all the universes are doomed to darkness and disorder on account of it ... maybe. Life spontaneously reorders the disordered state into new forms ... withing the 'marginal utility' constraints of a thermodynamic budget.

The original bacterium (as good a place to start this discussion as any) would have reproduced forever at geometric rates had there been enough of food, space, whatever. Constraints stopped that. The constraints would have been things like availble nutrients, available space (so the bacteria would not be smothered in its own waste) and the life span limits of the organizational structure of the bacterium. These constraints showed up as shortages to the increasing bacteria. There was no law saying the bacterium shall only replace itself, the law said the bacteria will fill all available space until stopped. If nothing stops the growth there is never a surplus but a shortage of whatever will stop the growth. Shortage not surplus sets the rules. End of story as long as organization of finite matter/energy dominates this universe.

Apparently in Viginia you have spent little time with hunter gatherers who remember shortages well and whose population had been kept in check by shortages for millenium after millenium (there is living local memory of that life up here) Humans have spent most of their years on this planet in the hunter gatherer mode. Your statement that 'humans don't do shortages' showed a disconnect from reality I couldn't pass over.

And just for language fun read some Milton (last name not first), that man ruled English like no other before or since. No point here intended except he is worth reading if you want to see how well language can be written. Of course language can't describe anything perfectly though poetry and music try to make a connect other than the mere symbolic value of the word would tend to allow. Still we are limited by whatever we can perceive and comprehend (in whatever fashion). In other words we are limited by our perceiving and comprehending system's shortfalls.

Make the most of the ride it is what we got.

"We have already hit the wall on growth, and it is growth that is needed to pay back debt with interest"

Your graph of "per Capita US energy consumption " doesn't show hitting wall on growth, not even growth of energy.
The US population has been growing and so has the growth of energy and GDP/BOE( about 1%per year over 50 years). California has had no energy growth and both population and GDP growth. It's GDP growth and real interest rates that's relevant to pay back debt.

"If we should start reducing our coal use, we will really see a quick decline in total energy availability, because renewables are very small, and unable to ramp up on the scale needed to replace the coal lost."

That would be true, if nuclear and renewables had to replace the BTU's of FF but they only have to replace the electricity produced by coal lost or the work performed by oil. Old coal plants due to be retired are only about 35% efficient. Nuclear, hydro, wind and solar have have grown quickly in last 50 years, and the US and Canada have very large undeveloped resources of hydro, wind and solar. It will probably take 40 years to replace most coal, that's about 5-6GWa per year. Last years wind additions give half of that(allowing for a 30% capacity factor). One net new nuclear plant and one new hydro dam per year would give the balance.

Interest just might possibly be paid back without growth, but only with sacrifice - doing without something to come up with the money to pay the interest and principal. In no way is it possible to continually pile debts on top of debts and to service them in the absence of growth.

Purchasing power is declining to 'cash value' of productive labor. The scary issue is whether it is 'American productive labor' which is bad enough ... or 'Chinese productive labor'.

Also known as the race to the bottom.

Solving the excess inventory of real estate for instance will require demolishing millions of houses. Bringing supply and demand into equilibrium is a pitiless process.

There may well be good reasons for destroying those millions of homes, but it is not excess inventory. While people are unhoused there is no excess of housing inventory.
There is only the mismatch between the price of the housing and the income of the unhoused.

The oversupply also has something to do with how much space each American "needs" to live in. So it's going to be hard to say how much a house should cost, and how much space per person is appropriate for the price to earnings ratio, etc... Add to this decreasing available energy, and a floor price pre four-person family may not easily be reached.

Homeless people could be sharing a house with other people (there is a host of reasons why homeless Americans have not traditionally done this, while the rest of us live in larger and larger houses, over the years...)

Food prices don't drop because end consumer demand is dictating the price. It's not the price of raw materials that rises prices of final products, but the other way around... What you pay for raw materials does not influence the price at which you'll sell final product directly.

There is a horrific tractor tire shortage. I'm searching for tractor tires. The local inventory in SD is very small, and suppliers claim that it will take almost a year to get fresh ones.

John Deere are sending tractors to dealers without tires.

A friend on mine from southern IL is in desperate need of rear tires for his tractor, and can't source them. His supplier said new tires are a year out.

Nobody I talk to can comprehend this situation in light of the collapse in demand for eveything ag.

Does anybody know what is going on?

Your right on the tires issue.
My farming buddy and I rode all over about 5 months or so ago trying to garner some tires. Some for his 18 wheelers and some for his tractors ,planters and so forth.

He got one place to bring him some tires. He stored everything he could get his hands on in empty storage places whereever he could find them.

When I had a local dealer put 4 new large tires on my little Jeep he was on the phone pleading with some distributors angrily trying to somehow find some tires for his inventory. He mostly does tires and farm tires. If he can't get any he will have to close the doors of his shop.

Its bad news out there on tires I have realized. If you can find them the prices are off the scale.

I don't know why. We have some tire plants here. One shut down a few years ago. They claimed labor costs but I suspect it was something else.

As I have stated in posts for some time, big ag is very very highly scaffolded. A tiny break in the chain anywhere and it stops fast.

A lack of parts during work season can shut you down. You hear the owner scream over his two-way...."People! Work on this farm is stopped and we are shutdown"...this is panic mode bigtime.
And there are ALWAYS breakdowns..even on new equipment.


It sounds like Liebig'a law of the minimum at work. With our limited inventories, we depend supply chains to work perfectly. Once the supply chain stops working, we have a real problem. Add to that the credit problems and consumers inability to buy what is available, and we have real problems.

A few things...

1. There are serious questions as to whether farmers will get the financing they need to even buy the fertilizer and other inputs they need to plant.

2. Denninger notes in one of his posts that "banks" only supply about 1/3 of credit/capital, the remaining 2/3rds coming from private sources - which appears to be sitting on the sidelines.

3. Brian Pretti has a long essay at reviewing several aspects of the latest GDP figures. The main take home is that the consumer is going away and is unlikely to come back soon and that it's unlikely that Keynesian actions will work. I think this is a "must read."

Interestingly, I'll be going to our farm supply to get a few things today.


1. There are serious questions as to whether farmers will get the financing they need to even buy the fertilizer and other inputs they need to plant.

The answers I got when I asked Swedish expertese a few months ago were that US farming mostly were ok but thirld world countries had problems with supplies interrupted by the emerging credit crisis. That made sense since USA has working institutions that other countries lack and their supply line is longer with more middle men. I guess this will be handled since it would be a national suicide to not do it and you have for decades used excess government support capacity for farming to get international influence. Wonder if Obama will do any priortizations between guns and butter?

Last time I asked an ag banker this question (couple months ago) he said farmers were still getting credit, but the worry was about the credit of buyers. Hence the commodity deflation. Eventually this could feed back into poor availability of farm credit of course.

Almost all farm credit is done locally.

So I doubt that an AG Banker unless he is right in the middle of farm country and with the smallish banks out here that he might just be guessing.

The reality will become apparent when local farmers cannot get good credit sources locally.

Since the land and their rep is what gives them access to local credit I don't see any of them looking elsewhere and right now all other banks and bankers are very highly suspect.

They can deal with a hometown bank riding the waves with them. I doubt they would trust bigger banks. I wouldn't for sure.

Airdale-not to discredit what you say but ag back in Calif is far different animal than here in the midwest

I wasn't referring to anyone from around here. His point was exactly yours. Local banks that lend directly to farmers are still lending.

Yes they are. For now. I am pretty close with some of the bank officers.
They have no problem with landowners loan, if the land is collateral as well as equipment.

Yet in the past there have been foreclosures. Back in the mid 80s. Farmers hit hard times and the banks went far as they could then foreclosed.

But for now..they are lending. And without that lending it gets scary.


Jason, did that ag banker you mention have anything else to say about the credit of buyers?

"The main take home is that the consumer is going away and is unlikely to come back soon and that it's unlikely that Keynesian actions will work."

Yes... To me, the most important aspect of Pretti's analysis is that the current situation is unprecedented in the post-WWII era. The combination of deflationary tendencies and people cutting back spending despite falling prices (such as gasoline) simply has not occurred to any significant degree in the past six decades. In essence, this "recession" (I prefer depression) is different, and is essentially a new kind of experience to anyone born after the war.



Some early Christian communities found that they could offer some support to orphans and widows, but there would not be enough for long term support for others in the community (Didache). They extended short term help to indigent, but the indigent may have needed to find work, famliy, or another community for more support as there was not enough to keep many people who were not working for their money. Labor cultivated land, produced and marketed food, built shelter, cut wood, made clothes, clay cooking and storage pots, metal pans, boats and fishing nets etc.

Economists have shown models where short term stimulus had reversed economic panic and hoarding of cash. There were also models showing rapid increases in external debt led to economic crash and currency devaluation. Stimulus did not fix long term inefficiencies.

Someone decided gambling casinos were good for the economy. Every one on the reservation made money. The dealers, the bankers, the resetaurants, the motels, the gas stations, the shops, the local council, the homebuilders, everyone. Soon other communities built casinos until there were more people with knowledge of how to make a casino win money than the more essential labor functions. The food production, energy production, textile manufacture, fishing was outsourced. People went to the casinos in hope for early retirement, losing the ability to save any for retirement. The casino owners borrowed more money to rapidly expand casino operations. Soon it was recognized there were not enough gamblers, they had gone broke, died, or gone to other casinos. The casinos tried to advertise but could not find more gamblers as they had ruined those sent to them. The casino economy went into a lethargic depression. People needed to learn more useful occupations than dealing black jack or spinning a roulette wheel. People started to save money for their retirements or purchases as credit had dried up. Rumors were started that gambling was bad. The economy began to try to recover.

Don't know how outsourcing the fishing is going, it seems fish have gone the way of the gambler (not so many around any more). Life on the res may have to proceed with fewer fish.

Because of these issues brought up I can only imagine one resilient solution to the problem of working large areas of land (perhaps I have a paucity of imagination?). My sense is that ag has to shift dramatically out of grains and into pasture. Let the animals do the harvesting. Pasture sends roots down 10s of feet, associates with beneficial fungi, and requires little work or inputs to maintain. It would be interesting to do the math on the net energy of conventional grains vs. the net energy of fully pastured meat.

The next resilient step is to have local meat processing facilities so the long-haul trucking of live animals is not required.

The other resilient step is to re-ruralize the human population so the long-haul trucking of frozen dead animals is not required.

All these new people in vacant rural areas will need new housing. Hence, a new housing boom! Sounds good until you realize the other homes will forever remain stranded assets. :)

Food for thought.

You mean throw out all the huge investments in their equipment?

A combine at $250,000?
Tractors at huge prices so that even I am not sure.

Planters and well semis and trailers?

Huge grain bins already erected but not paid for as yet?

Sounds like doom to me. But over the long long haul as big ag dies ....yes something will have to occur. Something else all the cities and suburbs are a write off.


Yes, that would be more resilient. Of course, a meat-fed population will be a heckuva lot smaller than a grain-fed one.

Reduction in transportable grain will mean the fractal evolved food-distrubution systems which play a large role in keeping 7 billion people alive will be pared back.

Personally, I think that'll happen anyway, and I think that post-bottleneck in any areas where any animals are left alive, pasture and animals will once again become a way of surviving.

I have a fondness for the efficiency of tree crops as well.

Why put livestock pens and meatpacking plants on good corn lands? Maybe put them on more arid lands near the railroad tracks. I do not have the financial analysis available to test this hypothesis. To move a meat packing plant might be a costly move. If corn prices go back up again, might shut some more ethanol and meat packing plants anyway.

In the old days, a couple of centuries ago, livestock would be raised mostly on pasture (and that included chestnuts and other mast in the woods for the hogs). The animals would then provide their own transport as they were herded by drovers to the coastal cities.

Oh God, here we go again. Are you all seriously suggesting that we might have a US food shortage in 2010 for shortage of tires? If we can nationalize or subsidize banks surely we can nationalize or subsidize John Deere.

Perhaps this is simply a matter of supply and demand? Do we really need more food (or Jeeps) on the market right now? What might the effect be of falling demand for US ethanol? I'm not sure, but I would be very careful about observing a so far short-term trend and extrapolating out far into the future. Of course, such exercises are helpful, but let's be careful we are not combing evidence for our own assumptions. The rational thinking vs. rationalizing thought argument.

I’m sorry I keep being the dissenting voice on these near-term food shortage posts, but they sound like scare tactics (whether that is the intent or not, probably not, but they come off that way) and really do a disservice to the cause.

