Financial Collapse and Energy - Something Other than a NINJA Problem

This is a guest post by Pedro Prieto from Madrid, Spain. He is the head of ASPO-Spain and organized the ASPO 7 conference in Barcelona last year. See also follow up post, regarding inflation adjustment to parameters.

When the economy started to fade last year, many attributed the cause to subprime lending.

Others put together very successful, hilarious stories, explaining that the ultimate reason for this financial crisis was the NINJA policies of banks (credits granted to people with No Jobs, No Income and No Assets). Many of these stories were uploaded to Youtube.

Neither subprime lending, nor NINJA policies, nor any financial media is able to explain why banks around the world, which had been for decades very cautious in granting a credit without solid collateral, suddenly started to grant loans to insolvent people; or why the strict financial regulatory and supervisory entities started to look the other way.

This is an attempt to offer a different perspective.


In the beginning, the world used barter or countertrade. Countertrade was based on equivalent human effort (labor), which, in fact, corresponded to easily measurable equivalent energy expenses.

For example, if a chair maker needed six working hours to make one chair and a farmer, producing eggs to fill a basket, also needed six hours of work, then a chair could be reasonably be exchanged for a basket of of eggs. This approach was immediate, rational, and simple. But the procedure limited the exchange in goods and measurable services, especially those involving large volumes, complex transactions or distant operations.

Gold as a Mediation Device

Gold was introduced to solve the problems of the earlier systems. Its natural scarcity represented many hours of human equivalent effort in piece that was small in weight and volume.

It was ductile and malleable; it could be coined; it was difficult to alter, easily divisible and transportable. Gold very much eased the paths of commerce.

However, gold still represented, in principle, a measurable form of condensed human equivalent effort (energy) in the commercial exchanges.

Paper Money

Marco Polo took paper money from China, where it was invented, to Europe and then to the world.

It represented, with an authoritative signature, a given amount of gold deposited by a bearer, in a well known and secure deposit, that the faithful depositary was obliged to immediately return to the bearer upon presentation of the paper money.

And this gold, in its turn, continued to represent goods or measurable services, in human equivalent effort (embedded energy, in a sense). And it proved for many centuries to be more effective than gold.

Despite the early existence of paper money, the physical and monetary world still had a close relationship. This was the case in spite of specific abuses and partial system bankruptcies due to regional wars or collapses.

Nixon unilaterally broke the Bretton Woods agreement in 1971.

Bretton Woods was the last global attempt to fix gold as the standard for exchange of goods and of measurable services. The agreement was reached late in 1944, after some developed countries had abused the printing of money without the necessary physical backing or equivalent reserves.

In 1971, the US$ became the world reference for valuing all human activities.

It was at this point that a real growing divorce between the physical world, represented by equivalent human effort (energy, in the final analysis), concentrated in gold in the reserves of each country. It gave way to a new form of paper money, where the authoritative signature committing an amount did not necessarily correspond to equivalent real goods or measurable services.

We should ask ourselves why this growing drift between the physical goods and measurable services has been working until now.

Professor Albert Bartlett summarized the reason very well: “The greatest shortcoming of the human race is our inability to understand the exponential function."

A Mathematical Model

Let us represent mathematically two different types of growth. If we assume, for instance, that goods and measurable, physical-related services grow at 3% per year through a given period of time (i.e. 50 years) and financial services grow at 8.5% per year, we have the following graph:

Graph 1. Mathematical models of growth

Interest Paid by Banks: a Religious Touch

The so-called “religions of the Book” originally were opposed to lending money with interest. This opposition represented clear recognition that interest based on credit is the main agent forcing the world toward continuous growth, faster than natural trends.

The official position of the Catholic Church until end of the 18th century could be summarized in the phrase enunciated by Thomas Aquinas: Pecunia pecuniam parere non potest.-–Money cannot give birth to money. One of the sins severely punished by the Inquisition was usury--and in those days, they considered usury what today would be considered a very low interest rate.

About 800,000 Jews were expelled from Spain in 1492. Inasmuch as they could not become owners of property, they specialized in trade and banking services. Some of them were in control of lending and were therefore tolerated-–after all, they were not Christians, and sometimes having somebody to ask for money to advance a payment for a given enterprise was initially useful. According to the Torah, Jews can lend money with interest to gentiles, but without interest to other Jews. They also understood the impact of the debtor of having to pay interest.

For Muslims, bank interest is theoretically forbidden by the Koran, although some of them-–especially those called by the Western countries “conservative Muslims” and clearly not the “radical” or “fundamentalist” Muslims--have also managed, in the new globalized world, to evade from the norm with artful financial devices.

However, even the Catholics finally managed to get away from this doctrine and even dared to make subtle changes in the 2,000 years old prayer, so that they moved from the traditional Our Father, asking Him to forgive their own debts and those of others, by praying:

Pater noster, qui es in caelis:
et dimitte nobis debita nostra,
Sicut et nos dimittimus debitoribus nostris;

Instead of that wording, there was much more flexibility for operating in the financial markets without remorse with the following wording:

Our Father, Who art in heaven,

And forgive us our trespasses,
as we forgive those who trespass against us.

A Euclidean Model for Diverging Worlds

Equivalences between rectangle triangles have been understood for thousands of years. A clay cuneiform tablet found at Tell Harmal, close to Baghdad (Iraq), from the Old Babylonian period (1,800 BCE) depicted a theorem, similar to one of Euclid, but 1,500 years earlier, on rectangle triangles equivalences.

Figure 1. Treasures of the Iraq Museum. Dr. Farah Basmachi. Ministry of Information. Directorate General of Antiquities. Iraq. Baghdad Museum (at least in 1980)

Therefore, if credit is the amount of money, or equivalent, that somebody takes from and owes to a physical person or legal entity, the creditor has the right to get it back (with interest-–more money--) in a given period. And if interest is the obligation, deferred in time, to return more money-–i.e. equivalent goods and/or measurable services--that is human equivalent effort--than those originally taken, the Euclidean model suggests that financial money needs more time, every time, in order for the financial model to match the physical reality that it should theoretically correspond to.

Graph 2. Diverging growth rates as values change through time. (Y axis uses log values)

Therefore, amortization periods necessarily need to get longer over time, starting from a given base. As the physical world is finite, the financial representation of money or monetary values cannot, at a given moment, match physical goods--nor even at a reasonable future moment, deferring the relationship in time. Neither can they match reasonable human effort, or energy efforts translated into equivalent physical goods at the disposal of the holder of the paper money.

Myopic Visions of the World

Even if GDP is an inaccurate measure of the goods which have been produced and services which have been rendered (the bomb business or an increase in traffic accidents is good for GDP, for example), it is still a tool of neoclassic economists that is theoretically an index related to the production of tangible goods and measurable services. And it shows that the divergence between physical and financial growth is becoming more and more evident over time.

I cannot accurately quote Noam Chomsky here, but I recall him saying something like, "Probably nine out of each ten circulating $ in financial markets does not correspond to the physical exchange of goods or the measurable trade of services."

In the next chart, we can see the effects of the diverging financial and physical worlds over time.

Graph 3. World GDP and Dow Jones Index for the period 1970-2007.

for the world GDP growth and for the Dow _Jones Index

Now, let us add some other variables starting in 1970, such as the world oil production and trends in total primary energy production, and trends in wold GDP in Purchasing Power Parity, setting 1970 production equal to a base value of 100:

Graph 4. World GDP, Dow Jones Index, primary energy consumption and world oil production in the period 1970-2007 and projections of world oil production until 2030. Sources: Ibid and ASPO data base November 2008. Base = 100 at 1970

So, everyone was happy believing in the spiral of infinite growth. However, if money is to represent an equivalence to physical reality, we have been lying to ourselves for quite a number of years.

Then, why has the growing gap between the monetary world and the physical world apparently worked so well during the last several decades of robust growth? There are probably several reasons: Faith in infinite growth; the progressive lengthening of amortization periods for principal and interest; and the charging of the future to the wasteful present.

Therefore, the system works as long as owners of paper money (courtesans and gregarious people in the kingdom) are made to believe by the swindler tailors of the Emperor’s New Clothes of Hans Christian Andersen, that the looking-glass clothes, light as a cobweb, were magnificent; they are made to believe that their accumulated financial wealth as per the red line of the above graphs may be exchanged any time by the blue line of physical goods or services.

The system also works when the owners of financial assets see financial models indicating that they will recover physical world equivalent assets some years later, as long as material goods also keep growing, even if the material goods are growing at a lower rate and the recovery periods keep extending.

And it also works well, if all the community bearing financial or monetary values, as per the red line do not SIMULTANEOUSLY attempt to “materialize” all this money, at a given moment, into physical goods or measurable services, resulting in a need for goods and services beyond the level that actually exists as per the blue line at a given point in time.

Gregarious Behaviour

But the system may collapse if somebody, spontaneously, shouts for the first time, as the child did with the Emperor: "But he has nothing on!“, and then all run at the same time to “materialize” the red line financial values with the blue line physical goods and measurable services at a given moment, as we have recently seen in our world.

That is why the swindler tailors, most of the leaders and financial advisors, specialists and experts, working for the real financial powers, keep asking for the people to trust and believe in the system. Perhaps there is only a need to make some small adjustments in re-weaving the clothes, but the fabric is as beautiful as the ever-growing free market is not negotiable.

That is why these courtesans always address the herd and tell them the same thing that Don Vito Corleone said to his protégées: this perfect market system works based on trust and belief.

But the child has already shouted. And we know that the king and his whole court will walk, anyway, with still greater dignity in the middle of the financial and industrial production chaos, until they end the procession, as if the king were properly dressed.

And they leave us diving head first for a hard landing, from the heights of the red financial line, to the bumpy slope, slide or cliff blue landing strip, paved by and always directly linked to declining energy production.

Many thanks to Pedro for offering a very helpful analogy. For me, this helps fill in a missing piece of the puzzle. We know the growth in financial assets couldn't continue, but it was hard to measure the extent of the overshoot. Now, as oil production decreases in the future, the blue line is likely to head downward, further reducing true assets.


Excellent article! While the space here is limited for long discourses, you managed to compress it into a coherent "digest".

One could also note the role that derivatives played in the drive to squeeze even higher 'profits' our of the doomed financial system.

I am currently reading a book published this month, Fool's Gold by Gillian Tett, a prize winning British writer. It is a detailed history of recent events in the financial markets. From the back cover: "The J.P. Morgan derivatives team was engaged in the banking equivalent of space travel. Computing power and high-order mathematics were taking finance far from its traditional bounds, and this small group of brilliant minds was charting the outer reaches of cyberfinance." Companies other than J.P Morgan later took these techniques to riskier heights. This 291 page book includes notes, a glossary and an index. Other than the fact that it is more than I wanted to know, I recommend it highly.

Why is it that every explanation for the current predicament centers on some group of genius financiers that created these brilliantly arcane arrangements that were intended to improve the human condition?
All they are is typical swindlers just like all the others that came before them.
Let's just admit that all of the institutions in the world are run by criminals and call a spade a spade.
I think that maybe the main problem is that we glorified the wrong behavior.
Why is Warren Buffet a hero? He never created anything in his life and he certainly didn't benefit man kind.
We need an entirely new ethos that is eco-centric (is that a word?) and we also need to reward different behavior and punish what used to be regarded as noble.

I'm in total agreement with you Sir. Until this system the greedy people of the world have built (I blame their parents for not drumming this basic fault out of them when they were very young) colapses or is pulled down by the people below them who, at some point in the near future, begin to suffer real hardship, then the show goes on.

Nice one Pedro. Any relation to the Canned Heat drummer, Pedro de la Cote? Porge, there is a word 'ecocentric'. Describes a person who drinks the bland, de-caffeinated, bean based beverage, Ecco.

Does this article imply that I should covert my paper money into hard assets before everyone tries to convert theirs (red line to blue).

Logically, you should buy physical assets and sell financial assets now, while everyone else thinks are recovery is underway.

There are several risks, however:

1. You may have to move (no water, no jobs, lack of locally grown food) and you won't be able to take the assets with you, or sell them.

2. The assets won't last over time. Food spoils; termites get into wood; fresh water is hard to keep clean in adequate quantity.

3. Having more assets makes you a target for those without assets, possibly increasing risk to your physical person.

I think it is probably worthwhile to change your attitude as much as possible that toward "Not having all these assets is OK, I can do without."

I am pretty much in deflation camp, but I acknowledge that TPTB probably can delay/prevent it if so they choose (before lowering interest rates, now QE, etc..).

