I am Perplexed: Comments on the World Financial Situation and Peak Oil
Posted by Gail the Actuary on June 9, 2010 - 10:15am
This is a guest post by Bob Lloyd. Bob is an associate professor of energy studies at Otago University in New Zealand.
I am perplexed; I really cannot understand how the world’s economists and commentators on the present precarious global financial situation have not come to the conclusion that must be obvious to all persons who have followed peak oil. Money is not a disembodied quantity; it is related to the real world by means of what people can exchange it for. In particular the relation between energy and money must be very tight to the extent that money pretty well must be a token for energy and therefore for oil.
Except possibly for bare land, all items of trade, food, minerals, motor cars and other consumer goods rely on energy for their manufacture, and crude oil forms the largest share of the world’s energy mix, followed by coal and gas. Thus, if we plot world energy supply against world GDP, we should get a close relationship. Oil is currently around 35% of world energy supply. Figure 1 below gives a plot of world GDP against world oil supply. The GDP figures come from economist Angus Maddison, but other sources would give similar results.
The oil data comes from BP statistics (from 1967) and Realty earlier. The plots are the natural logarithm of each against time, starting around 1950 to the present. With these plots the slopes of the lines give the percentage increase per annum and these increases are shown on the plots.
There are four regions of interest on the figure, the first region is from 1950 to 1974 and the data for this time shows that the increase in world oil supply was around 7.3% p.a. compared to the increase in world GDP of around 4.6% p.a.. Or in other words, a 1% p.a. increase in oil supply produced a 0.63% p.a. increase in world GDP.
The second region of interest is the period of the 1970s oil crisis when turmoil in the Middle East hiked prices and restricted supply. During this time the world changed the relation between oil and GDP dramatically. Energy efficiency was improved and energy intensity, that is the ratio of energy use to GDP, decreased, such that in the third period, from the mid 1980s until recently, the increase in world GDP to increase in world energy supply reversed and during this time a 1.6% p.a. increase in oil supply was able to produce a 3.2% p.a. increase in GDP. That is the world GDP increased at double the oil supply increase. Now a change in the increase by a factor of two means that if we plot oil use against the square root of the world GDP the slopes should be the same on average. This plot is shown in figure 2.
As can be seen, the relationship is very close except after 2005, the fourth region of interest. How can that be? World GDP still increases at 3.2% per annum until 2008, but oil production is pretty much flat. At first sight it looks as if world oil use has been decoupled from the world economy? But, what about world debt? Figure 3 shows two sets of data, one from the CIA World Fact Book (total external debt)and the other from the Economist (Magazine) Intelligence Unit (public debt), see: http://buttonwood.economist.com/content/gdc over the past decade.
Finding any data sets back in time for total external debt has proven difficult, any help would be appreciated. The CIA Fact Book data is pretty erratic in terms of what country data are available before 2005 with only a few countries in a complete set from 2003 to 2009. The data from these countries do, however, suggest debt levels accelerating after 2005: see figure 4. The data set from the Economist, for public debt only, is shown in figure 5.
Data from the International Monetary Fund gives reasonably good data for developing country debt but the data for the wealthy countries does not appear in their databases. Presumably because the wealthy countries were thought to be too big to fail! Of course some countries may have reason to hide their real position as it would be likely to affect their credit ratings and hence their economy (e.g. Greece). But with world GDP hovering around the 60 trillion level as of 2009, it is clear that world external debt is now close to world GDP and that debt will make it difficult to cope with a falling oil supply. Economists of the Keynesian variety, who are still advocating even more debt to stimulate growth, may be in for trouble. In Keynes’s time when there was an increasing supply of oil at 7.34% p.a. this could have worked, but not at the present.
The debt information is pretty suggestive of what is going on, and that is, the reason the world has been able to keep increasing GDP since 2005 is because it has been borrowing from the future to fund the addiction to economic growth. But this situation cannot continue without serious problems in terms of repayment. And we have imminent peak oil, with the consensus dawning that soon after 2011 oil supply is highly likely to start declining with decline rates anywhere between 2% and 8% per annum.
The 64 trillion dollar question is what will happen to world GDP? Robert Hirsh in his 2008 Energy Policy paper has suggested that GDP will decline at around the same rate as oil supply, so if oil supply declines at 4% per annum then world GDP will also decline at 4% per annum. If the current ratio is anything to go on, then 4% decline in oil may produce an 8% decline in GDP, but the situation is not likely to be symmetric or for that matter linear. With a large debt hanging around it is also likely that the world monetary system is at risk of imploding (see Gail Tverberg’s recent posts on debt repayments in a situation of decreasing wealth. http://www.theoildrum.com/node/6439).
With peak oil and large world debt coinciding it thus seems as if we are staring down the barrel of a highly non linear event and if you factor in climate change it may be a double barreled, highly non linear, pair of events.
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Thanks Bob, for a very interesting post.
Clearly the recent period is an aberration. I expect if we had a good way of measuring all debt (not just government debt, or external government debt--and even those are tricky to find), we would see a big ramping up of debt in recent periods.
Suppose a homeowner can use his home as source of extra funds, by continually pulling more equity out. The homeowner can then spend those funds, and the businesses receiving those payments can spend them again. So one would expect a favorable impact on GDP.
Deleveraging would seem to have the opposite effect, pulling down GDP. That is a big reason governments have recently ramping up debt, to offset a decline in private sector borrowing, in my opinion.
An interesting point, indeed. Which begs a larger question -- the guys who run the "economy" are all smart, at least as smart as I am, and I understand this, so what are we missing?
I believe we are missing the obvious -- the "economy" is and always has been a giant con game. A casino, in which the house always wins, but always lets the rubes take home a little, and sometimes a lot, so they keep coming back.
There is just no way that CDO's and all the rest of the past and present "high finance" schemes could have worked if CPA's were really bookkeepers and not creative thinkers, and bankers just took in deposits and made loans.
I finally tumbled to this when I read a biography of Charles Ponzi, and I saw the extreme degree to which he was encouraged and protected by the "establishment" -- until he finally went a step too far, and then he was shown no mercy.
It is impossible to predict the future, except to predict that even during the collapse, people will be wagering the little they have in hopes of winning a little more from people who are even unluckier than they.
NeverLNG wrote:
I believe we are missing the obvious -- the "economy" is and always has been a giant con game.
Why would you believe such a thing? Yes, we have had occassional frauds like Enron and Madoff -- but the entire "economy" is a con?
The global economy -- run largely on oil -- is what feeds, clothes and houses some 6+ billion people every day. That is not a con game.
Over one billion living with chronic hunger. Over two billion living with unsafe drinking water.
Your wonderful economy is certainly doing, to quote former President G.W.Bush, "A heck of a job."
And that is just what is happening now. We have been rapidly drawing down the wealth of our progeny for short term gains that mostly go to the very few. Our own children, not to speak of great, great...grandchildren, will not have the enormous wealth of light sweet crude, since we have now squandered at least half of what will ever be extracted of this precious stuff.