P.S. That said, I would like to add, nice simplified/clear explanation of the liquidity problem.

There's a shortage of credit right now, Andrew. Nationalization isn't helping that, is it? And did you ever study the results of completely "nationalizing" an economy, like old Soviet Russia or old Communist China or even Communist North Korea? Shortage doesn't even begin to describe that insanity. Nationalization is just a sham act of desperation in these circumstances, an attempt to fool people into thinking everything will be ok so that they put their remaining savings back into the betting pool called a stock market.

Let's hope the world turns out as nicely as you wish. Let's not do any contingency planning on worst case scenarios. Or rather, how about you proceed like that, ok? Me? I reserve the right to invoke Rule 308 if necessary.

"This country, with its institutions, belongs to the people who inhabit it. Whenever they shall grow weary of the existing government, they can exercise their constitutional right of amending it, or exercise their revolutionary right to overthrow it." -- Abraham Lincoln

"I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding is but swindling futurity on a large scale." -- Thomas Jefferson

First off, they are not nationalized yet. Second, yes I do think nationalized grain production would be able to produce and distribute enough grain to feed the US populace. If you want to argue why this seemingly obvious truth is untrue, please do so... but leave the off topic quotes at home.

And, again, the banking system and agricultural system are fundamentally different. See my other post.

The shortage of large and very large tires for mining equipment has been going on for at least two years. I appears that things may be loosening up now as lower commodity prices slow mining growth. is my guess on what is going on with tractor tires since I know what is going on with my company and inventories. There is a large focus on decreasing inventories to cut costs. Our Just In Time delivery system is being re-evaluated since we do not expect demand to be on the retail end, we are guessing on the low side of the wholesale end. For the first time since I started in my company, our Plan data is being set for negative in TY/LY models. So, in this scenario, there may inevitable short term spot shortages in remote retail locations because it is not a profitable to have idle inventories waiting for customers that may never show up and purchase.

Large tires ( tractors, mining machinery) require higher amounts of natural rubber than car tires. The boom in construction up to 2008, resulted in a shortage because rubber trees take <10 years to grow, so natural rubber shortages.
No problem buying auto tires( very little natural rubber).

This where I am coming from when I criticize abstract concepts like EROEI and other arguments involving abstractions so often posted on TOD. There seems to be an inability to differentiate an abstraction from the real. Energy is seen as real while the concrete forms of energy with all their differences are treated as subserviant to the abstract. . .

There is a paradox: Language annihilates what it describes. It is impossible to escape the subjective; our world is constructed in analog - by us - described to ourselves in our minds with language. The world we inhabit lacks the potency of the real which lurks fruitlessly out of reach. Because of our immersion in language, we have abstracted ourselves. The more 'successful,' the more intelligent, the 'smarter' we become, the less relevant to anything else we become. Behind the facades of 'reality' are more facades. The harder we try to get 'to real', the more elusive real becomes.

Forgive me for breaking my vow of silence... but this sounds like the very claptrap that sent me screaming out of English graduate studies 25 years ago. It's pretentiously called "post-modernism." It is the very height of obfuscation.

If "language annihilates what it describes," then your message itself has just annihilated itself and is therefore nonsense.

"The world we inhabit lacks the potency of the real which lurks fruitlessly out of reach. Because of our immersion in language, we have abstracted ourselves. The more 'successful,' the more intelligent, the 'smarter' we become, the less relevant to anything else we become."

As Big Daddy says in "Cat on a Hot Tin Roof," "If you got to use language like that about a thing, it's ninety-proof bull, and I ain't buying any."

That "we" is presumptuous. You may speak for yourself, if you wish.

As for the question-begging in the "energy is abstract" quote from this "x" person: "Energy" is no abstraction. It is quite clearly defined as "the capacity to do work" and may be measured.

How I wish I had stuck to the hard sciences as an undergrad.

Once again, I sincerely apologize for the rant and I promise to keep my mouth shut further.

Energy is indeed as abstraction when it refers to the commodities that are being analyzed in the EROEI argument. Defining energy as the capacity to do work is no more concrete than defining grain as the capacity to support life or metal as the capacity to be malleable. The concrete units of energy, grain and metal all have specific details behind each different form.

These details are important and unique to each which makes comparing, adding, subtracting, multiplying or dividing them impossible. We can not compare, mix, add, subtract, multiply or divide corn and soybeans for example even though they are both grains. Nor can we we do it with metals such as iron and gold for example. The same is true for energy. We can not compare, add, etc. energy units of different forms of energy. If we do the result is silly nonsense.

It would be like adding corn and soybeans together. If we were to do such a stupid thing the mixture becomes worthless. The same goes for comparing iron and gold. And it applies to energy. We can not compare, add etc. energy units of different forms of energy. Defining it as the capacity to do work makes no difference. The capacity to do work exists only in its concrete forms. Each of the forms is unique. Grouping the various forms under the label energy is an abstraction.

Energy defined as the capacity to do work does not exist outside its various forms just as grain or metal do not exist outside of their concrete forms. If energy is not an abstraction, define its characteristics. Is it renewable or not? Does it pollute or not?
What is its utility? How available is it? These questions can not be answered for energy because it is an abstraction.

We can not compare, add, etc. energy units of different forms of energy. If we do the result is silly nonsense.

This is nonsense itself. (Guess it's my turn to respond to your nonsense today.)

It's quite possible to calculate the amount of electricity produced by burning a certain amount of coal, or natural gas, that's used to produce it. We can thus "add" an amount of electricity produced by coal to an amount of electricity produced by natural gas, and thus "compare" the quality of natural gas' energy content to that of coal. Similar additions and comparisons can be done with any form of energy (light, heat, kinetic motion) as long as one has the empirical background of several centuries of physics research, which we do have. We even know, for example, that the energy contained in matter is equal to its mass times the speed of light squared. If you'd care to visit a museum in Hiroshima, you could see that even this somewhat abstract formula has extremely PRACTICAL consequences, and that there is nothing "impossible" or "silly" about the calculations involved. If there were, you would not be reading these words on a computer screen, because computers would be "impossible" and the knowledge that produced them "silly."

If energy is not an abstraction, define its characteristics.

A joule is defined entirely by kilograms and meters and seconds, which are certainly on the concrete side of the concrete-abstract spectrum. (A joule is 1kg*m^2/s^2.) Not much abstraction visible to me.

PS: Yes, you can get philosophical about the nature of kilograms and seconds, but going down that epistemological rabbit hole doesn't change the practical uses of the terms any more than asking "What is the nature of the color red?" changes which objects are red.

x - Energy is not an abstraction - it is work. In SI units it is measured in Joules. 1 Joule = the work done when applying the force of 1 Newton through a distance of 1 metre. If you want to do some work (expend some energy) sit down and stand up. Moving your body weight against the gravitational field of the earth will require work (energy) and you need to eat food as your source of work (energy). Now, your body is not a 100% efficient converter of the potential chemical energy in your food to (say) the potential energy in a raised weight. You do exercise - you get hot = waste heat - another form of energy. The same applies to all other energy conversion processes - they are not 100% efficient so I'm not sure what your concern is over EROIE as a measure of energetic return for energetic input. Provided the relevant conversion efficiency is applied it is entirely valid. On another thread re: ethanol you posted similar comments to those above. Lets say you run your farm machines on ethanol and it takes you 100 gallons to sow, harvest, transport and process the corn from one acre of land and at the end of it you produce 50 gallons of ethanol - how are your prospects looking for next year? You're 50 gallons down - going to do it again? Now lets turn it round and say it takes you 50 gallons to do the farm and convert bit and it produces 100 gallons of ethanol. Looks a bit more promising this time - you are 50 gallons up and you could sell some/all of this as surplus and do the same again next year. All looking dandy? First case EROIE = 50% second case = 200% gross. If you want to get into finer detail you can add in the energetic cost of making and maintaining your plant, keeping yourself in food and lodgings, and all the other factors which keep you going. Just make sure you identify the relevant conversion factors and apply as req. In this case we are comparing ethanol in to ethanol out so one can compare gallons directly but if you run your machines on diesel just convert them both to Joules and then compare. This is not saying anything about the financials - I think there will be others on here who can/have expand(ed) on that.

One horsepower = 745Watts = 745Joules of work done every second = 74.5kg lifted vertically at 1m/s = average guy running up a 3m flight of stairs in 3s (all approx). Find a tall building and keep going as long as you can - doing work is real.

Nicely put. Sometimes I wonder if they are confusing the concept of energy with entropy. In many ways entropy is much more difficult to quantify and reason about, and maybe some of these people (like x) got the wrong impression along the way.

I really don't know what else to make of the stubborn refusal to ack the utility of EROEI.

I think he's just making the point that we use different forms of energy differently. If you have a gasoline car and need to drive somewhere, it doesn't matter how much energy you have - it matters how much gasoline you have.

He's not "just" making that point. He's attacking valid concepts (such as EROEI) and talking utter nonsense about physics.

Much of the discussion on this forum is precisely about whether one source of energy (say, solar) can economically be substituted for another (say, gasoline) via certain technology (say, solar panels and electric cars, instead of refineries and gasoline engines). There is more than ample scientific theory and available data with which to make educated guesses about such subjects. (Some of that theory and data has been being practically applied to technological innovation for centuries.) x is making a wholesale rhetorical attack on the practical validity of such discussions, and what he's saying is pure drivel.

In fact, energy most definitely is an abstraction. It's a useful one, because it gives a quick way to compute some macroscopic constraints obeyed by the laws of physics. Thermodynamical computations are intrinsically abstract---and powerful. But they are certainly abstractions.

Do you remember the story from Feynman's book when he was asked to review some primary/secondary school science materials? He was annoyed as heck that the textbook described all sorts of processes as coming from "energy".

If energy is not an abstraction, define its characteristics. Is it renewable or not? Does it pollute or not?

E=mc2. Energy, ultimately is everything. It exists with that other aspect of space-time or dimension to create the universe. Energy can neither be created or destroyed, but it can move from a state of high availability to a state of low availability, from potential energy - stored and available, to kinetic energy for moving things or thermal energy to heat things. Once used this energy is no longer available and is dissipated into the universe. This is called entropy. Energy is not in itself 'renewable' as it can neither be created nor destroyed.

Neither does 'energy' pollute - rather it is the releasing of energy from stores such as fossil fuels that pollute.

Check out the Laws of Thermodynamics.

Hope this helps,


I would suggest that all it takes is one missed harvest. One biggie that hits all farmers. Like ..yes tires.

So according to you ,MikeB..what is valid? One's own experiences and gained knowledge..versus the ivory towers and google_wikis_Master'sThesios_slipshop science_etc?

Urban knowledge then? Academia?

Big fight..but I think if and when Big Ag bows out for one harsh reason or another that no Ag Profs will have seen it coming. They are always fact they glean a lot from farmers and having to get 'down in the dirt' where its all played out..not sitting in front of PCs in their offices.


I would suggest that all it takes is one missed harvest. One biggie that hits all farmers. Like ..yes tires.

Or a plant disease, like wheat rust. A drought over a large area would also be disastrous. Such as the multi- year droughts in California, Australia, etc.

Gail and I had a discussion a little while ago about the farm credit situation. There didn't seem to me to be problems, most farmers own their land of own and lease extra acreage. The supply and market credit system is still working. Tomorrow? I worry about the futures market, since nobody can sell a thousand tons of soybeans or wheat in a vegetable market. So far, the forward/futures markets are working; the commodity 'hyperinflation' seems to be over and done with.

I don't have enough information about food and grain marketing overseas to be able to 'guesstimate' what direction prices will go in the short term. For sure the trend is lower, but that is never a straight line function.

The tire situation is a mystery to me. I can see where it would be a problem particularly with large equipment. I suspect there are small computerized 'chipsets' or electronic black boxes that would immobilize your machines if they failed, too.

Australia is a fairly large player in world grain production and our climate system has gone belly up this year. What has not been washed away or burnt to the ground is dying of drought.