Of course, they are cautious not to overheat the system, as they too know that oil has peaked and life $200 oil would kill the economy again.

The article itself is good, one just has to bear in mind that it is prety much impossible to defend against TPTB. Our JIT economic system will function until it won't and when it fails it is likely that no hard assets will be of any help, farming land included.

it is prety much impossible to defend against TPTB

I agree with that, I live in the UK, we have a saying "as safe as the Bank of England" which is meant to imply 'as safe as you can get'.

The Bank of England issues our currency, the 'Pound Sterling' - the pound it refers to is one pound in weight of Sterling Silver (an alloy of 92.5% Silver and other metals).

Our paper currency is a receipt for this silver, so a twenty pound note is a receipt for twenty pounds of silver that was once deposited with the bank (in those days it maybe represented twenty years wages). Today, twenty pounds of silver is worth somewhere in the region of £3000 (about two months wages, such inflation!), but a twenty pound note will only get you around two OUNCES of silver, not twenty pounds.

Somebody has stolen 318 ounces ( >99%) of the original silver that was deposited, as it was deposited in the Bank of England it must be somebody in there! Does the Bank of England sound safe to you? Have faith in our Banking system!

"Our JIT economic system will function until it won't and when it fails it is likely that no hard assets will be of any help, farming land included."

This would seem to go against the thinking of many Peak Oilers who believe that a piece of farmland, the Doomstead, is going to save them. Why dont you think farming land will be of help?

Gail,these comments could have been written by a farmer as a cautionary tale for those who want to believe that getting back to the land is a realistic goal-ESPECIALLY those who get thier info from pollyanna websites and think that we can produce like Chinese and Korean peasants ,evidently,just because we are Yankees.

We lost our peaches and nearly all of our apples to a late frost this year.We lost our cherries over the last three days due to unusually heavy rains.They just kept swelling up until they burst,less than two weeks before the harvest would have started.

And we live in an area long noted as exceptionally well suited to these crops.We are fortunately diversified in a way not possible on a very small acreage,and we will not lose everything-at least we never have.

Buying a farm now could easily turn into a disaster, especially for those of use who have little idea what would be needed to actually produce food in adequate quantity to feed a family and store if for winter months. The more I think about the problems, the more I admire our ancestors and their ability to get along without fossil fuels.

I have always been of the opinion that the minds of the past were better than of the present..............they had to be.

Not buying a farm is higher risk. If food is short, any additional food is a direct benefit. In addition, I have not materially impacted my fitness. Productive land is a hedge. My venture may fail, but my odds increase.

Gail, don't take this personally, but your logic sounds to me like an excuse. Inaction is a valid option if the benefits outweigh the liabilities. In your case this may be true, but bashing farming is illogical. How is your food supply more secure in a city full of strangers?

My guess is that you judge the marginal increased fitness of farming as insufficient. I agree, but all other options I can find are worse.

Cold Camel

It is interesting for me to find this debate here since I've gone over this territory with my husband now for a few years (with me arguing for a farm and he, a person who really dislikes dirt, arguing against).

I think it's worth examining his point. My husband argues that you don't need to run to a farm for cover. What you want to do is always have what other people will pay for. Maybe you have some doctoring skills or maybe you can sell things or maybe you can write or teach or design or sing......whatever. The point is to spot where you can compete using your talents and then throw yourself into this wholeheartedly. If the market changes you have to be quick to adapt, but if you are good then you may be able to compete well.

There will always be an elite (non-producers) and my husband's idea is to be included among them as they "circulate" (Pareto's term) since he hates anything that involves lifting a shovel. I think he'd rather be a really starving used book dealer than a well-fed farmer.

The governments of the world are trying to slow down the collapse process as much as they can in order to 1) avoid chaos and panic and 2) give the elites a chance to "circulate" naturally in a new lower energy based society. When I say elites I mean all non-producers, that is shopkeepers, librarians, teachers, office workers, etc. Almost all of us are elites these days.

I personally can understand both positions: the escape to the farm or the desire to stay and fight for ones position.

If you love working the land and love animals then the farm is for you!

But if you really hate that life, it might be a bad choice.

BTW: To read more about medieval Spain and moneylending try a great novel CATHEDRAL OF THE SEA by Ildefonso Falcones. The author is a lawyer who uses his vast knowledge of legal (and other) history to portray Barcelona and its surrounding area in the 1300s. For those who are PO aware (I think Falcones may be) this novel is a special TREAT because these old laws are so often concerned with food (energy) through the use of land for grazing etc. There is so much intricate knowledge of money, foreign currency trading, land use, grain markets, etc displayed (but in a fun way) that I promise you will be vastly entertained. Also of course there is a lot of horror--the prejudice against Jews and the Spanish Inquistion (does local have to mean narrow-minded? Isn't there another way?) the cruelty of the feudal lord (must they be so nasty or did being nice mean being weak?)...

The whole novel is a picture of what it means to compete in a city (where you obviously can't be a farmer for lack of land). The hero, Arnau, manages to succeed but there is a lot of luck involved so I don't know how realistic this is.

Forget your PO worries and get totally into this novel where someone else's PRE-OIL worries will provide great vicarious thrills and food for thought!

I too am currently reading a book about cathedrals and medieval times. It's called Pillars of the Earth. At each turn in the book it becomes painfully obvious how oil has dramatically changed our way of life.

I think you are married to my brother.

My perspective, that if I can't sell it, I can eat it, comes from my grandfather, but your (husband's) arguements are certainly valid, as is your conclusion that if you don't like dirt, don't become a farmer.

The challenge for all of us is to be quick on our toes, farmer or not. Market conditions can render the best plans invalid. I recommend "Farmer Boy" from the "Little House on the Prairie" series as an example of the random nature of profits. That book paints a positive picture of farming, the rest of the series portrays a more realistic and negative view. The key is never to be left redundant.

I have lots of potential routes to take with my land, none of which are currently economically viable. The same is true for your husband's plan, his out of the mainstream lifestyle isn't economically viable, so really, we're both full of it. Ah, well, back to the grindstone.

Cold Camel

You are right, oldfarmer, and your comments appreciated. But we don't have any other options that are more appealing. A little food is better than no food. I'd rather be puttering around on dirt than rioting on the streets because the stores were empty.

Cold Camel

I remember watching a program some time back about a town in the US where they had a plaque dedicated to a local farmer who was long dead. The reason he got the plaque was one year all the crops failed in the local area except on his farm (something to do with his elevation above sea level was mentioned) and what he produced was enough to keep the town from starving till the next spring.

The next Hero might be the past hero.

Well said oldfarmermac.
I do not live in USA but exhausted soils was fairly typical for US up to middle of 20thC until farming found the industrial alternatives. Jackman and Long, 1964, in The Oregon Desert, give a sympathetic and entertaining account of the brief 'homesteading' boom in that part of the country during the first years of the last century. Teachers, clerks, fit young folk, found, alongside some personal tragedies, some good romance and socializing and played some good baseball apparently, and I guess the kids had memorable childhoods, but there is hardly a trace left in the ground.
I guess the Chinese and Korean peasants will still be around. Even they are not self-sufficient and need these days some industrial N fertilizer and sufficient regional/system 'insurance' against inevitable local failures. March larger regional system adjustment is required to deal with issues of water or other long term declines.
Having said that, maximising suburban or urban gardening can ensure some healthy nutrition and an attractive environment.

Hi Phil. I wouldn't underestimate the Chinese. They have a command and control society, a largely rural population, and a history of cultivation that goes back before the Europeans were plundering and pillaging each other,


point 1.

no water, no jobs, lack of locally grown food)

No water! I am not capable of surviving without modern medicine, if the water goes then I am long dead because other things are gone.
point 2.

The assets won't last over time. Food spoils; termites get into wood;

Ok, I am growing my own food and have chickens, but, nowhere near enough land to feed myself. Should I convert money into more land?

Point 3.

Having more assets makes you a target for those without assets,

When things get this bad, see point 1.

I think it is probably worthwhile to change your attitude as much as possible that toward "Not having all these assets is OK, I can do without."

I don't want all these assets. Everytime someone tells me to save more for old age I answer "what old age" and "I need less in old age". As you have pointed out in previous posts, I just want to "store" for old age so I can eat without doing the "hunting".

To be honest, it is pointless preparing for WTSHTF because I am only alive because TSH not HTF - figure that one out :-)

Sometimes people here do not realise how dependent they are on modern conveniences.

No water! I am not capable of surviving without modern medicine, if the water goes then I am long dead because other things are gone.

I'm gone in very short order without not only modern medicine, but relatively intensive healthcare as can be had (in the US) only with sufficient health insurance. Society need not break down for me to go; I need only lose my job.

Hi Gail;

Sound advice. I have no assets or debt. As soon as my partner pays off her small debt we are off to the farm upcountry in N.E Thailand.

Another thing. What do you make of the recent rally in oil prices? What price do you think the battered world economy can entertain before it sets off another downward spiral?

What price do you think the battered world economy can entertain before it sets off another downward spiral?

I saw a chart here on TOD a while back showing the world economy topping out and plateauing at $60/bbl, but not starting to drop until about $90/bbl. We're at $65/bbl this morning.

That's been exactly my take on the situation for the past several years now.

Hence, got out of stock funds (liquidated retirement accounts) and put money into things like home insulation, solar panels, good bike, tools for growing food, etc.

Most everyone thought I was nuts and when I tried to explain why (see article above), they thought I was nutter. Not so much anymore.

Great article Pedro.

Good article indeed, and spot on with respect to what's coming. I am a former equities trader (pro) now still trading, but in countdown to the day it becomes pointless. I left the field, left the country and while not having "gone native," exactly, have made great changes in my life. Anyone interested in homesteading in Argentina in a strawbale house, please have a look at

I believe the snowball of financial destrution has come too far down the hill to be stopped now.

Insulation, done that!
Solar panels, 6.84 KwP thanks to FIT in Germany
Bike, of course with trailer.
Growing food, already eating home grown stuff and have chickens.
Electic tools, perfect for the solar panels.
No medicine, I die.

No medicine, I die.

Are you 100% sure. My mother in law had diabetes and was dependant on meducation. I treated her homoeopathically for it, she had a heart attack and when she got out of hospital - no need for diabetes medication, that was 4 years ago. A lot of stuff that doctor's tell you is spin, just like the "fast money" morons.

One of my signatures is: If you want to remain healthy, solvent, and alive, stay away from doctors, pharmacies, and hospitals. Now, of course, I may have a massive collapse a few seconds from now, but this motto has worked for me for over 30 years (and near three score and ten years, I take no pharmaceuticals, I use herbs and natural "medicines" when necessary, and haven't taken so much as an aspirin for many years).

I rather think that many Americans are almost totally neurotic, whimper and run to the doctor for many mostly imaginary ills, load themselves down with prescriptions, and think of the health disaster system as their mother.

You're living in a cocoon of youth and hubris. Just wait a few more years.

Well Speedy I'm a chemist dunno what medicine your taking but if patent enforcement weakens a lot of medicines will be readily available.

Of course if you think we are going to have total collapse its a no go.

But depending on the details many can be synthesized in any well equipped lab.
Obviously its something else I've thought about post peak.

Does not mean that medical research will advance but there is no intrinsic reason to lose most of our drugs as long as things stay reasonably stable somewhere in the world.

Obviously one of the big exports from these stable regions will be drugs.

I'm so thankful I got a chemistry degree even though I've not really used it all that much its always been something thats been really nice to have.

In a normal economy it gives me the option of becoming a lab tech of some sort with reasonable pay and basically 9-5 type working condition to focus on other aspects of life. If things get interesting a chemist becomes a fairly valuable guy to have around.

Give me some sulfur and I can rule the world :)

There is a famous character here in Toronto, now in jail, who stocked up on bicycles. They were stolen. He likely did not steal them him all himself but he was the market for stolen bikes in Toronto. When he was finally caught he was found to have teens of repositories containing hundreds of bikes. It was reported that he was hoarding bike for the eventual peak oil future.
I was think of investing in a sizable shipment of Brook "Imperial" leather bicycle saddles.

Thanks Pedro (and Gail).

