Tipping Point: Near-Term Systemic Implications of a Peak in Global Oil Production--Principal Mechanisms Driving Collapse

Recently, a 55 page paper called Tipping Point: Near-Term Implications of a Peak in Global Oil Production (PDF warning) was published as the joint effort of two organizations: Feasta and The Risk/Resilience Network, with lead author David Korowicz. We have recently published three excerpts from that paper, which can be found at this link. This is a fourth excerpt.

6. Principal Feedback Mechanisms Driving Collapse

6.1 Introduction

We currently live within an integrated complex globalised economy. We have framed the process in which this occurs as a catastrophic bifurcation, driven by a series of reinforcing positive feedbacks (sec: 4.2). The final point will be a de-globalised (localised) economy of much reduced complexity.

We begin with the state of globalised civilisation that we argued in sec: 4.1 has been in a relatively stable dynamical state for the last century and a half or so. In its broadest outline we might say that declining energy flows reduce economic activity which further reduce energy flows. A series of increasingly severe processes are set in train which start to cause cascading collapse in major hub infrastructures and the operational fabric of the global economy. These processes have different time-scales, some could evolve over years, some could be relatively abrupt but because of coupling between them, the faster processes are likely to lead the overall collapse rate.

6.2 Monetary System & Debt

6.2.1 Credit in the Economy

Credit in its various guises is the unifying embedded structure in the global economy. Credit underpins our monetary system, investment financing, government deficit financing, trade deficits, Letters of Credit, the bond market, corporate and personal debt. Credit and the promise of future economic growth support our stock market, production, employment and much else besides. It is the primary institutional infrastructure of the global economy.

The money flowing through our economy has been created through the issuance of debt [56] Money enters the economy when banks create money in return for the promise to repay that debt with interest at some time in the future. All positive balances in our accounts, except for a very small percentage reserve, are lent out to others at interest. Debt and money are the mirror of each other. If we all paid back the money we owed, there would be no money left in circulation, and the interest on the debt would be left unpaid.

Money supply is the balance between loans being taken out, and loans and interest being repaid. At any time, the money supply is insufficient to repay the total amount of debt outstanding with interest. In order to pay back loans in aggregate, more loans must be taken out for consumption and investment than the repayment of old loans. Thus in order for debt to be repaid, money supply must increase year-on-year. This can be done either by increasing GDP and/or inflation. Our monetary system depends on continually increasing debt outstanding and GDP for its stability.

Bank reserves represent much less than 10% of money owed to depositors by banks, which means they do not have the money to repay their debts to their depositors. This implies a strong level of collective trust: when we lose trust, bank-runs can ensue, potentially collapsing the banking system. If we lose the banking system, the society wide implications for welfare can be severe. In general, shocks of this kind can be transmitted and absorbed by governments, central banks, society at large, and international institutions. This too implies a level of trust in the adaptive capacity of globalised networks to contain the damage and prevent contagion. Local shocks can in general be contained, but because of the level of integration and tight coupling some shocks can rapidly rattle the world as the current crisis attests. At the core trust in monetary system is largely assumed throughout the globalised world. But with the loss of that trust, the system's ability to absorb the shock is lost, for the system depends upon that trust. Further, that trust depends upon continued economic growth, because only by growth can the devastation of hyper-inflation, deflation, and monetary collapse be avoided.

The economist Paul Seabright sees trust as a central underpinning of the global monetary system, and thus the trade networks upon which we rely[57]. Trust between unrelated humans outside our own tribal networks cannot be taken for granted (would you trade with a random stranger across the globe and send real money or goods without the reassurance of some guarantee of honest completion or ability to punish a defaulter?). Because trade is in general, to all our benefit, we have developed institutions of trust and deterrence ('good standing', legal systems, the IMF, banking regulations, insurance against fraud, and the World Trade Organisation etc) to reinforce cooperation and deter freeloaders. Trust builds compliance, which confers benefits, which then builds trust. But the reverse is also true, a breakdown in trust can cause defections from compliance further reducing trust.

6.2.2 Credit & Monetary Collapse

Increasing debt, and thus money supply, without a corresponding increase in GDP, leads to a devaluation of money's purchasing power which is inflation. But increasing GDP requires increasing energy and material flows. With an energy contraction, the economy must contract. In a growing economy, debt can be paid off on average, as the growing 'pie' allows the payment of the principle plus interest. In a permanently contracting economy, the shrinking pie cannot cover even the repayment of the principle. Another way of putting it is that reducing energy flows cannot maintain the economic production required to service debt. All the money in the world could not repay debt outstanding--mass default or hyper-inflation are the only ways out. Credit, the life-blood of economies must dry up.

This means that we are moving into a period of extreme monetary uncertainty, framed by the global economic crisis’s intersection with energy constraints and its consequences. We would expect a continuation or initiation of deflationary trends within economies. That is, money supply decreases, and that in turn causes prices to drop relative to goods and services produced. This is firstly because increasing spare production capacity and fears of future business failures and job losses reduce demand for new loans. Lower production and margins in the economy increase the relative debt burden which puts further pressure on consumer, corporate, and government borrowing. Even though people and companies may continue to service their loans, growing bad debts may force banks to write off their capital, the basis of their ability to make new loans under the fractional reserve banking system. Perceptions of future risk will reduce consumption and increase interest rates, further stalling economic activity. This deflationary process is self-reinforcing. Under normal recessionary conditions, governments might step in to maintain demand and liquidity through deficit spending or quantitative easing. But underlying such initiatives is the assumption that growth will return facilitating the repayment of sovereign loans and acting to mop up excess liquidity.

At this moment, increasing concern is being expressed over the risks of sovereign defaults, commercial property defaults, and credit card defaults. If we assume that as time goes on, the implications of an energy withdrawal become clearer to some potential creditors, one might expect rising interest rates, loans having shorter terms, and eventually the absolute refusal to finance most loans. Why lend more to someone who will not be able to repay the loans they already have outstanding? Eventually, it will become clear that almost all debt outstanding cannot be repaid, except in hugely devalued money.

If a small percentage of people in an economy cannot service their debts, their secured assets may be taken. This is necessary to maintain the banking system's viability. Likewise, a nation's standing within the bond market is dependent upon it striving to repay its debts. But there must come a point when a critical mass of defaulters rises to such a level that there is no longer the political will to enforce the confiscation of assets, or there is active defiance against debt collectors. Furthermore, when a nation realises the bond market will no longer facilitate borrowing because growth cannot be maintained, the market and social cost of defaulting drops, while the benefit of doing so rises. This social cost, in general, falls further in the queue, the farther you fall behind the initial defaulter.

Increasing fears of banking collapse are likely to lead to panics by depositors trying to retrieve their money, but as we have seen, the money is not there. Traditionally the job of the Central Bank is to stand behind a bank with emergency cash. But such models are not designed to manage a system-wide insolvency crisis on this scale.

We can ask what this means for the monetary system. We remember that we only exchange something of intrinsic value for money, if we assume that money can be exchanged elsewhere for something of intrinsic value in time and space. The two monetary conditions for this are stable exchange rates and low inflation. Both of these embody our trust in counter-party currencies and our perceptions of future risks. The other co-dependent pillar of the monetary system is bank intermediation. But the banking system of necessity must become insolvent as their assets (loans) vaporize and their capital disappears. However, unlike today there can be no bail-out as governments will be just as insolvent. We can list some of the risks to monetary stability:

  • As money supply shrinks, unemployment rockets, and government finances fall apart, there will be the temptation to assuage short-term public anger by printing money to pay wages. This could drive inflation and hyper-inflation.
  • A severe collapse in production and supply chains could lead to an overhang of money in an economy as against goods and services, driving inflation.
  • Fears of inflation, and fears over expectations of future availability of important goods, could drive inflation.
  • A collapse of the banking system and/or a failure of banking infrastructure (see sec. 6.4)) may mean that money and records are not available to enable transactions. Since some 97% of money is digital, and the global ability to print quality notes per unit of time is small, there is a possibility of an almost complete absence of tradable money.
  • If production collapses in potential trading partners, there is likely to be increased banking intermediation risk, increased risks of civil unrest, and a loss of trust; one may not want to hold that country's currency as there is a large risk of not being able to exchange it for intrinsically useful assets. For similar reasons, they may not want to hold our currency. This becomes a mutually reinforcing feedback driving out monetary confidence globally.
  • Money, and exchange rates we might say, are becoming opaque. Difficult to value in space, which supports trade; and time, which supports investment and saving; which together scupper economic life.

Bank intermediation, credit, and confidence in money holding value is the foundation of the complex trade-networks upon which we rely. The financial situation described will expose what heretofore has not been a problem; the mismatch between our dependencies upon globalised integrated supply-chains, local and regional monetary systems, and nationalised economic policy. A complete collapse in world-trade is an extreme but not unlikely consequence.

The failure of production within the economy will mean that almost all income is absorbed by food and energy, but there will be little income to pay for it. Importing energy, food, and inputs for the production process into a country will only be possible by exporting something of equal value because running trade deficits is based upon credit. Monetary opaqueness may mean that barter or hard currency (gold, oil, grain, wood) may be used to settle accounts.

With the collapse of production within a country comes the collapse of exports too, from which follows a further inability to import energy or materials to increase production. As explained earlier, modern economies produce almost nothing indigenously, increasing dramatically the probability of supply-chain breakdowns causing key inputs in the production processes to disappear, further stalling production. Thus countries are likely to remain trapped with limited economic activities.