Good job, somebody had to say it so it might as well have been you!
I particularly love the logic that there are no viable industries to loan to, but we can't produce enough tractor tires! Gee, I don't guess a bank would consider a loan to produce tractor tires a viable bet, because the tires would get sucked into the black hole of liquidity?! There are countless industries like this, with waiting customers, with a product to sell but with no capital stream to link the two...we have an "surplus" of quarter million dollar houses while millions live in claptrap apartments and sub-standard housing! I have said it before and will say it again, this is the most "whipped up" so called crisis in the modern history of the world, manufactured for the purpose of pricing down the wealth of the biggist investing class in history so it can be removed from them at a song. Much of it is outright theft. When the bottom comes, and the turn comes, there will be a concentration of the wealth of a generation in a small number of hands, and billionaires will walk away with what it took this generation 4 decades to create. To put it in direct clear language,it's a pack of shit, and has been from the start. Now to see the conjecture that we poor dumb consumers are going to suck up the wealth of the universe!! What a pack of...opps, I already said that...:-)


So why can't we understand completely what is going on? Can it really be a vast conspiracy or is it a gridlock caused by shortcuts investment banks and insurers took with weird financial instruments such as CDS's and CDO's?

Something has to cause the deflationary pressure. Deflation doesn't spontaneously happen, but a stimulus has to provoke it. All those insured defaulted loans are not being paid up because the excess of insurance policies could actually cause windfall gains by one party. That is not what insurance policies are supposed to do (they are really just supposed to prevent a total loss) but I think someone dreamed up a new way to use these as "shorts" and make a lot of money as things go downhill. But this does not work if everything gridlocks. So if things do start moving, it will likely serve to feed the insurance policies.

No one can prove that capitalism and free-markets are immune to the monkey-wrench. Is this the big monkey-wrench no one ever envisioned?

Overall I have no problems with Steve's post but we may never know what combination of stimulii and constraints lead to the potential deflationary crisis.

My share of the stimulus amounts to 7/10ths of one per cent of my annual income. As one of the "masses" will this extra money in my wife's purse cause us to be sucked into the black hole sooner or later than if I wouldn't have received it?

If you end up paying more in taxes, you may find your own "net stimulus" to be a wash. So the question in my mind is unanswerable because it may in fact turn out zero-sum to individuals.

You would have been sucking into it sooner faster if you had never heard of it.


Something has to cause the deflationary pressure. Deflation doesn't spontaneously happen, but a stimulus has to provoke it.

Okay, I'm going to go out on a limb and people are going to call me a jackass, but deflation is simple. It's always caused by surpluses, the excess of a good or excess capacity for the production of a good. Surpluses are inherently deflationary. If the good is brought to market then the surplus will be traded or priced at a lower value to compensate for its excess over demand.

Why aren't there deflations all the time, then?

Because the surpluses are usually managed. Surpluses are stored, concealed, hidden, shipped to markets overseas, denied they exist on Bloomberg or in the Wall Street Journal or dumped into a stream or river.

When the surplus cannot be concealed .. and is then forced onto the markets ... then the trouble starts. This has happened over and over and over again. Joseph Stiglitz (ex- World Bank chief economist) estimates that over a hundred countries have faced serious financial crises since the early 1950's *. Most of these crises were the results of surpluses; excess investment capital, excess capacity in trade goods manufacture, excess inventory of some kind or other, excess foreign exchange. The excess of the good drives its price lower. If the good keeps appearing in the market in excess of demand, the price keeps declining. At some point the lower price has consequences elsewhere ... that drive the price of the good - and other goods - lower still.

At that point the deflation is self- reinforcing. This is where we are today not just in the US but worldwide.

There are huge and non- perishable surpluses of houses, cars, office buildings, highways, pipelines, electical power stations, oil, coal, shopping malls, credit, flat screen televisions, oil palms, cell phones, ethanol distilleries, money (!), mafia dons, television stations ... you name it. Not only that, the equipment, tools, manpower, financing and management exists to create more! The whole point of financial engineering was to 'hedge' the deflation risks of all that stuff! The idea was to remove all limits to production once and for all! Credit was going to finance the making, finance the advertising, finance the shipping and handling, finance the purchase of stuff ... anywhere and everywhere on planet Earth. The problem 'du jour' was to increase access to more and more markets. China and India were not only going to make the stuff inexpensively for our multinational companies, their 'middle class customers' were going to buy if from our same multinational companies!

Now .. the stuff cannot be gotten rid of. So, the price of stuff is declining. HEY! People make stuff!

Yeah, too bad for them.

So ... where does that leave us? Identify and eliminate the surpluses is one step. People look to government. This is a mistake. Government tries to get demand to increase by increasing lending. Let's see ... add 120% to the Fed balance sheet ... hope the (functionally bankrupt zombie( banking system will expand credit ... hope the customers will start borrowing money again. Instead, more and more of the credit system fails. Let's try 'Plan B'.

Government can increase demand by hiring workers. They can't hire enough to make much of a difference in a gigantic economy such as ours. Government can destroy the industrial capacity of the rest of the world ... like we did during WWII. That's why the Depression ended, BTW. Not a good plan ...

Plan C: we can eliminate the excess capacity which would take some pressure off the resource base at the same time. It's a hard decision to make since all that stuff represents a gigantic expenditure ... sunk capital. But ... there are few other choices.

Sending it to Mars is not an option.

* 'Globalization and Its Discontents' Joseph Stiglitz 2003

There are huge and non- perishable surpluses of houses, cars, office buildings, highways, pipelines, electical power stations, oil, coal, shopping malls, credit, flat screen televisions, oil palms, cell phones, ethanol distilleries, money (!), mafia dons, television stations ... you name it.

We also have a surplus of fraudsters and system-gamers but that is just me being flippant.

Oil definitely is a quasi-surplus at the moment caused by the current state of the oscillating demand. If everything else depends on this, do you see another oil crunch snapping us back out of a deflationary spiral?

There are huge and non-perishable surpluses of . . . oil

I found it interesting that except for 1930, oil consumption worldwide rose throughout the Thirties, and oil prices rose from 1931 to 1937. Oil prices in 2008 dollars:

As Downsouth has pointed out, there were three million more cars on the road in 1937 than in 1929. Big difference today is that hundreds of millions of people worldwide want to drive a car for the first time.

Our middle case is that by the end of 2012, the top five net oil exporters will have shipped about half of their post-2005 cumulative net oil exports, with the other half being shipped from 2013 to 2031. Also, by the end of 2012, I estimate that the combined net oil exports from Canada, Venezuela and Mexico (three of our top four sources of imported oil) will be down to about 2.8 mbpd, versus 5.0 mbpd in 2004.

IMO, the key difference between our current predicament and the Thirties is that we are now facing a long term, and accelerating, decline rate in net oil exports worldwide.

There are two people walking in the forest in Africa and both see a hungry cheetah at the same time. The one person bends down and puts on his running shoes. The second person says, "HEY! Forget it! You can't outrun a cheetah!"

"I don't have to, I only have to outrun you!"

That's the problem with the net export model, an overseas importer only has to outbid local consumption by a very small amount ... and pay shipping and handling charges, of course. Since most exporters are small countries with authoritarian governments, cash from importers has a lot of clout. Particularly in a deflation mode like now, where the almighty dollar is almighty.

I may be wrong and I'd hate to see things come to this point ... and situations where in- the- ground declines such as in Mexico are not going to be changed by money waved at the decline ... but I would not be surprised at oil reaching American shores as long as there is money to pay for it. If there is some money here, there will be less ... there.

Foreign cash has to compete with authoritarian regimes that may need to keep their populace pacified to stay in power. Foreign cash also suffers from constant devaluation (inflation). The incentive to hold foreign cash also drops as global markets shrink, yielding fewer places to spend such cash.

Some countries are, however, already adopting barter schemes, oil for grain, for example or oil for machinery (often militarily related). I would expect such trends to intensify in the future.

That's the problem with the net export model, an overseas importer only has to outbid local consumption by a very small amount ... and pay shipping and handling charges, of course.

Except that so far (with the exception of political upheavals, e.g., Russia in the immediate post-Soviet era) I haven't really haven't found any case histories of this happening. Consider the net export declines from Indonesia, Venezuela and Mexico for example. Do you have any examples of exporters meaningfully cutting (in the absence of political upheavals) their domestic consumption in the face of declining production?

Also, I am basically making a quantitative argument, and you have to keep focused on the math. For example, at their 2008 production decline rate, if Mexico wanted to just maintain flat net exports of 1.0 mbpd, they would have to cut their consumption in more than half in five years.

It's also interesting that the UK and Indonesian net export declines were so similar, given the radical differences between the two regions.

The UK is characterized by high per capita income, high consumption energy taxes and a minimal increase in consumption (+0.2%/year over the net export decline period).

In contrast, Indonesia is characterized by low per capita income, energy consumption subsidies and a fairly rapid increase in consumption (+4.1%/year over the net export decline period).

We believe that most net oil exporting countries fall between Indonesia and the UK in terms of per capita incomes, rates of change in energy consumption and energy consumption taxes versus energy consumption subsidies.

And as noted above our 20th Century experience with global depression corresponded to rising oil consumption, except for one year--1930--and despite the highest nominal oil prices in history, the world has been unable, on an average monthly basis, to match or exceed the May, 2005 crude production rate (EIA) for the last seven months of 2005, for all of 2006, for all of 2007 and for all of 2008.

Given all of the above, IMO it is a huge mistake to characterize our oil supplies as a "huge surplus."

Saw the following over on The Automatic Earth (comment section). I would characterize the food & energy producers as "Winning through losing the least."
Jim Rogers Doesn't Mince Words About the Crisis
Maria Bartiromo talks to global investor Jim Rogers

What does all this mean from an investment standpoint?

Always in the past, when people have printed huge amounts of money or spent money they didn't have, it has led to higher inflation and higher prices. In my view, that's certainly going to happen again this time. Oil prices are down at the moment, but that's temporary. And you're going to see higher prices, especially of commodities, because the fundamentals of commodities are enhanced by what's happening.

Which commodities are worth buying or holding on to?

I recently bought more of all of them. But I really think agriculture is going to be the best place to be. Agriculture's been a horrible business for 30 years. For decades the money shufflers, the paper shufflers, have been the captains of the universe. That is now changing. The people who produce real things [will be on top]. You're going to see stockbrokers driving taxis. The smart ones will learn to drive tractors, because they'll be working for the farmers. It's going to be the 29-year-old farmers who have the Lamborghinis. So you should find yourself a nice farmer and hook up with him or her, because that's where the money's going to be in the next couple of decades.

Do you have any examples of exporters meaningfully cutting (in the absence of political upheavals) their domestic consumption in the face of declining production?

You know, WT, the wag in me wants to say ... Uh, the United States ... ?

Refiners last year were shipping diesal and distillates to Europe while our truck drivers fumed about high prices. Diesel was priced even higher in Europe ... our production has been slipping for decades, obviously.

Please don't misunderstand. I don't disagree with the net export model. Citizens in exporting countries - with dollar linked money to spend - will buy products that represent middle class comfort and convenience. We Americans are more than happy to sell these things, which all add to demand for energy.

But, I keep looking at the decline in oil prices. Goods like oil are losing value relative to money, particularly dollars, even more particularly, cash dollars. Currencies are 'de- coupling' from the dollar. Cash dollars are becoming the only real store of value in the world. People just aren't ... and won't ... spend them. In fact, they will sell off almost anything to get more of them.

On the production side, the capacity of the industry is immense. 85 MPD is probably sustainable for many years, even if less than 85 MPD is actually produced on any given day. With the means to pay for this shrinking (demand) and the capacity constant or declining slghtly (supply), the imbalance continues to drive prices lower. And lower and nower nad lower.

Eventually there will still be the potential for 85 MPD - which can appear at any time - but the dollars to pay for it will be impossible to get. So, the cycle continues.

This is what happens:

Riot police broke up a demonstration in Russia's Far East region on Saturday against higher import duties on used foreign cars, highlighting official sensitivity to any protests linked to growing economic hardship.

Russia needs money, hard currency ... US dollars. They will stifle domestic use and sell what the can - energy - for the dollars.

With cash dollars being more and more valuable they become more and more scarce. Trading for dollars will become more expensive for the good that is traded for them. (Trading oil for food is probably cheaper, if the food producer cannot find any dollars.) If Congress raises taxes as the Obama budget suggests, watch out! Dollars will disappear!

Lots of oil, no dollars. Oil will be very cheap indeed, but nobody will have the cash to buy it. As for credit, nobody will pay good cash money for the credit, either. The surplus of credit is driving the credit value - the money costs that are imbedded in most goods and services - lower. Adding more surplus credit thusly drives prices lower and increases bankruptcies.

It's a strange new universe, this is.

Two points about the US.

First, we went from finding our largest Lower 48 oil field, the East Texas Field in 1930, and from a leading net oil exporter (especially during the Second World War), to zero net exports in 18 years, in 1948--22 years before our production even peaked.

