What connections are there between debt, oil prices, and personal income?

I was looking at the ratio of US debt to US disposable personal income together with some other graphs of oil supply and oil prices, and realized that maybe there is a connection between debt, oil prices and personal income. In this post, I show a few graphs, and offer my conjectures as to what may be behind the relationships. You may agree with me, or perhaps you can offer some different ideas as to what happened in the past, and what may be ahead.

Figure 1 -Ratio of US Debt (based on Z.1 Data of the Federal Reserve) to Disposable Personal Income (based on data of the US Bureau of Economic Analysis)

1981 -1987

Let's start with the 1981-1987 period. I have always wondered how the US was able to add all kinds of nuclear facilities, ramp up coal production, and improve auto mileage, back at the time oil consumption dropped in the early 1980s. Maybe the answer was more debt! At that time, there were some low-hanging fruit--switching out of petroleum based electrical power plants, to nuclear and coal, and downsizing vehicles. It takes capital to do all of these things. Perhaps the big increase in debt in the 1981 to 1987 period was at least partially a response to this need. We might have had our own special period, (relating to the decline in quantity of oil used) if weren't for the availability of more debt.

If one looks at crude oil production, shown in Figure 2, it dipped in the same period as the ramp-up in new debt--about the 1981 to 1987 period.

Figure 2 - World Crude Oil Production, based on EIA International Petroleum Monthly Data

One can think of average personal disposable income in terms of the number of barrels of oil it would buy.

Figure 3 - Number of barrels of crude oil that the average per capital income would buy, calculated by dividing average disposable personal from income BEA by the average price of a barrel of oil from EIA, based on the average price paid by US refiners for this oil. 2010 is partial year.

Back in 1981, oil was very expensive, in terms of the disposable personal income of Americans. But it gradually got much cheaper in the 1981 to 1987 period, as debt was ramped up. Part of this may have been other energy sources that were ramped up to help substitute for oil helped reduce the real demand for oil, and thus bring down its price.

1987 to 1999

Between 1987 and 1999, world crude oil consumption grew. This was especially the case at the beginning of the period and closer to end of the 1987 to 1999 period, as can be seen from Figure 2. Oil became more and more affordable in terms of personal income, as shown in Figure 3.

I think of this as the time of the big stock market price run up. With more and more personal income, in terms of oil, it was possible to support a dot-com boom, without even adding much debt.

2000 to 2006

The stock market bust and recession of 2000 corresponded with a drop in people's purchasing power, in terms of oil, as one can see from Figure 3. To try to fix / disguise this problem, another huge ramp up in debt was engineered, as can be seen on Figure 1. While there was growth in oil production at the beginning of the 2000-2006 period, increased demand, particularly from China and from oil exporting countries tended to act to raise prices, even as production rose.

2006 - 2010

My expectation for 2006 onward can be summed up in this graph I have shown previously.

Figure 4 - Expected Gap Between Oil Demand, Unconstrained by Price or Credit Issues, and Supply.

In the absence of a restriction in supply caused by high prices or by inadequate credit availability, one would expect world oil demand to grow as shown in the green unconstrained demand line. But with less oil available, something had to "give". A lot of people originally thought the result would be higher and higher price, but we have seen that there is a second cutback in demand that works as well--a cutback in credit availability. So somehow supply and demand are kept together. The result can look as much like peak demand as peak supply.

Rune has shown a graph showing that indeed, OECD consumption was restricted in this period, as prices rose.

Figure 5 - Graph by Rune Likvern showing impact of high oil prices on OECD consumption.

And if we look at average per capita disposable personal income, in 2005 dollars, as calculated by the BEA, we find it flattens out in this period:

Figure 6 - Average per capita personal disposable income in 2005 dollars.

Not too surprisingly, with very low purchasing power in terms of oil (see Figure 3), and dropping oil consumption, people were not able to keep up their big purchases, and the price of houses started to drop.

Figure 7 - Average housing price, from jparsons. net

Looking back at Figure 1, which I have repeated as Figure 8, we can see that recently consumer and business debt has dropped, but government debt has continued to grow.

Figure 8 -Ratio of US Debt (based on Z.1 Data of the Federal Reserve) to Disposable Personal Income (based on data of the US Bureau of Economic Analysis)

What is ahead?

It is hard to see how this whole situation can resolve nicely.

With oil production likely to stay low, the problem with flat personal disposable incomes is likely to persist. This in turn is likely to make it difficult for governments to increase their revenues. (I have shown US figure, but there are no doubt parallels in other parts of the world.) If they cannot increase their revenues, they likely will not be able to repay their debts. So debt defaults around the world are likely not too far away--especially for the countries in worse-than-average condition.

Theoretically, oil production could continue to rise if there were enough investment. For example, one could theoretically ramp up oil sands production, plus oil shale production, and maybe even add some coal to liquid production. But to do something of this sort would require a huge amount of additional capital, and this in turn would require even more debt. Dennis Meadows of "Limits to Growth" fame has said the limiting variable in our current predicament is capital. It looks to me as if we are at this point running up against this limit, certainly from the point of borrowing for capital. Real capital, created by net energy, has likely been declining for years.

What thoughts do others have on these issues? Is there an easy way out?

Given where we are in terms of capital investments in energy production, I think we will see the 'Detroit Model' replicated everywhere.

I think that's mostly true for most locales. We spent our FF inheritance and there is no "plan B" or "C" etc.

I think maybe the rate of conversion to the "Detroit Model" is the key to the transition. The faster the conversion, the more painful.

You're considered lucky if you're able to keep your professional sports teams in the process ;)

One thing that struck me about the debt-to-personal-income ratio graph at the beginning and end of the article is how strongly debt rose during the Reagan and W. Bush presidencies. What's that about?

Reagan - $10 trillion to win the cold war.
Bush - the Gulf war.

And throw in tax cuts on top of all of these things. Reagan had cooked up a rationale for how it was supposed to work such that the deficit didn't explode. Bush Sr. called it "Voodoo economics", which turned out to be closer to the mark..

And when Bush the lesser came to power, Cheney said that "Reagan proved deficits don't matter". So another round of tax cuts, plus 2 wars.

But ultimately the problem is that the voters like getting tax cuts. It may cause the deficit to balloon, but to most people that's an abstract problem.

ericy -- Go back and check the congressinal records. Despite the mythology, federal tax revenues increased during Reagan's time. Can't argue with black and white numbers. But you're right about the deficit. He and the congress spent that extra tax income and much more.

Of course, it's never simple. In his first term marginal income tax rates were lowered but the base was increased by getting rid of a lot of loopholes and deductions. Economists still argue about the net effect. Wage inflation was significant in his first term, which almost certainly drove nominal tax revenues up. Population grows every year which, ceteris paribus, increases total tax revenues. In 1984, the total SS tax rate was increased from 9.35% to 14.0%. In his second term the deficit did make him nervous enough to support modest increases in the top marginal rates.

Many economists believe that the 1986 changes to the Alternative Minimum Tax have had the long-term effect of shifting income tax burden from the wealthy to the upper middle class. Interesting to note that the feds now collect more from people paying the AMT than they do from people paying the regular income tax.

"the 1986 changes to the Alternative Minimum Tax have had the long-term effect of shifting income tax burden from the wealthy to the upper middle class"

Yup, do ya think that was an accident??

Yes, the famous "Laffer Curve," named after the eponymous "economist." Appropriately named, if spelled differently.

Funny thing is I seem to remember when the democrats were in charge back in those days,deficits didn't matter.It seems most of us are afflicted with selective memories.

Clinton balanced the budget but with the help of a republican conress , arguably because he was to a large extent FORCED to by that same republican congress,helped along enormously by the bubble economy of his day. But I have not yet seen a single comment, iirc, in this forum to the effect that his budgetary success depended on the dot com bubbleor the congress.

There doesn't seem to be any PROBLEM with bau whenever a democrat lives in the White House, so long as a bubble is inflating.

Nobody much here seems to realize that all budgetary bills in this country are basically originated and controlled by the house of representatives-or who was in control of the house during the Reagen era,or who has been in control of the house for most of the post WWII era.

No Siree;Everything, EVERYTHING , that is wrong with our budget and our govt is the fault of Reagen and Bush I and II.

Incidentally anyone who thinks I live on the bau republican reservation/ plantation is sadly mistaken, and will quickly realize thier error if they bother to read my other extensive comments.

I DO get tired of simple minded black and white comments based on ignorance or partisan mudslinging lies.

Sound bites, whether accurate or not, threaten to be the death of us.

We do not live in a simple world beset by simple problems.

Painting them as such will not help move us towards solutions.

I'll grant you make some points, but IMHO not enough. It is clear to me based on detailed knowledge of Canada's experience through the Reagan / Thatcher / Mulroney years that the problem is NOT (conservative / republican)ism but the neo-liberal economics to which they subscribed whole-heatedly and still refuse to leave despite its complete failure in real-world application. Things are far easier to follow in Canada because here the Prime Minister (executive) is always from the parlimentary majority (congress & senate majority). And here, evidence is clear and overwhelming that application of the "reduce taxes to generate growth" was an abysmal failure, running up deficits during the hot economy of the late 1980's then pitching the country economically completely unprepared into the 1990 recession which nearly broke the country and caused the $Cdn. to take a huge drop (not being a reserve / safe haven currency, we hadn't any of the protections which muddy up your history). It took the Liberal government which followed a decade to re-balance the economy to where international investors would again buy our bonds, a very painful period of raising tax rates and cutting spending, but the voters stuck with them through it and I gained a lot of respect for them, though I've never yet voted for them. I've certainly pulled my support from the conservatives though, and will keep it off as long as they continue to subscribe to the neo-liberal economics of the Chicago / Austrian school (eg. "cut taxes to raise revenues" and "don't tax the rich / keyword flat taxes", a strategy which absolutely depends on rapid and no longer sustainable growth, and which benefits the wealthy disproportinately).

Lengould, You make some good points as well, points which incidentally bolster my own KEY point;these things are not simple.

When you use the words " neo liberal economics... and... they still refuse to leave", you must admit that the "THEY" these days are not Reagen , Thatcher and Mulrooney.

In the 1990's the GOP congress would not raise taxes and Billy would not lower them. BC found a politically easy place to put the money - deficit relief. The current GOP would just cut taxes - in fact thats the only economic policy they have right now.


If they cut taxes in the early '80's and we class the 80's economy as being "hot", then I would say that, for creating economic growth, that policy was a success, not an abysmal failure. What was an abysmal failure, was the failure to cut (gov) spending along with the tax cuts, the result being the massive deficits that eventually undid the growth.