And because our supply-chains are so complex and globalised, we may not be able to import important items even if we had something to exchange. This happens because our supplier may have lost some critical inputs into its supply-chain, or lost its operational, social, or informational capacity locally. This means that local supply-chain failures quickly become globalised.

6.3 Financial System Dynamics

Money only has value because it can be exchanged for a real asset such as food, clothing, or a train journey. As long as we share the confidence in monetary stability we can save, trade and invest. Like bonds and shares, it is a virtual asset, as it represents only a claim on something physically useful[58]. However, the current valuation of virtual assets towers over real productive assets on which their value is supposed to be based. A bond is valuable because we expect to be paid back with interest some years hence; paying twenty times earnings for shares in a company is a measure of confidence in the future growth of that company. The output of real productive assets must collapse because of energy and resource constraints and the failing operational fabric. The implication is that virtual wealth including pension funds, insurance collateral, and debt will become worthless.

The acknowledgment by market participants that peak oil is upon us, coupled with an understanding of the consequences is likely to permanently crash the global financial system. That is, the behavior of the market is based on a combination of (a) fundamental physical constraints, such as rising loan defaults induced by the current economic crisis, (b) energy and food price inflation, and (c) interactions of (a) and (b) with the hopes and fears of market participants, particularly their faith in the overall stability and continued growth of the system. The transition from a few market participants accepting the idea that peak oil is a major constraint, and large-scale acceptance can be very rapid, though the onset of the fast transition can be difficult to predict. In other words: growing government, corporate, and public acceptance of peak oil, will initiate a fear-driven conversion of a mountain of paper virtual assets into a mole-hill of resilient real assets which will help precipitate an irretrievable collapse of the financial and economic system. Such a transition can be expected to be fear-driven and mutually reinforcing. This is part of the reflexivity of markets, in George Soros's phrase; or an example of a positive feedback, in the language of dynamical systems. In this context we can understand reported pressure placed upon the International Energy Agency by the United States to overstate future production in its World Energy Outlook 2009[59].

The end-point will be a collapse in bond and equity values. This is a result of various reinforcing processes, including loss of confidence in debt repayment, monetary confidence, supply-chain disruption, evolving diseconomies of scale, and massive potential losses in discretionary consumption.

The result for market participants would be a rush to extract virtual assets (money, bonds, shares, derivative instruments) to convert them into productive, non-discretionary assets (resilient energy assets, land, farm tools, gold). However, there is a vast imbalance in their respective size. In all, total paper assets are probably valued at over $300Tr, supported on a Gross World Product of about $55Tr, which itself must collapse. In comparison, the total clean-tech market capitalisation is about $1 Tr. In order to get an indication of the ability of the clean-tech sector to absorb investment, we note a record global investment in renewable power of $140 billion in 2008. The vast mismatch is clear, even assuming there were willing sellers of renewable assets or land. Green-field renewable infrastructure investments (building wind turbines, solar PV cells, DC cabling) are likely to have limited ramp-up rates, which if on the scale of investment increases between 2007 and 2008 would be of the order of 16%. This means pension funds, sovereign funds, insurance funds, and other major holders of such assets will lose everything, with little hope of asset conversion. Maintaining value in cash is likely to be ineffective because of deflation blocking conversion, or extreme inflation eroding the valuation of cash holding.

It should be clear from the body of the text that one could expect much of the greentech sector to collapse due to failing operational fabric, so the rush will be to secure actual turbines/solar PV panels, or to produce them before systems begin to fail.

This means that there is a very small conversion window and that only a tiny fraction of investors will get out of virtual assets, to secure the small amount of real resilient assets.

6.4 Critical Infrastructure

Economies of scale are the familiar benefits of a globalised world. They mean that not only can goods or services be produced more cheaply, meaning greater sales volumes, but also their availability frees up discretionary income that can be spent on other goods and services.

In the energy-economic environment so far discussed, this process goes into reverse. The rising prices of goods (because of the energy and resource cost, supply-chain and money risk reasons) and the reduced discretionary income reduces the number of goods sold, thus reducing broader economies of scale. These feed back into the rising cost of goods, reducing further the number of sales. This dynamic is expected to be most forceful for the most advanced technologies.

For example, as fewer users can afford to replace mobile phones or computers, or use them less, the cost of the personal hardware and maintaining the network rises per user. Rising costs mean less discretionary use. But because common IT platforms require a large number of users, and economies of scale support the most discretionary use (say Facebook, texting, and Playstation) and the more important uses (business operations, banking, electric grid emergency services), the cost for businesses and critical services is likely to begin to escalate.

The components of infrastructure have been designed with the assumption that inputs to maintain, repair and upgrade would be on-stream. In addition component lifetime is often short (3-5 years for laptops and mobile phones). Furthermore most faults cannot be repaired locally without complex ready-packaged components.

We remember that the most complex infrastructure has the most complex supply-chains and is more likely to have more inputs with fewer substitutes. Thus there is greater risk of critical infrastructure operational failure for want of a critical element. The complex sourcing and production over the globe means each nation's particular economic, monetary, and social predicament becomes tied to our own, and ours to theirs.

To the above risks we must add the local economic and monetary risks, and our ability to import energy. This interacting nest of conditions means that we could see cascading failures in the grid, health service, IT systems, telecommunications, and water/sewage systems. This leaves us with the risk of a near complete systemic failure in the operational fabric upon which our welfare depends.

Failing infrastructure feeds back into reduced economic activity and energy use, further reinforcing failing infrastructure.

6.5 Food

Global food production is already straining against a rising demand and the stresses of soil degradation, water constraints, over-fishing, and the burgeoning effects of climate change[60]. It is estimated that between seven and ten calories of fossil fuel energy go into every one calorie of food energy we consume. For example, it has been estimated that without nitrogen fertilizer, produced from natural gas, no more than 48% of today's population could be fed at the inadequate per capita level of 1900[61]. Today it is true to say that no country is self-sufficient in food production.

The fragility of global food production will be exposed by a decline in oil and other energy production. It is not just the more direct energy using inputs that would be affected such as fertilisers, pesticides, seeds, and diesel spares for machinery, and transport. The failing operational fabric may mean there is no electricity for refrigeration, for example.

It should be clear even from the above overview that a major financial collapse could not just cut actual food production, but could result in food left rotting in the fields, an inability to link surplus production with those in need, and an inability to enact monetised food transactions.

Our critical reliance upon complex just-in-time supply-chain networks mean that there is little buffering to protect us from supply shocks. In the event of a shock, and without any planning, it is likely that unrelieved hunger could spread rapidly. Even for a country that could be food independent, and even a potential net exporter, it may years to transition as old systems fail and new ones put in place (rationing systems, education, re-location of farm laborers, horse breeding, nutrient re-cycling systems, seasonal re-adjustment of production, tool production, storage and preservation skills and products). In the interim, the risks are severe.

6.6 Energy Production

We have focussed upon peak oil, although we have mentioned concern about peak gas and even coal. Here we wish to outline the principle issues around how a decline in oil production would affect the use of other energy carriers. The central point to be aware of is that the production and delivery of all fuels not only maintains the operational fabric of the globe, but is also part of, and dependent upon it.

The use of different energy vectors are tightly coupled. Oil is predominantly a transport fuel, however its demand is tied to production in the wider economy, which is dependent upon natural gas and coal via electricity production. The reverse is also true: a forced reduction in oil use would induce a system-wide reduction in electricity and heating use. They are also coupled within the energy production process itself: oil is used to transport coal and re-supply the infrastructure of natural gas and coal. The water required in much of the energy process and in electricity production is obtained by diverse fuels. At a wider level, all energy carriers interact to maintain the operational fabric. If this operational fabric fails, continued production, processing and distribution of all energy carriers may be imperilled. Reduced production in one energy carrier can cause a reduction in the others in a reinforcing feedback.

A fall in income for energy producers would reduce their ability to bring on new production and to maintain existing energy infrastructure. Because the exploration and development of all fossil fuels, renewable technologies, and nuclear power are on an upward path of higher energy and financial costs and operational complexity, they are particularly dependent on high real prices being maintained, and continual inputs of high complexity inputs.

For example, much future natural gas supplies (and coal) are expected to be produced from remote regions such as Siberia, requiring huge up front investments of fixed pipelines, which require long-term confidence in purchaser solvency and monetary stability. Other sources, in Qatar for example, will require a ramp-up of liquefaction/gasification plants and specialised ships. Again this requires huge upfront costs; and open supply-chain inputs to provide a complex infrastructure that in many cases is at the limits of current technology.

The likely inability of the global economy to re-boot will mean that potential supply may exceed demand for years. All the while, the loss of the operational fabric may mean potential future production becomes lost to the entropic decay of energy infrastructure and the diseconomies of scale in running large facilities with low volumes of production.

Usually when we talk of energy security we are in particular referring to the fuel. However the failure of the operational fabric might mean that fuel is available, but we cannot pay for it; the electric grid collapses; or repairs to the natural gas pipeline network cannot be maintained. Monetary collapse may mean all energy carriers are not traded except under barter type arrangements.


[56] Douthwaite, R. (1996) Short Circuit: Strengthening Local Economies for Security in an Unstable World. The Lilliput Press.