Second, I was asking about net exporters. The US is basically an example of the post-peak Import Land Model. In order to just maintain flat net imports, we have to cut our consumption at the same volumetric rate that our domestic crude oil production declines.

Regarding this assertion:

On the production side, the capacity of the industry is immense. 85 MPD is probably sustainable for many years.

I think that you are dead wrong, especially as drilling projects are postponed or cancelled, since the industry has been unable--for more than three and a half years--to match or exceed (on an average monthly basis) the monthly crude oil production rate that we saw in May, 2005 (EIA).

Mathematically, the world in 2005 was at about the same stage of depletion that the North Sea was at in 1999, and the real North Sea decline did not kick in for three years, which would be 2009 for the world. Also, if we separate North Ghawar from the rest of the Ghawar structural trend, North Ghawar and Cantarell were the two largest producing fields in the world in 2005. Peter Wells asserts that North Ghawar will be "effectively watered out" by the end of 2010, which is probably the same fate as Cantarell. This is true of many of the world's largest fields--producing what Matt Simmons calls "oil stained brine."

And all of the factors that you described about our current depression were also at work in the Thirties, which--after 1930--were largely characterized by rising consumption and (after 1931) rising oil prices.

Finally, where we have seen consumption drops in exporting countries during political upheavals, e.g. Russia, we also generally saw huge drops in oil exports.

Russian Net Oil Exports (actual & forecast, with projected 10 year net export decline rate shown):

And again, you need to look at the numbers. Here are the 2007 Russian numbers, from the EIA:

Total Liquids Production: 9.9 mbpd
Consumption: 2.8
Net Exports: 7.1

Our (Khebab/Brown) middle case is that Russia's 10 year production decline rate (from mature basins) will be -5.1%/year. If this is what we actually see, Russian production would be down to about 6.0 mbpd in 2017. If Russia's consumption was zero in 2017, their net oil exports would be down to 6.0 mbpd--a 10 year decline rate of -1.7%/year.

... And again, you need to look at the numbers.

The number I keep looking at is the price per barrel. The market is telling me that relative to last summer and last fall there is currently excess supply over demand sufficient to drive prices lower.

I'm not trying to start an argument. It's just the market is pointing in a direction and it needs to be examined. At this point, after a long run up and a very high (blow- off) price, the current decline in price isn't a transient phenomenon. It is a trend change.

All the depletion curves tell me the same thing. Depletion indicates that oil is being produced and put on the market. If it wasn't the depletion rates would indicate a less sharp decline over time. (Perhaps they will.)

Perhaps producers are calculating that selling the oil now is preferable to waiting next year when unemployment world- wide is double what it is now. The bird in the hand, so to speak.

An alternative reason for declining prices is the value of the dollar is increasing. This is true but it is hard to see the dollar priced in oil to be three and a half times more valuable than it was a year ago.

Another alternative reason is the market is distorted by money flows. (Velocity of money incresing total funds available for commodites) Open interest on the futures chart does not indicate excess money during the peak or run up. There is more to this than meets the eye, but I don't think the run up in prices was a strictly money flow issue.

I don't disagree with any of the depletion scenarios. I think 'Peak Credit' hit harder and sooner than peak oil. Peak oil will ultimately constrain supply, it certainly is locally. Post- peak credit destroys demand. The point is the destruction of demand increases marginal purchasing power. Even if production if five barrels a day, if there is only a need for four barrels, it will be a buyers' market.

That demand would keep climbing because of China and India and more big gas guzzlers and whatnot ... was an assumption. The same sort of assumption that house prices will always go up. "Nobody is making any more land and the population is increasing!"

What matters is not supply of anything but the purchasing power to take possession of it.

What happens next? I don't know. If production is constrained by some event ... prices might rise ... but who will pay them? Not us Americans. We are not going to borrow to use fuel. Demand will decline and prices will also.

If prices decline even further, exploration and production will be curtailed and production will decline even more sharply. If prices continue to decline it is because the economy is still contracting and demand is falling along with it. Falling supply and falling investments in supply will be paralleled by falling investments in demand. Five barrels a day might be too much production after all.

I agree that the decline in demand outpaced the long term decline in net oil exports in recent months, but I suspect that a combination of voluntary + involuntary reductions in net oil exports this year will change that, and I expect that future net export declines will be mostly involuntary.

Regarding oil prices, an average price of $40 in 2009 would still be an average rate of increase of about +10%/year since 1998. Compare that to GM and Citibank stock prices since 1998.

Regarding involuntary net export declines, some updated info:
Venezuelan Oil: Worse Shape

The author of this article puts 2008 Venezuelan net oil exports at 1.71 mbpd, versus 1.96 mbpd in 2007 (EIA), a decline rate of about -14%/year. I estimate that Mexico's net exports fell from 1.4 mbpd to 1.0 mbpd. So, the estimated combined VenMex decline was from 3.36 mbpd in 2007 to 2.71 mbpd in 2008, a decline rate of about -21%/year, and a volumetric decline of 650,000 bpd in one year.

The estimated one year VenMex decline is about 62% of total 2007 Canadian net oil exports. Canada, Venezuela and Mexico are three of our four largest sources of imported oil.


When you analyse the way language proceeds from thought in consciousness you find that originating thought is formless and laguage that arises to convey the formless inner impulse gives that impulse form in the outer world. Language is an approximation of the underlying spiritual impulse. Language destroys reality. It's perfectly simple. Form is unreal and the formless is true reality.

Merrily, merrily, merrily, merrily; Life is but a dream.

Really, I'm being most earnest.

Emptiness is emptiness, and form is form. But sometimes, form is emptiness. Language does not "destroy reality". It is just another unfathomable aspect of it.


Ah, the view from different windows. You miss my point but going further would be a waste of resources.

Are you saying that once we form a thought into words, we forget the original thought, and have to now live with an approximation? I disagree. I constantly have to add caveats and explanations in order to "zero in" on the still-to-be-fully-expressed thoughts I have. I never express them perfectly and yet they remain.

Are you saying that the formless "spiritual impulse" is true reality? I strongly disagree. You seem to be implying solipsism. While the existance of objective reality cannot be proven, solipsism yields no functional benefits, and predicts nothing useful. Believing in an objective reality, which is more real than my thoughts concerning it, yields plenty of useful predictions. Even if it's wrong, it's pragmatically the better way to think.

The relationship between language and 'reality' has been examined for a long time. 'Ephemeral reality' were ideas of Jung, Freud and Lacan, a French linguist - a student of Freud - whose concepts generated the 'Language annihilates what it describes' phrase.

I'm not making this stuff up. I'm not original enough.

With the economy, it is impossible to touch it or look at it. It must be visualized. You cannot go to the zoo and ask where the Economy is.

Although the zoo is probably the first best place to look for it.

Well, Lacan and others of his ilk tend to make some assumptions about language that linguists find no support for. I've always like the idea of language capacity for annihilation, but language is not completely independent of perception. This has been shown in the studies of Berlin and Kaye on color terms already in the '80s.

That's true, but the assumptions are aimed at moving targets. It's hard to get linguists to agree, and when agreements are reached the targets have moved again.

With economic philosphy, the 'rational' way to describe a process is with mathematics but that is a lie made up in the disguise of a truth. The math models adhere to the models' own inner dynamics - and are incomplete - or leave out something important and are irrelevant.

A large number of models, math and otherwise ... have proven to be worthless crap. Reputations have turned out to be worthless crap as well. People might be PO'ed by my language or ideas but I haven't lost anyone billions of dollars, either.

A large number of models, math and otherwise ... have proven to be worthless crap.

This does not apply, it should be said, to the laws of thermodynamics. Or to the related enthalpy or entropy calculations of chemical reactions. Or, most likely given the proven utility of its foundations, to EROEI. Despite using mathematics, these are not "lies made up in the disguise of truth." Their "truth" is in their utility. Likewise, economic theories are not worthy or worthless because they use mathematics or not. They are simply either worthy or worthless (perhaps depending on the situation).

I've read the "above the fold" section of your post two or three times now and still can't figure on how it has any bearing on anything practical. You have gone down a philosophical road that makes it very difficult for you to communicate your thoughts to a large number of people, since only a relatively small number of people are familiar with your jargonized used of ordinary terms like "reality" and "annihilate." Other philosophers, most notably Richard Rorty, have argued (in fairly plain language) that we should simply stop using terminology that isn't practically useful ("reality" being a case in point), and invent new terms, such as "inter-subjectivity", to replace old ones where replacements are needed. I would humbly suggest that this is a better approach, at least when addressing the general public on matters affecting policy. You'll be better understood.

I'm sorry, I should have said 'Economic models, math and otherwise ...' I keep thinking of the mathematical risk models used to price different kinds of derivatives. The models all failed. The strategy of marketing risk by relying on these models failed. These failures have caused millions of people to suffer.

I'm sorry deux, I'm doing the best I can. I don't disagree at all with EROEI. If anything, the concept is interpreted too narrowly.


No, as you observe you need to recursively zero in on the thought, words are an approximation. You can never “perfectly” express a “thought impulse” in words.

I am saying that the “spiritual impulse” or “thought impulse” is closer to true reality than the objective words formed. Which would you rather have “your mind” xor “a dictionary”. Spirit is permanent and unseperated – “I Am You and You Are Me and We Are All Together” to paraphrase John Lennon. Spirit gives Life to Clay.

I had not heard of solipsism until you mentioned it but that is not what I mean at all either. Mind is transient just like the body. Consciousness might be a word to play with but that also is transient, it is an appendage to spirit just as much as your left arm is an appendage to spirit.

As to pragmatic results, well it is the physical – “materialism” that has got us into this mess and I have plenty of practical results from “Seeking not to store up goods of the earth, but to store up goods in heaven” to paraphrase The New Testament, not that I would expect anyone to “ride in that carriage with me”.

EXAMPLE: During the Vietnam War a senior Buddhist monk sat in meditation on a busy street, poured petrol all over himself and lit a match, he then sat calmly while he burnt to cinders. This monk was so focused in “The Spirit” that the physical, objective reality was of no consequence.

I am not an academic of philosophy or theology, I am just a “not so humble Magician” so please excuse my wishy washy, all words are approximate attempt to explain.

I was only intenting to clarify StevefromVirgina's abstract thinking a little and look where it got me, explaining the meaning of life - 42.

Language destroys reality. It's perfectly simple.

Perfectly simple, except that most people can't figure out what you're talking about, and don't care to.

A truly simple way to make your point would be: "Language is an imperfect way to understand the world." Or maybe "Theories can be wrong." Most people can understand and accept such propositions.

Language destroys reality. It's perfectly simple

So. How many rows of potatoes did you cultivate while you dreamed up the convoluted excuse to state that little headline attention-grabber?

Wrong season for potatoes here, I was actually sieving cow shit whilst I constructed my hypothesis in preparation for a crop of brassicas, leafy greens and root veg.

You refuse to understand what I'm saying, that's OK, I have all of Eternity to get the message through.

Everything I Will comes to fruition because I do actually know what I'm talking about.

Like for instance, I made a comment somewhere in this thread on Saturday that Oz was dropping like a bag of the proverbial and was repudiated with links to gov statistics stating otherwise. This weeks newspaper headlines confirm my statements, and so do the Oz equity markets, finally showing signs of the delightful crash that engulfs the worlds finance sector.

Don't you love the way the DOW is dancing this week, all part of my glorious plan for humanity.

Eat it.

Perfectly simple, except that most people can't figure out what you're talking about, and don't care to.

So why are you bothering to reply.

You are merely playing with words. Back in the day Descartes was merely playing with maximum and minimums of language concepts. Once we have learned language it is too interwoven in our makeup to separate out from our basic perceptions in the conscious mind. Focussing on a point just zooms in, it doesn't remove the parts of the frame around the point. Learning language is kind of like losing virginity it is an irreversible life changing event.

Once we have learned language it is too interwoven in our makeup to separate out from our basic perceptions in the conscious mind.

You have not tried, have you. I have and it can be done.

You still did it with a brain that had developed in the way that it had by learning language, how can you ever be sure the separation was complete?

I can only say, without trying to be "cute" in any way, "Which end of the tube do we choose to look down". You're question can only be answered by yourSelf, in meditation free from linguistic constructs. Sorry, that does sound "cute", but on this occasion I am having a serious moment.