On the other end of the tail pipe, we have also, of course, altered the chemical composition of the atmosphere beyond anything since humans evolved. The runaway global warming that we have likely already set off from this profligacy is going to deprive all our offspring, not to mention the offspring of other complex life forms, of a livable planet.
What don't you understand about this?
Are you another economist that has never attained any knowledge of the real world beyond the autistic constraints of that enormously damaging world view? Even in terms of this narrow economic view--why do you think nearly all banks stopped borrowing from each other. They all think that each other are crooks. But you think everything is just hunky dory outside of a few bad apples? We are burdened with a system that assumes endless growth is not only possible but necessary and virtuous. The same system reduces human's to endlessly desiring, endlessly selfish self-maximizers, also known as "homo economicus." These bases of macro- and micro-economics are not based on anything but fantasy, but they are the basis of all economic activity, which is admittedly doing a very good job at one thing--drawing down very rapidly and permanently the majority of the irreplacable (on any human time scale) resources and living systems, piratically stealing these from all future generations and all other life forms for our very short term and dubious "gain."
End of rant.
Nice rant. Got any ideas?
How about this: send a bill to the <2% who own 95% for 95% of the cost of cleaning up the mess!
Craig
I do.
Here www.squareandc.net
and here..
aadivaahan.wordpress.com
Come on by.
A billion is a large number. But percentages are more useful ways to measure phenomena such as hunger.
Also, it is important to note where people are hungry. Hunger's declining in China. By contrast, population is exploding, economies are stagnating, and hunger is a problem. This has little to do with the economies of Western countries where most of the posters here live and work.
Con may be a strong word. But, unbelievably, irresponsibly, unsustainably structured and down right viscous to most, would be more accurate. When it stops growing, it collapses -- like anything with a ponzi-dynamic built into it's design.
Now we start the cannibalistic phase of capitalism, as the rich eat the poor to satisfy their perverse addiction to growth, until it's death.
I wonder what's next?
Con is actually the exactly right term, since it comes from "confidence." The whole system depends on the confidence of those being conned that the system is eventually going to work for them. As that confidence evaporates, so does the whole system it was based on.
Cannibalism is already happening--people breaking into homes to strip them of copper and other materials, mostly unoccupied homes right now, but that will change with the next down turn, the one we are just beginning to see the beginnings of.
How is people "mining" abandoned houses for material resources equivalent to cannibalism? Are you suggesting that the next downurn will provoke the breaking into occupied homes to scoff down a few tasty neighbours?
LOL. Over at PO forums, for a while every thread eventually devolved into discussions of cannibalism.
I was speaking metaphorically, of course. To the extent that the abandoned houses were going to be abandoned for ever, these activities would be more like recycling, though illegal recycling.
But when people, as they have, start stealing lengths of in-use railroad track and telephone cable..., I think we can start talking about a society that is eating away at its own connective tissue.
there are regular reports in the UK of thieves frying themselves, or blowing themselves up as they steal copper from electricity substations or saw through natural gas pipes.
Locally, a pair of copper thieves tried to escape the police in their pickup truck. They ran into a tree and all the copper from the back didn't stop and went right through the cab.
Beware the power of inertia.
No one said that the 'entire' economy was a con. In fact, the word was enbraced by quotation marks, indicating that only some of the economy was a con, and that part was not real.
I could say much more, by have limited time today, Michael. Two more words, though, say it all: The Fed.
Craig
MichaelWSmith - You appear to have a very peculiar & narrow world view taken from a very high and exclusive office window. have noticed your comments in other threads, as being consistantly short-sighted. You rather look like a shill (as others have also mentioned).
I think it is a matter of symantics - the con game is the short-sightedness of all concerned - the public, the government, business & industry, and yes, people like me who understand that they should be doing much more in their own personal lifestyle.
prariecomm
Re: "look like a shill"
Cut the ad hom and civilly address the substance please.
I have only one question:
WHO OWES WHAT TO WHOM?
(When it's all toted up, who ends up with most of the money? I bet the answer is very hard to find... perhaps our economics friends, perhaps Jerome, could post on this.)
That question is separate and distinct from that of who ends up holding most of the "money".
"Money" creates a disconnect between the Promissor, the Promissee and the 3rd Party who makes good on the promise.
That probably sounds like a lot of mumbo jumbo legalese.
So let's de-abstract it by giving a concrete example:
BOSS (a.k.a. the "promissor"): That was a heck of a good job you did for me this week and I would like to compensate you for your good work by giving you this stuff called "money". I will give you 100 units of this money stuff.
WORKER (a.k.a. the "promissee"): Gee thanks BOSS. But what do I do with this "money" stuff? How does it become compensation for all the hard work I did for you this week?
BOSS: The beauty of this money stuff is that it is "legal tender". You just take it to any provider of any good or service and I PROMISE YOU (because I'm the Promissor) that "they" (the unknown 3rd Party) will provide you with fair value for these 100 units of money stuff.
WORKER: OKee Dokee BOSS, Gee thanks.
Later that day:
WORKER: Hello Mr. Fast Food vendor (a.k.a. 3rdParty), I wish to exchange some of this money stuff for a healthy and well cooked hamburger meal, make that with super-sized cheese and a large carbonated beverage. This is all just Greaaatttt!
It actually is great, the promissor can give the promissee what the promissee wants withouth having it available, understanding it or even knowing what it is. Money is a wonderful invention that combines practicality with freedom and integrity!
The people (and institutions) who are willing and able to borrow are the ones that owe.
Debt is taken on by intentional choice.
Hi, I just thought that with all this talk about debt and the worlds financial situation some of you might find the following video of interest, it is 3 mins and quite funny but also very accurate.
http://www.youtube.com/v/LyePCRkq620
Regards
Very good information and data. Kudos and thanks.
Thanks, Excellent!
Most economists don't think in scientific terms about resources and other physical issues, they take economic activity as if a self-sufficient causative agent. Their laws of supply and demand and prices don't tell us what the supply will be in the future or why. And demand can increase supply but not 1:1 (or there'd be no price increases or crunches in the future!). So increased demand for oil will cause increased supply but not enough to match. The supply will also be harder and more dangerous to extract. This could not be understood by quack economists like Julian Simon and most of the Right.
We lost the chance to nip peak oil in the bud in the 70s when reactionary forces blocked strong population control. With proper leadership and resources not wasted on misadventures like Iraq, by now we could have a smaller population enjoying a sustainable lifestyle. The road taken over the past few decades made our choices and prospects incredibly difficult. That's a fact, not ideological spin or partisan favoritism.
I agree with your last two sentences there but I'm a bit nervous about your connection between "resources wasted in Iraq" and "strong population control". Other than the vigorous methods implied by that connention the only ways to reduce population are to attack fertility and/or allow increased mortality. I think everyone can agree that just allowing more people to die (through for instance denial of medical services) is a bad way to attack population since all the knock-on effects will be very negative (more single parent families, more orphans, fewer experienced workers).