[57] Seabright, P. (2005) The Company of Strangers: A Natural History of Economic Life. Princeton Univ. Press.

[58] Soddy, F. (1926) Wealth, Virtual Wealth and Debt: the Solution of the Economic Paradox. George Allen & Unwin.

[59] Key oil figures were distorted by US pressure, says whistleblower Guardian 9th Nov.(2009).

[60] Godfray, H et. al. (2010) Food Security: The Challenge of Feeding 9 Billion People. Science Vol. 327.

[61] Smil, V. (1999) Long-Range Perspectives on Inorganic Fertilizers in Global Agriculture. International Fertilizer Development Centre.

"Debt and money are the mirror of each other. If we all paid back the money we owed, there would be no money left in circulation, and the interest on the debt would be left unpaid"

I have seen this thought expressed in various ways in different articles. It is bogus. And most troubling, it often is the basis for further logic ... which means that even if the subsequent logic is sound, the end result will be flawed because it started down a false path.
Money is created into existance for debt and interest. It is just as easily destroyed from existance by repayment in human effort, improvement in utility or value of a current asset, or debt forgiveness.
The false idea of never being able to repay interest without a system that continually creates new, higher amounts of debt is simply silly. It seems to originate from "static model" thinking. Reality is a dynamic circular flow with ungoing iterations.

I agree. If we paid back all the debts in the world, there wouldn't be any debt to incur interest.

There is nothing structural in the fractional reserve banking system to prevent contraction. The system only magnifies the base level of money issued by central banks. One could remove the fractional reserve system and therefore remove corporate and personal debt, but there would still be a monetary base.

Perhaps someone with better economics knowledge than me can point out a flaw in this thinking, but could one not create a society with a fixed monetary base, but where lending money is not allowed. That way you have a medium of exchange for goods and services, but ultimately no inflation and no debt. Of course, you'd have to save up the money to buy things before you bought them, but would that be such a bad thing?

The comment about debt and money being the mirror of each other is certainly true for the bond market, because the debt of one organization is a bond, that is held by someone else (often a pension fund or insurance company), and treated as an asset by them.

There are a lot of different ways money is loaned into existence, besides the bond market. I don't think the one-to-one relationship exists on all of them. If there isn't a one to one relationship, the question is whether there is more debt or more money, and how much more.

Hi Anando,

You'll also note I make no discussion of the velocity of money for example, or contemporary methods of 'creating' reserves. The aim of the paper is to explain to those without knowledge of monetary economics some central ideas that make some important points understandable. The static element that you quote, a type of 'balance sheet view', i have found useful for communicating to people who don't quite believe all their deposits are not 'in' the bank. Likewise, for earlier discussions of non-equilibrium thermodynamics, the central conclusions are correct, even if they do not encompass every angle, and skirt around several issues that my physicist friends get very excited by.

Hi David,

You obviously do not have a background in monetary economics. First of all, velocity of money is not a way of creating reserves. It's the turnover of money in circulation.

The central conclusions are not correct. I know of no monetary model where money supply expansion is necessary to pay back debt.

We have money during the Middle Ages with little or no economic growth.

You must have mis-interpreted me. I understand clearly what velocity of money is. I mentioned velocity of money and issues in reserve architecture in the same sentence merely as examples of (the many) things i did not refer to in the paper so as not to confuse people coming to monetary issues for the first time.

Your second point is I believe incorrect in the general sense.


The second point is correct. I have a graduate background in monetary economics. I am quite familiar with over lapping generations models, etc.

You can have steady state economies with money. Such models are standard.

One dollar changing hands ten times can do the same as ten dollars exchanged once. As Anando stated, the static model is hopelessly simplistic. The existence of money and debt are negative and positive potential energy; transactions are kinetic energy. High levels of debt do require either large amounts of money or high rates of transactions to service.

The implication of Keynes and Galbraith was that the velocity of money was as or more critical than supply; indeed, as in Newton's laws of motion, the economic energy of money is likely an exponential function of its velocity, which is why the central banker's role is to 'take away the punchbowl just as the party gets going'.

We're living through the effects of not having done that. I propose that to qualify as an economist one should first have a degree in physics; if one can't qualify as understanding the principles of structures and motion of 'things' then what hope is there that one could possibly grasp the basic behavior of money?

I propose that to qualify as an economist one should first have a degree in physics; if one can't qualify as understanding the principles of structures and motion of 'things' then what hope is there that one could possibly grasp the basic behavior of money?

I completely agree.
We should educate everyone in science and particularly physics because it teaches the proper method of thought.

All the examples for designing our man made systems are present in nature and the're happening all around each one of us at all times.

Learning how to observe these natural phenomena and model them scientifically and then using these relationships across disciplines is the key to our future.


Again, we face the issue of being properly correct or communicating clearly to the uninitiated. If we can do anything pre-collapse, it will be because we can create a narrative that is generally correct and can be understood without a background in general economics, monetary theory, NE-thermodynamics, energetics of complex systems etc. It may not be beautiful, but I think it is important that this information is popularly understood. My fear is that if the only people who understand are a small, specialist, wealthy elite; by the time the crisis is upon us we will find they will have occupied all the real assets left to be had. There is an argument that such a process supported the origin of feudalism after the Roman Empire collapse, though I'm not qualified to judge on this issue.

"The existence of money and debt are negative and positive potential energy; transactions are kinetic energy"

This sort of analogy is liable to lead to all sorts of trouble-in physics there are the laws of thermodynamics, real honest laws! In money and credit creation 'the law of the regulator', or "the law of credit accounting' are there to be circumvented by the 'force' of the lawyer or CDO designer. Maguabe in Zimbabwe can do wonders with his printing press.

I don't see how the curvature of space has any impact on modeling human behavior. I highly respect physicists, but when they stray from their field, they are no smarter than the next guy.

We could use your argument to deduce that every basketball player should major in physics since they should understand the principles governing physical motion ...


I love it when a denier comes along. Econophycists will be the ones who figure this stuff out.

Show me the contributions of 'econophysicists' ...


If you were to borrow $1 today and change your mind tomorrow, there will be a days interest owed and where does that come from? That issue writ large is what they seem to be expressing when they say

"If we all paid back the money we owed, there would be no money left in circulation, and the interest on the debt would be left unpaid."

It is very true that the debt can be paid back with human effort but that assumes that the vast amount of debt accumulated in the system has been borrowed for productive rather than consumptive purposes.

If the money supply is static, then an increase in the velocity of money can support a higher nominal value of GDP and hence allow you to 'pay back the loan'.

One point I have made is pointed out is shown in this slide (from Delusions of Finance.):

I don't think Tipping Point makes exactly this same point. The issues I see act in the same way, though, as this paper indicates.

One additional thing that might be added to the OP, in the chain of cause and effect, is a role of efficiency in collapse. A common thought is that resource constraints simply lead to efficiency, but I'm very prone to the view, looking at history and natural processes, that nature hates efficiency. Or rather, efficiency represents a condition of stress, and a stressed system will quickly find a way to return to balance, regardless of inconvenience to those involved.

In the collapse scenario given in the OP, efficiency is just another stress within the system, which it resolves most directly by decreasing in size, rather than by more growth and greater efficiency.

Maybe it is better to say that complexity is a sign of stress and that enhanced efficiency often requires increased complexity (think global supply chain). A Stress system is not inherently out of balance, but it does imply that there are few unused resources available for emergencies and is therefore vulnerable to disruptions.

When will airlines go over the edge? In the last 10 years they suffered from: 9/11, SARS, Asian financial crisis, high oil prices, the GFC, credit crunch, swine flue, misplaced hedging and now that Iceland volcano. I did this short post before the world continues business as usual

Flight disruptions in Europe a Foretaste for Period of Oil Decline

The CO2 from the volcano is 150,000 tons per day


Global air traffic consumes 5 mb/d which is around 1.6 million tons of CO2 per day or more than 10 Iceland volcanos exploding 365 days a year.

I think the solvency of airlines is going to be an issue. For a while, airlines will merge and merge, and cut capacity. But at some point, (perhaps now, with the big losses due to grounding by volcanic ash), they will need huge bail out amounts, and governments won't have the money to provide it, apart from incurring more debt (or perhaps, "printing more money".)

We don't realize how dependent we are on airlines, until we lose them.

Seemingly the BMW production line was shut down in Germany for want of components/specialists that could not be flown in. I am presuming BMW is a very sophistiated organisation, yet it took only a few days for severe problems to emerge. That the more complex your processes and the more specialised your inputs the more at risk you are seems clear. Still, I'm suprised!

Hitches and stoppages in production are occurring all over the place.
A shoe factory in Belgium has put most of it's employees in temporary unemployment for lack of leather, which was to come back after treatment in Asia. String beans, some fruits and fresh seafood are going short on the shelves. Light weight and (relatively) small volume high tech components are not arriving. Kids and teachers are missing classes. These kind of disruptions are going on all over Europe.
As people take priority over cargo, people will get home sooner than goods, so even if the Eyjafjallajokull stops spewing altogether, it will still take a few days to get things sorted.
I'll admit to surprise, but I am expecting surprises, and I think we can expect surprises that turn out to become a lot worse.

Many supply lines could be shortened within a year or two. Take computer boards. It is not hard to shift production from one country to another. Even the high labor rate countries still have board making capacity that gets used for smaller production runs. The capital equipment could be scaled up pretty quickly.