I know what you are speaking of, I am merely pointing out that the very physical structure of the brain of all who have learned language has been shaped by learning language. Linguistic constructs may be so deeply ingrained in the very physical structure of the brain and its electro/chemical pathways that complete separation may well nigh be impossible. Or in other words the meditation is still being done by a language capable human using a brain that developed by becoming language capable. Brain activity is certainly different during deep meditation but there is none the less brain activity. It is of course equally possible that the meditative max or more properly minimum might actually be more easily attained by those otherwise fully developed humans who for some odd reason or another never developed language. There have been few of those however so it would be certainly a difficult hypothesis to test.

"in the beginning was the Word..." might or might not be the very essence of our consciousness. I am not being frivolous either.

It did pile up didn't it.


Once again, I sincerely apologize for the rant and I promise to keep my mouth shut further.

How are we going to learn from you if you keep your mouth shut?

Why do you feel "obliged" to keep you mouth shut?

Look at the extended "conversation" that your words have elicited!

There are key differences between housing markets and food markets.

1) People do not buy and store food as an investment in their future.

2) People do not stop buying food simply because "the market isn't right" or whatever.

Therefore, deflationary pressures are not going to grind the system to a halt by themselves.

I see legacy costs as a very short term factor in future costs. Worst case scenario, they drive up costs, which brings supply back online and shortly there after supply and demand fall back into balance. Short of a true supply problem, the market will adjust.

And yet deflationary pressures DID grind the system to a halt in the 1930s. Your platitudes are destroyed by the reality of history. I strongly suggest you review what happened in the United States during the Great Depression, and in other nations around the world during other financial meltdowns, both inflationary and deflationary. The evidence is there for you to see if you but open your eyes.

So nothing annoys me more than when people put words into my mouth I did not say. We were talking about the AGRICULTURAL PRODUCTION AND DISTRIBUTION SYSTEM. And yes, THAT did not grind to a halt in the 30s. If you need proof, perhaps you should google "Great Depression Food Lines."

Second, this is not the Great Depression. This depression is, I think, the result of hitting a wall in oil production. The situations are different. Unlike you though, I do not buy that peak oil means everyone must die just because you say so. I argue points not ideology. I find that people who argue ideology have already made up their mind.

Doesn't it kind of destroy your argument to cite all past depressions and recessions when we certainly did not all starve in ANY of them?

Don't the "Great Depression food lines" disprove your assertion that: 2) People do not stop buying food simply because "the market isn't right" or whatever.

Why would they be waiting in the bread lines if they were still buying food?

Perhaps Andrew should study the population rates of change before and after the Great Depression, along with mortality rates during the Great Depression. The evidence is very strong that about 7 million US citizens perished prematurely during the Great Depression. Since the US was not gassing them in concentration camps and there were not 7 million murders recorded by the FBI, one would be compelled to look at other possible explanations, like starvation, exposure, and lack of medical care, all things due to the breakdown in existing systems.

Andrew, the very food lines you cite are proof that the EXISTING distribution systems failed and had to be replaced by massive charity systems, both private and public, to feed the population. That's not ideology. That's fact, whether you acknowledge it or not.

People who lived during those periods wrote about how daily commerce simply ceased, how government and private programs had to be hastily constructed to do what the failed commerce system no longer could do.

If you are arguing that family farms continued to farm, that is true but the markets for their products vanished. And further, today, there are not 70% of the US population on family farms. In fact there are less than 2% of the US population engaged in agriculture at all, and the bulk of that is corporate agribusiness. Just what do you think will happen to such agribusiness if the wheels come off?

Talk about arguing ideology! Tell me what happened to the food distribution systems in Argentina in each of its recent financial debacles, Andrew. Tell me what happened to Iceland's food distribution system during its current debacle, Andrew. Look around you. The possibility of systemic failure is real. It's not assured but it IS possible despite your pathetically over optimistic diatribes to the contrary. People like you ensure that I stay a doomer. Incapable of planning for the worst, you're probably like the people who leave their houses unsecured during a hurricane evacuation then wonder why their insurance claims are so much higher than their neighbors. Further, if you've seen how poorly existing distribution systems respond during localized crises like hurricane evacuations, you might have second thoughts about assuming that the entire system nationwide is going to work in any capacity.

Edit: Andrew may decide to read some accounts from recent financial debacles. Try reading Lessons From Argentina's Economic Collapse (PDF), for example. It's not the Mad Max strawman that people use to try to discredit preparedness advocates. It's what life was really like in Argentina during the 2001 financial debacle and for years afterwards. There are plenty of additional accounts out there as well. Only someone who assumes that "it can't happen here" can argue that we are somehow magically immune and an attitude like that is both erroneous, and quite possibly delusional.

I don't have the exact figure in front of me, but something like half the men who signed up for military service when the US entered WWII were so malnourished they had to be rejected. And this at a time when the military was desperate for cannon fodder, er, soldiers to fight a world war on multiple fronts.

That number of malnourished adult males suggests strongly that many others simply starved. We think of bread lines and soup lines as symbols of how bad things were, but the folks getting any soup and bread were the lucky ones.

The idea that a system based on greed is going to get us through permanent, on going declines in all resources and through deteriorating natural support systems is the most ludicrous, ideologically blinkered position I can imagine. The greed-based economy is already hopelessly broken. When its beating red heart, the investment banks, have to be socialized, you know it has become obsolete. Trying to "save" it is, as many have said, pouring money down a rat hole.

The delusional nature of the thinking of nearly everyone who has been trained in neoclassical economics (that is, brainwashed into the insane ideology that greed is good and infinite growth is not only possible but an absolute imperative) would be a cause for great wonder and hilarity if it weren't destroying our children's world.

Yes, all efforts are aimed at reviving consumption via somehow coaxing the banks into lending again, which won't work for perhaps the reasons you give.

We got out of the Depression not by the New Deal, but by war buildup expenditures. Germany did it before we did. The expenditures were massive. It was not done by reviving mass consumption. Mass consumption replaced gov't sponsored war consumption after the war. This was possible because there were still a large reserve of natural resources, energy in particular, in the ground. It was possible to pay off debts.

Things are different this time around. The resources are no longer ample. The debts cannot be paid. Growth cannot resume in any sustained way. Shrinkage is unavoidable.

Consumption should not be revived! There should gov't assistance in shrinking it. But it should be planned shrinkage so that it can be comfortable, or at least tolerable, and somewhat equitable. No one should starve, no one should be sleeping on the street, no one should be lacking basic health care. BUT, to keep people in their McMansions with 2 cars is totally impossible. It's gone. The material resources for it are evaporating. There needs to be relocalization, reconcentration, a return to agriculture and light industry, etc, everything to reduce consumption of non-renewable resources. Reviving the auto industry or the airlines is nuts. Rail service needs to be expanded in conjunction with
relocalization. Money shoud be used to these ends, not to revive the dead (i.e. rescue billionaires who are dropping zeros off their net worth.)

Part of the problem is that too many of us in the middle class ALSO think of ourselves primarily investors. We do not even allow ourselves to think outside the box we are in. But as a class, our goose is cooked. We ain't getting it back. Survival means finding some means of collective survival. And that mean thinking about what will allow us ALL to survive, and our kids and grandkids. And although each of us is obliged to do the best we can with what remains of our portfolios, if we put that first in seeking societal solutions, we're done for.

We need two economies. One is the dying globalized market economy. The other is the alternative economy that is as local and regionally self-sufficient as possible. The latter one has to grow. Although measures to keep people in their homes for a certain period are justified, it won't be possible longer term. But what is possible is the development of the alternative economy where people can actively rebuild a new way of life. There are millions of people who hae been or are about to be thrown on the slag heap. Most will never be incorporated into the "regular" economy again, short of a much larger and wider war (which unfortunately cannot be excluded.) But the alternative economy can and ultimately must re-engage the millions that are expelled. If things are done right, new and decent lives can be led at a teeny fraction of the cost in real resources required for life in the regular economy.

This won't happen of course, not until disaster is upon us. The empire will struggle to revive growth, it will struggle to maintain or regain control of the physical resources needed for growth. There are various contenders for those resources and there will be war. But at some point, all the contenders will find their legs buckling underneath them, and they will hit the ground, and everyone will discover that the ground, the soil, is THE ultimate resource. And perhaps then we'll get truly serious about survival.

I agree with most of this comment and have written somewhat similar things at

I do think the New Deal did a very great deal to help with the Great Depression and absent the war and too much timidity, it would have done the job.

But back to the article Steve wrote---

There seems to be a serious contradiction between two ideas in Steve's article. On the one hand Steve advocates "quietly get rid of all the stimulus packages." But previously he said: "While this is happening, money never reaches the masses and workers who consequently cannot afford to buy the increasingly expensive goods."

It appears to me that a better solution to propose would be in two parts:

  • Stop pumping liquidity into the financial sector. Per this article that only increases deflation and makes matters worse.
  • Increase dramatically the parts of the stimulus package that put purchasing power into the hands of consumers, that is the 'Masses' and 'Workers' in Steve's diagram. If the Masses and Workers can afford to buy, the business will be able to sell and perhaps the cycle can be broken.
  • There are plenty of places in this society where money could be invested that would keep Workers working and provide an adequate living to those not working. Teachers are being laid off for lack of funds, when we should be doubling the number of child care workers, including but not limited to credentialed teachers. Higher education is being cut back due to lack of funds, when in the long run nothing pays back better than educating our brilliant under classes. Coal and oil are poisoning us and destroying our planet, when we should be expending almost all available resources on alternative forms of energy. It is the start of a long list.

    Obama is  rather timidly heading in the right direction, except for the financial bailouts. Let's give his courage a boost, and forcefully ask for more.

    Increase dramatically the parts of the stimulus package that put purchasing power into the hands of consumers, ...

    Yeah, that's what I disagree with, mostly anyway. Food, shelter, etc, but not a resumption of the kind of consumerism we have had. People are cutting back, not just those out of work. They should be. And much more cutting back should be done on a societal basis. There needs to be money spent on putting a net under people and keeping going those parts of the economy that are essential to basic well-being, but also focused expenditures on moving toward a new way of life.

    In addition, the tax increases do not go nearly far enough. They need to go up much more steeply after 250k, and keep going -- no loopholes. Same with estate taxes. There will be runaway commodity inflation at some point if money continues to be printed. All that plus of course a drastic rollback in miitary expenditures -- to say the size of Russia's or China's, or even the total of those two -- which would still be an 80% reduction. None of this will happen of course.

    The problem with Obama is that he may be lulling many into thinking everything will be alright. Many of his steps are directionally correct, but they're so teeny that they can never work. Of course, were he to do any significant part of what was truly needed, he'd be joinng JFK, MLK and the others. Even the teeny steps he has takne will piss off significant sections of TPTB.

    Of course, were he to do any significant part of what was truly needed, he'd be joinng JFK, MLK and the others. Even the teeny steps he has takne will piss off significant sections of TPTB.

    Therin you have evidence of a small oligarchy conspiring to control society and it's wealth.

    Amen, Mikeb. This post is ridiculous. Fertilizer prices are high, or were for a while. That's all the useful information it contains.

    The analogy of the financial problem to a black hole, meanwhile, is stunningly pointless and sophomoric. The Federal Reserve Bank is not the core of the problem. The corporate capitalist economy, which tried to compensate for excessive wealth polarization by lending money to the proles, is. This author clearly has zero acquaintance with that hard reality. And the Fed serves Wall Street and other private interests, in case you haven't been paying attention.

    And, by the way, what's so abstract about EROEI? It costs energy to get energy, and the process can be rather precisely measured and tracked by those inclined to do so.

    Disagree hugely.

    I think this post is exactly right on. Its very important to start discussing these issues.

    If you want to bury your head in the sand and decry it then have at it.
    Pointless and sophomoric?

    Name calling..thats the ticket. Gets us lots further down the road.

    Ahhhh I see you also 'broke the code' on EROEI!!! Kudos.

    Airdale-down on my knees when it shells down like this..down on my knees...Sooooo hey lets discuss Obama some more why don't we? Yep.
    Obama has no magic wand. Our food supply is not in his hands. Its the farmers and I-N,P,K and many other factors that most haven't a single clue about.

    The Federal Reserve IS the core of the problem. Not necessarily its existence, but its current structure and sperations are problematic.
    The corporate capitalists are brokers; they buy and sell credit and money. The original money or base money is created by open market operations of the Federal Reserve. A short description of this process can be found here:

    The corporate capitalists of Wall Street lend this money over and over again and stimulate repeat transactions with the same money. They get to keep a small piece of each transaction. Trillions of dollars have been pledged by the Fed to keep the brokers in business. Regardless of why, the consequences of this are real. Own a house or a car with a mortgage or a car loan? Do you have student loans or credit cards? You are in the bad loan universe.