I am working on a similar post. In past recessions we had a)time, b)lower population and c)alot more of the cheap energy left underground (nearly instant 'energy gain'), as well as low levels of overall (paper) debt. If you denominate US Debt (private, household, corporate, govt), it works out to over $60 trillion, which does not include off balance sheet derivatives, nor underfunded social security or medicare). If we had to pay back this debt in barrels of oil, it would be 1.3 trillion barrels of oil at $50 per barrel. (not that we would ever do this, but it gives a perspective on what our debt is in remaining oil left on planet - arguably it is greater than remaining URR - this was NOT the case in 1970s or 1930s).

The decoupling between financial/marker and real assets is extreme. This is the real story.

Nate, would you say that looks like a clear way of showing that the world is already bankrupt (subject to my homeopathic home fusion never receiving the funding it deserves)? And what I would then be wondering is how, and how much longer, can the world go on imagining it is not broke (when it is). And what bursts the bubble and what then?

I think the industrialized world is in Chapter 11, but not terminal. For the interest we get every year plus the remaining bank account is still large enough to support this population for some time, but only on dramatically lower natural capital spending habits, (which will only change if we change how we measure 'success'). It is not likely but possible to reduce consumption of resources by 80-90% over next couple decades and still lead meaningful enjoyable lives. The problem is the sunk cost - all the infrastructure built during last 30-40 years that requires high amounts of energy dense fuels and global transport needs to be addressed/changed as soon as possible to something less transportation oriented, at least for basic needs.

Personal mobility gives the people the illusion of freedom, so TPTB will be very cautious to forcefully impose any regulation (apart from possibly lowering max speed).

IMHO it is precisely this "freedom" thing that prevents people to sink in that we actually live in resource constrained world. Had enough people embraced the truth, the economy changes profoundly immediately and the reality is that at the moment that is still not needed as the oil supply is plentiful. TPTB chose gradual transition, so that as little people as possible actually notice anything.

This Saturdays Campfire will be part 3 of the book recommendations, but next week I am going to write a post on this exact topic - the fact that we like CONTROL. There are many examples of human experiences that only differ in the amount of control we have - the rest of experience is identical - those that we can control exhibit a lower stress hormone (cortisol) to norepinephrine ratio in our blood etc. Basically freedom to choose actually is healthier for us (to a point).

The papers I will discuss are:

"Biological Basis of the Stress Response" by James P. Henry, Integrative Physiological and Behavioral Science, January-March, 1992, volume 27, Number 1, pages 66-83.

"Pituitary-adrenal and sympathetic-adrenal correlates of distress and effort" Lundberg and Frankenhaeuser (1980) Journal of Psychosomatic Research volume 24, pages 125-130.

IMO this will shed insight into what future systems are workable...

Nate, can I get in a comment on your control topic in advance (so you can modify your article beforehand if seems appropriate).
Thing is that most uni psychologists have long been shy of mentioning individual differences, due to p.c. concerns. As a result they do all sorts of studies which lead to false generalisations --an error folk-psychologists also fall into-- when the variability is much more to the point.

In the present case a swift look at your choice of papers raises the thought of substantial differences in handling of stress (or definition of stress) related to the level of N - neuroticism, and P - psychoticism, and also I would expect time-dependencies related to the E -extraversion factor.

On the other hand we all have adrenal glands, even though in my case they've been hanging on by a thread for many years and only kept going by learned magic. Note for instance the ridiculous recent uk govt recommendation that everyone should take bloodpressure lowering thingys when my own constant struggle is to keep the pressure high enough anyway.

And more directly related to the topic of control, I'd be amazed if there were not huge individual differences in this arena too. Some people are overwhelmed by too much choice and gladly go to a McDumbo's diner where they are idiotically restricted to a choice of #6 or #4 or so on.

Some people just want to be told what to do, while others go out of their way to become judges so they can engage in nasty criminal abuse of others' lives as happened to myself.

I've also read findings that lack of choice makes people happier with their lot. You were warned! (You still have the choice of chickening out...)

Eric Fromm ¨Escape from Freedom¨

I was watching the History Channel film "Life after People" on DVD the other night and when ever they were talking about the time it takes for infrastructure to degrade, I kept wondering how the decline of energy (oil particularly) would affect the rate of decline of infrastructure.
I am wondering what others think:
Would infrastructure degrade faster without people; With people still using the infrastructure but not maintaining it; Or doesn't it make any difference?
My guess is that infrastructure will degrade faster with use but no maintainence.

One word.

Fire :)

Jon, The answer depends heavily on the type and location of the infrastructure. Here in Santa Barbara the place would burn up rapidly during a drought period without fire fighters. In other areas damage could come rapidly from flooding. In other areas damage would come very slowly.

So you have to ask in each case what are the physical and biological threats to the structure and what is the type of structure.

Nate I am encouraged that you think we are only in chapter 11 and can avoid the collapse so many see as inevitable.You must be pretty smart(wink) since I think you are right.

I find these new economic models intrigueing,but also a little cryptic-like somebody elses borrowed lecture notes.They raise as many or more questions in my mind as they answer,although I do get the aha! moment from them here and there.

If you or anyone here knows of a good book that gathers them together and examines each one,using plenty of examples,I am ready to buy in hardcover if necessary.It must be accessible to the non professional, not many of us are trained economists.

I rather tend to agree that we could "lose" 90% of our financial system and still manage a good life, if you accept learning, enjoyment, creativity and so on as "goods."

While I really liked the explanation given here, particularly as it relates to the disconnect between physical value and money, I'm still puzzled. I'm puzzled because even if you took away all money, had it all evaporate, people are still left with shelter, tables, bed, chairs, and so on, and can do without aircon, can get more blankets for the cold, can sleep when it gets dark, which leaves, really, just water and food (and cooking) as the really critical needs. Food supply is not going to be really affected if JIT goes down the drain; fewer deliveries can be managed. City folk may have problems, but small towns, like where I am, you can walk to the farms, if necessary. Water comes out of taps now, but if you really need it, you can just go collect some from the almost daily rains, take a "bath" in the rain. If there is no energy for cooking, solar cookers, which can be made in a couple of hours or less, can be used. There are many, many, many ways in which we could manage, so I really don't see any direct connection between a failed financial system and being able to bathe, eat, drink, and so on.

Interesting you mentioned solar cookers.
My 10 year old and I just made a homemade solar cooker from a pizza box aluminum foil black paper and clear plastic last night for a school project.
It seems a high odd bet that the school is trying to create awareness in these young people at an early age.
In addition they are learning about conserving and the environment. This is very encouraging but I am afraid it may be late in the game.
I have even noticed that some of the mainstream programing for children centering on the theme of saving the palnet and conserving etc.

My personal opinion says if we end up operating on 80%-90% of what we need at present the the world will be F###ed place to live in, especially if you are not a part of the elite. Simple as that.

There are too many people.
Imagine how poor the poor will be if the middle class are making do with 90% less than now.
I don't know if it's naivety or wishful thinking to expect an even collapse to mediocrity, where all exist in a communist society of common good.

No more hip operation for grandma or triple bypasses for granddad. Governments will struggle to fund schooling let alone infant vaccines with 90% less taxes.

Just an opinion though, the last time I was wrong it was a mistake.

Dayahka. I second that. I look around me and see megatons of junk and stuff that could be used if we needed to. It takes only a little bit of trying to make what we need- I mean need-out of all that.

People in the US ought to go to places like Bangladesh and see what people do when they need to.

Then I think of myself. The best thing I did was marry the right woman, who loves to grow our own food in return for my fixing the hardware that needs it- and I still have the 50-80 year old tools I inherited from my good old father in law. He got the best tools and kept them in shape. And no batteries anywhere.

What is the connection between Cleopatra, Jesus, Julius Caesar, Shakespeare, and Moses? None of them used any electricity at all.

I have to tell you that in Shakespeare's era Londoners burned coal for heat. Coal was one reason that London became such a big powerful and complex city.

Shakespeare's parents couldn't read and his father was only a middle-class glover but (as energy availability was increasing) bright kids could get an education and luckily for us, Shakespeare got one.

Before any elites acknowledge bankruptcy they will resort to the military. That's always the last resort.

(1) Quite what will the military be deployed to do to stave off the effects of bankruptcy/whatevercy?
(2) How will their bosses pay their military if they are bankrupt?

TJ interesting you should say that. I am an expat in Thailand. and watch Australia Network (with the self effacing slogan 'A different view'). I watch the sport-the news is too hilarious. Anyway, there is an emergence of programs featuring the paternal police state (The Force and Rescue). Shorts of blockheads with no necks sporting the latest fashion sunglasses gearing people up to obedience, or they will kick your head in. The elite will squeeze the population for all their worth.

Nate, Neat way to look at the issue. Just the three largest banks in the US today, have over $150 Trillion dollars of derivative "assets" on the books. Due to recent rule changes they are carried at face value rather than market value. Talk about no clothes. These would add about $135 Trillion in needed oil extraction. Good luck.

Most people think that 90% of those derivatives are currency swaps, which have very little risk beyond a few hundred basis points. But WHAT if a counter party goes under with an exaggerated currency move? Then the only way to halt the domino effect is adding fuel to fire (more easy credit, more quant easing etc.)

100% reserve requirements, tethering to real assets, reducing debt, reducing leverage, reducing consumption, etc. How to accomplish it all at a pace that doesnt upset the applecart is beyond me...

Nate, (apologies for the idiot faction intruding in here again, but...)
I suspect I'm not the only reader who's out of his financials depth with your first paragraph there. But it appears that you are describing some scenario that is perhaps sure to arise and then cause an abrupt collapse of some systems to some extent.

And then your second paragraph appears to be in line with the concept of having to convert an airplane (current system) into a helicopter (steady state system) while keeping airborne throughout. Again a seemingly inevitable abrupt collapse in the making.

If you (or someone else less busy) could elaborate these points into an econo-dumbo's guide then at least one reader would be most grateful. I think also it could be useful to incorporate these ideas into the "Will there be an abrupt collapse" article I have been working on. Not that there's a shortage of impossible problems already. More the merrier (insanity permitting)!

I wish to raise a query about the use of the word "collapse" in the title here. Not least because I'm preparing an article to send to TOD about whether or not there will be any collapse.
If this word is used to mean total collapse (where not qualified as "partial collapse"), then surely we have not yet seen a financial collapse. If a financial collapse had already taken place it would mean we are now reduced to bartering with money no longer holding value. We've had a financial downturn, sure.

Secondly, not only is fiat currency a delusion, the entire concept of wealth and ownership is merely a belief in people's minds.

Thirdly, has the child shouted yet? Some people now see the scam of unbacked money. But most continue to be naive and trusting in the genuine value of their cash. Most wealthy people have too much invested in the delusion to wish it to be undone.

The question is when will be the time when a critical mass of people do not find it convenient to believe in wealth/ownership and then things would/will really become "interesting".

I wouldn't read collapse as past tense.

At this point, I think the child has only whispered, and the financial authorities have shut him up. The word is that recovery is just around the corner. I read that 90% of economists surveyed see recovery in 2009, and most of them see recovery in the third quarter. Amazing group-think, based on next to nothing.

My own thought exactly. Such pathetic bahh-bahhing!
A wonderfully ironic leading headline in a recent FT said
"King warns of slow recovery". [where King=BoE chief]
Characteristic propaganda trick of leaving the key point implied, and disguising a reassurance as a "warning".

As for media suppression the following three links speak for themselves:

Classic pump and dump scam :)

(Glad to see we've double-crossed memmel into shorting the market.)

"The entire concept of wealth and ownership is merely a belief in people's minds."

The concept of ownership and possession is shared by most if not all mammals.

Correction and apology for sloppy language and underlying conceptualisation! A concept is a concept, and never a belief. My sentence might better have read:
"Wealth and ownership are merely beliefs in people's minds."
Meanwhile, non-humans may also have these concepts, but they do not share the same beliefs relating to them. Rather they tend to believe that your honey belongs in their hive or your arm rightfully belongs in their mouth.

Never underestimate the power of the people to believe.

As an atheist I am always amazed by the stuff people accept as true even though the evidence clearly shows the opposite.

If a lie is repeated often enough in somber tones, accompanied with threats, and from a person seen to be of high authority it will be believed by the majority. It also helps to have back up literature from an even higher authority that supposedly can not be questioned.

Religion has had all of these for centuries. Economics and free market ideology now has an extensive literature to back up its lies. Anyone who questions it all is deemed an illiterate buffoon or worse.

Amazingly it all seems to work in the end. The people of faith succeed because they all accept the lies and the system continues on its merry way after periodic bouts with reality. These collapses and calamities are treated by the believers as punishment for questioning and lack of faith. Or perhaps they were brought on by the evil atheist doubters in their midst.