Reduced fertility has been tried in Asia (by China through state controls and by Japan through everyone working too much to have sex) and has resulted in serious social problems for both countries. I guess my question to you is; going back to the seventies and assuming the "reactionary forces" were contained how do your "proper leaders" impliment sufficient limits on fertility to reduce the population that doesn't end up with the above mentioned "vigorous methods" needing to be employed?
-Pinkoir
Fertility control "worked" in white, western, industrialized cultures. Worked so well that the social welfare schemes they came up with were under-funded and under-manned, and labor had to be imported from less "modern" places. The result, of course, is a declining white population and anguished screams about "controlling immigration".
There is a good movie about this "successful" demographic change Zardos. I just don't think people are smart enough to figure this out.
Not to worry, once hormonal contraceptives become unavailable we won't have to worry about that.
On the other hand, fertility rates are going down around the world, probably largely because of the wide array of pollutants that our wonderful industrial society has unleashed on the world.
Contraceptives are generally not very expensive to produce. And "natural" methods are also widely known and available.
There wasn't any fertility control in the White Western countries, there was just sufficient wealth and security to lead people to naturally have less children to maximize their own benefit. Since the upcoming end of that wealth is exactly the subject we are discussing here I don't think we can consider that an effective means of population control.
The only good thing about Zardoz was Sean Connery's wicked outfit.
-Pinkoir
In the past, there was not really any population control, per se. It was just that people died very young, and even if a couple had 18 kids, only 2 or 3 lived to maturity and had children of their own. And, they died in their 40s. That is one very good reason that the human population of planet Earth was self limited to 700 to 800 Milliion until the Industrial Revolution, powered by fossil fuels, ramped up the good times for all. People kept having many babies; they all lived longer b/c they were better fed, courtesy of the IR. Later, medical advances added to that, and even with 3 or 4 kids, growth continued. Right now we are doubling in what, 30 years? Even the US is growing, though not at that rate, and much of it due to immigration.
This, again, is part of the looming problem with peak oil, peak gas, and peak coal (all within 150 years or less); with no fossil fuels to power the machinery, farming becomes less efficient; transportation of many foods becomes impossible (it spoils too fast); people become malnourished, and susceptible to disease. Most pharmaceuticals depend on oil... those diseases run rampant. Death at 45 becomes the norm, and babies die as infants. Young people again fall to childhood diseases.
Now that, my friend, is an effective means of population control!
Craig
"In the past, there was not really any population control"
As with most broad statements, much depends on your definitions. In this case, what do you mean by 'the past' and what do you mean by 'population control'?
Before Christian times in Europe, infanticide was widespread, and still is in many traditional societies, especially of twins. Nursing mothers are also less likely to get pregnant, IIRC. There were also various methods of birth control, some more effective than others. And abortifacients where well known in many cultures. And of course famine, disease, violence, suicide...have played there part in 'pop control in most societies.
See my reply to Pinkoir. The problem about the retired isn't about having enough population growth, it's the intrinsic ratio of consumption years to production years. If people live a long time but retire years before they die, then they have to work harder to cover themselves no matter how many there are or if we add new people. If the average expectation of life is 20 years past retirement instead of 10, then on average we have to work harder to cover ourselves for those extra years.
Yeah, you can bandage it over by bringing in new people from outside and having them work, but then they'll retire and live long too. On top of that, there's more infrastructure etc. which just costs yet more effort, to subtract from the final canceling out of the people per se. (And population growth means more demand means more expensive oil, land, housing etc. due to increased demand. Uh oh, did I let something out of the bag?) Having more people to cover retirees is like borrowing to pay off debt or drinking to cure an hangover. The only way to deal with it is: be more efficient, work longer, or live a simpler life.
BTW a dopey movie like Zardoz doesn't prove squat, but I did like Connery rising out of the grain to fire that Webley Mark V.
There was never a need to import labor. The developed countries that didn't import labor are none the worse for it.
California serves as an example of the non-benefit of immigration. Former LA mayor Richard Riordan says that LA's only choice is bankruptcy. It is just a matter of when.
But disease and death would be good for the GDP! With all the medical expenses, funeral parlors, and people traveling to attend, we would be on the path to growth again.
This argument of the absurd is an example of some erroneous GDP metrics to describe our economy. But with population control, all evolved organisms learn to self regulate. Or, as Dr. Albert Bartlett said, we better start choosing from the left hand column or else Nature will start choosing for us from the right hand column.
I think we have a very useful tool to address the population and fertility problem: we need to eat less food. In 2001, Russell Hopfenberg and David Pimentel wrote a paper titled "Human Population Numbers as a Function of Food Supply" which provides strong evidence for the causal relationship between food supply and population in Humans. This shouldn't surprise us, because this relationship holds for all other species, as well. Thus, instead of directly limiting fertility, which hasn't been effective historically (as you mention) and prompts a strong and understandable emotional backlash, instead we put in place a global diet until we have successfully regressed from homo economicus back to homo sapiens, and can once again live in balance with the planet. This is certainly not pleasant, but it is a reasonable alternative to global suicide, which appears to be the current course. Everyone would be sharing in the same sacrifice, with a noble and attainable goal spurring us on. This would have the additional benefit of necessitating a corresponding reduction in the production of food, which would help us back down from resource consumption both directly and indirectly. Finally, I think a good tandem policy would be to allow people to expand on their mandated diet if they eat sustainably from the land, which would further help to transition back to a culture that respects the Earth as life-giving.
Of course, this goes directly against the consumptive logic of modern industrial capitalism (which is why we're staring down the double-barreled shotgun in the first place), so we first need to root out our addiction and worship of capitalism, and, more generally, of progress.
Statistics over the last century clearly demonstrate that reproduction does not increase with more resources. Something close to the opposite of that appears to be true. Large family sizes (high fertility) are characteristic of low-resource (poor) and rural populations. As development unfolds and general SES improves, as well as with urbanization, fertility (reproduction) declines. Of course, it takes a LONG time for fertility changes to change population numbers.
Rapid population increase was the result of declining death rates without the accompaniment of declining birth rates. Both of those declines occur with general development, but the first occurs first (leading to population increase), and the second lags behind. It took a while (and is STILL taking a while!) for the second to get up enough of a head of steam to get ahead of the population curve. The "increased resources" are the cause of BOTH declining death rates and declining fertility rates, with the latter gaining
ascendancy only over time, later in the process. Hence it looks for a while like increased resources are causing a disastrous, population explosion, when in reality what is
happening is a death-rate-decline "explosion", followed over decades (or half-centuries) by a fertility-decline "explosion", of which (thankfully) we're now in the midst.