Whatever may be the tax policies of various governments over recent decades, they all seem to have increased spending, including things like increasing pay/benefits for government employees, such that there are now large current and future liabilities, which must be funded either by taxpayers or borrowing, or printing money (inflation).

Very western governments have been able to resist the temptation to borrow and spend, regardless of their political stripes, and that, IMVHO, is the real problem. Once growth stops but the interest bills don't, you have a real problem, as Greece is experiencing.

Governments solution to almost anything these days seems to be to spend money it - there are sometimes decisions that can be made that don;t involve spending, but these are not perceived as vote winners. Everyone can see the pie being spent, and wants their piece of it, instead of everyone recognising that the pie should shrink instead.

I've certainly pulled my support from the conservatives though, and will keep it off as long as they continue to subscribe to the neo-liberal economics of the Chicago / Austrian school (eg. "cut taxes to raise revenues"...

I'm always amused by the Laffer curve. Even left-wing economists will generally grant that such an effect exists if tax rates are high enough. Academics who have looked seriously at it estimate that the peak is with a marginal rate of around 65-75% -- several different approaches to modeling the effect get answers in about that range. The simplistic symmetric parabolic curve is typically drawn with the peak at 50%. Today's Republican Party asserts (implicitly at least) that the peak is somewhere below 40%, since cutting the top rate from 39.5% was going to increase revenues.

Serious economists -- even hacks like me -- point out that what the Laffer curve really represents is a dynamic model that says that, if you cut tax rates today, revenues at some point in the future will be higher than they would have been without the cut. Me, I don't know -- models with feedback loops are always tricky. Is private investment (a milling machine) more efficient than public investment (roads)? Is spending by the wealthy (a yacht) more efficient than spending by the poor (more food)?

All I can say is go and look at the chart at the top of the page that shows debt/income. There were two periods of "growth". One during Reagan, the other during Bush II.

During Bush I, it appeared to be fairly stable. And yes, he was forced to, but we did have a balanced budget at the end of the Clinton years.

Just to confirm, you are referring to the debt having grown during Reagan and BushII, right? Watching closely from Canada, Clinton was more conservative than many of our liberal politicical leaders, though I still respected him because he was never fooled by those stupid Chicago school economists that drove Reagan / Thatcher / BushII policy. Perhaps a Rhodes scholar is mure useful than a mediocrity such as W.

The Rhodes Scholar oversaw a housing bubble that continued under W. The Rhodes Scholar began banking deregulation that continued under W.

The deregulation of banking was due to one of those meetings between the House and Senate to reconcile differences between their bills. The repeal of Glass-Steagel was pushed through mostly by GOP Sen Gramm of Texas. Even now after the effects of deregulation are obvious the GOP continues to fight the implementation of effective regulations of the financial industry and protections against predatory lending. The GOP is on the side of the crooks and opposed to laws which protect the innocent. It is a key part of their party platform.

Robert Rubin and Bill Clinton fully supported that decision. Phil Gramm didn't smuggle something past them. Rubin wanted it too.

OFM, The most rabid partisans exaggerate the differences between the two parties. Examples:

- Reagan cut taxes? Then what did Carter do with capital gains tax?

- Reagan deregulated? What did Carter do with CAB, ICC, and other Depression era agencies for regulating prices and market entry? I remember airline, train, and banking and S&L (with disastrous effects blamed on Reagan) deregulation under Carter.

- The Bushes favored opening up oil drilling? What did Obama just propose?

- The Democrats favor more entitlements programs? Why did Bush II support and sign a big Medicare drug benefit extension?

- Wall Street has more influence over which party? Robert Rubin and Bill Clinton were not as friendly to Wall Street interests? Obama and Tim Geithner haven't held back from substantial reform?

I could list dozens of items where each party acted like the other. The people who think they represent the good party against the evil opposing party are deluded.

Did someone say Tweedle Dum....

There is only one "easy" way out -- to die. Hamlet's dilemma.

Resolving that in favor of life, we can see only two easy solutions if energy is constrained
1. Inflate out of debt, destroy the creditors, and thereby decrease consumption.
2. Deflate, destroy the debtors and thereby decrease consumption.

If additional energy sources appear, then the problem can be avoided fairly easily. This is the magic solution that most people seem to favor (in my area it takes the form of "strip the 'waste' off the forest floor for biomass") but it could be increased nuclear power, clean coal, nuclear fusion, or development of "free energy" or "dark matter."

With some difficulty, people can get used to a lower energy regime, become more efficient, respect each other and live together in solid communities. This is the "hard" way out, but it will preserve civilization and might even result in a more pleasant Earth to live on.

1. Inflate out of debt, destroy the creditors, and thereby decrease consumption.
2. Deflate, destroy the debtors and thereby decrease consumption.

Hadn't thought of it so concisely, but those are the two choices. We have a fixed home loan, so our family keeps waiting for #1 to kick in big time.

Yeah, as someone with a low, fixed-rate mortgage, I figure that would be OK, too. However, do you have any savings? I have some modest retirement accounts and other sums set aside, and I figure that kind of inflation would, if I was lucky, turn them into enough for a weekly snack.

Another source of additional energy might be human muscle power. There was a news item this morning that said 1 in 5 men between the ages of 25 and 54 are unemployed, with one prediction that even with decent economic recovery that figure could be 1 in 6 more or less permanently. That's a lot of guys sitting around that can be put to work doing something. Of course, those so elected may not be too happy about it and might be inclined to resist in some way ...

Ayres and Warr did an energy analysis of the US economy from 1900 to 1998. They found that human muscle power was no longer a significant source of energy for the economy by 1900 and that animal muscle power was no longer significant by 1930.

Of course it depends on how you look at it. Something like the CCC could get lots of useful work done while putting otherwise idle hands to work earning an income, but the quantity of work/energy/power produced would be trivial. Likely less than the rounding error of therms in the gas market or KWh in the electricity market.

Obviously you have never seen me with a chainsaw. I could clear the back 40 pretty quick if you let me :) I think pure human power is silly, but humans with small power equipment can still do a lot of damage. Never let me have access to a Bobcat!

I'm in agreement with MMIH here. Muscle power, along with light equipment, can do lots - take a look at the pyramids, Roman coliseum, Taj Mahal, Angkor Wat, etc etc.

More realistically, there are many jobs where people plus light equipment can do things that are now done by fully automated equipment, it just hasn't been economical. But, people paid moderate wages (with low taxes) and high energy costs (and high energy taxes) will shift that equation.
The real difference is not human muscle power, it can never compete, it is human dexterity than cannot be matched. It requires very complex machines to do same tasks that we can do easily (shearing a sheep is a good example, as is bricklaying). Even the chainsaw example is good one. You can get very big, expensive machines to take down trees, but they can;t do it for all sized trees or all geography. And once you do have one, you have to clear a lot (all) the trees to make it worthwhile.

Machines can mutliply muscle power many times - we just need to look for the cases where muscle +light machines can outperform machines alone, and there are many such cases.

IIRC, it was either Ayres and Warr, or someone commenting on their work, that said that almost no one is a laborer in the developed countries now, everyone is a supervisor. Some supervise other people; most supervise machinery that uses external energy to do the work of many people. The machinery tends to require more direct supervision, but most managers have had one or more employees that gave them the same feeling :^)

For those not familiar with the A&W work, traditional growth economics says that the output of production should be credited roughly 70/30 to labor and capital; A&W make the split about 65/5/30 for exergy, labor, and capital. I'm still trying to decide if I think the consistent 30% share for capital is a coincidence, or reflects an important underlying truth.

Hey hey mcain6925,

I think it's an important underlying truth. The 30% reflects the skill and wisdom put into production. Think monkeys with typewriters. They have the energy and the capital, but they aren't crafting anything just hitting keys at random. The labor adds little value and thus the labor share is low.

Imagine this hypothetical experiment:

Humanity magically gets wiser at 1AM Jan 1st 1900. Politicians quit commissioning bridges to no where, quit building armies and fighting with them. Journalists report on important matters of civic interest rather than sensational infotainment or propaganda and yellow journalism. Businesses think very long term rather than focusing on quarterly earnings, they become responsible stewards of their communities and environment. People stop buying lots of cheap beer and start buying smaller quantities of good beer.

In essence capital, labor, resources, and energy are deployed in more productive ways. Or, conversely, cease to be deployed in counter productive ways.

Compare the outcome of that hypothetical, magically wiser thought experiment with what actually happened. The difference between the two is the factor share of labor for regular humans and wise humans. The constant 30% over time and between models reflects the fact that we are only so good at planning and allocating resources wisely and we haven't changed much in the last hundred years.

So, if this true why do we continue to allow the economic apologists to define "productivity" solely in terms of labor ? Shouldn't it be measured in terms of energy/exergy?

That would be getting too close to The Truth! Almost all post war production management theory has been about minimising labor input, although marketed under the much more politically correct term of "maximising productivity".

There is one other consideration here. I think there is some confusion between "capital" and "enterprise" (or "management").
Enterprise is one of the factors of production, and represents all knowledge, experience, skill and intellectual property that goes into it. Capital is merely a measure of money available to buy other factors of production; land, (or materials, which includes energy), and labor. Without any management, the other factors are poorly co-ordinated. An experienced team will almost always out produce an inexperienced team given similar amounts of land, labour and capital. Any analysis that has zero allocation to management is flawed from the start.

WE could split "land" into physical materials and exergy/energy.
Labor sometimes contributes exergy to the process, though it is normally co-ordination of machines/materials
Certainly, there is room to swap labour for some exergy and vice versa. Given that US and Canada tax labour and not energy, companies have maximised energy input and minimised labour input (or moved offshore). But we are starting to see some reversal of this trend. A shift in taxation would speed this up, and minimise use of scarce energy, and maximise use of abundant labor - what a concept!

With a chainsaw? Take away the fossil fuels for the chainsaw and how log will it take you to clear the back 40?

Actually, a chainsaw can be run on ethanol, with a little pine or eucalyptus oil mixed in for lubrication.
And, you can run an electric chainsaw off a battery, inverter and a solar panel, or a generator running on wood gas.

But, in the spirit of your statement, I did once see the Australian champion double handed crosscut saw team (father and son!) beat the Australian chainsaw champion in a contest to cut through a 20 inch log. Even the non FF ways can still be productive, in skilled hands.

Best hopes for creative solutions!