    Whether you like it or not.

    As for who serves whom, they both service each other. As the Fed tries to rescue its brokers, the fact of the rescue itself advertises that its brokers are insolvent. I'm not making this up.

    A more interesting question ... is 'hyper- deflation' possible?

    The problem of quantifying all this mess looks like the hard part. What we know from understanding oil production is that you can't understand it if you can't measure it.

    I find the analysis of the credit default swaps fascinating. These act like insurance against bond investments and other lending policies, and a recent Wired article lays the blame on a single default correlation formula that became very popular on Wall Street and the last few years.

    I wrote about it more here:

    All of risk assessment relies on probabilities of occurrence but what happens when all the modes of failure, i.e. the default o a loan, becomes prone to a form of Common Mode Error? As you probably realize, natural disasters rarely suffer from Common Mode Errors and therefore one can manage the risk by spreading isolated failures over a wide range of customers. But economic disaster stretches far and wide (such as a peak oil crisis) and the Common Mode Error will basically wipe everyone out.

    Over on the Drumbeat thread, I listed the chapters from a book on the Great Depression called "We had everything but money." Here is an interesting little story from the book. A glimpse of our future?

    Movie tickets for a tire

    In the late 30's our town's only theater burned old car tires for heat. If you didn't have the dime for the ticket, an old tire would get you into the matinee for free. Every Saturday afternoon, I'd buy an old tire for a nickel at the junkyard, roll it up the hill to the theater and present it to the ticket taker. To this day, the sight of an old car tire reminds me of those days!

    Risk management can work like a fault-tolerant system. If one mechanism fails then you go over to another mechanism to keep the system going. The old car tire is another form of payment that rolls over when the previous form stopped working. That is essentially a crude form of fault-toerance.

    What we are dealing with now is the lack of redundancy. People put all their eggs in the basket of spreading risk by creating all these complex insurance swaps, without ever realizing what would happen if this all deadlocked. No one has a rollover mechanism. Insurance only works if it is a non-critical failure (for society as a whole) as the risk is spread by the vast majority of non-affected customers.

    The Wired link is essential reading. Thanks WHT!

    Again, where is your analysis of the real economy? You have no understanding or explanation of it and its relationship to money, Wall Street, and the Fed. The Fed exists to lubricate the "private" economy, but that doesn't make the Fed the core of the problem. And talking about reforming it is just a way of indirectly talking about challenging the capitalist class. Semi-informed nerds love to pretend that's not true, but it is.

    We need more democracy and a great deal more public, not-for-profit, ecologically intelligent enterprise, not dilettantish mumbo-jumbo about how we print money and can't understand the world. We need loan forgiveness for small people and nationalization and stiff re-regulation of banks, not misleading analogies to the universe and black holes.

    All we can do is understand the constituent parts and try to expose the machinations that are going behind the scenes. Real economists don't seem to do this, just like they can't stand to analyze constrained-resource (i.e. oil) economies. It just doesn't fit into their group-think. I like the kind of post that Steve writes because it really gets you thinking.

    As to the "semi-informed nerds" comment, this is the new way of blogging. Cross-checked and debated semi-information leads to emergent collective information that starts to make sense.

    We need loan forgiveness for small people and nationalization and stiff re-regulation of banks,......


    ....not misleading analogies to the universe and black holes.

    Concrete mentation proceeds from Abstract mentation and you need a little bit of education and a ray of light on your situation, to help you stop that aggravation.

    Cross-checked and debated semi-information leads to emergent collective information that starts to make sense.

    Correct. Some of you folks are very clever.

    I am curious as to the role that rapid contraction, of other economic industries that utilize anhydrous ammonia and DAP has had on the contraction of fertilizer prices. DAP is used in some places as a shale inhibitor for drilling water reactive shale formations, as a substitute for more HSE dangerous KCL and more potentially environmentally hazardous oil based invert drilling fluids. And ammonia is utilized in many industrial processes. The quotation implies that the drop in demand resulting in lower pricing is a solely a function of the agricultural industry.

    I am a native of Kansas and have been around agriculture it’s a costly low paying job and farmers are always living harvest to harvest. It’s an occupation with enormous overhead costs that have to yield to pay for the next season, and subtle changes in the economic dynamics such as a shortage of tractor tires can have a tremendous effect of the earning potential of farmers and agricultural industries, as increased costs can only be passed on so far to the downstream market. For example if the costs associated with a wheat crop, Fertilizer, fuel, equipment, seed etc. rise and it’s a bad year, bad weather, too little or too much rain and the crop yields poorly the market will only pay up to a certain amount for the end product, agriculture has market demand price restrictions. People won’t pay $20 for a 1# sack of flour; consequently the mills that make flour won’t buy the wheat at too high a price. And agricultural products have a limited shelf life, so they can’t just sit back and wait for better pricing and end up taking what they can get for their crop no matter what associated cost increases came with planting growing or harvesting.

    Its and occupation that people do, because they love it and/or feel bound to by tradition not necessarily to get rich. Obama’s proposed repealing of farm aid to agribusiness saddens me greatly being originally from an agricultural state as agribusinesses allow farmers to be a part of a larger entity giving greater stability to their livelihood than having a single-family farm. Some prefer the family farm, however many like being part of a conglomerate.

    The future of agriculture in a fertilizer scarce world may require a shift back to traditional farming methods, like crop rotation. Rather than specific crop specialized farms, individual farms may have to grow a variety of crops to offset poor growing seasons, like a bad winter wheat crop, and rotate the crops grown on individual plots seasonally to manage and accommodate the demands of the soil. This was how crops were grown before chemical fertilizers. And maybe application of natural fertilizers, as terrible as it may sound, land farming animal or municipal sewage. In the spring in some small Kansas towns there is a smell in the air when the wind is blowing from the right direction, as C.A.F.O. pig farmers land farm material from their sewage lagoons. As smelly as this is, it is an excellent source of soil enrichment that is a byproduct of something else and is renewable and effective if not somewhat unpleasant to be around at the time of application. Land farming organic waste is done on a limited scale already but many good sources of natural organic soil enrichment literally goes down the toilet. Granted technologies will have to be developed to utilize these sources safely for people involved. It is certainly an avenue worth looking into and expanding.

    I am curious as to the role that rapid contraction, of other economic industries that utilize anhydrous ammonia and DAP has had on the contraction of fertilizer prices. DAP is used in some places as a shale inhibitor for drilling water reactive shale formations, as a substitute for more HSE dangerous KCL and more potentially environmentally hazardous oil based invert drilling fluids. And ammonia is utilized in many industrial processes. The quotation implies that the drop in demand resulting in lower pricing is a solely a function of the agricultural industry.

    Oil industry activity is declining sharply as well. Add the declines in chemical and general industrial use and the trend has to be declines in both use and price. I don't see any other outcome in the medium term. Agriculture uses a lot of ammonia. Whether the price will cause farmers to try other approaches such as cover- crop rotations (rather than the more common soybean/corn) or use animal waste is dependent on what is available. In your state there is enough animal waste. If industrial livestock production is ended, there will still be considerable pastured livestock that can be a source of manure.

    If you move from corn/soybean aress farther north to wheat I don't think there is much choice but chemical fertilizers. High prices here would suppress yields, no way around it. Less yields would be a mixed blessing. If other areas pick of the production slack then northern wheat farmers would have a lot of the usual problems; people being driven out of farming. However, if the wheat crop is smaller overall, including Canada, there would still be sufficient income even with the lower yields. Of course the wild- card is other costs. Diesel prices have dropped, but there is always something.

    If I was farming I would use a traditional rotation with livestock and experiment with a small plot just to try some new technique. I think smaller farms are the future with many more farmers. I read a farmer's comment about how he was successful pasturing livestock on winter grass, not providing fodder ... and producing excellent cattle. I think there are a lot of interesting new approaches. The real challenge is to be able to afford to try some of these; as you noted the business does not allow much room for either experiment of error.

    The majority of ammonia (83%) goes to fertilizers and almost all DAP goes to fertilizer.

    There simply is not enough manure or other organic fertilizer available (including rotating with legumes) to obtain the crop yields we need in order to feed everyone. Also, there are very real problems associated with getting such things as human waste to fields, at least until we all go back to the land.

    We literally "force feed" today's crops to get what would have previously been considered extreme yields. Fertilizer in the US has gone up 400% since 1960.

    Paul, I came across this study while I was searching David Pimentel's papers; he's done a lot of work on the corn ethanol situation which by itself is pretty interesting.

    This study compares yield and examines relative costs of both conventional and 'organic' methods.

    The report speaks for itself in detail and it is worth reading.

    ! Soil organic matter (soil carbon) and nitrogen were higher in the organic farming
    systems providing many benefits to the overall sustainability of organic

    ! Although higher soil organic matter and nitrogen levels of the organic systems
    were identified similar rates of nitrate leaching were found as in conventional
    corn and soybean production.

    ! Fossil energy inputs for organic crop production were about 30% lower than for
    conventionally produced corn.

    ! Depending on the crop, soil, and weather conditions, organically managed crop
    yields on a per hectare basis can equal those from conventional agriculture, but it
    is likely that organic cash crops cannot be grown as frequently over time because
    of the dependence on cultural practices to supply nutrients and control pests.

    If I can find more comparative studies of permaculture, I will post these as well.

    I support organic methods but do not see them as without drawbacks.
    The strongest case for organic farming methods is that they preserve P and K which will eventually be depleted in 100 and 300 years, respectively.

    The practical issues are that human and animal wastes are the worst sort of bulk materials to handle, and the nitrogen degrades quickly. Then there is the safety issue. Modern sanitation has rid us of many infectious diseases.

    Most of the material is water. Typical dry manure analysis:

    N P2O5 K2O
    Cow 2 1.5 2.2
    Poultry 4.7 2.7 1.4

    Compare this to diammonium phosphate:
    11 46 0
    Potassium chloride:
    0 0 60
    Ammonium nitrate:
    34 0 0
    An equal weight mixture of the DAP, KCl and NH4NO3:
    15 15.3 20

    Thus inorganic fertilizer is 5 to 10 times more concentrated than dried manure. It is also able to be easily handled by conveyors, trucks and railcars and is much easier to spread.

    Putting the "map of the bad loan universe" into my own terms, here's what should be done.

    If it's true, as the conventional wisdom has it, that the destruction of Wall St would reverberate to cause great harm on Main St, then clearly what we need to do is build a firewall to defend the line at Main St.

    So, for the window we have left where the dollar still has value and everyone still has faith in the federal printing presses, this bailout money and this stimulus should all go to the regional banks and state governments on the second circle out, the institutions which actually do the real lending and services provision, the only institutions which are possibly salvageable.

    The federal government's efforts should be to guide these institutions in using that money to rebuild relocalized economies, economically mediating between the relocalized businesses, farms, hospitals, and schools on the third circle out, and the people whose society and government this is supposed to be.

    Meanwhile we could and should carry out a moral cleansing:

    Will Ben Bernanke be held accountable if farm yields fall and people starve as a result?

    The best thing for the US government to do (and at the cheapest cost to the Masses and Workers and their grandchildren) is to listen to Nassim Taleb and Nouriel Roubini and prosecute the malefactors, then quietly get rid of all the stimulus packages.

    What are the prospects for any of this? As Steve said:

    Never happen! That's too common sensical for the Masters of the Bad Loan Universe.

    Unfortunately it becomes more clear by the day. What we Peak Oilers only previously theorized, that the fossil fuel society would do nothing but pump, burn, steal, spend, and party until it goes off a cliff, is now a proven reality, and like Cassandra we can do nothing but watch.

    Note the Sacramento agricultural model in the railroad methodology of production, processing and distribution. Agricultural rail lines to Isleton, Placerville, Fair Oaks, Rumsey, Calaveras and many more, connected to refrigerated warehousing and canning facilities. Campbell Soup, Del Monte and other food processors were down the tracks from the American Can Co. Sacramento smelled of cooked tomatoes in late summer, and America ate well.

    Solving immediate problems of tire shortage is uppermost on farmer's minds, but some IQ on this website needs to get rail savvy ASAP and bring the 3066 county planners back to railway orientation. National Guard Railway and Operating Batallions need to be reformed, to supply rail operating and maintenance personnel for regional rail expansion. Betcha a few rail lines could help with some oilpatch logistics as well. See books like Christopher C. Swan's "ELECTRIC WATER". See ASPO Articles 374 and 1037. Note James Howard Kunstler's pleas for rail rehab and local link-up.