When you look at a chart of the total population spiking up wildly, it gives the impression of an out-of-control situation that can only end in catastrophe. It is clear however that that is not the case, as attractive as the idea may be to neo-Malthusians
First, you're mixed up because you confuse the issue of whether someone predicts population *will* increase or not, with the issue of how bad an effect it will have *if* it increases. Second, if we don't need to worry because population will flatten anyway, then why are right-wing hacks griping about Europe committing "suicide" by having ZPG etc? And e.g USA is still growing, just not as fast. That's bad enough. Think of how much more we'll pay for oil from there being more people. It's a tax on the rest of us. The least we can do is quit encouraging people to have more through tax credits etc.
White Europe, that is. No one seems to be complaining that the Turks and the Algerians and the Pakistanis aren't increasing fast enough...
I agree, we should not encourage population growth for ancient reasons. I just want to dispel the myth that people get horny around copious amounts of food. As if we just restricted peoples diets it would take care of the problem.
The tax credits are so low they only encourage the poor. They should have a graduated tax credit so educated individuals have more children. But it doesn't matter what TFR is if you continue to import foreigners.
Hey! How about instead of having more children we take better care of the ones we have. Education would be a nice place to begin; then medical care! Oh, and jobs. Yeah... that would be nice for my kids and grandkids, and for yours. Unless you happen to be in the fortunate 2% who own 95% of everything, in which case your children are entitled to good jobs at your buddies' companies (and theirs can work for yours).
Actually, if people were fairly compensated for the benefits they provide through their labor, instead of being ripped off by the wealthy, they could spend less time at work, more time with their families, and provide the love, support, guidance and training their children need.
When oil runs out, you will see greater exploitation of human resources (you could say slavery might become more popular with the wealthy since that is the only source of energy they can exploit then). And, as their 'resources' get hungry, you might see the occassional uprising. I wish this was not such a certainty. Yet, from my view human nature is such that, in the end, it becomes this unthinkable. Starving people will turn on their oppressors, and on anyone they believe has food. We really need to begin to transition to local food before the SHTF.
Meanwhile, growth is not the answer; more children (White European, Tan Mediterranean, Black African, Cocoa Indian or Ochre Asian - and I have personally never met a white or black person, merely people having different degrees of pigmentation) is not the solution, it is the problem. Carrying capacity has been exceeded. Please keep your hands and legs inside the device; please fasten your seat belt securely, and please refrain from smoking. Thank you. the management
Craig
I got after resources waste in Iraq since it blew money and effort we could have used to build a sustainable economy. Since I disapproved of the venture it's weird for you to think I'm making a connection of any kind between that an birth control. I was just listing them both as big bungles by dumb/superstitious/greedy forces in society. I want to encourage people to practice BC, not get killed once their born (ie, the rational valuation of born persons over hypothetical or unborn persons, not the reverse as done by conservatives.) I'm OK with not making them do it: how about, everywhere, quit making them not do it? And I'm also tired of subsidizing other people's reproduction. I'll pitch in for schools or help for the truly needy, but not also tax credits per child for families earning 80, 100k etc.
IMHO the alleged social problems are bogus. Much of them come from altered male/female ration and not lack of PG. To answer you and the other commenter: societies don't really *need* those extra workers, the hyped up ponzi economy pushes to want them and push the whole thing on the rest of us. REM that having 1000 more producers means 1000 more consumers, so they cancel themselves out that far - and then the extra infrastructure investment is a net loss to standard of living (takes away effort and resources that could have been used for direct consumption or conservation.)
REM also that having more children doesn't help take care of old people, that's another con: spinners don't remind you we have to take care of all those kids first, and again: they cancel themselves out.
A stable population could do just fine, working and consuming for itself with no genuine (as opposed to trumped up) "need" for imported workers or internal population growth.
This could not be understood by quack economists like Julian Simon and most of the Right.
... Or indeed by hardly any economists, or any major political grouping. While culpability for misunderstanding the situation is much broader, economists deserve a special share of the blame, for being the group of modern intellectuals who specialize in misunderstanding and ignoring the motive power of the economy. That's just what "economic science" is.
Gail, couldn't this be explained by asuming GDP is the production of oil production, and oil usage efficiency. Call the equation:
GDP = O*E
If I assume E is increasing by roughly 3% per annum, then the rate of GDP growth is
3percent higher than oil supply growth. Since rougly 2005 O has been essentially flat, but if we allow E to continue to increase, that would expalin the data.
I don't think there is much of a case for to be made for time invariant E. Cut useless waste -say add insulation to an oil heated building, and the net benefit (warmer living quarters) is the same regardless of how much oil is burned to produce it. We are consumers of energy services, not energy per se. Improving the efficiency that we turn energy into energy services can make a difference. Now that we are at/near/beyond PO, the fraction of human effort devoted to improving E ought to go up. During the downslope of Hubbert's curve, we will be in a race between increasing E and decreasing O.
I object to the charcterization of debt as borrowing from the future. From the standpoint of the overall economy, debt is a wash. Debt is a promise by one party to make future payments to another party. Changes in debt are orthogonal to the physical economy. In the physical economy borrowing from the future would be the drawdown of stocks of physical stuff. We are borrowing stuff like ecosystem services, fossil fuels, and possibly stored food from the future. We are not borrowing money from the future. If you draw the box too tight, then those in a limited sized box can borrow from those outside. For instance the US as a whole is borrowing from China. I.E. we are taking physical stuff from China, and giving them promises of future stuff in return. China is doing the inverse.
Shouldn't net world debt then be static? That is what confused me about the graph of world debt--it looks dramatic, a doubling of world debt in one decade. But aren't all those countries simply indebted to each other? So isn't it kind of a wash, at the global level?
I must be missing something.
Debt is created out of thin air by those with the legal right to extend credit. Nowadays this is primarily the role of central banks, which are government regulated private institutions in most cases.
In a fractional reserve banking system, debt/credit can generally expand in total whenever it is permitted to do so by a society. It comes down to a confidence game. As private creditors got nervous recently due to defaults, governments stepped in to try and backstop the deleveraging in the system, which basically chokes off credit expansion, by withdrawing bad debt from private balance sheets and spreading the risk of further default onto the general public. Hence, in theory, some level of confidence is restored and banks can start lending again--which adds to debt.
This scheme can work for a while, but likely not for very long, and so we should expect a series of financial upsets as debts continue to go bad.
To get back to your question: Indebtedness to each other is not a zero sum game with fixed amounts. It can expand exponentially, indeed it has to, in order for the system to remain stable. However, because debt/credit expansion needs to be coupled with economic expansion to avoid defaults, we are in a catch 22 situation where we can't afford not to increase debt AND we can't pay back our debts.
PS. I have almost no economic training...am just a biologist. Like the title of this article.
Things haven't changed much really!
Nice quote.
I'm still confused about total debt.
If a bunch of people sit around in a room and loan each other money, the total amount of money in the room hasn't changed, just the level of borrowing.
Isn't this what is happening on the international level?
I am working on a paper that discusses money and debt in language that makes more sense to me than the language normally used. Here is an excerpt...