Now compare the results of the hand sawers and the chain sawers after a day, or week.

I think that's why they tried slavery as a "creative solution" in the past. Best hopes we do better during and after collapse.

Human muscle power is not an energy source anymore than an an engine is an energy source. Humans and other animals simply convert biomass into work.
These long term unemployed have been sacrificed on the Altar of Greater Productivity. To believe that anyone other than the government will hire these men and women is living a fantasy. While the average American worker is the world's most productive it is due to increased automation of the workplace destroying private sector jobs.

Print paper. Simultaneously increase the bank reserve ratios to control inflation.

The debt vanishes over time.

Bing, we're back where we were 50 years ago.

But how do we go forward with this model?

Without growth, it is impossible to earn the additional increment that is really needed to pay back debt with interest, and we are already past that point. So most of the debt pile falls flat, and the international finance system needs to be restarted on a different basis. Not a pretty picture.

It's called "jubilee" --total forgiveness of all debt, wiping out of all accounts. It's in the Bible. It's been done before, but not so far as I know voluntarily.

But it will probably work. Once all the debt is flattened, people will have to pick up and go on. Just not "easy".

In the "good old days" when "money" was a physical asset such as gold or silver, "jubilee" would have been practical. The "money" would stay with whoever possessed it at the time of jubilee, just the obligations to return it to someone else at some future time would go away, but those with the money would still have purchasing power. Now however almost all money is created as debt, so to wipe out all "debt" would wipe out all "money" and crash the economy, since no one would have any purchasing power.


I agree with you about the result crashing the economy.

I think the result, too, would likely be a lot of fighting over the physical assets that underlie the debt. Governments would likely change as well. The result, in the end, might be quite different from what any of us would forecast, based on what is written on pieces of paper now.

Wouldn't the stock market melt? Think of the retirement folks! Oh man would that get interesting. Talk about zombie disaster scenarios. Grandma goes to the mailbox and no check... her head spins around and eyes pop out.

LGN -- I had my own jubilee years ago. Loaned money to each of my siblings over time. Never paid me back...OK by me. But they also knew I had one rule: I never loan money to anyone who has never paid me back for a "loan". Worked OK...in more than 20 years none have asked for a loan again.

OTOH, I won't be surprised if money lenders dodn't follow the same rule. In the end they look at a borrower's ability to pay back. If your debts are wiped clean and have a good income then you'll rate as a good risk.

Critical difference: When you or I "lend" money we transfer money that already exists from our pocket to someone else. When a bank or credit card company etc "lends" money it creates money that did not previously exist and gives it to the borrower in exchange for a promise to repay, with interest.

So, the "common sense" which applies to borrowing / lending between persons does not scale up.

If we have a debt jubilee and some body nearby who has lived high on the hog (while I have been driving a twenty year five year old Toyota pickup and raising my own beans to stay reasonably solvent ) gets to walk away with a farm newly purchased on credit with a govt backed loan , I am going off my meds, and will probably be charged with murder unless so many like minded people join me that we are able to start our own French Revolution. ;-)

Seriously , there is essentially a zero chance of a GENERAL debt jubilee without a civil war.

Now ANOTHER jubilee for the fattest of the fact cats is a real possibility, and one has already been implemented.

I do believe it has been amply demonstrated by now to any reasonably impartial observer that Pelosi and company are just about as much in thrall to big biz bau as the last administration.

Anyone who thinks the democrats are going to save our bacon should sit down for a while and contemplate just where the current administration went for all the key economics and banking personell.

Not that a McCain administration would have been any better.I am quite willing to believe it would have been worse.

ofm, I'm not a particularly religious man, but I would recommend going back and reading select passages from the New and Old Testament. Maybe starting with the prodigal son parable, some Mosaic law, and a little Revelations just to spice things up.

The right wraps itself in the flag and thumps its fist on the Bible, but when it comes to applying Biblical redemption to a fellow American, they just go totally f'n ape sh!t.

I'll never figger 'em out, I guess.

I'll go off my meds too and join you - jubilee my arse!

I think Richard Russell has it right. Without growth, debt will begin to act as a "short" on the dollar. So credit dries up and deleveraging acts like a short squeeze. The race for dollars is made more intense as weaker foreign currencies fail and foreigners also seek shelter in the up-melting dollar.

Even precious metals fall in the great dollar short squeeze. At least for a while.

Party lines don't matter. Like Dmitry Orlov says, "Pay no attention to national politicians, they are a colossal distratction."

> If some body nearby gets to walk away with a farm newly purchased on credit with a govt backed loan, I am going off my meds, and will probably be charged with murder.

Why? I think this attitude is childish, if you'll forgive the offence. How does it make any difference to you? If he gets forgiven his debt, or goes bankrupt, it makes little difference to you and your beans and your pickup one way or another, unless you are somehow locked in bitter competition with the man already over something.

Do you normally feel that the Government should act to maintain equal outcomes for everyone? You don't sound like a left-wing person, so I'm not sure why you begrudge the man his good fortune.

I think that the Meadows report underestimates the impact of human ingenuity. The only "hard" constraint is entropy. It is the common denominator of all fossil ressources : coal, oil and gas of course, but also any concentrated mineral one way or another (very often as a result of long term biological processes). The problem with entropy is that it can take very different value depending on the phase space that one considers. For instance, neglecting the exergy embedded into heavy fissionable atom, or the exergy flow received from the sun, leads to greatly underestimate the resources that are at our disposal. As a consequence, on a long term basis the future can still be bright. Wind, nuclear and solar have all the potential to be high EROI sources of exergy on significant amounts without being exhausted as far as we can conceive the future. With time, great amount of real capital can be created and sustained.

Yet, the critical issue is that our current stock of real capital is for a large part in symbiosis with the availability of relatively cheap fossil fuel. By capital, I am not simply talking about "stuff" like road, houses, bridges and power plants. It also encompasses know-hows that required some energy to be acquired (through trial and errors), but that could not be any more applicable in a restricted fossil fuel environment (malking building diesel engines for instance). Note that national accounting (such as one you can find in the "flow of funds" report) may have only a remote connection to the effective stock of real capital "out there" so I am not so sure that the graphs you display above mean really something.

However, we know that if cheap fossils become unavailable, accelerated amortization of the "linked" capital must occur, at such a pace that our global stock of real wealth may not only decrease but even decrease. In a context of rising population, it means that the real capital, and thus the productivity per person is going to go through an air pocket, and that will be painful. There is no easy way through it, especially if we use some of this capital to make war to each other.

The best we can do now is endeavor as much as possible to accumulate real capital that has "dual use". I.e. that is economically useful in today's world of cheap fossil fuel, but remains operable on sustainable sources of energy. This is why converting to assets that rely on electricity is a safe bet, because most sustainable electricity comes to this form. Think about electric bikes, electric train, heat pumps, etc...
The other challenge is to "de-fossilize" production processes, which will require lots of reengineering.

Taxation of fossils is the best way to give the appropriate price signal to switch early, but it is essential, contrary to what happens in Europe today, that the generated income be affected exclusively to "public goods" investment expenses. Redistributing it merely to whatever class of society to lower other taxes (or to not increase them) will not be as efficient.

I think our human ingenuity really needs to be put toward developing a new system that runs with local materials, without (or essentially without) fossil fuels. We had such a system years ago. We had many small farmers using animals to help with farm work. We had many types of craftsmen. We had some types of industry, run using water and wind power, generated by fairly primitive means, using local materials. We had a great deal of knowledge about what crops grew in different parts of the world, without more than the simplest irrigation, and without the use of fossil fuel based fertilizers.

Now we have the need for a similar system, starting if not immediately, starting in what seems like a tiny time frame--certainly less than 50 years. We have the benefit of greater knowledge about science now. But we don't have too many people seeing a need for a step back this far--they assume that as long as they have a solar panel for themselves, things will be OK. But what about planning for their children? I don't think we have a way of making solar PV panels with local materials--nor do we have a way of making today's huge wind turbines with local materials. The so-called renewables are just fossil fuel extenders, with a very limited lifetime.

Building a new system, even if it is simpler, will take capital and resources. Without the current system collapsing first, it is hard to see how that will happen. And if the current system collapses first, it will be very difficult to do.

"I think our human ingenuity really needs to be put toward developing a new system that runs with local materials, without (or essentially without) fossil fuels."

Excellently put. Do you mind if I use it the next time some schnoid tells me that human ingenuity will solve all our problems? These days, I usually tell them, "Great, so start getting humanly ingenious and come up with a perpetual motion machine." But that is not always a very productive way to carry on the conversations.

I would add that it doesn't have to be 100% local for everything. There were spice and silk trading routes in ancient and medieval times that spanned continents. But you are right that these will become more and more the rare exception.

I'm sorry but if you seriously believe we're going to go from present systems to having only camel drivers trading on the silk road in one swell foop, then you're far more deluded than any of the supposed "cornucopians" you constantly attack.

It doesn't have to be one fell swoop. But over a fifty year period (or less), we have to get to a very different place than we are now, and not many are working very hard on getting there.

A problem with the financial markets (which we are already seeing) could affect our systems pretty remarkably, pretty quickly, IMO. How long would electrical power continue, if no one had money to pay for electricity?

Ok, I grant that time frame is definitely significant. I'm estimating a serious power-down from petroleum over a 50 year period, which IMHO we will collectively survive fairly handily (it is only a liquid fuels problem, not an energy problem, after all) provided we don't fall into some stupid propaganda trap and get involved in a serious war. I've no opinion on how stock markets will fare, as I don't see that as being of much significance in the big picture long-term. The stock markets of today are so far removed from any productive activity as to be no more important or worthy of concern than any other large gambling enterprise, Atlantic City or Vegas. If the anti-nuclear crowd forces us to use coal rather than nuclear as the transition / bridge technology to efficient solar electrical generation then the climate will undoubtedly suffer, with the poor subsistence farm groups of many less-developed regions suffering disproportionately, though their savy elites will perhaps exploit their disproportionate solar energy resources to profit handsomely eg. Desertec. I'm sold on probalble future climate change for Earth seriously re-structuring the agricultural big picture, moving ideal growing locations nearer the poles, and am both activly promoting development of mitigating technologies and fully prepared to take a serious economic hit to help, but am not very hopefull overall. Resigned to surviving in Canada, probably do-able for myself and grandkids.

The stock markets of today are so far removed from any productive activity as to be no more important or worthy of concern than any other large gambling enterprise, Atlantic City or Vegas.