The hardest stuff to shift around is wafer fab. Those plants take a long time to build and cost big bucks. But their products are small with a high value per unit weight. The market will have plenty of time to shorten production lines for computer chips.

Matt, When will airlines go over the edge? Already lots of them went bankrupt in the last 10 years. Delta for example. I expect bankruptcies and consolidations to continue. The future looks like the past but more so.

A more interesting question: In percentage terms will the number of passenger miles flown go down faster or not as fast as the amount of oil pumped?

I think this Tipping Point explanation does as good a job as possible to convey the understanding that with a descent from peak production (because at peak plateau the system is strained but still works) the economic system starts to break down. At a certain tipping point, there is a series of events that leads to collapse.

In other words it doesn't work. Meaning once oil production starts to decline for various reasons our oil based economy no longer works and leads to collapse. That's simple enough to get. The actual details can be argued, but the gist of the idea is easy to understand.

Like one writer put it so aptly, the age of oil will end with food riots. When the price of oil rose into the ethers of 120-147 food prices rose sharply, cutting off many lower income families from sufficient food and riots started. In the aftermath of Katrina people looted stores for food and drinks. When tortillas rose in price in Mexico, riots broke out and their govt. forced a reduction in price which stopped the riots. But once we reach a certain tipping point, the riots will not be scattered worldwide events that come and go, but rather stores will be looted over huge regions, never to open again. That's the point where the system has collapsed and we are left to survive in any manner possible, such as Kunstler type communities.

However, here is the crux of the situation after collapse. There will not be enough food for everyone. So what happens then? And I don't think rationing is the answer at that point, because there won't be a policed system to enforce equal distribution.

The food issue is a serious concern. Many advocate hoarding and building one's own garden, but there are limits to how well these "solutions" work.

It seems to me that we should be building large scale alternate food production that is not as dependent on our current fossil fuel system, but it is very difficult to make such a system feed as many as today's system. There is a very significant cost to building such a new system--for example, who will purchase land from existing owners? And the fact that it is not likely to produce as much (because of reduced irrigation, for example, and reduced ability to make and distribute even "organic" sprays and soil amendments) will discourage this change.

It is popular to compare organic output to conventionally produced outputs, but I think this misses the point. Organic farming is also very oil dependent, even if perhaps not quite as much so as conventional, because it uses trucks for transport, irrigation, various kinds of soil amendments that must be transported, various kinds of sprays that need to be transported, electric fences, and a lot of other things from the oil economy. If we truly need to step away from fossil fuels, our output will be much lower than current organic output.

The food issue is a serious concern. Many advocate hoarding and building one's own garden, but there are limits to how well these "solutions" work.

Agreed, on our own they will only be temporary measures, but they might make the difference during a collapse to provide time to then later join a local community.

If we truly need to step away from fossil fuels, our output will be much lower than current organic output.

True, but also the lower output associated with the transition time to organic will be a problem.

Gail, Perk Earl,

As deflation tightens its grip here, it is the large globalised multiples that are benefiting from economies of scale, while country markets and more sustainable farming suffers. People have understandably followed the lowest prices, which has wider benefits to the economy also. Most farmers are up to their necks in debt, and have been left squeezed and trapped by clearly unfair commercial contracts. We need to adapt and transform our food systems, but it is getting harder and harder to do so.

It seems our whole food system will become more and more vulnerable until the whole system comes crashing down around our heads. This really scares me!

'So do I,' said Gandalf, and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.
-- Gandalf,
J.R.R. Tolkien

In wars people experience much more deprivation than what Peak Oil will visit upon us. So why will our society fall totally apart due to Peak Oil?

In WWII Britain, Germany, and especially the USSR experienced large declines in living standards starting from levels far below how we live today. Why must our civilization crumble when we will still have ways to make electricity and to heat buildings and to make fertilizer?

A couple of points:
Yes the thesis is correct that we are heading for a collapse. That's like saying, in the long run we are all dead, or there will be a major earthquake in California.
It could happen tomorrow, it could happen in 200 years.

All societies collapse. This provides fodder for future historians.

The other point is "so what are you gonna do about it"
This is where I fail to understand why everyone is not buying gold, more gold, and as much gold as you can afford.

It could happen tomorrow, it could happen in 200 years.

Well, if we are talking about peak oil, and the consequences of going post peak, then I think the prognosis is it will occur much, much earlier than 200 years from now. Most have their eyes on this decade, meaning between now and 2020.

This is awfully close to the old "I haven't died yet so I probably won"t die, at least not for a long time" mentality.

We might not be dead yet but the trouble is we have AIDS, H1N1, cancer, TB, Rickets (?), hang nail, myopia, constipation, and dyslexia. So it's damn certain we will die SOON.

If 97% of money is now electronic information, shouldn't we drop the old "government printing press" cliche?

As long as Wall-Mart will accept a swipe of our plastic, only the underclass (or rugged contrarians} without plastic need actual cash.

I agree that constricting energy will constrict economic activity. But I am not familiar with any future scenarios that have envisioned how merchants will have to stop, or cut back on, accepting plastic.

Cap'n Daddy

The plastic only works as long as the voice at the other end of the transaction approval request says yes.

Certainly so ...and it's not even a voice any more. I'm trying to envision the specific cutoff points ... and will the person with a thousand dollars worth electronic wealth get cut off before the person with a million dollars worth of electronic wealth ...or will it all "go up in smoke" at once? davidk discusses some of that below.


If it's these details that interest you, I suggest researching what happened in Argentina a few years ago. The government limited daily cash withdrawals from banks, for example. Not that that's the only way things could go down, but at least it's a real world example.

CapnDaddy, when most people speak of "printing press money" they are not talking about printing greenbacks, they are talking about "printing the debt". Bonds, bills and notes are printed, or used to be anyway, now they are mostly just electronically generated. But the government can just issue bonds and create money out of thin air. That is "printing press money".

Of course the bonds are supposed to be redeemed at one point or another. But new bonds are issued to redeem them and also to pay the interest. That is why the dept keeps rising.

So we do have a printing press to generate money, just not greenbacks. In fact "printing press money" never referred to greenbacks. They are only printed on order from the central banks, usually to replace old currency that is destroyed. But the banks can order green currency for other reasons but they must always buy them from the Treasury Department. Greenbacks have never been printed just to raise money for the government.

So the cliché can stay, we still print money. We just call it "The National Debt".

Ron P.

Right you are Ron, but it's not just the government that is creating "money" and ballooning debt any more. In this country "gummint" (both parties) are increasingly stooges of Big Money. Those who blame "gummint" as the only villain in this morality play are whacking at the ventriloquist's dummy.



I'm not so sure.

Deep co-dependencies between the financial-banking infrastructure/ the grid/ IT-telecoms means if one part fails, cascading failure could ensue.

Why might one (or more) parts fail? They are dependent upon niche complex economies of scale, which will become dis-economies of scale as discretionary income dries up. They are dependent upon complex high intensity supply-chains that require monetary transparency/stability and wide-system economies of scale to remain functional; we can not be sure of either.

From a risk management perspective, a medium of exchange is so important that i think it would be foolish to put all my hopes upon digital money. It only requires the grid to go down for a few days, so your digital money becomes no money becomes no food.

Right you are, David. I certainly have no more hope for, nor faith in, electronic money than I have in paper currency in a dramatic systems meltdown. Both are only "information." In a dramatic collapse scenario that information could rapidly become "history."

But IMO a sagging, slow crunch down is more likely than sudden collapse. None of us can foretell what will trigger the slow crunch, and how differing pieces of infrastructure will give way, nor with what speed and in what order.

Oh! ...And someone above issued the standard call for "gold, gold, gold." Down my way, boxes of ammunition might be a harder "tradin' currency."

Cap'n Daddy


I am in Texas and I have more lead than gold....................

The lead to gold ratio in my neck of the woods is at least five hundred and probably a thousand or more to one in favor of lead.

If we have a truly wild ride to the bottom and we actually need to buy something with physical gold, it will be necessary to have the lead standing by at full alert while the gold is exchanged for the goods.

All this round and round about the monetary system is beginning to make my head spin.I used to think i had a fairly good understanding of the subject, but I am not so sure anymore.

If anybody knows of a good recent book on the theory of money and banking written by a person with serious credentials, and written for the well informed layman, a book which starts at the beginning and doesn't skip any of the major points, Please !

Post the title and author.

Thanks in advance!

Hi David,

If you actually had a model, with well defined assumptions, and the consequences deduced therefrom, then it might be interesting.

But all you are doing is a bunch of handwaving, similar to Gail's anguish meditations on debt.

Now I'm not an economist but... the discussion of money and debt here leaves something to be desired.

I have pondered these topics since first introduced to them through Martenson's Crash Course, and while I am far from understanding this in debth, I have found some pieces of the puzzle that I'm convinced are correct... and in the process have found numerous common beliefs that I'm convinced are false. Many of these common, but false, beliefs are textbook orthodoxies; but that doesn't make them any more correct. That a paper like this repeats them, is disappointing.

One is the myth that banks need reserves to lend. IMO Steve Keen put that one to rest once and for all with his essay The Roving Cavaliers of Credit. Keen quotes Basil Moore:

“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”

Keen, however, underestimated the role of the government sector in the money creation process; he recently admitted so, and opined that the school of thinking called Modern Monetary Theory or Chartalism is the only one to come through the GFC "completely smelling of roses".