We have a debt based monetary system, which is also called a fractional-reserve system. This means that money is loaned into existence. Or, put another way, the physical wealth that will be created in the future by the use of the loan is recognized as paper wealth at the time the loan is made. Therefore, the vast majority of money and other paper wealth in the world is in fact debt representing physical wealth that will be created in the future. In addition, a loan creates money which is loaned out again to create more money which is loaned out again to create more money and so on. This means our economy is an inverted pyramid of debt (paper wealth) with each layer relying on the layer below to pay its interest owed. Enough new money must be loaned into existence each year to pay the interest owed for that year. Without this new money there would not be sufficient money in existence to make all of the required interest payments.
The mathematics of our system therefore requires exponential growth in both debt (paper wealth) and the production and consumption of physical wealth to prevent the pyramid from collapsing. The growth exponent need not be large, but it must be positive. If you plot a simple exponential curve you will observe a remarkable fact: at some point the curve becomes parabolic and explodes upward, regardless of how small the growth exponent is. This exposes a design flaw in our debt based system. We live on a spherical planet which means the natural resources required to create physical wealth are finite. It is therefore a mathematical certainty that at some point in the future it will no longer be possible to grow our production and consumption of physical wealth at the required rate and the pyramid will collapse. An interesting characteristic of this system is that debt (paper wealth) growths in advance of the corresponding physical wealth. This means that it is possible to get into an overshoot situation where the required collapse in debt (paper wealth) is much larger than the underlying deficiency in physical wealth. This is where we are today.
It is fascinating to look up a conventional definition of fractional-reserve banking such as that provided by Wikipedia. You will find a lengthy description that is factually accurate but that completely misses the two most important characteristics, namely that it borrows from future physical wealth and requires exponential growth. Most of our leaders and economists either do not understand our system or prefer to obscure reality. I suspect the former.
Why did we choose a debt based monetary system given that it is mathematically required to collapse at some point? The answer is that a debt based system maximizes the rate of economic growth by borrowing from the future. Standards of living, corporate earnings, and government power increase at the fastest rate possible which keeps the public, businesses, and leaders happy. A debt based system also makes it easier for governments to run deficits which helps to re-elect leaders by providing citizens with something for nothing. And citizens have more access to credit for consumption which enables them to live beyond their means. Finally, banks are able to make a lot more money with a debt based system so they were motivated to promote the adoption of the system. When we created our debt base system no one imagined that humans would ever be able to exceed the maximum possible extraction (and waste absorption) rates of natural resources. The system has worked well for us over the last century because we have not experienced any physical limits to growth. Of course the earth’s ecosystems and other species have taken a severe beating by our increased use of natural resources but that is a topic for another paper.
Can our current debt based system continue to operate if growth in physical wealth is constrained? The answer is yes, but not well. If physical growth is constrained then debt (paper wealth) will build up until it is forced to collapse and realign with underlying physical wealth. The cycle of debt (paper wealth) growth followed by collapse could in theory continue forever. And if government policies prevented the build up and subsequent collapse from being too severe then our society could probably continue to function reasonably well, albeit in a cyclical environment. One problem we have today is that all governments worldwide decided about a decade ago to try to prevent any correction by creating more and more debt in the hope that it would accelerate physical wealth growth, and they did not succeed. Why did governments chose this policy? Because most people in society do not or choose not to believe in limits to growth. This is understandable given that our modern culture evolved in the absence of limits to growth. Governments now find themselves in a checkmate situation where if they allow a collapse it will be unacceptably destructive so they have to exponentially create even more debt to delay and exponentially worsen the inevitable collapse. This suggests another illuminating way to view our debt based system. It is a leveraged system meaning that a small increase in physical wealth is leveraged into a large increase in paper wealth. But all levers work in both directions. Thus a small decrease in physical wealth results in a large decrease in paper wealth.
I largely go along with this, but would like to labour a point about credit.
The fractional reserve banking system effectively privatises the monetary system. No longer are notes passed from person to person, but they are given to banks and the bank credit replaces the notes as money, credit entries pass from person to person.
Also. Exponential functions are fundamentally unstable. Boom/bust are inevitable under a fractional reserve system.
ok. So you have all this debt. You have control of the presses. You are a politician. Do you allow the biggest depression in history, or do you (effectively) print money to pay the debt?
Historically printing has been covered by growth. However, there can't be real physical growth because we can't hit the accelerator in our cars as hard. So? Inflation. Monetary growth with a diminishing amount of real stuff.
I don't agree with this. Here is some good reading and here is some more. For many thousands of years, again and again empires have risen and collapsed, often it seems via inherently unsustainable growth, which repeatedly hit its limits.
Therefore, modern culture evolved in the presence of limits to growth. Fossil fuels were developed in response to limited sustainable fuels.
You think anyone wanted smelly, poisonous, hard-to-acquire coal when there was still plenty of wood to go around?
You are correct and I was unclear. By modern I meant the last half of the 20th century.
I disagree. I think that with the "discovery" of the "New World" by European explorers the appearance of limits receded. Huge expanses, large metallic ore resources and undreamed of quantities of wood were there beheld by people from cramped, poverty stricken, famine ridden, war-torn Europe. From that time it seemed that the world was a limitless storehouse. If one thing started to run out — wood or whale oil — something else came up — coal or kerosene. All through this time our theories of economic behavior were being created... so many ideas we now take for granted arose out of this time of growing energy and raw materials. This doesn't mean that there were not limits, but in the face of plenty the limits were ignored and considered trivial. Until now... sort of... for some people...
Good point, you are correct. I will revise and clarify.
"Therefore, modern culture evolved in the presence of limits to growth. Fossil fuels were developed in response to limited sustainable fuels."
I can only partially agree. Over time, cutures usually found replacements for their real wealth, mainly by buying/stealing it from other cultures and replacing/substituting energy sources (wood---->coal----->oil). Humanity had the room and resources to move on, so their limits were limited.
"You think anyone wanted smelly, poisonous, hard-to-acquire coal when there was still plenty of wood to go around?"
But eventually they did want "smelly, poisonous, hard-to-acquire coal" and eventually "smelly, poisonous, hard-to-acquire oil".
Now what? Poisonous, hard-to-acquire nuclear? To what end?
Kye Bay said:
This ignores two very important things:
1) Government money creation, which does not depend on issuance of debt (see my comment below)
2) Defaults/bankruptcies, which will erase claimed but unpayable interest
Kye Bay said:
Ummm no. No. No.
It is not factually accurate. Read Steve Keen's essay The Roving Cavaliers of Credit for a good debunking.
It does not borrow from future physical wealth. Yes you could say we're like inheritors of a large inheritance, living high on the capital, squandering it instead of investing it. But we're living on stuff saved up in the past. When mainstream economists talk about borrowing from the future, they mean it literally, as in "Cash-for-Clunkers pulls forward demand to beef up this quarter's numbers, but it's borrowing from the future".
And no, I don't see how it requires exponential growth. I think this view confuses cause and effect. Consider:
One way to view money is as an information carrier.