This is a common sentiment by the public (and here) but it's just not the whole story. Stock markets are very important once an economy has come to depend on them. To say that they aren't worthy of our concern is, to me, completely inaccurate. Shut down the stock markets and a large amount of money stops circulating in the system. Moreover, that would make every retirement account that depends on stocks worthless in an instant since there would be no way to turn the stock back into cash. That impacts pensions, endowments, capital formation for new enterprises, etc.

You'd be smart to forget the private pension plans and vest whatever can be extracted in a government plan because the brokers will simply loot it on you anyway. In the government, at least it will reduce the debt somewhat, thus reducing those interest payments. Worth a detailed analysis anyway, and at least you have some hope of something left the day you retire. Let the bankers fail.

"I'm sorry but if you seriously believe we're going to go from present systems to having only camel drivers trading on the silk road in one swell foop"

You seem to have mis-undestood my intended meaning. I guess maybe I should have said "even" in my discussion of ancient long-distance trade, but I thought it would have been obvious to anyone reading at all carefully that I was responding to gail's apparent absolutism--that there would be absolutely no trade.

So I took the obviously-beyond-most-extreme doomerish case--medieval or premedieval levels of technology--and pointed out that EVEN there, trade across huge distances was a regular occurrence.

You seem to have taken it to mean that I was proposing that we would resort to "having only camel drivers trading" but that was not my intention. Am I not obviously not being clear enough.

(I do greatly appreciate your spoonerism, though--one of my favorites. It always makes my students look sidelong at me like perplexed poodles.)

This doesn't make sense.

You take it as a given that "you think" we need an economy using only local materials. Because? Based on previous posts, I am assuming because peak oil = peak energy = peak debt = reduced international/long-distance trade = make everything with only local materials.

But if renewables and nuclear (and remaining gas/coal) offset peak energy, debt can still be financed, trade can continue, more renewables can be brought online.

So how are non-FF energy sources just "extenders"?

So how are non-FF energy sources just "extenders"?

They are, as long as FF are needed for mining, production, transportation and maintenance. Doing all that without FF takes a very long time if there is energy to be generated for 7 billion or more humans. Therefore so many are looking for a transition mainly with unconventional gas and coal, shifting off the problem a little. Oil, gas and coal provide roughly 1 billion barrels oil-equivalents in just 5 days. Stop at this thought a moment: 1 Gb in 5 days.

They are, as long as FF are needed for mining, production, transportation and maintenance.

No, they are not needed. Electricity can run much of what oil does, and the few uses of fuel can be accomplished with syn-fuel. Also, we are not entirely running out of oil for at least a century.

Doing all that without FF takes a very long time if there is energy to be generated for 7 billion or more humans.

I am not sure what you are saying here. What takes a long time?

Therefore so many are looking for a transition mainly with unconventional gas and coal, shifting off the problem a little.

Not me. I suspect there will be profound changes in society that reduce how many total joules we use, namely, the ongoing decline of private transport coupled with efficient use of utilities... there is little gained in GDP by running your thermostat at 70 year-round.

Oil, gas and coal provide roughly 1 billion barrels oil-equivalents in just 5 days. Stop at this thought a moment: 1 Gb in 5 days.

You are changing the subject, and doing so with a sensational appeal. My comment was about the fact that it isn't fair to call renewables only "FF extenders" when wind and many types of solar are clearly net energy positive.

What does "local" mean ? Most "industrial" transportation is performed by ship and train, and both can work without fossils (nuke and wind for ships, nuke wind and solar for trains). It is clear that, barring the discovery of a cheap and light battery technology, trucking will go down in the transportation mix, but the world won't go back to 100% local.

Again, some adaptation is needed to the infrastructure, and the sooner it is done (even if slightly cost-disadvantageous) the better. Electrifying train lines is a safe bet IMO. We could also see more and more interest on nuclear powered container ships (for "safe" shipping lane, such as Shanghai-Long Beach/LA). COSCO is already working on it. It would allow China to remain competitive internationally even if border adjusted carbon taxes were introduced.

"local" in this context means a minimal or zero transportation component, and that is a reasonable goal.

If you look at rail freight, you will find the majority of it is actually raw materials, rather than finished goods (with the notable exception of cars). Certainly we want to see more rail freight, and electrified at that, though none of the major railroads have announced any electrification plans. They have been looking at it, but the fact that none are doing it suggests they have deemed it uneconomic.

As for a Chinese owned nuclear container ship, I'll lay money that the first time it tried to dock in Long beach, or anywhere else on the US/Cdn coast, it would be met with a storm of protest. They certianly won't be shipping to New Zealand, who have a zero nuke ship policy, and you could expect a few other countries to start saying the same if there are nuclear cargo ships floating around.

As good as electrified transport is, minimising transport in the first place is better.

Here is another view of worldwide debt for those new to the topic. A similar graph could be made just for the US.


Click for larger view.

All of us know that if you had a loan last year, but don't have one now, it makes finances a whole lot more difficult. Think about a person with a large credit card balance, who receives a letter in the mail that he/she is being cut off, and will need to repay the debt, without a new credit card. The person will be expected to continue paying down the old balance, with interest, without having the benefit of a way of charging new purchases. It wouldn't be too surprising if new purchases drop off greatly, causing the economy to contract further.

This happens with other debt too, and is the reason debt expansion works so well to make the financial situation look bette. But once debt contraction sets in, it is very difficult to keep the whole system operating. As much as a person would like to repay his credit card debt, after being denied new credit, many will default. This will put the banks in a bad position, and make things worse.

Quote; "... make things worse." Only in the interim. The sick consumer society has to learn to live within its means. It will lead to a healthier future. None of our family members ever had a credit card debt since we purchase only things if we can afford it. Yet, we often said that if everyone is doing this the economy would collapse. Yes, it would be painful for a while but perhaps a new economic morality would rise out of the ashes.

The question is how much food, water, and other goods the new "healthier" society could produce. I don't think anyone thinks it could produce enough for 9.0 billion people, or even our current 6.8 billion people. There would likely have to be a population reduction, to bring population in line with what the "healthier" society could afford. Not everyone would characterize that change as being for the better--certainly not the folks in the group without enough food and water.

The question is how much food, water, and other goods the new "healthier" society could produce.

Exactly. I'm heavily involved in the Transition Initiative, whose goal is to create that next "healthier" society but some days I have to admit I'm not very keen to live through a society cut off from credit. I see a link (as Gail does) that is foundational, much like blood is to the human body. Granted, the metaphor breaks down when one compares how the human body cannot simply adjust to less blood whereas the economy will — eventually and with no choice in the matter — adjust to less credit.

But the part of the metaphor that concerns me is the initial bloodletting. I get weak when I give blood and can't do things I might normally do. Our economy will be in exactly the same situation for, I believe, the next few centuries until we reach what Greer has termed the Ecotechnic Society.

As much as a person would like to repay his credit card debt, after being denied new credit, many will default. This will put the banks in a bad position, and make things worse.

It will not take long for many people to put two and two together:

  1. I owe a lot of money to the credit card company.
  2. The interest rate they are charging is usurious beyond belief.
  3. They say that's because it's an unsecured loan.
  4. But since it's unsecured, about the only thing they can do if I don't pay them is to refuse to lend me more money.
  5. But they refuse to lend me more money anyway, so why repay it?

The banks might end up a lot worse off than they imagine.

Gail -

One might ask: if the person in your example is only able to make purchases by use of credit card debt, then should that person be making those purchases in the first place? Sure, without a credit card that person's purchasing power will decline and contribute to a contraction of the economy, but perhaps that is not such a bad thing.

In that case maybe the economy isn't really 'contracting' (with all the negative connotations that implies), but rather reverting to a more natural, stable, and sustainable state. Painful and disruptive, yes. But perhaps for the best in the long run. The longer the fall, the more painful the landing.

Is there an easy way out?

There may well be some combination of "heroic measures" that could kick the problem down the road for a few more years, I won't comment on the specifics, being neither an economist or a voodoo priest, but as I understand the predicament we are in thats the best we could hope for.

We have constructed a global finance and production system containing the built in requirement that its size in the future will always be exponentially larger than it is in the present.

Insofar as these systems are dumping ever increasing amounts of waste into finite biological systems on which we are dependent for survival, and extracting ever increasing amounts of resource inputs from sources that are non-renewable in human time scales, they are doomed to fail.

I am optimistic in that I think it is worthwhile to work on building an alternative, rather than simply increasing the height of the overshoot cliff, but realize this may well be naive on my part...

Is there an easy way out?

(1) The 1st step to be done is to tell the electorate that declining oil production is ahead and that motorists have to tighten their belts and not blame oil companies for high oil prices and/or shortages. Otherwise we'll get riots like in Greece.

(2) In relation to debt curves of other countries, the German curve shows upward kinks in 1973 (1st oil crisis) and 1979 (2nd oil crisis). This additional oil crisis debt was never paid back, but always rolled over.

(3) Since you are looking at the US situation Figure 2 should actually show US consumption and production with the gap being filled by imports, paid in local dollars, after the Bretton Woods agreement was terminated by the US, thereby discontinuing the convertibility of the US dollar to gold.


With respect to your point (3), you are right, there are a lot of things going on. The US was becoming a service economy, ramping up imports of manufactured goods from abroad. The Bretton Woods agreement terminated the convertibility of the US dollar to gold in 1971, and that affected results as well.

I was hoping by putting this up, people could add some of the things I was missing, in my incomplete review of the charts.

One reason for the riots is how much of the cutbacks are being imposed on those who can least afford them. One report stated that pensioners are having their pensions cut from 400 Euros/mo to 200 euros/ mo. 400 means just getting by. 200 means starvation. Greece's and most of the world's financial problems were not created by working folks and the retired. The problems we are now experiencing were created by the filthy rich. They are demanding that old folks starve so that the filthy rich get paid back. Greece would be better off defaulting on bonds not held by Greeks.

I'm with you on this one. The "bailout" from the EU/IMF is not a bailout of Greece, it is of the bondholders. Greece will be left with a loan to the IMF instead of the bondholders. Yep, they are better off defaulting. This will also mean that no one will buy Greek bonds again, so the government will have to live within its means, which is not a bad thing. They won;t get hyperinflation, because they have the euro. They will get even more unemployment than they already have, but that will happened regardless.
If the Greek government wants to look after its people, and not foreign interests, it should default, and then never get in this situation again.
Pericles would never have let this happen, it's time for some ancient Greek leadership!