Now I'm not an MMT expert (but at the current rate I will be... in a couple of years 8-), but the perspective makes a lot of sense to me.

A good starting point is Bill Mitchell's blog, and in particular his teaching models A simple business card economy and Some neighbours arrive. And also his Deficit Spending 101 part 1, part 2 and part 3.

For example,

The important conclusion is that the Federal government is not financially constrained and can spend as much as it chooses up to the limit of what is offered for sale. There is not inevitability that this spending will be inflationary and it does not necessarily require any increase in government debt.


The GBC framework leads students to believe that unless the government wants to print money and cause inflation it has to raise taxes or sell bonds to get money in order to spend. People have the erroneous understanding that taxation and bond sales provide money for the government which they use to spend. So if the government increases its deficit (spending more than taxing) then it must be increasing its debt holdings or “printing money”, both of which are deemed undesirable.

However the reality is far from this erroneous conception of the way the Federal government operates its budget. First, a household, uses the currency, and therefore must finance its spending beforehand, ex ante, whereas government, the issuer of the currency, necessarily must spend first (credit private bank accounts) before it can subsequently debit private accounts, should it so desire. The government is the source of the funds the private sector requires to pay its taxes and to net save (including the need to maintain transaction balances). Clearly the government is always solvent in terms of its own currency of issue.

(my emphasis; both quotes from Deficit spending 101 - part 2).

Seen in this light, statements like "But the banking system of necessity must become insolvent as their assets (loans) vaporize and their capital disappears. However, unlike today there can be no bail-out as governments will be just as insolvent" seems just... bizzare.

The real problem here, one that Mitchell often rails about, is that not even the people in charge of the money system - central bankers, politicians making fiscal policy - understand how this system really works.

That the people in the driver's seat are driving blind should not surprise anyone reading TOD; but if we are to truly understand where we are headed, and offer a realistic way to steer the vehicle away from the cliff we are heading towards, we need to figure out the controls.

I'll look at some of your references.

I agree with you about reserves. However, if you look at my replies above, you will understand my aim is to communicate to the uninitiated without getting too long-winded. A discussion about reserve composition, temporal ordering, and the ingenious schemes to 'get around' them would not alter the principle arguement, and would not serve the pedialogical aims. Therefore I kept to the standard narrative.

Seen in this light, statements like "But the banking system of necessity must become insolvent as their assets (loans) vaporize and their capital disappears. However, unlike today there can be no bail-out as governments will be just as insolvent" seems just... bizzare.

Not quite! Not everybody lives under the Fed. I live in one of the Euro PIGS, and therefore our government/ central bank has no ability to issue its own currency, we can become insolvent. However, I agree the phrase could be better presented and made more general.

davidk said:

I'll look at some of your references.


davidk said:

A discussion about reserve composition, temporal ordering, and the ingenious schemes to 'get around' them would not alter the principle arguement, and would not serve the pedialogical aims. Therefore I kept to the standard narrative.

Well, the reason I comment is that I am unconvinced the "principle arguement" (principal argument?) is correct. Mind you, I'm not convinced it's wrong: I'm trying to figure it out. And I am convinced the "standard narrative" is wrong.

So far, I'm convinced that currency-controlling governments are fundamentally different than other economical entities; and that the USA occupies a very special position among these, because their currency is the reserve currency of the world (for now). (I'm not from the US, btw). To make a long story short, as long as the world wants dollars, the US must run deficits. And there is no need for them to go into debt to do so.

Private debt is another matter. But here, too, it's not really the debt that is pernicious: the way debt and deposits are created together is (to my geeky brain anyway) quite nifty, since it makes the amount of money automatically match the amount of money the economy needs to function optimally. Well, potentially anyway.

What's pernicious is the interest. But I still don't see that this necessitates growth. In a constant-size economy, interest redistributes resources from the 'renters' to the 'owners'; so I think it may be more correct to say that (relative) equality and social justice... democracy... demands growth.

The US didn't run deficits during the second Clinton term.

The decision to run a deficit is a decision.

I can make no sense of this claim that the US has to run a deficit because the world wants dollars.

The US didn't run deficits during the second Clinton term.

The decision to run a deficit is a decision.

I can make no sense of this claim that the US has to run a deficit because the world wants dollars.

Clinton's 2nd term and supposed budget surplus was one time capital gains taxes from the phony dot come bubble.
And that assumes that the numbers reported by the government are accurate and honest which I don't think they are at all. Why are you such a cheer leader for this colossal fraud ?


Face the facts, you believe in a lot of urban legends. Government statistics are pretty accurate.

And capital gains does not explain Clinton's budget surpluses.

You need to get over your whining about the 'end of the world'.

I have posted this transcript from James K. Galbraith's book The Predator State before, but here we go again:

For the next three years, the recovery gathered force. Unemployment fell, the budget deficit began to diminish, and inflation did not rise. The 1997 Asian crisis brought a flood of capital back into the safe haven of U.S. Treasury bonds, strengthening the dollar. The trade deficit rose.

But now the budget deficit did not. Indeed it fell -- all the way to zero and into actual surplus, for the first time since 1969. How could this happen? How could our foreign deficits go up while our budget deficit went down? If the money sent abroad did not come from the government, where did it come from? This fact caused many who had been exposed to the "twin deficits" view of budgets and trade to deny that the view was accurate. But they were forgetting the third element in that equation. There is one possible way (and only one) for budget deficits to go down while the trade deficit goes up: for the private sector of the American economy to "take over" the budget deficits previously run by the state. And that is what happened. Private businesses and households in the late 1990s chose, for the first time in postwar history, to move massively into deficit. Credit cards, mortgages, and home equity loans suddenly became the drivers of American economic growth. For a time, the American household took over the job of running deficits from the American government.

(p. 60, my emphasis)

Yes, it was a decision to run surpluses during the Clinton era.

A deeply flawed decision, as we can see with hindsight; because unlike fiat-currency-issuing governments, households and businesses (and governments not in control of their currencies) can become insolvent, and will become insolvent if they pile on too much debt.

Actually, revenue grew faster than expected. So the US government ran surpluses.

Revenue grew as a direct result of the dotcom bubble. Any other "explanation" is bullsh!t.

I was involved in this and needed a "tax strategy" and tax lawyers/accountants business went through the roof during the late 1990s.

Clinton got lucky that is all.

Just more and bigger numbers on paper (or in servers) changing hands faster than in the past.

Clinton raised taxes at the beginning of his first term and the very second after its passed, interest rates began falling.

Clinton raised taxes and it sharply reduced interest ates.

Clinton raised taxes at the beginning of his first term and the very second after its passed, interest rates began falling.

Clinton raised taxes and it sharply reduced interest ates.



The assumptions that underpin conventional economics are purely ideological and the Chartalists are the only ones who have the polarity of money correctly figured out. They correctly identify that it is a credit instrument (think of a redeemable share as an analogy), whereas all other schools insist that money is a debt instrument and thereby tend to prescribe diametrically wrong policies.

If we must have a government creating credit, then I recommend the direct creation of credit by Treasury Branches (note here that Alberta's state owned ATB bank originated as 'Alberta Treasury Branches' as part of Alberta's abortive venture with top down 'Social Credit' in the 30s).

In the Treasury-centric model I propose, service-providers-formerly-known-as-banks would manage the allocation of the credit necessary for the circulation of goods and services and the creation of public and private productive assets. This credit would be interest-free but not cost-free, since there would be a service charge, and a provision against defaults to cover the Treasury guarantee. The key here is an enterprise model which ensures that they have a stake in the outcome, and operate under the supervision of an accountable Monetary Authority. There is no need for Central Banks: Hong Kong has never had one, and it has done them no harm.

The beauty of this model for banks is that the only capital they need as a service provider is that required to cover operating costs.

Once productive assets are complete then they would be refinanced with existing money (eg pension investment, sovereign wealth funds) and the Public credit (aka QE) would be retired and recycled. What we should NOT be doing is creating credit and using it for the purchase of existing productive assets, which is the direct cause of asset price bubbles.

In fact, in a world of direct instantaneous connections, there is no need for Treasuries/States as intermediaries any more than there is for banks, since credit may be created directly 'Peer to Peer' and investment in productive assets may likewise take place Peer to Peer.

But that is the end-game.

As a transitional measure the way out of our current mess is QE on a massive scale, to be invested in productive assets - and in the necessary skills needed to create those assets.

Both the Treasury and Congress have authority to issue currency on their own without having to borrow. i don't think the Treasury could do so as a practical matter. It lacks the organic separation from the Federal Reserve upon which it relies. Congress is probably too politically compromised to take any money- creation initiatives. Almost 100 years of US central bank power has allowed it to undermine its competitors.

There is no reason why there cannot be multiple currencies simultaneously. The Federal Reserve money monopoly is being made into something very harsh and uncompromising by peak oil. The US dollar is becoming a proxy for crude oil - dollars can be exchanged for crude on demand. The dollar becomes so every day the oil price doesn't zoom to $150 a barrel. When the relationship is ultimately cemented, that day is the day when the productive economies of the world will cease to function. Dollars will disappear and so will oil. The price in dollars will likely decline but the 'real' price of crude relative to other goods and services - and wages - will become unbearably high.