Saying the emperor doesn't have any clothes on is no more welcome than saying god does not exist. It will be rejected as blasphemy.
It is only in fairy tales that all the people recognize that the emperor is naked after the child points it out.

Someone has said all children are atheists and faith is learned. I think it is true.

"Someone has said all children are atheists and faith is learned."

I would argue with this assertion. Given that humans evolved in male dominated groups, it would be instinctive for people to form such groups. Religions have simply elevated the dominant male notion to a higher level for better control. Kids take to religion naturally. It takes a lot of education to convince them otherwise when they grow up. I think religions had to evolve when humans developed self consciousness and realized that the "big monkey" wasn't any better then they, themselves. With advent of religion, the Big Monkey became invisible and perfect and all powerful.

Agree as concern the unobserved but there is a kind of faith that the sun will always rise in the east derived from observation.

Kids take to nearly any human endeavor naturally.

And any system of learning or information can become a religion if you teach it children, punish them for questioning it, and cork it off with fear.

You sound like you where raised a Old School Catholic.
I was as well.

Porge you guys are right about religion and kids.Old Scholl Catholicism seems to be remarkably similar to Baptist fundamentalism in more respects than not. Been there,and had that done to me.

Catholic means universal in Latin and was the "official" version of Christianity sanctioned by the Romans. I have a theory that it was there last ditch attempt to continue the Empire through the control of the already rapidly growing Religious movement of Christianity. If you think of the tenets of Christianity in general and Catholicism in particular it basically says you should suffer here on earth to get a better deal later. It also says that if you are rich here you get the shaft in the next go convenient for the Romans.

I may be wrong but;

Wasn't the Catholic Church set up by Paul, who never even met Jesus but was struck by lightning instead. Spin doctors have been around a long time.

That's another theory I guess. I like mine better.

They are equivalent hypothesies actually.

"Thou [the apostle Simon] art Peter [=petrus as in petroleum!], and upon this rock I will build my church"-- words attributed to Christ in the Gospels.

WOW, now that is a unique interpretation of the bible and the only one that makes sense!

Lightning? Gimme a break. You're making the same logical error fundamentalists do when they read the Bible: you're reading it literally, and trying to find some natural phenomenon to explain in concrete terms what is metaphorical language describing an intense spiritual experience/awakening. Stop reading 'miracles' literally, rather one should see them as signs (Gospel of John's preferred term). Even the earliest Church Fathers were well aware of these things, and focused on a more 'spiritual reading' of the texts.

Actually, I think there were hundreds of different sects competing for several hundred years in the so-called AD years until Constantine realized that the only way to unify the empire was to unify its belief system, and the only way to do that was to convene a council of all the leading sects and have them come up with the one true religion.

When they couldn't do that after a couple years, Constantine told them that first we need a God, OK, take Hesu from the old Celtic religion and Krishna from the East, OK new god: Hesu Krishna (which some 1000 later evolved into the form we know it now). OK, now that we have a god, we need a story, go develop a "bible," which they did, drawing on all existing sects, pagan and non-pagan, which is why Christianity is really a pagan polytheistic religion masking itself as monotheism. OK, now that we have a bible, burn all the other bibles from the other sects. A few hundred years later, they again convened and "edited" these texts.

Point: Christianity is an invention with fictional characters and a fictional god, and many are the people who believe, have believed, and will believe these fictions, and if you don't, burn them at the stake, or whatever.

Capitalism is our latest "religion." You don't "believe" in Capitalism, then you're a no-good evil socialist, liberal, unAmerican, and so on.

Only when faith in this religion--the Capitalist religion of money as god--collapses will you have any real collapse.

What a load of mythology from Dayahka! The early Christian texts are very authentic apart from the magical bits. Most crucially Christ WAS seen "risen again" alive by witnesses because he'd never actually died; someone else had been arrested and crucified by mistake, and Christ cleared off along the road to Emmaus before he could be captured.
And that's why Judas was so remorseful that he had brought about the death of an innocent man and killed himself.
The main thing that Constantine did to Christianity was turn it from a pacifist dissident sect into an arm of a military establishment.
And the names jesus and christ are nothing to do with hesu and krishna.

Most crucially Christ WAS seen "risen again" alive by witnesses because he'd never actually died; someone else had been arrested and crucified by mistake, and Christ cleared off along the road to Emmaus before he could be captured.


Nothing in your link supports this interpretation, not even after following the "Historical Jesus" and "Resurrection appearances of Jesus" links. Indeed, your link tells us that most historical scholars disagree with your claim:

"Though the reconstructions vary, they generally include these basic points: Jesus was a Jewish teacher[2] who attracted a small following of Galileans and, after a period of preaching, was crucified by the Romans in Iudaea Province during the governorship of Pontius Pilate."

It's fine to have your own opinion, but it's patronizing to dismiss someone else's post as "a load of mythology" and then proceed to assert highly controversial claims without a shred of supporting evidence.

Wow. Simply stunning. Part gross oversimplification + part fabulation + a pinch of delusion = mindless drivel. Your understanding of history (ancient, Roman and Christian), philology and the evolution of religions is so twisted, I don't know where to start. Just on a purely etymological level, you've got it all wrong. Start with a dictionary; how about a Hebrew or Greek Lexicon? Jesus is a Greek word, derived from a common and universally recognized SEMITIC name (Joshua/Yeshua), that was common in 1st c. Palestine. As for Christ, well I'll let you read and discover the rest yourself. Clue: it bears no resemblance and has no connection, linguistic or otherwise, to the Hebrew.

Concerning the content of your statement, what are your sources? H.P. Blavatsky (Isis Unveiled)? J.M. Roberts (Antiquity Unveiled)? Hardly authoritative.

The Hesu Krishna claim you make here is oddly reminiscent and typical of the work of notable 19th quacks, new-agers, theosophists and spiritists. Or perhaps is it the work of self-proclaimed scholars and deluded lunatics like Godfrey Higgins, Gerald Massey, Alvin Boyd Kuhn? Or have you just recently read Tom Harpur's equally preposterous 'The Pagan Christ' and made his views your own? Or did you get this off the Internet? Maybe you watched Zeitgeist and accepted it all as truth (whose claims concerning religion, incidentally, are largely based on the aforementioned authors). I will very be surprised if you cite anything other than the authors mentioned here. If you do, they're likely to be authors whose references will cite them profusely. 20th c. archaeology, linguistics, etc. have thoroughly disproved these theories, and it is most unfortunate uncritical and prejudiced minds today are ignoring 100 years of scholarship and exhuming archaic bogus notions whose falsities are evident to even only the slightly critical and diligent mind.

A little advice, stop reading Dan Brown, blogs/books by new-age nut-jobs, conspiracy theorists and the like. If you want a real understanding of Biblical Monotheism, before even dealing with the 'Jesus Event', I suggest anything by Mark S. Smith, particularly:
- The Early History of God: Yahweh and the Other Deities in Ancient Israel' (1990)
- The Origins of Biblical Monotheism: Israel's Polytheistic Background and the Ugaritic Texts (2000)
- Rainer Albertz, whose numerous writings on the origins of Israel, monotheism and Judaism are illuminating
- The Triumph of Elohim: From Yahwisms to Judaisms, Diana Vikander Edelman, Ed. (more purely archaeological in perspective)

On the origin of Christianity to the emergence of Christendom and it's interaction with the Roman Empire, read Peter Brown, especially:
- The Rise of Western Christendom: Triumph and Diversity, A.D. 200-1000.
- Power and Persuasion in Late Antiquity: Towards a Christian Empire
- Authority and the Sacred: Aspects of the Christianisation of the Roman World

On Jesus, the Gospels, etc. I don't know what to suggest, but from what I understand, Raymond E. Brown is a recognized authority on the subject, appreciated by both Catholics and non-Catholics. At the very least, I'm sure his bibliography will come in handy.

I realize this is way off topic of the thread, but I couldn't let this pass. Sorry.

So my guess was correct.

My parents tried, but then they made the mistake of sending me to a Jesuit high school. I had four years of religion classes where we discussed:

  • the possibility Jesus could have been born in the summer
  • the origin of Christmas in December due to pagan solstice celebrations
  • the small likelihood that John could have actually written John's Gospel
  • Biblical discrepancies and contradictions
  • Plato, Aristotle, Galileo, Freud, Marx

While at various times in science class we were learning about acids and bases, combustion, or, don't tell your parents, evolution.

I weren't no practicing Old School Catholic after that. Thank God I'm finally an atheist now.

Someone has said all children are atheists and faith is learned. I think it is true.

Interesting comment.

When it comes to any one specific religion (i.e. Christianity, Judaism, Islam, etc.), certainly it must be "learned" and the adherents make sure that religious schools (madrassahs, etc.) are established and fully funded to perpetuate the belief in that one specific religion.

When it comes to religion in general, there may be a biological imperative.

It certainly "feels" like there is some other being listening to each of your prayers, watching and judging your every move, rooting for "you" to live long and prosper.

And who do "you" think this other being is?

That's right. It's the other parts of your brain. Call it God. Call it "spirituality". Call it what you want. It's there and it's real. Which is why some form of religion will always persist and thrive. Because it's part of our biology. Because it "feels" right.

p.s. Some more additional links on the same topic:
Talking to yourself
Talking to Yourself is Good
Try not to Fall

I call it self-awareness.
Humans are the only living creatures that possess this far as I know anyway.

Humans are the only living creatures ...

Very unlikely.

Belief in human exceptionalism is, ... well, illogical.

Pretty much every social mammal has to "model" in its own brain, the expected behaviors of others in its social group. Each member of a pod of killer whales, for example, needs to understand what the others are doing during a coordinated hunting maneuver.

It is not much of stretch to imagine that the ability to model the behavior of others extends to modeling one's self as well, hence, self awareness.

The family dog knows full well which family member is most likely to drop food under the table during dinner and understands full well that it should position its self near that other member of the social pack. That behavior implies the ability to model others (of another species) and the ability to model one's self. The latter is self-awareness.

When taking my first (and last) economic course about 30 years ago it struck me that all the work of economics had forgotten a basic premise. If it takes one person to feed one person via hunting or agriculture (or one family to feed one family) there is no economy. If that person or family has some time to spare they might create a few goods to trade (arrow heads, baskets, eggs). I have lost the links but I think it was USDA that provided me with the information that in the 1700's in the Americas it took 10 farmers to feed 11 people. Thus one person was freed for a different job out of every 11. Now the ratio goes the other way and in the US 1 farmer feeds about 80 people.

The basis for any economy is how many people can one person feed. All else flows from that basic. This concept which is obscure to most now may become painfully clear in the (possibly quite near) future.

Most of what we call our economy is that excess we can produce because we don't all have to feed ourselves.

I think the 10 farmers in the 1700's were "farming" fewer hours (on the average) than we work. They spent time building their own houses (repairing neighbors' etc...), splitting wood, making their own furniture or having very little, making their own clothes and bedcovers. Appalachian women had to make 8-10 quilts for each family member in the 1800's (!!!). And they also hung quilts on walls for insulation. The saving grace was the quilting bees and barn raising, which made all the work a lot more fun. The downside was that any mishap (say an adult died of pneumonia) would plunge the whole family into economic despair - there was no buffer.

In "The Story of Stuff" the claim is made that 90% of what we buy ends up in the landfill or otherwise consumed within 6 months. That sort of oversupply must be fossil fuels. We are trading "gold" someone has been pumping out of the ground, and our overwork results in making some people at the top insanely rich while we drown in revolving doo-dads. So far, everyone I've mentioned the 6 month statistic to has replied that it can't be true for them. It sure isn't true for me but then again my house is awfully cluttered... .. ;o)

Capitalism : A marvelous mechanism for turning natural resources and slave labor into air pollution and landfills.

How insane is this Rube Goldberg machine called capitalism?
We take the stuff out of the ground bust our assess transforming into some other form and then put it back in the ground!

I remember the comment about needing fewer farmers freeing up others to work in other occupations from economics class as well.

I think we have about reached the minimum on the number of farmers.

If I had to produce my own food without fossil fuels, though, I would do pretty badly, just producing enough for one person. For one thing I don't have the knowledge. For another, I don't live in an area well adapted to agriculture (soil is clay with rocks mixed in - trees grow well, not much else). In addition, I would need seeds of the right type, adapted for the area. I am not sure how I would deal with deer, birds, and insects who want to eat what I am growing. And assuming I could get things to grow, I would need to keep the fertility up.