The IMF loans come on top of the existing loans. The IMF bail-out of Greece is against the interests of the long term bond holders because IMF loans have precedence over existing long term bonds for repayment.

Some short term bond holders benefit from the IMF bail-out. But the longer term holders (pretty much any bonds not coming due in the next couple of years) are hurt by the bail-out.

I think people are missing a big point on the moral hazard of debt forgiveness.
Who suffers dispropotionately from this big bankruptcy?
It is the lower rungs of society (or those who drop down there).
Who is likely to be 'corrupted'?
The elite continues to coast along.
This concern for protecting 'widows and orphans' masks the speculators and bankers who cause these calamities.
The DOW fell +900 points because of a typo??

Insanity is the essense of our contemporary'rational markets'.

Bring back Glass-Stegall (or simply close the exchanges).

I heard a financial idiot say that they couldn't stop derivatives because farmers couldn't buy crop insurance!
They could buy it from the government at a lower rate that's for sure.

In this talk, Sean Carroll says that for every one photon received by the Earth from the Sun, 20 photons (of lower quality) are sent back out into space as infrared light.


Is this the disposable income of the earth? The earth has managed to save some of it's income as fossil fuel assets, but mostly it just lives paycheck to paycheck like the rest of us (though not many on this forum hopefully) it seems.

Where in this discussion does the actual financial system come into play? The simple truth is that money does not animate our world, the low entropy state of the sun and of the earlier universe does. I can't see how the financial system even enters the picture of what will happen to us as a species as we begin to bump up against our natural limits. One thing we can say is that our civilization will become more disorderly without the addition of external low entropy inputs. So for instance, who cares what disposable income will be because the system as a whole will be more disorderly.

We have a system that operates right now--one made up of a lot of different companies, employing a lot of different workers, and producing a lot of different goods and services (electricity, Internet, food, clothing, piano lessons, computers, etc.) The question in my mind is how this system will hang together, if there is a huge debt collapse. One of the big effects of the debt collapse would likely be a problem with international trade (which depends on debt), but there would likely be local effects as well.

For example, suppose your local electric utility is not able to pay its debt relating to power plants it has put in place--not unless it stops paying salaries to its workers. Is someone going to stand up and say to the electric utility, that it is all right not to pay the debt (which is likely part of someone's retirement account? I think it is just as likely that the debt problems will translate to other problems--the electric utility will instead lay off workers, and stop doing the maintenance they need to do, so that in not long, electricity reliability becomes a problem.

Or perhaps, what happens is the bank where the utility does business closes, and the bank accounts just disappear. How does the utility pay its employees and bond holders?

We take a lot of things for granted. Once things start going wrong in one part of the system, they seem to spill over to other parts of the system.

Enter the Unthinkable.

Debt collapse, as we all know is inevitable.

The priority for governments is to provide basic services and prevent anarchy. This is done through nationalization of energy and other essential infrastructure. All but a few of the Big Boyz lose their holdings and get booted down with the rest of us. Private business is largely wiped out and consumer items decrease in quality and variety. Most families will survive on government handouts, barter, and victory gardens. Inflation wipes out debt, but it doesn't matter because no one is buying anything anyway.

Globalism is over. International trade is very limited and constrained by tariffs and protectionism. Intra-regional commerce is more common. There may be local scrip to negotiate this..."The Wisconsin Dollar" etc.

Its only a psychological problem. Albeit a very large one.

I think the die-off occurs very slowly and gradually punctuated by a few dramatic epidemics or wars.

All of this takes about 50-100 years.

2007-2010 is the first salvo. Phase 2 of the financial collapse is inevitable within 3-5 years, and the drop down will be very catastrophic, but will stabilize.

Phase 2 of the financial collapse is inevitable within 3-5 years, and the drop down will be very catastrophic, but will stabilize.

I agree with the first part of that, but there's not enough information to understand why it would stabilize. Can you describe the state that it would stablize into?

I agree with everything in your brief but excellent post, except for the die-off occurring "very slowly." 50 to 100 years is nothing compared to how long humans in more or less their present form have been around. It's even less compared to how long primates have been around.

It's a positively meaningless amount of time compared to how long mammals have been around, how long life has been around, and how long the earth has been around.

I would characterize the collapse of our industrial, global civilization due to fossil fuel depletion as happening very quickly.

It is true that significantly reducing the amount of debt in the system will decrease the amount of measurable economic activity which will result in less products and services for most of the individuals in the system. Whether or not we should modify our current fractional reserved based banking system is an interesting subject which I will put aside for now. There are those who argue that it is unhealthy to continue on a debt based society based on creating funds out of thin air.

But I digress.

It does not follow, however, that the continuation of our current debt based and, therefore, growth dependent system will continue just because we decide not to tinker with the debt based system or we decide not to forgive debt on a widescale basis.

Ultimately, there is a significant correlation between income and productivity. As the supply of oil and other fossil fuels decreases, there will generally be less productivity per worker as energy is the major factor in that productivity. Regardless of what we do with the financial system, we will end up with the same result that you fear would result from blowing up the financial system.

I gather that you take the position that we need to continue the growth based economic system as long as possible to stave off what you think is the result of a steady state or decreasing state economy.

I believe the growth at all costs will not only be a disaster for the environment but will just delay the day of reckoning without any plan in place to mitigate the inevitable resource driven descent.

Localization all the way down to the household level will help mitigate some of the negative effects of a steady state or shrinking economy. Things that add value for the individual or the family will have more importance and will contribute to their well being even if not counted as part of the GDP. Returns from physical capital will assume more importance relative to returns on financial capital. Prudence will dictate that people will put funds or other resources into items such as zero net energy homes. Personal investment that achieves returns outside the financial system will be a prudent response to the coming financial crash.

The question, though, is do we purposely alter our current debt based, fractional reserve system in view of its probably negative effects on growth. Herman Daly believes we should gradually move to 100% reserve requirements in order to help achieve a steady state economy. Perhaps a gradual move in that direction will give us time to put the necessaary systems and habits in place to survive without endless growth.

We can probably stave off a debt collapse for awhile and continue to inflate the economy. However, I think this just delays the day of reckoning that comes from ecological destruction and massive energy and other resource scarcities.

The prevailing paradigm is that we must consume as much as possible as long as possible so that we can produce and consume as much as possible. We cannot imagine a world without a robust and growing gross domestic product (cost). However, I think this paradigm will, in effect, hasten the day where we get to experience mass dieoff/suicide.

Reduced consumption will suck for most people. But this surgery may be necessary to save the patient, even without anesthetics. As it is, we simply await our fate as we continue business as usual.

Things that add value... Returns from physical capital... put funds or other resources into items..Personal investment that achieves returns outside the financial system...

tstreet, please forgive me; I am not feeling well today, and when I'm this poorly, my brain sputters along on only one cylinder that is misfiring too.

My understanding of economics is at the Econ 101 level. I get things like supply and demand, you know- the basics.

But when I read this paragraph, my brain was going, "add value- 'value' means money, as in Value Added Tax. 'Returns' means money; 'capital' means money; 'funds' means money; 'resources', when used in conjunction with 'investment', means money. If you insert the word 'money' in all those places, well, I can't make any sense out of the passage.

I just don't speak Finanspeak too good. Could you rephrase it in Dumbese for me?

I tend to agree with your assessment. Most of these economic systems are examples of "disordered behaviors" as opposed to the "organized chaos" that many poeople seem to imply.

So I try to separate completely the role of productivity from any sense of income level. See this post on Japan

The general idea is that people will exhibit average productivity levels and a dispersion in this productivity level independent on whether we go through an expansion phase versus a contractive phase.

How about historical precedents? The Great Depression for example. Huge numbers of banks closed. Did the entire economy stop? Nope. The economy dropped by less than half.

Great article Gail! Knowing net energy decline is having a negative economic effect is one thing, but connecting the dots takes close analysis - thanks.

With oil production likely to stay low, the problem with flat personal disposable incomes is likely to persist. This in turn is likely to make it difficult for governments to increase their revenues. (I have shown US figure, but there are no doubt parallels in other parts of the world.) If they cannot increase their revenues, they likely will not be able to repay their debts. So debt defaults around the world are likely not too far away--especially for the countries in worse-than-average condition.

That is where we are now, and we can see the edges cracking with Greece leading the way. Part of the problem here is the lack of understanding that in a post peak oil world, there needs to be a move away from globalization to regional then local economies. The EU had an opportunity to do that if they had cut Greece loose to have their own currency. But instead they opted for BAU and dug a deeper debt hole. But even if BAU is still being held onto tightly, based on the above scenario you laid out, it won't be long before the EU has to cut countries loose and we begin to see other signs of moving towards regionalization, then localization. It is as Kunstler suggested, we are moving towards local communities that are self sufficient as we continue down the net energy ladder.

Peak Earl,

Glad you liked the post!

I think the paragraph you quoted is really the issue as to where we are now. With oil production likely headed lower in future years, and as a result, real incomes are likely headed lower as well. The belief that people have had in the past that debt levels of 1.0 times personal income, or 2.0 times personal income, or whatever, were safe simply cannot be upheld. In a declining economy, there will be tremendous debt defaults.

So not only can economies not take on new debt to get out of our current problems, but also they are likely to encounter difficulty paying back old debt, as oil supplies become less and less available. In the next few months to couple of years, we will get to see how this all plays out, as the IMF and the world groups struggle with more and more defaults by countries, and as smaller units (cities and states, for example) default on their debt.

We don't have a Plan B lined up as to how we run the world without debt (and how we would transition to the new plan--which is a big part of what is needed for international trade), and that is a problem.

In the next few months to couple of years, we will get to see how this all plays out, as the IMF and the world groups struggle with more and more defaults by countries, and as smaller units (cities and states, for example) default on their debt.

That is the big question - how will it play out? Once credit dries up far enough that new capitol cannot keep the infrastructure viable and debts cannot be repaid, isn't that the point of collapse? Or, can debt be forgiven? And if so, then how do we move on from there with no creditworthiness? It seems like it all leads to questions that cannot be answered in a conventional manner. But of course that would mean we will all be on our own at some point, and that gets back to moving towards self sufficient communities.

However, like one of your earlier posts noted, there won't be enough food and water for the billions on board. That seems like the inevitable bottle-neck we must all pass through.

Are there any economists out there that you know of trying to construct an idea of how non-debt-based but highly complex economies could operate? And operate in a context of rapidly decreasing through-puts? The only example to go on are the kinds presented in the neighboring thread on countries going through short term forced powerdowns of various sorts.

if you strip out the top 10% of income earners, those graphs will be more informative of real situation.