Even $150 oil and the breaking of the dollar as a currency would not be a solution as some other currency would become a proxy for oil and all the world would seek to own it/buy it so that they could obtain oil. Then Americans would have to buy that currency first in order to buy precious crude. The hard dinar/real/peso/obama/whatever would be as deflationary as the dollar is becoming today.

As for 'money' creation, most of what is considered money is really debt. The increase in the money supply is a natural outgrowth of commerce which expands the array of products and customers. Commerce creates the means by which it funds itself; the consequence is a steady decline in the purchasing power of any given currency unit along with an expansion of what each currency unit can be swapped for.

A gold- backed dollar of 1910 had more purchasing power in the abstract than a 2010 dollar ... but the newer version can buy helicopter rides. Videos. Antibiotics. Hot and cold running water and flush toilets. Cell phones. PC's and Macs. Viagra. Credit default swaps. Crystal meth. Whoever purveys this stuff will lend you the money (debt) to buy it, to allow you the benefit of its use prior to your being able to 'afford' it.

That is, to be able to earn from an item what you wouldn't earn at all had you not bought the item in the first place. It's a circular rationalization that ignores the reality that most items do not allow the user to earn any return from the item's use at all! The triumph of marketing at the expense of everything else!

One way to look at deflation/depression is to consider that the variety of products a currency can be swapped for shrinks. As deflation takes hold the array diminishes until the only product available to trade for is money itself. At some point along the way the 'debt' component of money becomes irrelevant and is discarded in favor of currency. Debt creation is an integral part of purchasing; nobody borrows simply to do so but to buy a(nother) good. As the variety of products shrinks the desireability of borrowing evaporates. Currency becomes a need; those without are destitute. Lending is a want, it loses relative value, it diminishes then disappears.

Evidence of this is the rise of 'repudiationism' which is the walking away from servicable debts which is taking place at all levels of the world's economies. This is an unmistakeable trend that is gaining force. It is systemically destructive as it limits the amount of yield - too high and the loans will be repudiated, too low and the loans will neither price risk properly or produce a profit. The outcome over time is the destruction of the debt component of money.

There is nothing new to any of this, it all took place before in the early 1930's including the diminishment of commerce and available products, the repudiation of debts and the abandonment of commerce for money trading - with the end of obtaining gold which represented 'final' or ultimate money.

The dollar as hard currency is a devastating instrument of deflation. Okay I'm seeing things that aren't there but the tipping point is past, starting during the middle of last November. That's the beginning of the current deleveraging leg, the time to exit all short- dollar trades and get into cash. The smart money is already out of most markets, trying to lure in suckers to buy them out ... in dollars.

I dunno about you but what Goldman- Sachs executives are doing is what I wanna be doing, too. Cashing out. In dollars.

There is no reason why there cannot be multiple currencies simultaneously.

JFK tried this by issuing Treasury notes backed by silver as an attempt to break the Fed Res monopoly and within months had his head blown off.

The only way we are going to take the country back is to have an honest leader issue a parallel currencies and stop using the filthy Fed debt based slave money.

That is the only way.

The first thing we can all do is stop paying the usurious taxes that were instituted at the same time as the Fed Res act to fleece the public by collecting their earnings as payment for the interest on the money that is borrowed from the parasitic Fed Res.

This is the truth of it folks.

Now what are we going to do about it??

Freedom is not free..................

The recession of 1961. The US government was running a surplus which removed money from the economy. Kennedy and Treasury Secretary Arthur Burns wanted to add some back.

I have a 'silver certificate' kicking around somewhere. They circulated parallel to Federal Reserve notes. The main cause of the recession was the rise in lending rates in 1959. By 1961 rates had declined and business was returning. Our economy was different, then. Much of the labor force was unionized and worked in factories and workshops. The US made goods such as (high quality) shoes, clothes, textiles, machine tools; capital goods such as airplanes, electrical generators, turbines, locomotives; the US was the steel- making and ship building center of the world. The US 'owned' the bulk of the world's GDP.

In 1961 there were 76 million US autos (compared to over 250 million current). Agriculture was local. Many cities still had operating streetcars. There were more Americans directly engaged in agriculture than today, most of this taking place on 'family farms' of less than 1000 acres.

Finance was an insignficant part of the US economy. The focus was engineering and Kennedy's demand for a 'man on the moon within ten years'. Post- Sputnik and the space race, schools across the country were emphasising science and math teaching. The social undercurrent was the end of 'Jim Crow' and racial segregation. Kennedy and his brother Robert supported equal rights for black people and the backlash was intense. While Kennedy and the New Deal Democrats were in political ascendency, the astringent neoliberalism of the John Birch Society was taking root within the Republican party.

I suspect Kennedy was killed because of his personal involvement in the Vietnam war. The South Vietnam government was a cabal that associated closely with several organized crime syndicates. One such was affiliated with the South Vietnam intelligence apparatus. At the time of Kennedy's death (one month after the deaths of S. Vietnam's deposed government leaders No Dinh Nhu and No Dinh Diem) there was official controversy over the S. Viet government actions to destroy Buddhist political elements; a US- State Department/DOD supported coup to remove Diem and Nhu was in process and a 'counter coup' by Diem involving unknown 'US figures' (Sheehan 'Bright and Shining Lie' pp 368)

They were going to have Tung's Special Forces and Nhu's hired gangsters murder Minh, Don, Kim, and a number of other generals and senior ARVN officers they suspected of involvement in the plot (against Diem), civilian accomplices of the generals like Diem's titular vice- president, Nguyen Ngoc Tho, and some Americans. They would later blame the killings on ''neutralist and pro- Communist elements''. How many and precisely which Americans wre to be killed has never been ascertained. (Secretary of State Henry Cabot) Lodge was supposed to have been marked, but there will never be any way of knowing. (Lucien) Conein was an obvious target, as Diem and Nhu had by now learned of his role in the plot. Nhu named the operation 'Bravo One'.

I suspect the 'Three Witches' were the conduit; Madames Nhu, Chiang Kai-shek and Anna Chennault. All were close associates, had access to intelligence services and funds (with Nhu having access to her husband's organized crime thugs.) were involved with ultra- right wing US political organizations and were generally considered to be 'untouchable' due to their anti- communist bona fides.

I suspect that Kennedy was killed by S. Vietnam government which fact was subsequently covered up by the US military, for obvious reasons. The killing was either revenge for Nhu's killing in Saigon or an insurance policy outlier of 'Operation Bravo One' that ran out of control.

Go figure ...

Budget surplus does not reduce the money supply. The government keeps the cash on deposit with the Federal Reserve. It is included in the money supply figures.

steve_from_Virginia said: "The US dollar is becoming a proxy for crude oil - dollars can be exchanged for crude on demand. [...] The hard dinar/real/peso/obama/whateve"r

In honour of the french "Louis d'Or" gold coins (Louis being the name of the king, d'or meaning golden), I submit the crude oil dollar should be called the Barack-Crude-Oil, or Barackrudo for short ;-)

steve_from_Virginia said: "Commerce creates the means by which it funds itself; ..."

Yes. A neat trick if ever there was one!

steve_from_Virginia said: "...the consequence is a steady decline in the purchasing power of any given currency unit along with an expansion of what each currency unit can be swapped for"

I am not convinced that this follows. I can imagine there being perfect balance between money created and the (monetary value of) commerce/assets/capital created along with it. Thus, while the relative amount of "the pie" each dollar buys shrinks, because the pie grows, the absolute size remains constant. Thus one dollar would buy less gold, but because the economy grew, not because the dollar lost value.

That the pie is changing qualitatively as well, I would see as an inevitable side-effect of the drivers of growth - I fail to see that this is directly/causally related to expansion of money supply. You seem to imply that deflation destroys technology... in some sense I think you are right; there clearly is a connection between the size and vigour of the economy and our ability to develop and maintain intellectual capital. But absent a collapse, the march of technology development is IMO an irreversible process. That it coincided with inflation and economic growth in the better part of the last century I would deem coincidental. The reduction in diversity during the Depression I think was more accelerated phase-out of obsolete technologies than a break in this development.

And the ideology is "supply side" with money being used to create the "demand that will create it's own supply".

This is total insanity.

We need to anchor the "currency" in the resource/energy side of the economy.

That's a ridiculous idea. It makes no more sense than backing money with gold.

In fact, it is easy to see the catastrophic consequences of backing currency with energy products. As oil declines, the money supply must fall and induce deflation.

Nominal debt combined with deflation is a disaster.

Energy is the master resource that drives all economic activity. Or I should say all real economic activity.

Monetary economics is obsolete.

You have a one track mind and it is obsolete.

Chris, thanks for your input. A lot for me to ponder!

ChrisCook said: "[The Chartalists] correctly identify that [money] is a credit instrument (think of a redeemable share as an analogy), whereas all other schools insist that money is a debt instrument".

I must admit I'm unsure how to interpret that. How exactly do you define "credit" as opposed to "debt"?

ChrisCook said: "There is no need for Central Banks: Hong Kong has never had one, and it has done them no harm."

IIRC Hong Kong keeps its dollar convertible to US dollars at a fixed rate. Sort of declaring themselves a US state... if it fits their "business model", why not? Works for the real states. Except California. And a few others... But could the US get by without a central bank? OK I don't really see the need for making the finance department and the central bank separate entities, but (most of) the functions of the CB would still need to be performed?