    Websites like TOD, CultureChange, LATOC, PostCarbondotorg and JH Kunstler can help with dedicated Generic Rail section on their home page icons. Models for rail distribution can be found; study Spreckel's Pacific Electric Railway, for a regional SYSTEM of day passenger, night victuals and freight movement and distribution. Initiative is needed; interested bloggers can obtain the US Rail Map Atlas volumes ( their respective locales. Moreover, credentialed emissaries must visit the Federal and State government and bring railway expansion and rehab to the discussion as a requisite, not an aside. Names like Woolsey, Pickens, Heinberg, Rep. Bartlett, Kunstler, Orlov and Lundberg need to help America think about Parallel Bar Therapy.

    Might haul asphalt by rail from the tar sands mines to the lower 48, if there will be a rail built, and try to get a lighter mix of products out of U.S. refineries. In Canada they used the sand and tar mix from the Athabasca mines to pave roads with.

    Ok, so banks are sucked into a liquidity trap and they aren't creating credit. And we need a supply of liquid money to keep from falling into deflation. Ok, so why don't we just print some more currency? The way I see it, the amount of liquid money consists of all the printed currency plus the mass of money that is available due to loans and derivatives. If the loan rate goes down, the total money supply goes down, and deflation follows. So why not run the printing presses, and give every taxpayer a brand new hundred dollar bill every month until we stop deflation?

    Printing more money is not fair to foreign investors. It is arguably fair to domestic investors because it acts as a flat, though ultimately regressive, tax. But by printing money, we have actually taken the step of taxing foreign investments because their money is stripped of its value. That's why the current tax system we have works (somewhat), in that it taxes the people that benefit from the services the government provides. Foreigners don't necessarily benefit from govn't services so shouldn't have to pay the tax.

    Ah, so we don't print more money because we are trying to be nice to foreign investors, so that the money we pay back to them is worth a lot? So in the meantime we struggle to fix the broken credit system. If we could just increase the amount of currency, and eliminate the need to borrow so much, and if this would fix the problem, couldn't we find some way to be generous to foreign investors?

    Thank you, Steve from Virginia, for your post! Perhaps it's still too early to push the panic button, but your points are worthy of consideration along with other factors that may impact farming. As a result, two things I'll add to my list of farming issues to keep an eye on are - tractor tire availability and current fertilizer prices.

    At the beginning of February I sent an email to numerous friends and family about current droughts throughout the world in food growing regions (see I got 2 answers back from farmers

    One said:
    "This map was probably more accurate for the 2006-7 growing season than today. 2007-8 we had the perfect storm. One of the main drivers in addition to drought was the price of oil. Overlay a chart of oil over a corn chart for the last two years. Almost one third of US corn last year (2007 harvest) went to ethanol production. After the collapse of oil ethanol became unprofitable and the number of ethanol plants operating decreased substantially. Many went banko. Just look at the price of ethanol related stocks if any are still trading.

    Granted grain stocks world wide are lower than they have been but the 2008 harvest rebuilt stocks a great deal. One note of caution as far as world wide food security we do need to have a relatively normal harvest in 2009. As it looks now numbers will be in a comfort range but normal weather is needed and some areas are experiencing drought. It is not as dire as the map appears."

    And the other one said:
    "This link ( will have some info on regional agricultural situations. A bit more of a mixed picture than the Market Skeptics one which was based on a search of media stories mostly. The Chinese wheat area drought looks pretty bad and Argentina is in trouble too. Indian wheat production is threatened but rain this month could still salvage it. Pakistan has above average wheat. Rice is above average all over the place. Ending stocks of grain world wide are up 16% following good crops worldwide in 2008 which will buffer some of the possible shortfall this year."

    Both responses somewhat reduced my concern about drought having a severe impact on food supply. However, neither of them were saying there's no chance of a problem.

    Here in California, although we finally started getting rain this month, we got virtually no rain for Nov, Dec, & Jan of this rainy season (Oct - April). Even with the rain we've finally gotten, Lake Shasta's volume has only increased by 1% of its capacity. California's 3 largest reservoirs, Shasta, Oroville and Folsom are all only about 1/3 full and the snow pack in the Sierras (another important source of water) is only 76% of normal. Much of the water from these sources supplies farmers in the California Central Valley, a major growing region. In spite of the recent rain, officials at the CA Bureau of Reclamation "made the staggering announcement Friday (Feb 20th) that many state farmers would receive no water at all from its system this year unless conditions improve substantially . . ."

    I can't find the link right now, but some farmers in the CA Central Valley have also been unable to secure bank loans for this year (to plant, cultivate and harvest their crops) because the banks consider them too risky in light of the water problem. Right now is when farmers need to start preparing for the 2009 growing season. In farming, timing is everything.

    It seems to me that although this might not yet be the time to ring alarm bells, it's definitely a good time for anyone who is able to start planning a garden. No one can wrap their minds around all of this and know for certain what the outcome will be - there are a lot of unknowns - but there does seem to be some reason for concern. Food isn't like all the other commodities in the financial market, it's fundamentally different. We've all gotta' have it.

    The period after the fall of the Roman Empire later came to be called the Dark Ages due to the absence of written history, art, literature, mathematics and scientific discovery from the period. There is recent scientific evidence that the Dark Ages actually did begin with a period of darkness around 535 CE.
    During the Dark Ages, the population of Europe declined to a very low level, perhaps 25 to 30 million.

    By the year 800 the Medieval Warm Period began and lasted until around 1270 CE. Meanwhile the population increased to an estimated 70-100 million. The population of England grew from one million to seven million.

    Another extreme climate event started in 1315, lasting several years and creating a great famine. Crop yields fell from 7:1 (harvested grain: seed) to as little as 2:1 in some years (2:1 means eat one and save one to plant). There was mass starvation and a significant decline in population.

    After two decades the food supply returned to normal for another decade until disaster struck again.

    The population of Europe was eventually reduced by roughly half ranging from 30-80% regionally, with parts of France to this day not surpassing the medieval population.

    We can read about life immediately after the plague in The Decameron.

    The great die off took pressure off of resources and ushered in a great period of prosperity, leading to the Renaissance.

    Vineyard Bank in California was worth 30 dollars a share during the real estate boom. Today it is worth about 13 cents and is in perilous condition. It is not on the list of banks so big they were likely to fail.

    Hello TODers,

    As usual: Have you hugged your bag of NPK today?

    Let's not forget that holding the 'real assets' of seeds & fertilizer is holding the 'real future' in your very exosomatic hands. The application of 'real asset' labor; actually being on your bent knees down in the 'real dirt' [full credit to Airdale], thus jumpstarts the 'real journey' to a hopeful Leibscher's Optima [20+:1 AG ERoEI] and planned avoidance of a Liebig Minimum, whether in farming or industry.

    IMO, the best way to clear out the high priced I-NPK inventory is for lots more people to embrace relocalized permaculture; it is ultimately the direction we need to go anyways, but we need much more Peak Outreach to get a stampede started toward the gardening sections of Home Depot & Lowes. Then, the subsequent composting of this crop residue can further leverage this trend.

    If only I could convince every American to buy a big bag, give it a final hug, then give it to every farmer/gardener across the land. This would massively 'real asset' recapitalize the system from the real roots of our wealth. Same with seeds, or any other item [farm tractor tires?] that might cause a farming Liebig Minimum. Imagine farmers having a seven year input stockpile inside their farmgate.

    Compare to throwing debt, gold, big screen tvs, plastic salad shooters, RVs, etc at a farmer--none of this junk will help grow a thing. In fact, plowing RVs & TVs into the topsoil will dramatically reduce harvest yields.

    Even if someone can't garden/farm, but merely stores I-NPK--> this is still 'future oriented' as any local stockpile adds to structural social resiliency more than our creaking, and possibly breaking, JIT supply chain. Positional dispersion is future-critical; I-NPK at the factory is pointless--it needs to be positioned inside the farmgate. IMO, it is no wonder that farmers commit suicide when they can't get fertilizer or seeds.

    Increasingly, farmers are having to pay upfront cash so the global pull-system quickly signals/induces the potash miners to descend 3500 feet underground, for the natgas rig-workers to keep sending the input to the H-B factories, and for the giant draglines to keep scraping up the raw phosphate ore. I would expect this non-debt method to accelerate going forward as Nature is tightening the Circle of Life all around us with cascading blowbacks.

    Throwing debt at banks is futile [kudos to this keypost's author]; it will only accelerate our fall into machete' moshpits, and vastly increase their frequency, scale, and duration. This inevitably will result is a sub-optimal fast crash [Jay Hanson], then onward to full catabolic grind [ArchDruid Greer].

    I would argue that my speculative 'Federal Reserve Banks of I-NPK', Strategic Reserves of wheelbarrows & bicycles, building out Alan Drake's RR & TOD ideas to support rapid transition to 'Kunstlerization', and SpiderWebRiding to augment full-on O-NPK recycling is the way to move forward for an Optmal Squeeze thru the Dieoff Bottleneck.

    At the very least, First World Govts should buy this high-priced I-NPK to clear/restart the JIT pull-system supply chain, then pay unemployed people to final square foot disperse it among the high forests and glens along our watershed mountain boundaries. See my prior posts on our need to refind our innate territoriality.

    Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

    Well Steve, I liked your attempt to map it all out. Makes for interesting discussion. It's still a bit early yet to say how this will all shake out with Obama's team, but what went on in the last Great Depression with FDR's team was a form of class warfare. FDR and his wife were from the elite class, so they knew the players very well. We seem impatient with Obama's approach so far--too timid with Wall Street is what I read. Perhaps, but FDR had to try many things (some worked, others didn't) and had to manage both ends of the economy so that the poor didn't starve and the elite did not attempt some form of palace revolt. I humbly suggest it may take Obama awhile to figure what's going to work and what won't or isn't working. Already we see and hear hints from him that the staus quo will not be maintained, and that Main Street must be accommodated.

    Think of a Ship of State analogy. We have a new captain. He is very smart, especially compared with the previous captain. The team previously in charge of steerage is still basically at the helm. They were trusted by all aboard but have done a poor job and have landed the ship on the reef. Some cry for all hands to be replaced immediately, but the new captain has decided, for now, to use most of the existing, experienced crew to right the ship off the reef and back into deep waters. It's early, panic helps no one, "the only thing to fear is..."

    I don't know how things are going to shake out either. All I can guess is it won't be a simple process; there will be higher prices at times and shortages at times and there will be times when things will appear to be ... okay. But the long term trend is reduced economic activity. Not an evil but a hardship.

    The problem I have with Obama is his ambition points in the wrong direction. He never seemed to be that interested in the national problems when he was in the Senate and he seems content to drift right now. He reminds me if Ed Koch, the mayor of New York City. Obama isn't pressing for accountability, which is something that would matter and wouldn't 'cost' anything. Accountability would inspire confidence. It would have instant effect.

    Obama's unreadiness to lead comes across as business as usual. Repeating a failed experiment doesn't aleviate panic, it's dumb. How mamy more 'stimulus packages' are going to be wasted? FDR tried a lot of different strategies, most failed. Right now the government tries the one tactic over and over. IF that doesn't call for some panic, I don't know what would.

    It looks more and more likely that we may need some sort of economic reset as in a multinational if not global bankruptcy. The ratio of private debt to GDP is more than double the historical average and nearly all this excess debt has accumulated in the last 8 years. Some of this is due to deceptive and predatory lending via bubble mortgages and low introductory credit card rates. Some of this is due to decades of shrinking purchasing power due to union busting and unfair trade practices. Some of it is due to the big growth of student lending. Too many are starting their working lives burdened with debts which earlier generations never had. How are a young couple with combined student debt of $100,000+ be able to afford that starter home ? And they can't expect to inherit from their parents. Our too expensive health care system leaves nothing for them to inherit.

    Thanks for a great post Steve. I'm clueless with finance and economics and you helped me get a better intuiitive feel for what is going on in that area.

    Have several friends experiencing savage wage deflation that is threatening their solvency here in West Oz. I've always felt that Australia would be the last domino to fall, and we are dropping like a sack of the proverbial right now.

    How many people in the West are earning less now than 5 years ago? Whats the unemployment rate in WA, 3%??

    January numbers for Australia; employed increased by 1,200 to 10,742,100. Full-time employment increased by 33,700 to 7,670,700 and part-time employment decreased by 32,600 to 3,071,400

    Participation rate 65.0%( last month 65.1%) This is virtually an all time high participation. Next to pulling people out of retirement, and kids out of school I can't see how the participation rate can be much higher.