Or substitute 'median' disposable personal income for average.

Could be. I just used BEA total amounts, divided by population. So part of the rising average income is the inclusion of more women in the workforce. As more are unemployed now, that brings the amount down. Children and seniors are included in the population used in the denominator, so that affect things too. Back when families were very large, I expect the proportion of people in the paid workforce was quite a bit lower.

Thanks Gail for an excellent article. For a remarkably insightful look at what may well be the coming attractions in our near future I highly recommend this chapter from Garret Hardin's book "Living Within Limits" (warning pdf):


Titled "Growth: Real and Spurious" he makes an excellent case that money can breed forever through interest bearing debt (what he calls by the once common name "usury"), whereas material growth cannot, and therein we have a dilemma. One which will probably not have a happy ending:

The Necessity of Failure

Neither the Holy Land, nor any land less holy, has ever had the stability needed for the maturing of a usurious account over a period of two thousand years. Realistically, we admit that there is no reason to think that any of the world's present sovereignties will last two thousand years. Few will last even two hundred years. Going from the unreal world of theory to the real world of contingencies we see that the potentially ruinous consequences of usury are deflected by many sorts of failure.


Item: bank failures. When a bank goes belly-up, its depositors lose some or all of their principal and interest; stockholders suffer losses, too. The community's aggregate burden of interest is lightened at the expense of some of its members. "Bad luck!" the rest of us say - and go about our business. (At least that's the way it used to be, before the FDIC)

Item: market crashes. The paper value of stocks - the amount that may be demanded of somebody by the holders of stock certificates - falls dramatically in a stock market crash. The effect of this is to redistribute wea1th - paper wealth. It has been calculated that the Wall Street crash of 19 October 1987 caused a loss of $1 trillion.

Item: repudiation of debts. After 1492, the govemment of Spain, spoiled by unearned riches from the New World, settled into a mode of pursuing honor-through-war, moving ever closer to national bankruptcy. In the years 1557, 1575, 1596, 1607, 1627 and 1647 - every fifteen years on the average - the govemment repudiated its debts. Of course, it seldom did so candidly; instead it forced its creditors to exchange "old paper" for new, which was worth less and had built-in time delays on payments. "It couldn't happen here"? Don't be silly. Any govermnent that wages war for honor's sake is suspect. ("Honor" is all too apt to mean, "We don't know what the hell we expect from this war - or even how to recognize victory if it dropped in our laps - but we're committed." Denial reigns; truth suffers.)

Item: confiscatory taxes. After World War II, England, in desperate economic shape, taxed capital gains at more than 100 percent. Such taxes removed not only the year's gain but also part of the capital that made the gain possible. (This is known as "killing the goose that lays the golden egg." Prudent political counselors advise against it.)

Item: revolutions. Bonds of the old imperial govemment of Russia were considered fine, conservative investments worldwide - until the Communist Revolution of 1917. The new govemment repudiated the debts of the old, of course. The delinquent imperial bonds (which were beautifully engraved) continued to be bought and sold in the capitalist world, though at disastrously reduced prices, for another twenty years. (Faith is wonderful.)

Let's see, Bank Failure: check. Market Crashes: check. Hmmmm..., can repudiation of debts, confiscatory taxes, and revolutions be far behind? Are the current troubles in Greece a small preview of what is to come?

If Hardin is right then the answer is yes, and he closes the chapter with this excellent observation:

The change, when it comes, may well be sudden and painful, because it will demand an inversion of traditional values. A post-usurious society will insist that:

  1. usury is abnormal (and it may be called "wicked");
  2. inflation, bankruptcy, debt repudiation, and confiscatory taxes are the necessary corrective measures required for stability in a usurious society; and
  3. for reasons of fairness, the practice of usury must be strictly regulated by the community, and banned in many instances.

For six centuries "informed opinion" has regarded the unlimited paying of interest on money as normal and generally desirable. People have assumed without question that material wealth can grow exponentially forever. Now we must admit that only debt can grow exponentially forever: that an exponential curve that soars off toward infinity can apply to nothing in the real world; and that such unpleasant events as inflation and debt repudiation are necessary correctives in a social system based on usury. The intellectual revolution demanded is a formidable challenge - for our children if not for us.

Considering this was written over 15 years ago, I think we can now safely say that the challenge is indeed upon us.


Oh, Halleluiah, Jerry. THANKS!!

I've been trying to say it that clearly for the past half-dozen years, and had no idea Hardin had written it 15 years ago.

The long wave of energy growth that began half a millennium ago is what has underlain the growth of Western civilization, technology and capitalism. The pseudo-science of economics is scarcely 300 years old. Economists have only seen the upside of the wave and for the most part deny or fail to understand that energy is not just another fungible commodity. When economics stops ignoring both history and physics, it may finally mature into a true scientific discipline.

The prohibition of usury was more than just a "moral" question. It was a principle of survival for a steady-state, solar-based society.

Cap'n Daddy

We have confiscatory tax rates in effect here and now in som e situations.

Somebody I know bought a house in 1884 for thirty thousand, and had to sell it for seventy thousand last year.

Atfer paying the state and federal taxes due, and figuring the loss of purchasing power due to the deliberate and continued long term inflation of the dollar, he could not buy as much food, fuel , medical care, or just about anything else, excepting electronics goods, with his so called profits as he could have bought im 84 with his original thirty grand.
Rents in that general area are about triple what they were in 84.

so far as I can see, there is no way to describe deliberate inflation as anything other than a tax on the savings and assetts of the working class.This ap;;ies to the wealthier elements of society too , of course, but wealthier people tend to have more investments and be savvier about managing thier money, and therefore are not hit as hard.

Inflation is a tax of creditors and cash holders to the benefit of debtors.

If you foresee inflation then buy hard assets with debt, do not lend to others, and try to avoid holding a lot of cash.

I would really like to know whether Peak Oil will cause inflation or deflation.

FP, not sure about what Peak Oil will do for inflation, but I'll make an educated guess as to what all the gov't debt worldwide will do for it.


I got involved with peak oil by realizing that the assumptions made by actuaries (infinite compounding of interest) can't really be true. This is a link to a post before I become a staff member called Our World is FInite: Is this a Problem?. In it, I talk about expected problems with the monetary system and with insurance programs.

I wrote a somewhat similar article for Contingencies Magazine, about the same time, which is sent by the American Academy of Actuaries to all their members--life, casualty, and pension actuaries. (My background is casualty--medical malpractice more than anything else.)

Hey hey Gail,

There is a strong correlation between income and debt over the last 40 years. The ratio of total debt to GDP has increased exponentially since the 80 (exponential regression of debt to GDP R^2 = .96 ) and the inequality in the distribution of income has increased exponentially over the same time (exponential regression of the ratio of the income share of the top 10% R^2 = .92 )

The reason is fairly straight forward. Servicing debts transfers income from the people with the debts to the people with the money who made the loans. This increases the level of inequality. And as the level of inequality increases people need to take on more debt to maintain their standard of living.

For those who are interested Steve Keen does an excellent job of examining and modeling the economics on his blog and in his published academic work. He was one of a very small group of economists to predict the financial crisis.

Energy prices effect income in the same way servicing debts does. Higher energy prices consume more of a person's disposable income. That forces the individual to either cut back on spending or to maintain their spending by borrowing. After the American peak in the 70s we tried cut back on spending. It was neither fun nor popular and didn't last very long. Since the 80s we have solved our energy problems by borrowing. Borrowing money from the middle east and Russia to by oil from the middle east and Russia and borrowing money from China and Japan to buy energy intensive manufactured goods from China and Japan.

Needless to say, this situation could only hold for so long. It is interesting that the untenable financial arrangement is breaking down at the same time as the global peak in oil. It is tempting to say that peak oil caused the financial crisis, but the great depression happened at comparable levels of inequality, debt to GDP, asset bubbles, and financial delusion that we could all quit our jobs and get rich from investing. It is also tempting to say that the financial crisis would have happened anyway even if the peak was another 20 years out, but it is widely held in the PO crowd (I think correctly) that an unplanned energy descent will cause harsh contraction in the economy and our fractional reserve financial system cannot survive without constant growth. And we did hit a plateau/peak in oil production just before the financial engine seized up.

IMO the American peak in the 70s and our ultimate response in the 80s was a systemic driver, but not the only one, that pushed the US economy toward ponzi dynamics and the recent plateau and run up in energy prices was one of the last straws. Ponzi schemes can't go on forever, but they don't have to end at any specific time either. In that light Meadows is correct. We could build out more if we had more capital, and we could have more capital if we could just borrow for a little longer.

Is there an easy way out? No. The limiting factor is the systems we are using: ponzi finance, non renewable resources, population overshoot, and a general mindset from the age of exponential growth that no longer exists. If we want out of this mess we have to change and change is never easy.


Gail -

I am having a bit of a problem understanding how you support some of the connections you are trying to make.

In the very beginning of the article, you say something to the effect that for the period 1981 - 1987 the US was able to add all kinds of nuclear facilities, ramp up coal production, and improve auto mileage. You then go on to speculate that perhaps the only way we did all these things was to add more debt.

Well, correct me if I'm wrong, but it is my understanding that shortly after the Three-Mile Island episode in 1979 no new nuclear power plants were ordered in the US, and that something like 50 nuclear power plants then on the drawing boards were cancelled. While some that were already well underway were no doubt completed, I don't see the construction of nuclear power plants in that time frame to be of any significance relative to the rest of the economy.

Coal production increased, but that was probably the result of the ongoing trend away from oil for domestic power generation, no doubt as a result of the oil embargoes of 1973 and 1979. Again, it's not obvious to me that this was such a debt-dependent activity, as opposed to a logical financial decision.

The US automotive industry improved fuel mileage not out of any altruistic sense, but as a matter of survival. The US auto industry, dinosaurs that they were (and arguably sill are), didn't learn much from the 1973 oil embargo and continued to build poor-quality, gas-guzzling monstrosities well into the late Seventies. As a result, they really got hammered by the Japanese imports. They finally got the message and gradually started to change with each succeeding model year. Again, I have a hard time seeing this as a huge debt-driven activity.

Then you go on to the 1987 - 1999 period and, to me, somewhat confusingly try to tie the dot.com boom to oil and debt. I'm not sure I get what you're driving at with this one. How the business of producing software and internet companies has much, if anything, to do with energy production is beyond me. This was just a matter of speculative excess.