We have a sense of what a dollar is worth; an internal 'valuation function'. This is reinforced every time we buy or sell something: stuff is assigned a dollar value, and dollars are assigned a stuff value. This valuation can change over time, but not very quickly.
People usually like to have a buffer, something set aside for a rainy day. Call it savings, call it wealth... This means that in a steady-state economy, there are quite a lot of unutilized resources.
So what happens when the amount of money grows faster than we can adjust our valuation functions?
Yes... we think we have more wealth than we actually have. Our valuation functions tell us so. And since we think we have the buffer we want, we go out more. Do more stuff. Buy more stuff. More of the physical resources are put to work.
Which creates jobs... demand for oil... iPads... and the economic growth ball is rolling.
So what I'm saying is that money/debth growth begets exponential growth in the real economy; and to have that effect, money must grow faster than the economy. And that is exactly what we see!
I read your link to Steve Keen and I think he is saying that the fractional reserve banking system operates differently than is conventionally assumed. This may well be true but does not, I think, detract from my key point regarding borrowing from future wealth.
In a savings based or full-reserve system the only money available to be loaned is that representing physical wealth surplus that has been saved. For example, I cut down some trees and create lumber. I exchange the lumber for money and then exchange some of the money for food and save the remaining money. This saved money is then loaned to someone who exchanges it for a car. At all times in this scenario the money represented existing physical wealth.
In a debt based or fractional reserve system, new money is created out of thin air when a loan is made to the person desiring a car, on the assumption that he will create physical wealth in the future to repay the loan. He then exchanges the borrowed money for a car. Note that the money used to pay for the car had no physical wealth backing it, but will in the future if the borrower cuts down some trees and exchanges enough lumber for money equal to the cost of the car.
With regard to the requirement for exponential growth, I think we do disagree, but I did not understand your argument well enough to offer a rebuttal.
Kye Bay said:
That is what he is saying, yes. And apart from his own (strong, IMO) argument, he is backed by the research of some very notable economists. I am convinced Keen's view is fundamentally correct, and that the conventional wisdom is wrong. Even the wisdom of the Chicago Fed, linked to elsewhere in this thread.
Kye Bay said:
True.
But wait...
Kye Bay said:
In a debt based system, yes. Whether it is "fractional reserve" or not, is irrelevant, as per Keen.
Now we get to the heart of the matter. That assumption is common, yes; it's the familiar "economic growth scenario" of the past, what, several decades to several centuries, depending on your perspective.
But what happens if there is no growth?
1) The creditor(s) continue(s) to pay, principal and interest. This will over time concentrate assets in the hands of the lenders/capitalists; the capitalists will become progressively wealthier and fewer. This is not sustainable(!); basically, this is the rationale behind Marx' belief in the inevitability of the Revolution.
2) Creditors that can't pay are allowed to default. When they default, their debts, including the interest, is deleted, along with the associated money. This brakes both the growth in money supply and the accumulation of assets in the hands of the lenders.
If enough defaults occur, money supply shrinks. I cannot see how, in a steady state economy, a combination of debt money + interest on debt + fair bankruptcy laws cannot be sustainable. Of course the banksters will object to such a state of affairs, since it means they as a group will not be continually grabbing a greater share of the economic pie. (The fresh US bankrupcty laws are in my view more of a problem than interest per se).
Steve Keen writes, in his book "Debunking Economics" (p. 217):
3) We're from the Government, and we're here to help. Despite what Denninger says, and what Stoneleigh and Ilargi says, government intervention works. There is little doubt that the western world would have descended into a depression following the 2008 meltdown without it (see Fiscal policy worked – evidence (Bill Mitchell); and there is also ample evidence that Japan successfully evaded the worst of their 90's crisis (see KOO's "Good News", excellent interview of Richard Koo by Kathryn Welling).
THIS IS %&"#%%¤ IMPORTANT!!!
This means that
A) Predictions of the immediate demise of the financial system are WRONG!
B) There is a very real, very deadly power struggle going on here, between the moneyed elites and (democratic) governments. Politicians and voters not understanding the tools/weapons available to govts plays into the hands of the banksters.
C) Banks or bankers are not the problem; banks or bankers with too much power and influence are. Banksters in modern parlance, usurers in medieval.
And, well, as for your belief that "savings-based or full-reserve" money is "representing physical wealth surplus that has been saved" whereas fiat money don't, well, I don't think that's correct either. My comment above contains a beginning of an argument in that direction, but I must resist the temptation to elaborate at present...
It seems you are discussing a dimension of fractional reserve banking that I intentionally ignored. Namely that it tends to concentrate wealth in the hands of people with capital. I have not studied this enough to know but intuitively it may be true. If you drop ten people on a deserted island with shells for trading, one of them will likely end up with most of the shells. But this will happen with or without fractional reserve banking due to differentials of luck, motivation, and ability. Thus all healthy societies need some form of wealth redistribution to maintain a reasonable gap between the richest and the poorest. My thesis is simply centered on understanding the relationship between paper and physical wealth, not its morality or the laws required to make the system work well in practice.
I agree with you that without government intervention we would have entered a depression in 2008. Where we disagree is the outcome of this intervention. I believe that it will end badly with a collapse worse than what we would have experienced in 2008 without the intervention. But we are in uncharted waters. It won't take long to find out which of us is right.
Kye Bay said:
*groan* You. Can. Not. Ignore. That.
You asked, in another subthread, why I thought it was significant. That's one of the reasons. Another reason is that it invalidates your argument, because if the default rate creeps up (rather than jump violently) it will brake the debt explosion (it's negative feedback) and I can't see how a steady state is an impossible result.
Steady state + draconian bankruptcy laws + interest on debt-money ==> rapid capital concentration.
!==> immediate system failure.
Nor can I see that a gradual decline is necessarily catastrophic.
Please understand where I'm coming from. I'm not a professional economist, although I worked as an accountant for a spell (which nearly bored me to death), and a grasp of basic accountancy principles are all you need to grasp the MMT arguments.
I came over Martenson's Crash Course in the summer of '08, and it made a great deal of sense to me, intuitively and immediately. But the claims he makes are extraordinary, and the evidence he offers is, well, sketchy. I read around, obsessed. Mish. Gold bug stuff. Jay Hanson's dieoff site. Most of them I read for a short time then dismissed. But some I found to have lasting value. The Oil Drum for one; Steve Keen's site is another...
Now Keen is an academic economist that, as the 2000's were progressing was warning vehemently against the buildup of debt, and how it would cause a financial meltdown that could outdo the Great Depression. His site has the domain name "www.debtdeflation.com", so you can see where he was standing. His message at the time (and through mid-2009) was rather similar to yours now (apart from some possibly important details, like the fact that modern banking can't meaningfully be called "fractional reserve", and that he isn't preoccupied with limits to growth - although he recently participated in a LTGish CSIRO project).