I am not sure how I would deal with deer, birds, and insects who want to eat what I am growing.

Eat 'em. That'll learn 'em.

In like manner it was the discovery of a novel goat grass hybrid -- I think anthropologists call it by the hypothetical name "Emma" -- that for the first time in human history allowed proto-farmers to easily collect and process more food than they could eat, which in turn allowed them to settle in fertile valleys and create proto-cities containing artisans, soldiers, teachers and merchants who could be fed from the surplus. The rest is (literally) history. The importance of being able to reliably create more food than you can expect to consume is perhaps the most important foundation stone of civilization ever laid. At the end of the day it may turn out to be the ONLY foundation. It may be that civilization simply cannot endure in the absence of a reliable surplus of food, and the greater the relative surplus (and the longer you can sustain it against adversity and invasions) the more "civilized" you get to be.

Well that and a steady supply of wood or other cooking approaches :)

I think you hit on one really key point. It should become the ONLY foundation.

I guess a really good way to look at it is to design like you would anything else a society built on reasonable agricultural excess that is designed to have minimal impact.

Obviously farming will always have some impact but I think we could determine what we can do without seriously impacting biodiversity then back down even a bit further that that.

That would be our base case we would work from. I suspect with some work we could even introduce a lot of forest style gardening that would lower the impact even more.

That would form your base society if you will then you start working through all the requirements for a comfortable life and minimizing the impact of those.

I see no reason that a pleasant equilibrium condition is not possible we achieved it in the past with far less knowledge and just sometimes only for a few etc but still.

And yes there are social aspects and they will need to evolve. A flower child like innocence approach is probably not the answer any more than some sort of tyrannical solution. I have to think that as we work on the problem of physical balance that we would also discover that we solved the problem of social balance in the process.

Not sounding like my typical doomer self today but I'm not a doomer I just believe we have to make fundamental changes and without recognizing this we can't succeed.

It isn't a matter of "it should be". It is obviously the difference between the number of people-hours needed to produce food+clothing+shelter and the number of people-hours available in total that can go into arts, finance, politics and the other trappings of civilization.

The elites are those that have figured out how to tap into this excess, in modern capitalist societies this is done by giving as many people as possible "sub-elite" status and siphoning off as much of their excess hours as one can get away with.

Unless you know exactly how this trick works and are taking advantage of it, you are not one of the elite. At best, you are one of the sub-elites that is managing to preserve a greater fraction than average of your surplus hours from being siphoned off to someone else's benefit.

Lest I sound overly cynical, this is not the worst possible system out there, but it is a bit demoralizing when you first figure out the rules and find out that you've been playing the wrong game for most of your life.

Once I was asked the Question:
"How do you get rich?"
My reply:
"Position yourself to take advantage of the efforts of others."
You are not cynical you are correct.
Now I am older and I see the the wrong in this system of exploitation.
I think that the people that produce are so busy and occupied with producing that they don't recognize the fact that they are yoked beasts of burden until something causes them to examine the situation.
Right now the situation is being examined and exposed and it seems we are on the cusp of a paradigm shift.

Id like to understand how fractional reserve ratios could be inserted into this article.

Much mention is made of the religious objection to charging interest. But it would seem to me that interest by itself wouldnt be nearly so destructive if Banks were only allowed to lend money that they actually have. The concept of interest is simple and merely takes into account the value of time. Its when banks can loan up to 10 times the amount of money they actually have that they "create money from money".

I tend to think that its that leverage that really makes the financial world divorce itself so quickly from reality. If we stuck with a physical backing behind EVERY paper note then I think we would have been safe even with interest rates. But with fractional reserve banking came reserve currency.

Also what interests me is what other currency exsisted aside from gold. For regular folks gold and silver might have been a bit "rich". What other materials were folks using for trade? Candles? whale oil? Olive oil? Something non-perishable, that had value and energy but wasnt as dense in value as gold?

There is a publication put out by the Chicago Federal Reserve that explains Fractional Reserve Lending.
According to this pamphlet the Banks are not allowed to lend out 10 times the deposits they have but 90% of the deposits and must retain 10% for withdrawals.
The problems, if you will, are created when that lent out 90% is deposited in another bank and considered a deposit and 90% is lent out again.
This theoretically could go on to infinity but converges on approximately 10-1. For example; If I deposit 1000.00, 900.00 can be lent out and deposited in another bank then 810.00 can be lent out by that bank etc.....
Google Modern Money Mechanics.

Now I believe that there is rampant fraud throughout the banking system and the interpretation of this fraction is probably the way you understand it.
I believe that even if the banks are audited that it is fraudulent and the auditor is being compensated by the bank to give them a clean bill of health.
Why wouldn't it be this way? That is exactly what is happening at the highest level of the system right before our very eyes.
After all, the tone is set at the top.
Criminals are running the country and all the institutions both public and private.
It is time for a overhaul.

Also what interests me is what other currency exsisted aside from gold. For regular folks gold and silver might have been a bit "rich".

Inflation is known for centuries. In Roman times it was with metal (cheaper - like iron or copper...) coins. It is not that our TPTB invented their policies out of their asses.

Inflation tax is the best tax ever - very slow and hard to notice.

Salt was one and is the origin of the word Salary.
Rome paid the military this way.


There is a very good book Salt A world History by Marl Kurlansky pertinent to this discussion.It's a very good read,about one evenings worth,chock full of interesting historical info.I reccomend it highly,and you can get it at Amazon for five bucks.

Thanks, I need something to read right now.

Ugh. I hated that book. I picked it up with high hopes. It turned out to be a rather boring collection of ancient recipes for salting foods.

I was very disappointed with it.


This is my first post here.

What about Salt as the basis for currency?

Salt will always have value - it takes some energy and effort to obtain it,
Salt can't be hoarded - if I try to corner the Salt market, you go to the Sea and evaporate some more.

Not a likely basis for currency today, but later?

(Thanks to Lisa S. for the idea.)

It is too abundant and also it dissolves in water. The reason it was so valuable in the past was probably it's food preserving qualities.
Maybe it will be more valuable in a post refrigeration future but I doubt it will be currency.

Salt is a nutrition essential and lack of it will cause death; however, the daily amount of sodium required is only about 300 milligrams. Where I live in the humid southeastern US the some early Native Americans were known to have died from salt deficiency. We routinely eat many times that amount from things like ham and other cured meats and cheese. Which brings to mind my favorite way of getting enough salt, namely, a ham and cheese sandwich and some tortilla chips.

When people list the things most necessary for survival they have a serious blindspot about salt. Without salt you can be dead within hours, and a great many have indeed thus died. Unless you eat enough meat it is very hard to find it other than from the sea or from (rare) salt mines. For these reasons it is one of the most crucial assets. The Romans built huge long roads to salt mines with good reason.

Thanks for the eye opener..I am starting to hoard salt now while it is still almost free.

This is getting silly.

Did you ever hear of the Licks of Ky? Rivers that contain salt. Or springs that contain a degree of salt?

So D. Boone went to Blue Licks or perhaps the Licking to boil down the water for salt. He was supposed to have traded in salt. Captured by the Shawnees, I belive the Shawnees, he was made a blood brother.

Anyway my understanding is that the cherokee and others using wood ashes as lye to create their 'samp' or porridge of corn( I call grits) and thereby partook of a degree of salt. Yet they also knew how to obtain it.

If the Native Americans had to rely on salt mines or the oceans then just how the hell do you think they survived? Really!

And did you NEVER hear of a SALT LICK???????????????????????????Jeez.

Dead within hours? What a load of garbage. I can easily go without salt for a long time and do so. I do NOT live solely on store brought foodstuffs!! and unless I put salt on it or its there naturally then I do not eat salt and that can be for more than one day , easily.

Where does these urban legends or whatever come from? Who makes this stuff up?

I was going to not post anymore today but this sheer stupidity was a tad too much. You get a F for todays grade.'


PS. I used to live right beside the Salt River in cental Ky. I wonder why they called it that???? Check it on a map.


I hope you didn't include my sarcastic hoarding statement in your rebuttal.
I stand by the ancient value being in it's preservative qualities and not because it was a necessary to survival as water.

My reply was to the comment above yours. RobinPC's.

Suprised no one else called him on it. And way Off Topic I might add.

I was recently chastised for being Off Topic so I won't add to it any further. The whole thread was in fact. But bullshit it still bullshit,salted or otherwise.


Fractional Reserve Lending magnifies the problem (and the risk), but the interest still has to come from somewhere (otherwise, the non-lending part of the economy runs out of money). Money has a time value because of the notion that it can be put to work to make even more money.


Money has a time value because of the notion that it can be put to work to make even more money.

That is true while the economy is growing. Since the economy actually started to shrank, TPTB have to deploy bigger guns. In the process a lot of money is lost, but that's nothing to be surprised about.

I would call it "doubling down". Go for broke.

I think that a lot could be corrected by linking the profit of the financier to the success or failure of the entrepreneur. Equity share if you will.
If you can keep the lenders skin in the game than he wants the venture to succeed and is not merely trying to confiscate the assets of the borrower.
The later is the SOP of the banking industry.
They put up fictitious value and hope to steal real wealth for there privilege of creating phony buying power.
So I agree no or less leverage but mainly the creditor and debtor sink or swim together...that will align the interests of both parties.
Our banking system is nothing but a swindle game in it's current incarnation.

Interest continues to be problematic though when this is a steady-state (no growth) game as any given investment is just as likely to succeed as it is to fail. In the world we are accustomed to, more enterprises succeed, which is why people are willing to borrow. If we focus on designing sustainable systems, that return to nature as much as they extract, then there is no profit in the system overall, and lending only makes sense in an "exchange" sort of way (I got surplus this year, and will lend to you, but I may need your help next year - I can't expect to get more back than I put in, even if some time has gone by!!).

What about improvements in efficiency as a way to "gain"?
That is, less waste, more product.
I agree that growth is over but doing more with less will always be a possibility and has basically been the story of technology.

Really the mess is so far gone at this point that most of these comments are nothing but an academic exercise.

Interest continues to be problematic though when this is a steady-state (no growth) game as any given investment is just as likely to succeed as it is to fail.


Consider this investment:

  1. Retired couple deposits $100,000 at a bank for 2% interest.
  2. Young couple borrows $200,000 at 2% for a house.

This is entirely supportable in a steady-state environment, as it just represents a transfer of money from one's most productive years (mid-life) to lower-earning years (retirement/start of career). The retired couple made the transfer by saving; the young couple makes the transfer by borrowing. There's no need for increasingly large amounts of money; advance two generations, and the young couple is now the retired couple, and the grandchildren of the original retired couple are now forming their own young couples.

Interest is just rent on money; it no more requires growth than rent on a house does.

I think that your example does not imply what you think it implies. Of course it is true that the people who are still working provide income (in the literal sense of the output of goods and services) for the people who are retired, since no other physical possibility exists. However, your example ignores the fate of the principle. If the retired couple does not spend down their principle then their heirs will. If the interest represents anything other than inflation, then the excess purchasing power must correspond to excess production. Deferring consumption is not the same thing as earning interest.

The principal only grows if someone is willing to take on additional debt. Simple exercise: I buy a bond that matures in one year and pays 5% interest. In a year's time, I'm paid $1.05. If I can't find someone to borrow the full amount at the same interest rate, the process doesn't continuously replicate itself. Some of the posters here are like little kids that just discovered compounding. Just because you can do an exercise on a calculator doesn't make it meaningful analysis.

If the interest represents anything other than inflation, then the excess purchasing power must correspond to excess production.

That's a fundamental misunderstanding on your part. Compound interest doesn't magically create money; it's nothing more than a way of calculating how much something costs.

If it helps you understand, think of it this way: the retired couple loans $100,000 and the young couple pay them back $110,000 over the next 10 years.

There's no "extra money" created; there has been a net transfer of $10,000 from the young couple to the retired couple. The young people are willing to do this because they gain the benefit of buying a house before they would be able to accumulate enough money by saving; the retired people are willing to do this because they gain $10,000 by allowing someone else to use their money for a while.

There is no "excess production"; there's no more and no less than what the young couple and the retired couple would have produced anyway. It's a transfer of money - a service fee, if you will - and nothing more. Fundamentally, it's no different from the retired couple buying the house themselves, the young couple paying the retired couple $10,000 in rent, and then the young couple buying the house for $100,000 after 10 years.

There is no "excess purchasing power". If you think there is, look again at the "rent on money" and "rent on house" scenarios.