Regarding the period 2006 - 2010 - High oil prices did indeed act as a drag on the US economy. But as far as flat or declining US disposable income, several negative trends had already been in the works for some time, and these had little if anything to do with peak oil: a weakening position of labor relative to management, off-shoring of manufacturing, and the importation of HB-1 foreign technical employees. If one looks at how much more the average family had to pay for gasoline during that period, it should be apparent that, while certainly a negative factor, it was hardly large enough to create serious financial stress for most. A shift of some fraction of disposable income to essential expenditure, i.e, fuel.

Now, as far as going local, that's certainly a worthwhile objective. But then again, one must ask: how local is your idea of 'local'? During Mao's Great Leap Forward, he instituted this hare-brained directive that all villages should be self-sufficient and produce their own steel. Even a freshman metallurgical student could have told him that this was an idiotic idea, but obviously it was not conducive to one's health to even think anything contrary to Great Leader, much less to vocalize such. So, predictably, it was a fiasco, and thousands of villages across China had an abundance of very heavy doorstops made of an absolutely worthless mixture of pig iron and slag.

One must realize that even in ancient times there was a vigorous trade (much of which was over long distances) in what one might nowadays call 'vital materials'. Back then, this heavily involved metal ores. Rome had a far-flung supply network. And all this was done about 2,000 years before a drop of refined oil was produced. So, while I wouldn't expect an Amish farmer type of person to be able to build a solar PV array or a 3 MW wind turbine, my point is that he doesn't HAVE to. If a society has any semblance of a domestic steel and medium-heavy manufacturing industry, then there is no reason why things like wind turbines cannot be built in a severely oil-constrained world. While PV is a bit more high-tech, what relatively small amounts of rare earth elements are involved could easily be traded with other countries, even if we have to use clipper ships to do so.

I don't view this as a binary either-or type of trade-off. I firmly believe that there is a logical hierarchy of oil uses, and one use close to the top of the list in importance is the transport of vital materials from places other than the US.

In closing, I think you might be stretching things a bit when you attempt to conflate the US debt/financial crisis with oil production and price increases. They are connected, but I suspect not as tightly as you seem to believe. Without doubt, the US is in deep doo-doo, but having high oil prices is not at the top of the list as far as causality is concerned.

Couldn't agree more, Joule

In 1970 total US credit market debt as a percentage of GDP was about 175%. By 2009 it had ballooned to 350% And this only takes into account on-balance sheet liabilities.

Somewhere along the way the home became the golden goose that promised two SUV’s in every driveway rather than a mere shelter for family life.

This transition didn’t happen by accident! The tax system was changed in favor of the wealthy, leaving the US as the most stratified advanced society in the world. Trillion dollar wars were fought without taxing ourselves to pay for them. Imported oil became the lifeblood of our society. Real wages stagnated as high paying jobs were exported in the name of globalization and corporate efficiency. In order to keep the middle class consuming the goods necessary for corporate profits, another source of funds apart from wage income had to be created.

The "solution" chosen by the "Masters of the Universe" was to pump up the debt cycle through cheap loans for everybody. Since the home was the largest asset for most Americans, it became the focus of escalating debt that eventually resulted in the Great Recession of 2008-201???? These loans were bundled into securities more closely resembling casino chips and peddled all over the world to hedge funds and entire countries looking for a fast profit or the illusion of security. The total liabilities implied by these casino chips approaches the annual GDP of the world!

Debt cannot be expanded exponentially any more successfully than population or extraction of finite resources. Peak liquid fuel energy is the defining parameter of our future economy, but the collapse of the global trading system that happened in 2008 cannot be adequately understood in terms of an oil shock or impending resource constraints.

In case you read down this far, I have a complete analysis of the Ontario wind speed data set you posted on TOD several days ago.


Let's get a discussion going on this topic on a DrumBeat or somewhere. The analysis is too cool and it can give us a lot of insight as to what is going on.

WHT: That's an excellent blog site on a topic which I find very interesting. I'd be interested in some discussion directly if you wanted to email me at lengould (AT) sympatico.ca. Thanks. I think starting a Drumbeat on the topic is an excellent idea, but I'll need to do a lot of studying first before I can contribute much that's useful.

OK. I's suggest the discussion should start with how the wind data was collected.

The housing bubble started in the era of cheap oil. But it was a bubble, and would have popped sooner or later even if cheap oil had continued.

There would have been the same financial impact even if oil were not an issue. I think peak oil coinciding in time with the financial mess is just a coincidence. I see no reason to suspect a causal relationship one way or the other.

Debt based financing is not necessary for growth. I don't know if it effects the rate of growth. It probably affects how growth happens but I suspect there is not much difference in rate of growth with or without debt based financing.

Physical dollar bills don't disappear. Not spending/investing them involves opportunity cost. Deflation can only happen if there is technological progress ( more/better goods ), or virtual money is disappearing. Once the virtual money is gone, deflation must stop. Virtual money would be all gone at the point where no banks are lending at all. At that point they are out of the picture unless they start lending again.

So what do people with dollars do when deflation is an impossibility. If they be excess dollars, then they try to earn a return on them by investing. Any positive return is better than zero return - even a low positive return like the return for investing in alternative energy. If you get more energy than you put in then your return is positive. You do it unless there is something more positive you can do with your money.

With electricity you can make anything. You can split H20 and CO2 and put them back together to make hydrocarbons and oxygen if you want, even though there are better ways to make hydrocarbons.

If you can get more energy than you put in to construct and maintain a facility ( say solar ), then you can use that excess to build more of the same thing, creating more excess exponentially. The rate of growth is lower than building more oil wells to pump oil out of the ground faster when oil is plentiful, but at some point the rate of growth provided by renewable energy positive endeavors are the best thing going.

Capital and financing is all BS. The only way the financial system can deprive capital from replacements for fossil fuels is by creating bubbles that appear to be better investment for a time. When enough other stuff fails low yielding sure things will look more attractive. Alternative energy may be currently among the investments crowded out by government securities. These things may need to fail before alternative energy 'sure things' become attractive enough to garner much capital.

As you said (or implied) in your intro paragraph, cheap oil helps inflate bubbles.

It doesn't necessarily have to be more expensive oil that pops them, but to concede the first point and then claim that more expensive oil never helps to pop them seems a rather odd and contorted stand to take (compared to this, some of the more twisted yoga positions would seem downright cozy!)

"With electricity, you can do anything"

Well, so far, no one has figured out how, for example, to fly a large commercial jet airplane with only electricity, or to put a rocket into space, or to annihilate an entire city in one blinding flash...

Your point about self sustaining renewables is a good one. It was done briefly with solar, as I understand, but maybe this is the time to really get it going. Why don't you start a company that does just that?

Well, so far, no one has figured out how, for example, to fly a large commercial jet airplane with only electricity, or to put a rocket into space, or to annihilate an entire city in one blinding flash...

Oxygen and hydrogen are used as rocket fuel, and can be generated by electrolysis. Nuclear weapons are irrelevant. That just leaves commercial jet fuel as a relevant example, which can be replaced by renewable liquid fuels.

Clearly there are some things where a stack of batteries will not directly replace fossil fuels, but actually not many. The few that aren't can use renewable liquids, which may add a small cost premium, but won't kill the industry.

Clearly there are some things where a stack of batteries will not directly replace fossil fuels, but actually not many. The few that aren't can use renewable liquids, which may add a small cost premium, but won't kill the industry

As for things that must run on liquid fuel - i.e. aircraft, lets look at the numbers. In 2008 the US airline industry used 55billion gallons of jet A-1 (source)
The most optimistic bio-oil production, that can be grown throughout the US, is for castor oil, at 1413L/ha, or 150gal/ac (source) , so to get your 55bn gallons you need 367 million acres. The US currently has about 440 million acres of total cropland (USDA), so we would need to turn 83% of it over to biofuel production, just for the airline industry.

So this is not a case of just paying a price premium, it;'s a case of it can;t be done, unless the industry shrinks dramatically, and I would say by an order of magnitude, so you only need 36m ac, or less than 10% of the cropland, to support it. A 90% contraction would probably be deemed to have "killed" the airline industry.

Now, I happen to think that would be a good thing, but we can;t say that it can be run, at anything like current size, on biofuel, because, quite simply, it can't.

I deliberately didn't say biofuels, but renewable liquids. There are other ways to get liquid fuels other than agriculture.

However, I haven't run any numbers, so I will concede that the aviation industry is likely doomed.

Well, OK, but what renewable liquids do you have in mind that are not biofuels?

The airline industry will shrink without oil, and that's OK, in fact, the sooner the better. Will be interesting to see if airships make a comeback - have seen some proposed for air freight, presumably because people still think of the Hindenburg. But passenger airships, at 150 km/h, point to point, would be competitive with passenger rail, and a better view.

Agreed on hydrogen-lifted airships. I've also done the numbers on liquid hydrogen-fueled jet aircraft and the numbers work fine. The reduced mass-per-MJ in the fuel easily compensates for the increased mass of cryogenically insulated fuel tanks. The turbine engines should need minimal modification for controlling hydrogen embrittlement in the hot-gas sections. The biggest difficulty is that the fuel tanks will want to be cylindrical and larger volume. Most reasonable for immediate purposes is to place them in the cargo hold, which reduces cargo capacity volume but not weight. Also likely need to put some added reinforcement into the wing spars to account for the fuel tankage moving from the wings into the fuselage. Longer-term, blended wing-body craft can regain more efficiency than lost with hydrogen fuel by re-distributing fuel tankage back out over the wingspan.

I know many of you didn't want to hear that, but reality is reality.

1) Cheap oil doesn't pop bubbles, but I don't think it actively helps inflate them. There could be a bubble pre-oil (and there were - think tulips ). Bubbles are the market acting irrationally. There was an internet bubble funded by investor captial which popped without much fanfare, and an equally sized housing bubble funded by fractional reserve banking that caused all hell to break loose when it popped because of the linking/concentration of risk inherent in that funding method. Cheap oil didn't pop those bubbles. Expensive oil MIGHT have popped the housing bubble, but being a bubble it was bound to pop SOMEHOW.

2) In the post I stated how to run airplanes 'on electricity'. You use the electricity to make hydrogen, and then put that hydrogen onto carbon to make hydrocarbons. Then you fuel the airplanes, not directly with electricity, but by putting hydrocarbons made with hydrogen made with electricity into their fuel tanks. Existing planes can run the fuel because with electricity it is possible to make kerosene fuel identical to what they run now. Hydrocarbons have a lot of good points as energy storage mechanisms. Why fix something that ain't broke?