ChrisCook said: "In the Treasury-centric model I propose, service-providers-formerly-known-as-banks would manage the allocation of the credit necessary for the circulation of goods and services and the creation of public and private productive assets. This credit would be interest-free but not cost-free, since there would be a service charge, and a provision against defaults to cover the Treasury guarantee. The key here is an enterprise model which ensures that they have a stake in the outcome, and operate under the supervision of an accountable Monetary Authority. [...] The beauty of this model for banks is that the only capital they need as a service provider is that required to cover operating costs."

Um. Are you proposing to remove capital requirements from banks? I can see how reserve requirements are spurious, but without capital to lose, well, the banks' "stake in the outcome" could easily devolve into "heads I win, tails you lose", couldn't it? Not that we're not there already...

ChrisCook said: "What we should NOT be doing is creating credit and using it for the purchase of existing productive assets, which is the direct cause of asset price bubbles."

A bubble amplifier certainly, and enabler likely, but THE direct cause...?

ChrisCook said: "In fact, in a world of direct instantaneous connections, there is no need for Treasuries/States as intermediaries any more than there is for banks, since credit may be created directly 'Peer to Peer' and investment in productive assets may likewise take place Peer to Peer."

Here I get associations to John Robb's concept of "networked resilient communities".

However, the Internet is not as free as many think; it's pretty easy for a state to control what passes its borders, and what happens inside its borders. If a state feels its money monopoly threatened by any such movement, the world of direct instantaneous connections could disappear more or less overnight.

The Hawala system manifestly works, but it's not popular with the authorities in my neck of the woods.

ChrisCook said: "As a transitional measure the way out of our current mess is QE on a massive scale, to be invested in productive assets - and in the necessary skills needed to create those assets."

My sentiment exactly.

Identifying positive feedbacks is again the key (HT Drumbeat):

Networked Networks Are Prone to Epic Failure

Networks that are resilient on their own become fragile and prone to catastrophic failure when connected, suggests a new study with troubling implications for tightly linked modern infrastructures.

Electrical grids, water supplies, computer networks, roads, hospitals, financial systems – all are tied to each other in ways that could make them vulnerable.

"When networks are interdependent, you might think they’re more stable. It might seem like we’re building in redundancy. But it can do the opposite," said Eugene Stanley, a Boston University physicist and co-author of the study, published April 14 in Nature.

The positive feedback loop possibilities are what gets me too.

We've got:
1. declining liquids production,
2. "Rust Never Sleeps" (matt simons on infrastructure entropy)
3. a likely lack of "sufficient investment" (DOE, and above)to bring on-stream "Future Unidentified Projects" (DOE)
4. Geopolitical nightmares in the middle east
5. A world economy on life-support (accounting lies and duct tape hold the US together FASB 157)

Too many weak links in all the critical areas of our civilization.

How long did it take the USSR to collapse? And what was the standard of living like during that period for the average Russian? Who provided aid to Russia and it's former allies?

comment deleted by Powerdowner.

"The tipping point" series is just outstanding. One could call it "state of the art" analysis.
Sadly, most people or shall I say sheeple is not aware of what is happening. I am from Switzerland and I have been reading the OilDrum on a daily basis since 2005. Thanks to this website my finances are ok. Otherwise they would be bust.

Just out of curiosity, what actions did you take to get into a good financial condition, and can you recommend some particular posts on TOD that were most helpful?

I don't want to reply fully for the original poster, but in some ways it seems obvious. In this post, they discuss how debt will need to be reduced. If you apply that to your own life, one would most likely translate that to getting out of a massive mortgage, which if done a few years ago would have been a smart financial move.

If you think about peak oil, then finding a company that has a large reserve base in a non-risky country will do good as prices rise. Just an example of such a company one could have invested in over the last decade:


Obviously, timeliness matters, so investing in 2008 would take a while to recoup losses and make a gain, but I think you get the point.

It's tempting to dive into a tremendous ammount of detail when dealing with these kind of highly complex and dynamic questions, but perhaps life is too short for that?

Money, debt, credit and a host of other connected "products" are really abstractions, usful abstractions, that we have created and developed over time. However, as societies develope and become more complex, increasingly, the "gap" between the world of money and the "real economy", the world of production and real things, widens; until the financial market is almost totally disingaged from reality and instead of reflecting and providing us with signals and valid information; it does the opposite, as it increasingly comes to resemble not so much an integrated part of the economy, but rather a parallel or alternative economy subject to it's own rules and with behaviour patterns that are unknown, and, arguably, unknowable.

For example. It is bizarre to see the financial markets soaring in nominal value, whilst the true economy goes down the drain. How is this possible? It's possible because the real economy is being sacrificed to feed the "mirage" of the financial sector, with, if this continues, potentially disasterous results to follow.

Arguably the entire global financial system is bust, with all the banks hiding the fact that they are insolvent. A "conpiracy" exists; consisting of the banks, the state, the media, the establishment economists, the political class; to obscure and divert attention from the dire consequences of the biggest finacial/economic crisis or crash in history for as long as possible, or until something turns up to revive what probably cannot be revived.

Vast, colossal, resources are being used in a desparate attempt to plug the gaping gash in the side of the Titanic and hide the true extent of the damage, whilst the first-class passengers discreetly launch the lifeboats and grab everything of value they can lay their hands on, before the list becomes too obvious to hide, and all hell breaks loose.

How does one maintain "confidence" in a system which is bust? Simply by denying that it is a giant, world-straddling, ponzi scheme, which is collapsing in slow motion.

Writerman you CAN write,, and that is well stated.

Its accuracy will only become obvious as (when ...if?) your scenario begins unfolding, by which time the only response will be wishing we had better provisioned our own private lifeboats.

Here is a question I have been trying to figure out:
Oil has gone from $26 in 2002 to $85 now.
Thats about a 16% compound growth rate over 8 years

My question is - how much of that is real, and how much is simply inflation.
When you look at a site like shadowstats.com, John Williams would say about 6% is inflation.

So that means about 10% is demand driven

But it then becomes circular - with the increase in oil driving up prices in and of itself, and one of the prices it drives up is oil.

I guess in the long run it does not matter. It is obviously unsustainable.

poly et al -- In answering remember that I'm just a simple minded geologist. Isn't demand the driver of inflation...at least within the country. I know that variations in exchange rates can have an inflationary effect. But internally what else can drive inflation in commodity X other then demand? An increase in the price of energy might run up the cost of running a movie house. But if the public cuts back on the movies will those companies raise prices to cover their increases or just accept a lower margin? Granted they would like to raise prices but if that effectively reduces net income how could they?


Thanks for a very thought provoking and informative paper. I will be circulating it around!

I am happy, on the one hand, to see that there is an emerging convergence of analysis and interpretations of what is happening in the global economy-energy matrix. OTOH, I am sad that so many fingers of evidence point toward a fairly catastrophic collapse (time span yet to be determined!)

Of importance in working out the details further I would like to suggest that we do a better job of understanding the effects on the economy in terms of net energy available to do useful work (exergy) and the timing of its peak. Declining EROIs in fossil fuels, from which 80% of global energy comes, means that net energy will peak sometime before gross energy (the fossil fuels themselves) peaks. That is the point in time that should most concern us since after that peak we are definitely in a downward, contracting economy with respect to the capacity to do more real work to produce more real wealth. I have reason to believe that that peak has already occurred but, unfortunately, unlike data on raw energy extraction, there is very little data on exergy production in a form easily obtained (we might be able to use refinery output as a surrogate). So it will be very difficult, for the moment, to have any real sense of what net energy trends have been. Working on it. Meanwhile we need to infer from EROI estimates which themselves are problematic.

Thanks again.


One possibly useful EROEI proxy: Revenue of offshore oil companies as a ratio to total oil produced. Or revenue of all oil services companies to total oil produced.

Seems to me costs can tell us a lot about EROEI. A high cost (not high price) energy source has got to have a low EROEI.

Paragraph 6.6 Energy production
Quote: "The likely inability of the global economy to re-boot will mean that potential supply may exceed demand for years."
Hence there is no shortage and peak oil whether it happens or not is irrelevant. I better sell my oil shares now.

This in today's Drumbeat: Networked Networks Are Prone to Epic Failure (Wired)

“Networks with broad distributions are robust against random attacks. But we found that broad interconnected networks are very fragile,” said study co-author Gerald Paul, a Boston University physicist.

The interconnections fueled a cascading effect, with the failures coursing back and forth. A damaged node in the first network would pull down nodes in the second, which crashed nodes in the first, which brought down more in the second, and so on. And when they looked at data from a 2003 Italian power blackout, in which the electrical grid was linked to the computer network that controlled it, the patterns matched their models’ math.

That broad networks could be so fragile is surprising, but even more important is how rapidly the crash happened, with sudden catastrophic collapse instead of a gradual breakdown, said Indiana University informaticist Alessandro Vespignani in a commentary accompanying the paper. “This makes complete system breakdown even more difficult to control or anticipate than in an isolated network,” he wrote.

“Money and debit are the mirror of each other.”

This quote is taken from Imaginary Quantities R. Argand translated by A.S. Hardy page 20 – 21. R. Argand solved the problem of imaginary quantities.