However, some half a year ago, he recanted. His models did not predict the economy's response to government stimulus. Not that they were wrong, as such; but they were incomplete. He is now working on expanding his models to incorporate government money creation. In the meantime, MMT is, according to Keen, the only school of economics to get through the GFC "completely smelling of roses".
No, we do not have long to wait to find out who's right. We don't have to wait at all. The evidence is in! Read the Koo piece I linked to, it describes the Japanese situation in enough detail for our purposes. Koo doesn't grok MMT, but when you do, it makes Koo's case even stronger.
(For the benefit of those not inclined read the (long) interview, a quick and dirty summary: Japan's problem was too much private debt. They reached a point where economic growth could no longer keep up with the increasing debt servicing cost, and their economy started tanking, exactly as Keen - and Kye - would predict. The government eventually intervened, and the downward spiral of debt deflation was halted. Things started to improve. But then misguided people started fretting about budget deficits, government debt and hyperinflation. Government stimulus was withdrawn. The crash promptly resumed, and govt had to step in again... and a few years later, when "self-sustaining growth" was back again, govt stimulus was withdrawn again, and the crash resumed... again. And so it has been going, for two decades. The whole time, the underlying problem was too much private debt. The nuclear option, Denninger's prescription of letting it all default, would likely have destroyed Japan's financial sector utterly. But government intervention has allowed the debt to be worked off over time. The result: a pretty much steady-state economy. It has not resulted in inflation. How could it? The govt is merely accomodating the private sector's desire to save).
Koo handwaves the "problem" of government debt away. But MMT teaches us that government sells debt mostly as a service to the financial industry. Bill Mitchell writes
To sum up:
* Governments in control of a well-designed currency cannot become insolvent. A currency-issuing government is not analogous to a household or business in this respect. (The Euro is not a well-designed currency. The Eurozone has real trouble). Government deficits are not to be feared.
* Governments have demonstrated, unambiguously, the capacity to halt and contain the effects of a debt-deflation meltdown.
* Japan's experience demonstrates that working off the excessive private debt will take time. Decades. During this time, growth is likely to be tepid, which actually is good news from our PO/LTG perspective.
* If, at any time before the private debt is back in sane territory, government support is withdrawn for any reason, the meltdown will promptly resume.
Kye, you have one ot the drivers of the meltdown figured out, but not the factors that have halted it, and have the capacity to stave it off indefinitely.
Private money creation was, in my view, a prime driver of the rapid economic expansion of the 20eth century... Merrill nailed it when he called it a "classic positive feedback loop".
As this phase ends -- has ended? --, government money creation takes over.
It's the end of an era, but not the end of the world. Not even the financial world.
You say your "thesis is simply centered on understanding the relationship between paper and physical wealth, not its morality or the laws required to make the system work well in practice". Well, my thesis is that the relationhsip between money and physical wealth is mostly psychological; our perceptions of value determined by "valuation functions", reinforced and updated through constant use. This is bidirectional -- we assign stuff (physical wealth) money value, and we at the same time give money a stuff value. Since large, rapid changes in this valuation function causes fear and loathing, on a personal level as well as on a whole-economy level, changing the amount of money to fit the size of the economy is a Neat Trick™.
And that, I propose, is the operative difference between a "full reserve" system and a "fractional reserve" (it's really no-reserve) system. In a full-reserve system, if the size of / amount of activity in the economy changes -- let's say it grew, more physical resources became available than previously -- money sends a signal that there is less physical resources than there actually is. You will be holding back more than the optimal amount of resources, because your perception of the value of the money you hold is lagging. On a whole-economy level, this produces slower economic growth than if the money supply had expanded. It does not produce no growth, because over time, perception of the value of money will adjust to fit reality. (I think velocity of money can be safely ignored here, because it will either have equal effects on the different systems or it will amplify the effect of no-reserve).
So since growth is our main problem, and rapid growth is worse than no growth, a "full reserve" system is desirable, yes?
Perhaps. But mind the selection effect. Countries with no-reserve systems will outgrow and outcompete countries with full-reserve systems; grab any fresh resource before others can react. A classic case of Tainterian peer polity competition.
I am seeking the truth and I appreciate you trying to set me straight.
This is what I think you are saying:
1) excess private debt is our main problem
2) public debt is not a problem
3) public debt can be increased further with no risk of monetary collapse and doing so will prevent a deflationary collapse, thus giving time for private debt to be reduced to a stable level
4) Japan is proof that the above is correct
5) A government that controls its currency cannot go bankrupt
6) The relationship between paper and physical wealth is psychological
7) The way fractional reserve banking is applied in practice means it is actually a no-reserve system
With regard to Japan over the last decade, they were in a much different situation than most countries today:
1) private savings were high
2) public debt held by foreigners was low
3) balance of trade was positive
4) no limits to growth (like oil) were yet starting to bite
Contrast with the US today which has debt to GDP at a record high (and much higher than the 30's depression), no private savings, lots of debt held by foreigners, a poor balance of trade, and oil about to decline.
Japan's new prime minister seems to disagree with you. He publicly warned today that Japan might collapse under their public debt load.
http://www.zerohedge.com/article/japans-new-pm-warns-country-risk-collap...
With regard to paper wealth being psychological I agree that confidence can keep things afloat for a while. Why else would everything still be functioning given insolvent governments borrowing money to bale each other out, marked to fantasy banks, housing and stock market prices supported exclusively by free printed money, etc.
In the end, if the money supply doubles and physical wealth stays constant, then it is a certainty that at some point money will lose half of its value, or it might collapse entirely if and when people lose confidence in the system.
We do I think agree on one point: We should move to a full reserve system to slow our growth. I would also argue we should do this to achieve stability in the face of limits to growth but I doubt we agree on this point.
You erroneously claim:
Japan's experience demonstrates that if bankruptcy is deemed politically unacceptable then companies burdened with excessive debt will slow economic growth for many years.
Bankruptcy and conversion of debt into equity is the solution to excess debt accumulation.
TIME based interest should be abolished and risk sharing made the only investment relationship.
Keep the lenders skin in the game and it will be fair. Sink or swim together.
If the venture fails to produce NEW value/wealth neither should gain.
The lender having the ability to confiscate the borrowers assets is absolutely criminal and is the reason usurers had a reserved spot deep in Dante Alighieri's Inferno.
See, this is where I get perplexed and confused, with the balance-sheet prestidigitations described in the Fed document Porge referred me to not really helping. My neighborhood bank or credit union can't lend money until someone, maybe me, makes a deposit, maybe because they got a check for cutting trees and creating some lumber. (If that bank could truly lend willy-nilly out of "thin air" they'd be headed towards global scale very quickly, at least until they collided with every other organizations so empowered.) Once someone makes that deposit, then they can lend, and someone else perhaps "buys" a car. The people who make the car in turn get paid, and pass the money along, and so on down the line. But it's the same in either of your two scenarios, as long as onward lending occurs at all.
So it seems like a distinction without a difference. Except that in the modern ("fractional") system, the bank is required to deposit X% of any deposit unproductively in the central bank rather than lend it onward. In principle, the authorities can then exert some influence on the velocity of the transactions comprising the ongoing chain, by adjusting X.