Pitt, the problem with that example is that it assumes there is a balance between those wanting to borrow and those wanting to lend. One of the crucial problems pointed out by Martenson is that there aren't enough young people to provide a market to give value to the assets of ageing people. And also, old people want to spend their life-earnings not save them into the grave.

the problem with that example is that it assumes there is a balance between those wanting to borrow and those wanting to lend.

That balance is set by the interest rate.

At 0% interest, there's no incentive to lend.
At 100% interest, there's massive incentive to lend.
At some interest rate in between, the incentive to lend will match the demand to borrow.

However, that's entirely beside the point, which was simply that interest payments do not require a growing economy or a growing money supply or growing debt to be a useful part of an economy.


You're wasting your time. I've been gradually piecing together the TOD theory of interest and money and I've convinced no amount of argument or evidence to the contrary will dissuade the true believers. Here's what I've been able to piece together so far:

1. Positive interest rates require that debt grows forever. Apparently no debt is ever retired and all interest payments are automatically transformed into more debt. Compound interest is a "financial law" that is followed under any circumstances.

2. Debt repayment requires that the amount of money grow at the same rate. Thus is the interest rate is 5%, money must also grow at 5%. (Apparently a fable called "The Eleventh Round" illustrates this, but as the fable is sited without the surrounding text from the original source, it is unclear what the purpose of the story actually was. My best guess is seigniorage, but I've been unable to track down a copy of the sacred text.) Money is undefined, but posters "know it when they see it." Understanding what monetary aggregates, the velocity of money, and so forth are is completely unnecessary to speak authoritatively on financial matters.

3. Since money must grow, so to must the economy, to prevent inflation. (This at least is consistent with the notion that inflation is caused by "too many dollars chasing too few goods.")

4. The interest rate must not be negative, but otherwise there will always be enough borrowing to insure that the "law of compound interest" (see above) is followed. Interest rates play no role in matching supply and demand for credit.

5. Financial systems can be fully described by the law of compound interest, but since resource depletion insures that the economy cannot grow forever, the only possible reconciliation of the laws of thermodynamics and the law of compound interest is an interest rate of zero.

no amount of argument or evidence to the contrary will dissuade the true believers.

True, but not everybody is so closed-minded.

There are people here who believe that the universe has spoken unto them The Truth, and people who are so convinced of their own perfection are impossible to help (and typically pointless to listen to). They're not who I'm talking to; I can't force open a closed mind.

There are other people here, though, who aren't self-deluded into believing they have infallible knowledge, and who are smart enough and confident enough to admit to themselves that they might be wrong. Those are the people I'm trying to reach (and, incidentally, I'm trying to be one of them).

Yes, a number of people here refuse to learn; that's always tragic, but it's no reason to give up on everyone.

The problem is that you are quite correct, as long as few enough people are taking interest.

As soon as too many people are taking or expecting to take interest the system breaks down into Ponzi schemes and inflation.

In modern Western civilizations everybody with 2 dimes to rub together is expecting to be able to get interest on at least one of them.
And the real problem isn't interest as such, so much as interest+leverage chasing ever higher returns. The ability to create leverage on leverage, debt with someone else's debt as surety, that is what has really broken the system. Mere interest by itself couldn't do the job in only 40 years.

You see it clearly.
The current layer on leveraged layer of phony paper promises of a unlimited growing pie makes John Law look like a piker.
This whole mess is going to be the next chapter in "Extraordinary Popular Delusions and the Madness of Crowds".
That is if any one is around to write it.

As long as that "money" represents previous production I agree.
I think that the problem is when "money is created to be thrown into the economy to force activity or as a carrot if you will.
The construct of paper money is a crude representation of the true wealth of the underlying real assets.
Fiat will only work for a while in an environment that has vast unexploited resources that have the potential to be developed into condition improving capital through the combination of the resources and human input.
Once this activity hits dimishing retruns the trouble starts.
Consider America from discovery to present day. It was the last frontier and now it is saturated and beginning to become resource constrained.

It seems to me that the problem of money expansion is the interaction between interest and fractional reserves. If there is interest, but 100% of deposits must be held, this limits the rate of expansion to the interest rate (which is still exponential, but at least more modest). If there are fractional reserves, but 0% interest, then expansion is capped. But combined, the expansion from the fractional reserves on interest is like a double exponent.

To look at this, consider the effects over 50 years on a $100 initial deposit. If interest is 5% annually, but the reserves must be 100%, then the initial $100 "grows" to $1,147 over 50 years ($100 times 1.05^50). With 0% interest, and 10% fractional reserves, the initial $100 can be expanded to $1000 ($100 * (1/0.1)), but no more. However, with 5% interest and 10% fractional reserves, the initial $100 becomes about $637 billion dollars over 50 years! This is caused by the exponential interest expanded 10-fold by the fractional reserves and then having interest applied to it cumulatively. The fractional reserve effectively multiplies the interest exponent.

With 100% reserve banking, banks don't make loans (or money) and customers pay to have their deposit looked after. Lending would happen through instruments like bonds. Any growth in the money supply would rely on the monetary authority expanding the base.

Thats why gold worked well when you did not have fractional reserve lending.
The growth of the money supply was so slow that mining gold worked like a charm.

However as trade expanded and we got more international banking going banks realized that the demand for deposits was low. I.e they could loan out more than 100% of the deposit base with no worries since you wound need a run on the bank to cause the bank to be unable to lend.

Also not its a bit more complicated say you have a lot of money on deposit from a large customer and you make loans based on that deposit then the customer removes his money.
The loans are now unsecured i.e if the fail you loose money.

I'm not the least convinced that money itself makes a lot of sense in a slow growth society. The more you think about it the more you tend to wonder why its needed.

In fact the moment you go beyond owning anything more than a few personal items things seem to get messed up.

Land Ownership for example is not that efficient yet its something we have to live with its seems for now.

Thats not to say pie in the sky concepts of sharing work either but it seems to me something closer to having rights to use something including exclusive rights for a period of time starts to get closer to something more sensible.

Recognizing that ownership is really a lease and approaching it more from leasing/rights type framework just seems to work better. Then money becomes more tied to fractional ownership of things of value or things that produce value. Stocks in a sense become the only money maybe.

This does not solve the problem of determining relative values but in a sense when something is created the money if you will the represents is worth is created right along with it and destroyed when its destroyed.

Nice analogy. Other words to explain the difference between physical assets and fiat currency are leverage and fractional reserve banking. The worry is that too many people will try to convert currency to physical assets at the same time, otherwise known as a run on the bank. The system will fail. That may happen, for instance, if China tries to convert it's dollars to another reserve currency. That size of run may be enough to tip the scale.

The worry is that too many people will try to convert currency to physical assets at the same time, otherwise known as a run on the bank.

As I understand it a "bank run" is when a large number of depositors try to withdraw their money from a particular bank at the same time, to the point where the bank may not have enough reserves to cover the desired withdrawals. This is not the same as "convert[ing] currency to physical assets" i.e. attempting to spend the money on goods or services. That would, I think, better be called "Inflation" or "Hyperinflation" (a matter of degree), the state in which an increased amount of money is chasing the same amount of available goods, leading to increases in prices charged.

And the sceptical optimist is unashamedly in favour of more debt.

Start here with this: Two Printing Presses: One at the Fed, One at the Treasury

Excellent post.

This helps explain our recent experience in the second half of the 2008 – that is a financial panic. Yes, basically most everyone decided to cash in their chips, and they discovered no one had enough money to pay off all the players (Wall Street and other companies issuing derivatives.

In 2008 we experienced the worst financial panic since the 1800s. The 1800s in the US were marked by a series of financial panics that grew from unregulated banking practices by state banks (wildcat banking). More specifically those banks financed an overexpansion of the rail system (many rail lines were later dismantled). The panic resulted when suddenly new credit was withdrawn.

Now in 2009, as the Fed realizes there is no house but itself (and other central banks and the IMF) that that can pay off all those chips generated by derivatives, it has embarked on a wild inflation of the money supply – that makes the wildcat bankers of the 1800s look like tame domestic cats. In the end, their efforts will fail. Some think that failure will end in deflation of the economy and prices. I agree that the economy will deflate down the back side of the energy supply curve. However my expectation is that monetary deflation in the US is almost impossible, and we will see prices of natural resources and food eventually rise to astoundingly high levels.

However my expectation is that monetary deflation in the US is almost impossible, and we will see prices of natural resources and food eventually rise to astoundingly high levels.

Yes, but in what timeframe? In forty years the process is going to be so slow that few people will actually notice it. People will gradually accept lower standard of living, actually they have been accepting it in US since roughly (again) 1971 or so. Some technical breakthrough masked this process, but that's about it.

Pedro wrote:

In 1971, the US$ became the world reference for valuing all human activities.

That one sentence sums up a great deal.


Welcome to the party. I have been writing about this disparity between real physical work produced wealth and ephemeral "riches" for some time now.

Biophysical Economics goes back a ways describing how the only real currency is exergy (net energy available to do non-energy-extractive work). I've even posted the same ideas here at TOD several times. It is heartwarming to see several posts lately expressing some version of money = energy as more people come around to realizing that no work gets done if no energy flows.

Question Everything

Yes, the only way to truly value all other wealth is as it relates to the energy that is needed or the energy that is saved (in the sense of ideas having energy saving value). The problem is that is is not an easy migration of consciousness to this type of value system.

I think that much ground could be gained if we taught our kids to center all their decision making on the scientific method and not on the various and sundry man contrived theories and constructs......but I am sure that everyone on this site is already of this mind.


I've just discovered your 'Question Everything' blog -- and added it to my favourites.

Smart stuff

George,you will be happy to know that as of today you have one more new Question Everything reader.
I am impressed.The only problem is time to read versus necessary day to day work.

Well thank you CO and oldfarmermac. Please feel free to comment when you visit.



1. While I agree with your overall analysis and sentiment, your Graphs 3&4 mix units. GDP is the current rate of productivity (value per year). DJIA is a combination of accumulated past production and expected future production (value). Even if GDP is negative (as it is now) DJIA will retain some value (at least for awhile). The growing gap between DJIA and GDP is not meaningful.

2. Debt and debt interest are not a problem if they are "invested" in projects that convert raw materials into goods with sufficient value to cover the interest payments. In effect you are manufacturing goods to backfill the created money.

The problem arises when the marginal benefit of your projects is not enough to cover interest. Then you are simply spending future GDP today and incurring the triangle problem you note above. Look at ACCUMULATED GDP and ACCUMULATED BORROWING (private, corporate, and government) since 2000 and you will see this problem quite clearly - a dollar borrowed was a dollar spent and nothing more. A dollar borrowed increased GDP by $1.00, not $1.05 to cover interest.

3. The above problem is exacerbated by financial leverage, whether linearly in the form of fractional reserves or non-linearly in the form of financial derivatives. (Perversely, derivatives tend to create even more leverage out of thin air once the consequences of over-leverage become apparent.) Financial leverage creates even more money that has to be backfilled with real growth.

4. When MARGINAL growth stops, borrowing and leverage must stop or the system will fail. Failure may take the form of hyper-inflation or severe asset deflation. Both of these mechanisms clear the excess money from the system by erasing accumulated money from either bank accounts (hurts the little guy) or 'investments' (hurts the big guy).

5. Presently, our governments are trying to convert asset deflation into monetary inflation. This changes the sufferer, but the problem remains.


I don't have a problem with mixing units on Graphs 3 & 4. I think of the DJIA as peoples view of the net present value of future earnings. These seem to me to be totally out of line with declining resources that will be available in the future. Somehow, growth that won't be there has been factored in.

I would agree that debt interest is not a problem if it is used to convert raw materials into goods with sufficient value to cover interest payment. It seems to me that 95% of debt payments are for other purposes though. If a builder takes out a loan to build a new house (and it is really needed), the interest payments should be paid for by the higher price of the finished product, relative to the raw materials. But these interest payment only last for perhaps a year, during the process of transformation. All of the other loans having to do with the sale of the house add nothing of value. The same with buying stock. If a company borrows money to develop a new mine, the difference in value between ore in the ground and mined mineral should pay the interest. But if you borrow to buy shares of the stock, this does nothing for production in the real world.

I would agree with most of the rest.

your Graphs 3&4 mix units....The growing gap between DJIA and GDP is not meaningful.

Worse than that, it's not even real.

The DJIA has increased by 900% since 1970, but inflation has been 450%, meaning the inflation-adjusted DJIA has only increased by 2x since 1970, or significantly less than the 3x increase in PPP GDP.