“Let us consider the origin of negative quantities in a case of another kind. If in counting a sum of money we adopt the franc piece as unity, we may operate successively by subtraction on this sum, and render it zero by taking away a certain number of francs. At this point the operation becomes impracticable and, consequently, -1 franc, -2 francs, ….. are imaginary quantities. Take now the nominal franc as unity, for the purpose of estimating a fortune made up of credit and debit. What we call a diminution of this fortune might take place by a decrease in the number of francs on the credit side, or by an increase in the number on the debit side, and continuing either process we should have a negative fortune of –100 francs, -200 francs, ….. Such expressions signify that the number of francs of debt, considered abstractly, exceed by 100, 200, those of credit. Thus –100 francs, -200 francs, ….., which in the former case can express only imaginary quantities, here represent quantities as real as those denoted by positive expressions.”

There is no such thing as a -dollar. Minus dollars means minus wealth.

I got a call from a friend yesterday. He was reminding me that he is still in my debt, for labor I provided him a couple of years ago. He said that he could pay it off in cash if I desired. I told him that the original deal was labor for labor, that I would soon need his services and would call.

My point is this: I have seen many people in past years trading labor for labor, labor for goods, goods for labor. This informal economy has been part of our local culture for..... well, for centuries, and I see it is growing. More folks are choosing, or being forced into, this informal economy as they intuitively understand that they can't afford to participate in the hyper-complex, disfunctional BAU economy that exists globally. Credit exists without interest, minimal taxes are paid. Fees are avoided whenever possible.

It is a system based on trust, honor and is understandable, honest and efficient. Real currency exists in this economy. Actual "money" (Reserve Notes) are only seen as a necessary evil, for paying property taxes, auto insurance, buying goods unobtainable without it, etc, and avoided whenever possible. These folks don't need a degree in physics or economics to understand where we're headed. They just get it. They will be uniquely positioned to succeed in the coming decline.

I could be wrong, but the article seems to assume that everything about peak oil and the financial impact of that will occur very rapidly. I do not think that is likely. Let's remember that when oil went to $147 a barrel the economy did not collapse. Certainly the worldwide recession brought on by the mortgage industry and the Wall Street blind men kept the effects of the oil crunch from increasing. If the worldwide recession had not occurred, then the likely outcome would have been significant inflation to deal with the increased price of oil and a destruction of demand (that results in a recession) until a balance was achieved between the price and demand. Then that would have held for a while until the amount of oil produced dropped, the price increased, and we reached another point of balance, etc. I think that the scenario for deflation will be salted with a great deal of inflation in the transition to a very different economy. But that won't happen quickly. The speed with which the events occur is important. Rising water that takes 10 minutes to reach 30 meters is very different from rising water that takes 100 years to reach 30 meters.

You have a point but from where I am sitting this kind of reasoning looks a little bit too nonchalant. Japan`s bubble burst in 1990--that was actually a peak oil kind of event (unrecgnized as such) a huge discontinuity that was in turn a response to the slowdown of the early 1980s, which was also a kind of energy-price problem--and another discontinuity. ("Things can`t go on as before---let`s try even harder to make them----crash---ooops"). Then the 1990s saw lots of government spending used to plug the holes left by the receding private economy. Well that worked for a while. Then the US started up its little credit bonanza (like the Japanese decades before) and Japan rode limply on those coattails for a few years before another crash---this time worldwide---occured. Now flash forward a few years and the destruction here is SPEEDING UP. Any recovery won`t last decades like the 1990s. Sure the govt has tried stimulus programs, sure things are "getting better".....but the cycle of stimulus, growth, crash is speeding up, not slowing down. No we do not have another 20 years to watch things unfolding while we sip our coffee.

I think given the high price for gasoline (it is now up to 135 yen a liter and more in some places) the next crash will be in a few months or less. People simply cannot pay this and buy food and other things too. Sure we have deflation----and many shops are also closing----so the supply goes down all the time and things I used to be able to buy easily I cannot now find without a longer trip. Some major department stores are slated to close in Tokyo this year. Arguably the steady economic blight is being camoflaged and hidden so that people will not peer to closely at the numbers and panic and leave the cities en masse to grow rice.

I think the inflection point may be much closer than we realize. The process is attenuated and you can actually watch it. Within a few years things here will simply stop functioning completely. Then people will respond back to that from the other side of the energy transition I guess.

Japan did not experience a peak oil event. Japan had an unbelievable stock and real estate bubble and its government was slow in reacting.

The result was a massive balance sheet writedown, which took over a decade to complete.

Let's start with the facts: Peak oil will reduce the overall energy input to the economy. In a period of energy reduction increasing production of more energy efficient cars/devices/products will be impossible since there's no equivalent to credit in energy terms.
Let's assume that we want to maintain current economy size. That roughly translates to maintaining current incomes. Certainly there are ways to increase energy efficiency in every aspect of the economy. The problem is that reducing energy usage (say decreasing the thermostat temperature in home heating) will lead to savings on the available personal income. That increased income will either be 'invested' in consumption or put on bank (which will later loan it to another person for consumption/investment). Overall, the energy savings in one sector will mean increased energy needs in another sector unless all of the economy reduces it's energy needs. Moreover, energy efficiency has diminishing returns on investment. Whatever we do we need a minimum amount of energy to move cars, ships, planes, heat our homes, grow our crops etc. Some sectors of the economy have increased energy needs which they can't minimize without reducing production (aluminum requires electricity, ships have minimum speeds if they want to meet delivery deadlines etc). In other words it can only do good for a few years at best. Consequently, energy efficiency requires a coordinated effort from all of the economy in order to be successful and even then it will just save us a few years.
So, the actual remaining solution is to enlarge our electricity production through high EROI mechanisms and invest in solutions that will have a minimum EROI/year of 1:1. EROI that's less will lead to diminishing energy returns. So, in order to just maintain current energy input we need to:
* Increase energy production through coal (in order to use that energy as an investment for the new energy production plants).
* Create more hydroelectric, coal, nuclear and efficient wind plants every year. All other solutions probably do not have the necessary EROI to help after peak oil. If we invest into coal we also need to make sure that we find a way to reduce CO2 generation. Nuclear has the disadvantage that it usually takes a few years to build the power plant.

On a global scale the above scenario obviously creates problems since not all countries have coal reserves in order to perform such investments. Let alone the fact that since coal production requires mining, increasing it's output in short time might be difficult.
That's just for sustaining current production. Debt on the other hand requires economic growth so things get increasingly difficult, especially since global production and debt obligations are quite de-centralized which means that contraction in one country might lead to economic problems in other countries. The most logical scenario is that countries capable of increasing their energy production (due to coal, oil reserves) will manage to cope with peak oil, at least for a while, enlarging their local goods production and 'buying out' assets in countries which lack these resources.

Maintaining energy production in a fall-back mode should emphasize a "Target" level economic model, easiest expressed in era of transport, agriculture, manufacturing processes, etc.

Weaving mills, electrified to some extent, but some hand- operated facilities? Water supply concentrated on surface delivery, or expedite recharge of aquifers while energy sources like diesel fuel is still available for construction? North America has food basket potential still, but lowered water tables like Central Valley (CA) and Ogallala in Corn/Wheat belt states means high energy use pumping.

Water in the USA will need large engineering to maintain agriculture, projects like the North American Water And Power Alliance (NAWAPA)seem to be justified in the overall EIOER calculus.

Targets of transport methodology seems to indicate the American scene circa 1920, maximum railway line mileage, with paved roads in Cities & towns for de-minimus automobile use, plentiful bicycles and electric street car lines to suburbs. Suburbs will shrink to uncover best agricultural lands built over during the happy motoring era.

Rather than the USA trying to meddle around the world in the Oil Interregnum, returning to the best model possible and living by example might be the most effective & humane approach as well. The early twentieth century US model with advances in energy efficiencies, health care, manufacturing processes should be readily duplicated in the other developed countries.

Will triage play a role? In fact, we are there now, striving to saves lives in Africa and India, China too is getting into a two-tier population. Desertification in China calls for US railway infrastructure upgrades; Mains expansion & extension, dormant ag rr branchline rebuild to assure foodstuff exports as we are able. Closed societies like North Korea, if they do not self-correct the dead-end militarism, shall suffer destruction with survivors ending up as wards of the Chinese and South Koreans.

The world homogenizes as diminishing energy units per capita make it more difficult to simply feed everyone. Unintended consequences of cornering resources include military resistance and uprising. Time is near to put away certain habits, private vehicles with excessive fuel appetite must be early to join the Concorde Jet. Victuals distribution is highest and best use of transport until population and resource base come into equilibrium.

Pessimism is justified. This writer suggested three decades ago Amazon development rely on railway based transport, to best maintain an orderly societal & commercial cohesion in the undeveloped rain forest. Several well-known environmental organizations rejected railway based transport, saying railway was "too industrial" and "fostered resource extraction". Of course, too many roads and ability to grow too many families has got us into a tight spot without the railways. Trucking was used for resource , workable on cheap motor fuel, thank you. This is not easy to say, and one risks being called heartless. It is frustrating to visualize a disaster, alert responsible organizations, -ignored and or patronized- and be proven correct.

Please do include railways in the Oil Interregnum Plan B. Achieving population/resource equilibrium is simply a cruel fantasy as long as everyone on earth somehow feels entitled to a private motor vehicle at puberty. Again, railway seems something to keep in the closet in the United States... it seems very strange. See you down the line...