    I'm not going by statistics, I'm going on what I see in the lives of the people I know or meet. From the unemployed and social security dependant through workers, tradespeople, professionals and local business people. I'm seeing the struggles and bankrupcies with my eyes. I'm hearing of staff curtacks and "kept on workers" having to juggle tasks to keep things running. Intimate with WA health care systems I'm seeing highly qualified specialist nurses being taken off specialist duties to work the floor of the wards one day a week, doctors stretched with 16 hour shifts because the system is cutting back on agency staff which are more expensive. Some business owners were saying things were depressed 6 months ago, now they are closing their doors. The local butcher informs me that across the spectrum customers are buying cheaper cuts of meat to make the dollar stretch further. The gun club owners comment was telling - "Hope someone comes in and commits suicide soon, that always gets our numbers up". Im looking at "units for sale signs" pop up like mushrooms all around my suburb and in nearby suburbs, and they stay up for a long time. Vacant blocks of land in inner city suburbs - staying vacant, miners being laid off by the thousands ..... It is dropping like a bag of the proverbial!

    AXIOM - Politicians use statistics to lie.

    An interesting analysis of the real end game here.

    Finally, in The Great Repudiation Revisited, Mandel mentions the above Institutional Risk Analyst article and concludes "At some point the bondholders are going to have to take a big haircut."

    We can now see that the plan is to slowly boil the frogs in order. In other words, the government preferred shareholders need to be wiped out first in a manner that offends foreign investors the least. That manner was to wipe out US government (taxpayer) preferred shares along with foreign governments common equity and preferred positions.

    The next frog to be boiled will be after Citigroup fails the stress test. At that point, there will be no way to avoid "an adult conversation" between the US government and foreign bondholders.

    Meanwhile, the government is avoiding an outright nationalization of Citigroup hoping to avoid pressure by foreign governments for the US to make good on a full repayment of bank bonds. If the government limits its stake to 40% or less, US Government guarantees of bank debts may be skirted, or at least postponed.

    Tying it all together, what's really happening has nothing to do with the announced plan to boost banks' TCE, tangible common equity. Rather, the plan is to repudiate the bondholders, step by step, boiling each frog in order, hoping to minimize the fallout from foreign bondholders.

    Who Bears the Burden for a $3 Trillion Mistake?

    Gail...this article by Michael T. Klare appears to be timely to this discussion.

    A planet at the brink?

    The global economic meltdown has already caused bank failures, bankruptcies, plant closings, and foreclosures and will, in the coming year, leave many tens of millions unemployed across the planet. But another perilous consequence of the crash of 2008 has only recently made its appearance: increased civil unrest and ethnic strife. Someday, perhaps, war may follow.

    As people lose confidence in the ability of markets and governments to solve the global crisis, they are likely to erupt into violent protests or to assault others they deem responsible for their plight, including government officials, plant managers, landlords, immigrants, and ethnic minorities. (The list could, in the future, prove long and unnerving.) If the present economic disaster turns into what President Barack Obama has referred to as a "lost decade", the result could be a global landscape filled with economically-fueled upheavals.

    Two worries, in particular, dominate Global Economic Prospects 2009: that banks and corporations in the wealthier countries will cease making investments in the developing world, choking off whatever growth possibilities remain; and that food costs will rise uncomfortably, while the use of farmlands for increased biofuels production will result in diminished food availability to hundreds of millions.

    Despite its Pollyanna-ish passages on an economic rebound, the report does not mince words when discussing what the almost certain coming decline in First World investment in Third World countries would mean: Should credit markets fail to respond to the robust policy interventions taken so far, the consequences for developing countries could be very serious. Such a scenario would be characterized by ... substantial disruption and turmoil, including bank failures and currency crises, in a wide range of developing countries. Sharply negative growth in a number of developing countries and all of the attendant repercussions, including increased poverty and unemployment, would be inevitable. In the autumn of 2008, when the report was written, this was considered a "worst-case scenario." Since then, the situation has obviously worsened radically, with financial analysts reporting a virtual freeze in worldwide investment. Equally troubling, newly industrialized countries that rely on exporting manufactured goods to richer countries for much of their national income have reported stomach-wrenching plunges in sales, producing massive plant closings and layoffs.

    The World Bank's 2008 survey also contains troubling data about the future availability of food. Although insisting that the planet is capable of producing enough foodstuffs to meet the needs of a growing world population, its analysts were far less confident that sufficient food would be available at prices people could afford, especially once hydrocarbon prices begin to rise again. With ever more farmland being set aside for biofuels production and efforts to increase crop yields through the use of "miracle seeds" losing steam, the Bank's analysts balanced their generally hopeful outlook with a caveat: "If biofuels-related demand for crops is much stronger or productivity performance disappoints, future food supplies may be much more expensive than in the past."

    Combine these two World Bank findings - zero economic growth in the developing world and rising food prices - and you have a perfect recipe for unrelenting civil unrest and violence. The eruptions seen in 2008 and early 2009 will then be mere harbingers of a grim future in which, in a given week, any number of cities reel from riots and civil disturbances which could spread like multiple brushfires in a drought.

    I disagree totally with this analysis.
    The banking crisis can be solved by nationalization of the banks. The government can run banking operations on government cash and ignore toxic assets which bank managements cannot as it is part of their balance sheets.
    Banking cannot be allowed to fail because it supports economic activity. If economic activity can continue for a few years without this cloud hanging over it, it will dissipate. This is what the Swedes did.

    I keep hearing about the Swedish banking rescue as a model, except it was about 4% of Sweden's GDP - what % would you say the present US/World banking crisis represents? With the insanely leveraged nature of recent banking, and the trillions of dollars that are being poured in just to keep the whole system from packing it in, do you really believe these two events are comparable?

    I'd rather avoid Nationalization, as I don't feel one bit responsible for the bad bets that AIG and the banks made - no more $ poured in, mark-to-market all the assets (including off-book ones), if undercapitalized, bankruptcy with depositor guarantees by the Govt. Same for the auto companies. Why should those who didn't play the game, pay for those who did?

    A large part of the toxic assets that were managed by the Swedish governmnet to handle the 90:s banking crisis were urban real estate that regained its value within a few years. If the toxic assets consists of suburban areas you got to find a way for those areas to regain their value for the Swedish solution to work withouth being a major burden for your government.

    Government cash isn't cash at all, it's credit. A crisis brought into being by an excess of credit cannot be solved by adding more credit. The new credit is no different from the old stuff. Moving uncollectibe loans (toxic assets) from one balance sheet to another doesn't solve anything, it just buys some time.

    Nationalization just changes ownership from private to government. It doesn't matter who owns the banks. They are broke. Nobody wants their product which is recycled government credit. To most Americans, bank owners are crooks and gangsters. When the government owns the banks, it will be a (very large) crook and gangster.

    Americans have gotten schooled on the real costs of credit; they see the costs in the foreclosures in their neighborhoods. Americans are just saying 'No' to credit.

    Americans want real cash, not 'government cash'. They want earnings not more and more loans. The country and the world economies need people earning money not borrowing. When some company sends me a way to earn ten thousand dollars in the mail rather than a credit card with a ten thousand dollar limit, this crisis will be over.

    It seems as though the money system is disfunctional. People will have to establish local currencies to get through. Maybe what is needed is the equivalent of the mobilization of the nation that occurred to deal with WWII. Rationing, office of price administration, a draft, CCC, and the whole reorganization of the way our economy opperates. Politically this probably wouldn't be politically possible until some event to shake up the populace.

    There was a period in Kentucky during my youth when I saw the results of poor farming methods very clearly.

    I saw on one uncle's farm huge gullies due to erosion. Gullies big enough to set a house in and it not be over the top of the bank.
    I saw soil that had been completely depleted and was not just clay and showed no signs of fertility. This was accomplished with teams of draft animals and smallish implements.

    I saw weeds that I had never seen before start to take over mismanaged fields and pastures. I saw much later enormous spreads of Nodding Thistle(Canadian thistle)..a disgusting ugly weed that you couldn't even walk through.

    I saw land being wasted on a huge scale.

    Then something happened. My father said this to me.
    "Fescue saved Kentucky." I didn't exactly know what he was getting at but I saw his fields change. Cattle and grasslands management started to make a difference. Better methods of tillage. Better cultivation tools like a rotary hoe pulled behind a large tractor. Not too much chemical spraying at time compared to now.

    I saw tobacco become better managed. Dairy herds and animal production on small farm scales improve. Many went into producing eggs. Chickens. Hogs and so on.

    Then again and once more something changed again.

    The small enterprise farms started to disappear. Cattle that once one saw on almost every smallish farm(100 to 200 acres) became less and less visible. Spray coupes came into being. Huge tractors came on the scene. Intensive monoculture became the norm and most small landowners started renting out their land to big 'operators'. Most stopped raising hogs as very large confinement feeding operations drove them out of business. Small scale chicken and egg operations disappeared.

    What the Ag Profs and Extension Agents were once extolling changed markedly. Their messages were now not for the small farmers but to the Big Ag operators. Ohhh they still called them 'farmers' but they weren't , not really. They were more and more just business men and the land was their industry.

    Now I see the land once more degrading. Weeds can explode almost overnite. My farm was becoming gullied as the operator went for maximum gain and less for good land management. I threw them off my farm. They had somehow thru the soil office ,now the FSA, tied my farm into their conglomerate and it took 2 years to get my farm off their books.

    I sowed my farm all down in good orchard grass mixed with Kenland Red clover. I sowed Ky Fescue 31 all around the edges in strips to keep erosion from occurring and getting a start. I put some cattle under New Zealand type of Hi Tensile fencing. Raised some horses. My soil improved markedly. I sold hay and made more money that having someone else run row crops on it.

    Now most of my land I have sold since I retired. The operators are coming back. The soil will start to degrade again I fear.

    The circle has repeated itself.

    I auctioned off most of my farming equipment. I no longer could see a future in what I was doing. Big Ag was the rule.

    Now I sometimes go to a FSA conference and see even more how the Ag Profs messages have hardened once more and almost totally into the proclivities of Big Ag and massive monoculture.

    I don't know who is making the decisions in these areas. I suspect it part and parcel of the themes of 'Globalization' and the desire to make large sums of money and piss away the land.

    Now large quantities of woodlands are being destroyed to increase the field sizes and put more and more into production.

    The whole emphasis, perhaps vis-a-vis USDA control is too blame...coupled with a mentality of 'take it all,give nothing back'.

    Airdale-not too many more years of this and we will have gone past the point of no return ,IMO of course. But what do I know?
    The land, the water, the tawdry desire for riches and the biggest baddest pickup money can buy. The McMansions springing up in once fertile pastures.The worse smelling big hog barns and chicken houses that send smell miles away on the wind. The lifestyle that I am glad I won't have to look at too much longer. I hunker down. What else to do? I dream of the past. I live in a different world but I remember when it was different.

    Ahh polluted creeks. Welcome back Johnson Grass! Hello Mares Tail and Pigweed.Hi Roundup, Lasso and all those other fancy names for poison.

    Yr depressing me, Airdale. I suspect that things will go to the brink before the cycle turns again. They may go past the brink.

    I read a lot of younger people want to start farming with a different attitude than the industrial producers have. The 'will is there', but the route to better farming and more farmers and more sensitive farmers is probably going to be arduous. All the crap - bad thinking - has to be cleared away.

    Another silver lining to the current 'collapse' is the relationship between ends and means is changing. I've grown up with the notion that the 'means' - of growing stuff or making stuff - was just some way to get to the 'ends' - the money. I suspect that things are switching around where the process matters as much or more than the money ... cause it does in the end, particularly with farming.

    I may be wrong. Maybe things will turn out another way and it will be a catastrophe.

    I get the idea that nature is always ready to work with us if we can pay attention. That attention part is the key.


    removed comment

    I get the idea that nature is always ready to work with us if we can pay attention. That attention part is the key.

    We must continue to learn from nature and apply the lessons learned in out of the box thinking on all possible levels.

    I could imagine abandoned shopping malls and parking lots being transformed into local food production centers with currently available off the shelf technology such as this

    Why not build a wormhole from galactic centre to those in the business of generating wealth (e.g. primary production)?

    Government can provide the funds to the borrowers who are solvent. Banks make money by administering the loans, but not by having their stupid, greedy hands on the money in the first place. Thus, the banks get some income without actually lending money.