3) Why don't I start a company to do just that? The time is not ripe. Maybe someday. Suppose I could guarantee a return of half what US government debt earns. Who would give me money when they could buy a T bill? Endeavors that earn less than government debt pays don't get done. When/if owning debt is seen as riskier than owning a piece of a sure thing, then MAYBE, although even then the presiding government will likely be forced to tax money makers to fund it's debt. Even without debt, all economic activity carries the risks associated with owning government debt plus it's own inherent risks. Unless owning shares can provide a better return than government debt can, it's always preferrable to own government debt.

Maybe renewable energy will be seen as a national security and/or infrastructure issue, and construction ( or subsidies for construction ) of such might replace roads and some military spending in a future budget. MAybe it will be immune to being taxed to death since doing so would be seen as akin to eating seed grain. I dunno.

Tulips are just a tiny bit different in their required energy inputs that exurban mcmansions. Yes, bubbles of specific kinds can happen on a comparatively small scale without fossil fuels.

But the expansion of entire major sectors of the economy and of the economy as a whole is, I would humbly suggests, a somewhat different matter.

Do the maths on that energy inputs for creating hydrocarbons by first creating elemental hydrogen and carbon, then putting them together. Your talking about some pretty fantastic energy and resource inputs just so you can go up in the air--something not really necessary to do to have a well fed, healthy and well educated...society. Why spend so much energy and resources on such a discretionary luxury?

Oh yeah, converting energy from one form to another involves losses for sure, but just because something becomes relatively more expensive doesn't mean it will completely go away. Scrooge McDuck will always be able to fly around the world.

Why spend so much on luxury? A big mac in the US costs more than a days' wages for what, something like half the world's population? Land and laws aside it's possible to buy a few acres of woods in North Overshoe, far from any roads for like $100/acre ( or squat ) and buy in beans and grain in big sacks which you lug there on your back, maybe growing some potatoes and veggies to can, and living in a tarpaper shack, burning fallen deadwood in a tin can stove to cook and keep warm. Basically living like a bum.

That's how the $2/day folks live round the world. How many big macs have you eaten? I don't fault the Scrooge McDuck's of the world or the Paris Hilton's of the world. I'd be exactly like them if I could. I shamelessly do the moral equivalent every single day.

The inefficiency is environmentally friendly. Think about the environmental impact of burning a barrel of oil uselessly or usefully. Which is worse?

I am IN the environment dealing with it, not in charge of managing it. A galactic department of fish and game would open a human hunting season on earth, maybe even offer a bounty. I am Yogi Bear, not the Ranger.

Well, there's no use arguing with the likes of Yogi Bear!! I am wildly outclassed.

You raise the chicken and egg question, does cheap energy cause an active economy, or does an active economy drive resource usage?

Certainly the availability of cheap resources, including energy, *enables* economic activity, but in itself does not cause economic activity. An equally valid interpretation of the available data is that resource usage is actually driven by economic activity, and economic activity is loosely related to availability of cheap resources.

There is no real reason why Americans need to drive gas guzzlers. They could easily perform the same functions with a lot less gas. The reason they use so much gas is simple: because they can. The same applies in many other areas. Do we really need powered clothes driers? Of course not, we just use them because we can. A huge amount of actual consumption falls into this soft demand category. It is demand created by a wealthy society, sucking up resources, and not demand that is essential to creating a wealthy society.

The idea that cheap oil -> wealth is attractively simple, but wrong.

Bob, I will agree that cheap energy *enables* wealth, meaning that it alone is not sufficient. We can view it as part of the "land" component of the four factors of production (land, labour, capital and enterprise). You can have production without it, of course, but, with all the other factors being the same, you can get a hell of a lot more production with it, as the world economy of the 20th century has shown.

In fact, when the coal powered steam engine arrived, we were probably at the limit of then productive capacity, and the steam engine "enabled" the industrial revolution. Given that it greatly enlarged the energy input into production, I think it's fair to say that it "caused" said revolution.

I think that economic activity is closely, not loosely, tied to cheap resources. Just look at what happens when the resources (e.g. oil) are expensive or unavailable. When the vandals took over Tunisia in the 3rd century and cutoff Rome's supply of cheap grain, there were devastating economic consequences for Rome.

Or South Africa under the Apartheid oil embargo.

Now, you are correct in saying that a lot of American energy consumption is "soft", or discretionary, but many other countries, particularly European ones have minimised, though not eliminated, discretionary consumption.

But overall, for western countries, cheap energy, and oil in particular, has lead to increased wealth. It hasn't in places like Saudi Arabia, but that is because of corrupt/autocratic governments abusing oil wealth, instead of putting it to good use. European countries put high taxes on energy, so for the consumer it is not cheap, but for the country, it is, and the tax revenue displaces other sources (e.g. income tax).

In fact, when the coal powered steam engine arrived, we were probably at the limit of then productive capacity, and the steam engine "enabled" the industrial revolution. Given that it greatly enlarged the energy input into production, I think it's fair to say that it "caused" said revolution.

Since the steam machine is often quoted as an example in the context of a FF driven economy, I have studied the roots of the industrial revolution, and it is much more complicated than people think.

The industrial revolution owes its creation as much to social and commercial changes, as it does to coal and the steam engine. In fact the revolution started because successful merchants accumulated sufficient capital to invest in more efficient production techniques, which at the time was done in a literal cottage industry with piece workers. Another necessary step was the enclosure acts, which forced workers out of small holders and made them available to work in factories as daily waged workers. The medieval guild system granted a monopoly to textile working based on wool etc, and prevented the new factories entering this area. Therefore another prerequisite was the arrival of new fibres such as cotton from the USA, which had no barriers for the new industry.

The first textile mills were located near water; both because of canals for transport and because they used water mills for power. The sites for water power were rapidly used up, and further progress of the industry hampered, however the revolution was already under way.

At this point necessity became the mother of invention. Coal was too expensive to transport long distances. Condensing steam engines in use for pumping water enabled deep pits, but the engines were inefficient. This didn't matter so much for colliers, but prevented wider use.

Only at this point, did Watt's more efficient steam engine enter the picture. The engines were very expensive, and required novel financing. They were often leased to mill owners. Financing came from owners of iron foundries, since the majority of the cost was in the iron. Transport of coal required a more extensive network of canals; these were also expensive to build.

This is a very potted history, as developments over the whole period would require a book. There were many new developments over the period, political, social, industrial as well as technical (I left out mention of the Jacquard loom, another key piece!). To say that coal or Watt's steam engine were the "cause" of the industrial revolution is far too simplistic and basically inaccurate. It is more the case that a revolution under way created a requirement for new technology. It is fair to say that in the form it took, the scale and pace of the revolution depended on coal.

If coal had not been available, it is quite possible that the capital and technical ingenuity available at the time would have found other energy source, or the revolution may have been put on hold until electricity was discovered.

There is a parallel with today. We have an industrial society with capital and technical ingenuity, which in order to continue growth must find new energy sources. The lesson of the industrial revolution is not that it was a pure accident based on an energy windfall, but that social and economic demands create an environment where new sources of energy are adopted.

Bob, I'll defer to you here. yes, industrialisation had started before Watt's day (as had the steam engine, of course), but I'd say it was the single largest factor.

As for today, the urge to adopt new energy sources, couldn;t agree more, though no one can agree on what those sources are!
I do still wonder if something will come out of left field and supplant everything, like oil did, but, barring some breakthrough in soalr energy, I just can;t see what that would be.

Agreed, and it will be solar, in some form or other. Short-term eg. first cycle, solar-thermal-electrical + concentrating PV, longer-term direct solar conversion likely with Optical Rectenna.

Who is honest enough to see "supply side economics" for what it is?

'Any' take these posts very seriously, or is it mind exercise for numbers crunchers and advocates of the Price System mostly?
I wonder that when I come here.
Unless we turn to a biophysical economics approach based on a science social design we are all doomed... yes.
That's obvious.
Kind of amazing thing is that on this site there is not a general recognition of this.
The Price System can not function in the future because of resource destruction for 'money' Analysis: I am the Price System
Purchasing power also is now lost due to kilowatt hours replacing man-hours. Simple enough Knol Analysis and links
Further reference... The Technocracy Study Course. Main author: M. King Hubbert.

This means that one can exchange one's debt including their share of federal and state debt for a ten percent drop in personal
income--that is we trade lifetime shares of one's income for the debt, it would be a reasonable investment. if the United States
traded shares of all debt, it is quite sustainable at current interest rates--adn share income instead of debt means that one does not
have the risk of a financial crisis when debt becomes due ( http://uthreee.blogspot.com/2010/03/debt-and-deficit-thoughtful-thursday... ), and
of course, should the American economy due particularly well, the investor would do better, sharing the American
good fortune.

I do not see why we have to experience a total collapse due to Peak Oil. An economic downturn similar to the Great Depression seems likely to me. But total collapse down to the level of hundreds of years ago? Does not seem inevitable. Some points:

1) The United States industrialized in the 19th century with oil contributing a far smaller percentage of total energy than it contributes today.

2) The United States industrialized with a far lower per capita energy consumption than we have today.

3) We have more non-fossil fuels ways to generate energy today than we did 100 years ago.

4) We have an improving list of ways to harness energy in the form of electricity. For example, while coal powered railroads 100 years ago and in the US oil powers them today in other countries rail runs on electricity. Rail could run on electricity in the US as well.

5) We can move ship cargo by sail power, albeit with a substantial time cost (and therefore more ships since each ship moves less stuff). Freight costs go up. But does freight drop even by more than half?

6) Jeff Rubin argues the lower value freight (e.g. cheap furniture) stops getting shipped big distances. But Peak Oil should not stop the shipment of semiconductors and other high value (in money per unit weight) goods.

7) So companies and banks go bankrupt. If we have a speedy bankruptcy court system then the ownership of assets shifts into the hands of creditors. Enormous debt burdens can be reduced by bankruptcy.

8) Countries have gone thru far greater trials with far less energy without collapsing. Look at the WWII combatants for example.

9) Bankruptcy does not destroy physical assets. Overleveraged companies will come out of bankruptcy with physical assets minus financial burdens of debt payment.

You have neglected to mention the United States industrialized with far fewer people. The economy at that time had a large agriculture and manufacturing base as well.

Solid. I like how you base many of your arguments on precedent. It's hard to argue with that.
And 6 makes lots of sense. Lots. Nice.