It's highly misleading to compare inflation-adjusted and unadjusted numbers. Comparing apples to apples literally reverses your argument, making readers worry that they're seeing a pre-determined conclusion fishing for supporting numbers. The argument needs to be rethought with analysis of actually comparable numbers.

Great post Gail I think it fits well with what I'm thinking.

Most of the "money" is locked up in the financial world and only enters the real world as these financiers buy mansions and sometimes companies. The buying of companies is more a change of control.

In a sense by keeping the money rotating up in the world of high finance and thence into FIRE with very little leakage back into the real economy in the form of exchange of paper wealth for real services the inflation is contained to the wealthy and the poor simply become more impoverished as a sort of a form of collateral damage.

Housing with its ever longer and more ridiculous loan terms can be seen as the huge bridge that tied these two worlds together. The massive excess in the financial world was kept from exploding by translating it into Real Estate.

Thus the multi decade housing bubble is what really kept everything from coming un hinged. On top of this of course was the financing of the growth engine in China.

Both served to keep the situation you see from becoming obvious. With the stuttering of the engine of Growth and initial collapse of housing we are at the very beginnings of the truth.

Building buildings without support from the real economy will fail. The entire game was obviously a farce at the end and now that the key balls that kept the game going have fallen its over. Certainly housing is needed as one of the key utility we need in the food clothing shelter base but for decades its served as they source of the ever longer financing needed to keep the big game going. Your post perfectly illustrates the game and also why its over.

It was at this point that a real growing divorce between the physical world, represented by equivalent human effort (energy, in the final analysis), concentrated in gold in the reserves of each country. It gave way to a new form of paper money, where the authoritative signature committing an amount did not necessarily correspond to equivalent real goods or measurable services.

Bank vaults full of gold do nothing to protect us against real productivity losses. What use do you think that gold would be if the global energy supply or food supply were to under go a sudden large reduction? Even if our currency was backed by grain and energy stores, they would offer us protection only for the time period represented by the size of the stores, which would be highly unlikely to be more than a few years.

Economic growth requires spending production resources (energy, labor, etc.) today to build infrastructure which will deliver producitvity increases in the future. No matter how a currency is backed if the those productivity increases fail to materialize then an economic crash is inevitable. Growth based capitalism in any form is and always has been a pyramid scheme with a finite lifetime. I see nothing about the post 1971 phase of capitalism that is more divorced from reality than any other phase, other than the fact that we are closer to the end of growth.

Well not quite :)

Charcoal actually is a good energy source and is renewable and if you let your rivers flood naturally your fields are naturally re-fertilized.

So you have a basic constant energy input simple enough there is a differential over this thats surplus this surplus can incrementally increase wealth if the population is kept under control.

Depending on population levels you have X amount of wealth per capita. If they go to low you have a hard time supporting a population of people not involved in staying alive. To high and you have a powerful incentive for people to breed to ensure they are taken care of buy more but poorer children.

Between these two extremes plenty of room for reasonable wealth. Building size is more constrained by heating cooling and maintenance costs than anything else.

Slavery is also always a threat as even the above does not remove imbalances via concentration of wealth. You can have a very renewable economy but if wealth is concentrated in the hands of a few its not a fair economy.

So if you go back before the recent past variants of reasonably sustainable economies that generated tremendous wealth but took centuries to do it are actually common.

Assuming we maintain most of our scientific knowledge and I see no reason we won't keep enough to allow anything lost to be recreated we also have this dimension which is much larger than ever. Wealth measured in knowledge has grown rapidly just because we have used it badly does not mean we have not gained a lot.

Thus at the most fundamental level I see no reason for a variety of excellent outcomes one day. This day could be thousands of years in the future but we have no intrinsic reason to assume that humanity cannot eventually finally get its act together.

I don't see this as the end of growth as more the end of centuries of misallocation of resources.

I think that you hit on a great point with the end of the misallocation of resources.
Another point is that the goal should not be growth per se but the improvement of the human condition for all.
I think that everyone would agree that happiness is not exclusively derived from material wealth but from a sense of well being which has more to do with trust and security as having a bunch of junk in the garage.

Exactly stop misallocation of resources and focus on improving the human condition.

You need a constant surplus every year to accomplish this consistently but thats trivially provided by the sun. It does not have to be that much and if you read Gails post with this in light its allocation of labor thats more important than allocation of resources.
Outside the obvious mass of materials needed to build a comfortable shelter we don't actually need much at all in the way of energy beyond food and keeping warm.

Modern science can readily create structures that are very low in energy footprint.

How much we travel is really dependent on the amount of surplus but obviously you can readily eliminate almost all daily travel by your lifestyle choice. This leaves travel primarily for recreation so I can't see that being a burden. Efficient aircraft can cover this.

And last but not least you have movements of goods because of different production patterns and specialties but again with modern green houses and other methods this can be limited to luxury items and filling up empty holds. If the population is low enough no reason to expand beyond the best places to live with any concentrated population.

If we want to go beyond this space is wide open literally :) There are no limits to growth in the true sense just limits to the rate of growth and the density in a given ecological system. Go up young man :)

No real reason the earth can't become a vacation spot and retirement home for old farts that want to grow tomatoes :)

Capitalism is a dumb system that will always cater to the money.
No one will build affordable small houses because the profits are in the McMansions.
This is true across the entire economy.
The ugly truth of American capitalism is that he top 20-25% are the only ones that have lived the "dream". At least since the slow decay started in the early 1970s.
All the brainy guys designing video games could just as easily be researching alternative energy solutions or as you mentioned those ideas of the different arrangements of production and scale and the efficiencies based on energy instead of bucks.
Capitalism is played out but try telling that to the 'Jones'.

This really isn't that hard to see intellectually. Just make energy the score card and the rest will just happen.
listening to U2.........appropriate music.

No one will build affordable small houses because the profits are in the McMansions.

Somebody will.

One of our fine Minnesota companies, With only a bit of luck they should be able to weather the current financial storm nicely, since they have always worked to a niche market.

But what do you do for the NASCAR folks?

Maybe horse racing? The only problem is you can't put to many advertisement stickers on a horse.

I did not mean to imply that I view the downfall of private finance capitalism as a purely negative thing or that human cultural and scientific develpment are going to come to an end. I am, however, convinced that private finance capitalism, with its stuctural emphasis on composite growth in total income, cannot be the basis of a civilization with long term stability. We may well go through collapse and regrowth, but if we are to reach an end point with relatively long term stability, we will need new social and political paradigms and not just renewable technology.

I think that it is important to distinguish between growth in income and growth in knowledge and exerience. The primary pleasure I get out of life does not come from owning toys. I get pleasure from hiking and camping, from reading novels and poetry, from solving intellectual problems, etc. I see no need for my income (in the sense of ongoing psychological satisfaction) from such activities to increase exponentially over time.

Well put !

And in a bigger picture view the loss of craftmanship has probably been on of the reasons people have fallen into the trap of owning things to gain prestige. Being the cabinet maker or the blacksmith or the stone mason and gaining honor in your craft has been lost and replaced by having the bigger truck etc.

In a very real way the population has been stripped of their intellectual wealth.

As and aside for me I have a interest in making all kinds of stuff and enough knowledge of science to figure out the basic requirements what I lack are the tools to allow a person to make advanced stuff in the home workshop. Given a decent machine shop you can build the right tools but our society does not allow people interested in making stuff the tools to do the job. We are so focused on mass production the whole area of craftsman style advanced production is almost completely empty. I say almost because plenty of people do do this sort of stuff.

Just the other day I was wondering what I would have to do to make something as simple as copper tubing in a home workshop sort of setting. It really a interesting challenge.
Its pretty obvious you can't do it the way its done industrially but then your left with wondering whats the best way ?

And problems like this can be solved using renewable energy resources and the quantities are very small so its not a energy issue but a technical one. Also of course if you where going to do this because you needed to your first move would be to probably eliminate using copper in exchange for some sort of clay and heavy glass pipe solution.

The very first thing I'd do would be to minimize where this solution was needed.
And we would assume that this would be done for some sort of very long lived solution so the energy constrains which are not all that huge are very small when averaged over the lifetime of the solution. Its ok to use a lot of energy to build something that lasts 500 years.

Great post.
Great graphics.
A lot to wrap one's head around in one sitting.

I'd say that "finance" is based on trust and promises among and between what used to be honorable men. Honor and ability to live up to one's promises have all gone down the toilet in recent years. Yes, the Emperor wears paper thin garments now a days (and termite infested ones to boot). Much for us to think about. How did we get here and how do we get out?

This post was originally a presentation that we asked Pedro to make into a post so that it could be better viewed on The Oil Drum. That is the reason for the great graphics.

The presentation was quite long, so I think there will be a second post as well in the near future.

Gail, Thanks for posting this by Pedro Prieto. It is a well-done historical perspective of how we got here. Right now we are experiencing a great shift in the what fiat currency represents.

Two quotes which I found very insightful lately focusing more on our current situation...

1) Mohamed El-Erian, of PIMCO:

The power of the convergence magnet – that mystical Anglo-Saxon model of liberalization and de-regulation where a prosperous post-industrialization phase relies on an ever-booming financial system – has weakened. No other model is able to step in at this stage.

2) Henry C.K. Liu, describes U.S. financial governmental policy very well:

Debt denominated in fiat currency is borrowed wealth to be repaid later with wealth stored in money protected by monetary policy. Bank deleveraging with Fed new money cancels private debt at full face value with money that has not been earned by anyone, i.e. with no stored wealth. That kind of money is toxic in that the more valuable it is (with increased purchasing power to buy more as prices deflate), the more it degrades wealth because no wealth has been put into the money to be stored, thus negating the fundamental prerequisite of money as a storer of value. This is not demand destruction because decline in demand is tmeproarily slowed down by the new money. Rather, it is money destruction as a restorer of value while it produces a misleading and confusing effect on aggregate demand....

The Treasury does not have any power to create new money. It has to borrow from the credit market, thus shifting private debt into public debt. The Fed has the authority to create new money. Unfortunately, the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand. Falling demand deflates commodity prices, but not enough to restore demand because aggregate wages are falling faster. When financial institutions deleverage with free money from the central bank, the creditors receive the money while the Fed assumes the toxic liability by expanding its balance sheet.

Deleverage reduces financial costs while increasing cash flow to allow zombie financial institutions to return to nominal profitability with unearned income and while laying off workers to cut operational cost. Thus we have financial profit inflation with price deflation in a shrinking economy. What we will have going forward is not Weimar Republic-type price hyperinflation, but a financial profit inflation in which zombie financial institutions turn nominally profitable in a collapsing economy. The danger is that this unearned nominal financial profit is mistaken as a sign of economic recovery, inducing the public to invest what remaining wealth they still hold, only to lose more of it at the next market meltdown, which will come when the profit bubble bursts.

I started reading TOD in '05, though I don't post too often here, anymore, I learned a lot here at this site. Thanks.
Financial News Express


Interest rates going up, and LOTS more funding to come later this year -new money wiping out bank debts and changing debt mix from private to public. Just shows governments can screw with markets for a while, but eventually government intervention fails -- the market goes where it should be anyway, and taxpayers carry the long-term burden. If rates keep going up it will cause inflation expectations to go up, but not earnings, and the positive feedback loops begin with a vengeance.

The Ancient Egyptians didn't have money. They built an stupendous civilization without the use of money, with a complex social system. Neither did the Minoans of Crete. Money, (at least coined money) was a Greek, some say a Phoenician, invention and came much later.
Curious, because much more backward cultures had "money", objects that they used as means of value for interchange, some American Indians used Dentalium shells, scarce and difficult to obtain; others used big stones curiously carved and not practical to move; others used cacao beans.
Yet the Egyptians although they didn't have money they had something like an abstract concept of value, and they would prize objects and work in terms of rations of food, from communal stores and carry out very complex calculations. For commoners use I understand. The priests and ruling class had gold, not coined.
Perhaps the Greek way has been a mistake.

santaluciae, I notice you mention the Egyptians pricing things in terms of rations of food. And I guess this is the key to how they managed without money. The idea is that the grain (the key food) would have been harvested and stored communally and each worker would then be paid by the government in an amount of grains for their work. So grain (/food) would have been their money. This was of course one of the very first-generation civilisations (as per Arnold Toynbee's account).

The Ancient Egyptians didn't have money.


"The use of gold as proto-money has been traced back to the fourth millennium B.C. when the Egyptians used gold bars of a set weight as a medium of exchange"

Thanks Pedro. This is a very interesting explanation that helps me. However, it leaves out a big element - technology. Technology enables an exponential growth in "value" produced per person or per unit of energy. Consider the energy needed for Gutenberg to produce one book, and then the energy needed to make your analysis available to millions of people. Orders of magnitude less energy or orders of magnitude more value, or both. I don't know how to factor in this element, but it certainly narrows the gap between your red and blue lines, and thus probably mitigates any collapse.
Also population groth has to be factored in. How do your curves look on a per capita basis?
I was also interested in the way your red curve took off about 2004. It was about 2002 or 2003 when the USA balance of payments finally went negative, if memory serves, and that may have been a seminal issue.
Clearly the financial restructuring act about 9 years ago took all of the brakes off the system, and prermitted growth of paper wealth way beyond any goods/services, but much of this paper wealth was nothing more than vapor, and while it will be damaging to the financial system as it dissipates, it will have little effect on ordinary people.
Interestingly, the "value" (price??) of real estate, averaged across the USA, grew at very near 3%/yr from 1952 to 2002, and then took off when Greenspan dropped interest rates in response to the 2000 "crash". The value peaked about Q2 2006, and then the decline started, and we are now about back to the 3% growth curve. The period from 2002 to now, was clearly a bubble, that has been pricked. So that excess has already been worked off.
I don't think that the situation, adjusted for technology, population, and corrections already made is nearly as dire as most of your readers see it, but I do expect to be excoriated by the doomers. Murray

Another lurking non-doomer, but it's hard to know how to contribute to these types of posts. A few months ago, it appeared to some that the world was going into a deflation depression, and the only thing you were advised to have was cash. Even depressions end, and it looks more likely that this recession has reached bottom, but now we can have a new fear, inflation, so it's a good thing most of us didn't sell our homes and other assets to earn zero interest in T bills or gold bars. I remember the 1980's recession, then gold went to $1000 an oz, predictions of >$2,000 an oz. Gold has probably been the worst asset to have over the last 30 years.
It's impossible to prove that the world is not heading for a total collapse, but when you can see what technological advances have been made over the last 60 years, how little of the resources we have available we actually need to survive and be comfortable, I see many opportunities to dodge most doomer scenarios.

"it will have little effect on ordinary people."

Aren't there already a lot of ordinary working people foreclosed and living in tents in the US? Ever been homeless? Little effect?

"when you can see what technological advances have been made over the last 60 years,"

And when you can see what vast blunders have been made over the last 30 years?

"how little of the resources we have available we actually need to survive"

And what a huge proportion of our prehistoric inherited resources we have stupidly squandered or degraded already?

And what a huge proportion of our prehistoric inherited resources we have stupidly squandered or degraded already?

We no more inherited oil or uranium, or solar energy from pre-historic man than future generations are going to inherit deuterium for fusion power from us.
Communities have always used available resources (sometimes squandering them), technology makes it possible to exploit new ones.

Aren't there already a lot of ordinary working people foreclosed and living in tents in the US?

No. Not unless you consider isolated groups of a couple hundred out of about 700,000 homeless to be "a lot", and even then most people in tent communities are not what most would consider "ordinary working people".

Based on what I can find, homelessness in the USA is up maybe 10% from a year ago, but fell by 10% from 2005 to 2007, so it's not clear that it's at an unusually high level.

Perhaps so Pitt, but Murray's words were in the future tense and the question remains as to how much ordinary people will in due course be affected given that "it hasn't even started yet" as one commentator put it (and with which I concur).

I don't think that the situation, adjusted for technology, population, and corrections already made is nearly as dire as most of your readers see it, but I do expect to be excoriated by the doomers.

Some of us are trying to be open to persuasion by non-doomers. But that sentence lacks evidence or argument for any case. Excoriate no, be unpersuaded by mere declarations yes.

be unpersuaded by mere declarations yes


it looks more likely that this recession has reached bottom

I would love to know what causes one to think that. I see exactly zero signs of recovery. The housing sales, for example, is nothing more than predatory buying of foreclosures - some of those buyers will soon enough be in foreclosure themselves.


Too many comments in a minute!

I would like to thank Gail and Nate for hosting my post in TOD.

And to all those producing comments. Many of them very sound and sensible. I will try to answer some of them this weekend.

There's a lot of truth in Pedro's essay but money and value are not equivalent and thus the relationship between goods and services and money is always in flux.

A radio was once a very expensive household item as were clocks, TV sets and a thousand other things we take for granted today. Some of the most expensive items of yesteryear have no value at all save as museum pieces or curiousities. Any one want to go into battle in a suit of armor or travel about in a stagecoach? I once read that it cost $10 ( in gold coin) for 1 minute of transmission time on the first transatlantic cable.

My point is that a 1910 Rolls Royce, as valuable as it maybe as a rarity, isn't worth as much as a 1972 Ford Pinto as an automobile. So, using Pedro's red line blue
line graph of 1910 gold dollars versus Nixon's fiat 1972 dollars for the purchase of automobiles, radios, hospital care etc. the real value of the goods more than made
up for the debasement of the money supply.

However, this does not mean I discount Pedro's graph entirely. We may have lived in a Golden Age, at least those of us fortunate enough to have lived in North America. The notion that a world of 7 billion can live as fewer than 1 billion once did may not be possible.

delete duplicate

The notion that a world of 7 billion can live as fewer than 1 billion once did may not be possible.

People in future will never want to live as people did pre-electricity, it's just too useful, it's like thinking we would live without fire or the wheel.

I think Chinese and Indians as well as people in all developed economies are living in a golden age, now, surely better than 1950. Australians certainly are, as far as I can remember. Was any population better off in 1950 than now? (Zimbabwe ?).

Substitute the word "gold" for "blue line" and you'll understand why gold (and silver) are the some of the very best available investments today.

Charlie Hall asked me to post this for him:

Charlie Hall agrees very much with Pedro's post (and has with the concept since his gradaute school days) as well as with the concept of Biophysical Economics put forth in the comment by George Mobus (see Charlie's own Biophysical Economics website at ). He thought he could add further ammunition to Pedro's post with the following concept and figures:

Charlie (with help from Bill Tamblyn) wanted to test the hypothesis that the Dow Jones Industrials as given every day on the news had two components, a psychological one representing mass psychology (i.e. lemming behavior such as irrational exuberance and the converse) and a second one representing real industrial production, which he reasons should be proportional to actual energy use. Thus his hypothesis was that the DJ may move up or down but it eventually has to be constrained by the real energy used (he is not really impressed with "efficiency improvements" as most seem to be just throwing more energy at a problem).

First the DJ must be corrected for inflation, as it is just prices, then the DJ and the total US energy use can be compared by adjusting the scales on each side so that the data overlap: The first attempt, starting in 1961, seemed to show something like that but was not really convincing, the second one, going as far back as 1915 and extending to the DJ's lowest point a few months back (it has since risen to about the energy line), seems to indicate that indeed the Dow Jones industrials has been "snaking around" the biophysical reality of energy use since 1915. This suggests that we may never have extended real growth in the Dow Jones unless we can get an increase in US energy use, which seems doubtful.

Charlie thinks the results give a lot of support to Pedro's post by showing a clear example of the biophysical basis and limits to our economy. This has also been shown clearly in our recent paper in American Scientist "Revisiting the limits to growth after peak oil" which is downloadable from my web site

"he is not really impressed with "efficiency improvements" as most seem to be just throwing more energy at a problem)."

Can you explain how refrigerators that are 2-3 times more efficient or light bulbs that are X 4 as efficient as incandescent bulbs and X10 more efficient than carbon filament bulbs used in 1915 are "throwing more energy at the problem" It seems that these efficiency improvements are saving energy.

"This suggests that we may never have extended real growth in the Dow Jones unless we can get an increase in US energy use, which seems doubtful."

No this suggests only that the Dow Jones Industrial Average ( adjusted for inflation) may not grow much more than total energy use. It says nothing about GDP growth.

Secondly, why would it be doubtful that total energy use would not continue to grow as it has in the last 100 years, is the wind going to stop blowing or the sun stop shinning? Do you extrapolate 100 years up trend or last 3 years down trend?

he is not really impressed with "efficiency improvements" as most seem to be just throwing more energy at a problem

This is a strong assumption, and one that must be backed up with evidence in order for his analysis to be meaningful. Baldly claiming "efficiency improvements can be ignored" is no more convincing than baldly claiming "efficiency improvements prevent peak oil from being a problem. Both are opinions that need backing up.

(That, and his reasoning seems odd; isn't efficiency by definition throwing less energy at a problem?)

the DJ and the total US energy use can be compared by adjusting the scales on each side so that the data overlap...the second one...seems to indicate

"These two lines seem similar if I choose arbitrary scales" isn't very persuasive. There are statistical methods to determine the correlation of data series, and it would be beneficial to apply those.

Moreover, there's still the fundamental problem of correlation vs. causation. Both data series are increasing because of a known common factor - population growth - which means that no meaningful comparison can be done without removing that known common factor. Per capita energy consumption in the USA has been approximately flat for the last 30 years (330Mbtu +/- 5%, EIA), whereas population-adjusted DJIA has undergone much larger changes.

It might be interesting to do a regression analysis to see how much of the movement in a population- and inflation-adjusted price series (such as the DJIA) is explained by per capita energy consumption. However, it seems likely that that would pull out the common factor of business cycle (both go down in recessions and up in booms), which isn't adding much new information.

I think "adjusting the scales" eliminates any useful correlation. Primary energy "consumption" also has no information about the value produced by the energy. I don't thnk this approach is meaningful. Murray

Pedro - a fascinating essay. GDP is an elusive beast to nail. But I agree entirely that it is disconnected from the real world. UK FOOTSIE is currently at 1996 levels and I find it hard to see how our GDP can have grown in that period and not impact the perceived value of our 100 largest companies. In fact the index is rigged to include resource companies that have grown more than most in recent years and they too are disconnected from the UK economy.

That said, phantom GDP does generate real economic activity - people buy Porches and Mercedes Benz cars - and importantly phantom GDP generates tax revenues - which are indeed fast disappearing in the UK as their phantom foundation collapses.

The system of growth is rooted in the desire for pensions and its one thing I would be interested to learn more about - the history of pensions. Its abundantly clear to me that non-productive members of a society may survive with large energy surplus which becomes impossible with an energy deficit.

Another thing I've always wondered about in assessing GDP and accumulated wealth is how depreciation is managed.

The current monetary system is a combination of distortion and obfuscation. Under “social engineering” savings do not pay enough interest to offset inflation, and then the interest is taxed as income. Also, people became conditioned to asset prices rising faster than the rate of inflation. Even Alan Greenspan commented about the increase in housing values being a source of collateral for borrowing and how this was good for the economy.

The late 19th and early 20th Century was characterized by chronic deflation of 1 to 1-1/2 percent annually except for brief periods, particularly WWI. Deflation became severe with the asset crash of 1929-32, which also coincided with the near completion of electrification of factories and the early stages of tractors, cars and trucks replacing work animals. Deflation turned into inflation with F.D. Roosevelt’s ending the gold standard in 1933.

The stock market boom and great housing inflation were partly a result of seeking a real return on investment not possible with time deposits or bonds. There was also a tax incentive in the form of lower tax on capital gains and a tax break on one’s home. Therefore, the early investors acted rationally, up to the point that investors were willing to pay more than replacement costs for stocks (see Tobins Q) and houses. Had the banks not been willing to loan more than 3.5 times income or more than replacement value of houses we would not be bailing out the banks.'s_q (see Martin Sklar on disaccumulation)

The banks made a fortune originating mortgages and passing on the risk to the securitized mortgage market. It was the crash in the securitized mortgage market, which left the banks holding bad mortgage paper that brought down the banks.
Ageing of the population and rising cost for basic necessities like food, gasoline, natural gas and electricity are a guarantee that we will have higher inflation in the future.

As a final caution, pay careful attention to the cost of basic necessities when studying inflation. The cost of the latest electronic gadget makes no difference to people in the bottom income brackets.

Pay close attention to costs of basics.

Isn't it amazing(or is it deliberate obfuscation) that the cost of food and energy are omitted from the CPI!
What a joke..........who do they think they are fooling?

Thank you! You pulled together all the threads and combined them into a single cloth. I have been trying, largely vainly, to convince some friends that we are nearing the end of a massive financial Ponzi scheme. Your article gives me some more ammunition, although it's hard to break through a faith based belief.