But raise X to 100, and the local "bank" would seem to become what I said elsewhere - in effect a mattress that happens to have security guards, not lending anything onward, but depositing everything with the central bank. Thus it appears that your definition of "full reserve", which explicitly entails onward lending, does not match the definition seemingly used in the rhetoric of populism or envy or possibly ancient religious canons (with numerous exemplars on this very page) - namely setting X to 100.
Somewhere underlying all this I suspect there must be a great confounding of quantities of money with the velocities at which those quantities move. On the whole I'm still left perplexed and confused, especially by the rhetorical usages.
I too struggled for a long time trying to understand this. For me, the key was to focus on when physical wealth is created and when the corresponding paper wealth is created. I trust that if you think about this long enough it will all become clear.
Actually, the most common scenario in fractional reserve banking is that you make a deposit with money obtained from a loan. And so on down the chain.
Paul, Kay,
please consider:
Lending is capital- not reserve-constrained (Bill Mitchell)
(Note that here the words capital, asset, and reserve have technical meanings. Very precise. In my other posts on this thread I have been using colloquial meanings. Sloppy. My bad. Apologies for any confusion sown.)
2 things on this.
1) Capital implies the ability of the entity being called "capital" to produce more capital or assets.
That could be physical capital or intellectual capital but is not merely a digit created by the Fed and injected into the banking system.
And
2)
This is the main problem. The system itself has very weak or nonexistent checks and balances and many opportunities for collusion and fraud.
Who watches the watchmen?
porge said:
You are confusing types (categories, names) and tokens (instances, physical entities); a map with the terrain.
... oh, why do I bother replying to this "porge" anyway? After all, it's just a string of the five characters p, o, r, g, and e ;-)
(The numbers on a balace sheet are symbols representing the (value of) the company's positions. If those symbols are judged by the Fed (say) to be out of whack with the actual value of the positions, why not change the map to fit the terrain?)
EDIT: The server seems to insert an end-blockquote tag if theres more than one consecutive newline? Messed up the quote.
EDIT2: I wrote above that
I should perhaps have added that:
"This effect is so strong that we often don't think of money as symbols for value at all, but think of money as having value in itself".
Mitchell, in the piece porge refers to, was clearly using the word "capital" in the accounting sense. This can be confusing. But think of a balance sheet as a map. When you look at a map and see a small black square, you say, "that is a house", which of course it isn't (it's a small black square on a piece of paper, duuh). But small black squares on maps conventionally symbolize real-world houses, so we think of it, and talk of it as a house.
KODE wrote: "It does not borrow from future physical wealth. Yes you could say we're like inheritors of a large inheritance, living high on the capital, squandering it instead of investing it. But we're living on stuff saved up in the past."
You could say that, and you'd be right. If you live on a desert island with your son and you spend all your time chopping down every tree and using up all the very limited food and water in very wasteful ways, it is not going to be of much comfort to your son to tell him, "I'm not stealing or borrowing from you, I'm just using up stuff from the past." You can only hold this position if you think that no future (or even current) person has any rights to the "stuff" and that you, on the other hand, have all the rights to it.
In my first comment on this thread, I said "So do I(*) (except in the sense of dohboi, above, that we're wrecking the biosphere and compromising the climate)." (*) That is, object to the characterisation of debt as borrowing from the future.
Which should indicate that I get your point, but am talking about something else.
Yes we are living above our means, wrecking the future. No contest on that point.
What I object to is the notion that debt equals borrowing from the future. That is, I think, a misleading statement about how money works. And that is my point. See my other posts on this thread. We really, really need to understand how money works if we are to understand our position and our alternatives.
Misleading statements don't help.
Fair enough. I must confess that I remain confused about international debt. Most of the discussion has been, as far as I can tell, about how nations and banks use debt to create money. But isn't it different when nations borrow from each other?
dohboi said:
Here I can only point to Mitchell's extended example, Some neighbours arrive.
The answer appears to be "not materially" (but I haven't worked thru this to my own satisfaction yet).
Note that for the MMT conclusions to hold, the exchange rate must be free-floating
Kye Bay, that is a very satisfying essay, logical and clear. I am glad to ignore those who object to it, since we know what their kind of thinking has done to us for the past thirty years.
About issuing new money to pay the interest, I conclude that the interest rate must be too high. If it was matched to the increase in physical wealth, maybe the system would be stable.
Kye Bay - this is such a accurate summary of the world's current problems that I am cross posting(with appropriate attribution) it to the Energy Collective where some exponetial function deniers are claiming that the demise of nuclear power and of course our society if we do not embrace nuclear power at once is all the greenies fault.
Look forward to the paper when it is released.
I find these discussions of fractional reserve banking very confusing. Seriously. And the Wikipedia articles don't help a bit. Two basic lines of confusion:
(1a) We can promise to pay each other amounts that we may or may not be able to pay when they come due. But the future hasn't arrived yet and we lack time machines. So how can there possibly ever be net or overall borrowing from future wealth, when that simply doesn't exist yet to borrow from?
(1b) What's theoretically impossible about the interest mechanism simply reflecting some individuals getting some goodies sooner rather than later, getting them from someone else who forgoes them for the time being, and paying back a bit extra for the privilege, thus enjoying a lower overall lifetime living standard in exchange for the time-shift? How is that impossible even in a perfectly zero-growth economy? How does it require overall growth?
(2a) I don't quite understand exactly what's meant by "loaning money into existence". If I receive some income and lend part of it out, I'm temporarily passing along the part I lend out, i.e. imparting some "velocity" to it. But I don't get to counterfeit money in that process. If instead I deposit it in the bank and the bank, acting as intermediary, lends it out, how does that differ in principle?
(2b) If I change the label from "money" to "gold" in my thought-experiment, how would that change anything in the real world? The bank isn't allowed to counterfeit money, and physically it can't conjure gold out of thin air. What's the difference? The quantity of gold or money is conserved until there's an injection or draw from outside. After all, bankers (under whatever title was applied to them) have lent at interest even in the days of the gold standard, or even of physical gold - which is why religious-minded levelers have felt the need to condemn the practice since ancient times (when there was essentially no growth.)
(2c) Suppose we took the limiting case of a bank operating on a full instead of fractional reserve basis. Could it be anything more than a mattress with security guards? Could we even call it a bank? Could it lend any money? How, if its "reserve" is 100%?
The multiplier effect allows a initial deposit to potentially create 10 times the amount(at 10% reserve requirement).
The first bank gets a $100 dollar deposit and lends 90. That 90 could be deposited in another bank and treated like a initial deposit so bank B lends out $81 and that gets deposited in bank C which can now lend $71.90 etc.etc.....this could continue to infinity but converges on about 10 times the initial deposit in bank A.
Bank A is not allowed to lend out $1000 on the initial $100 deposit like some people think (this is the most common misconception that I encounter).
But at the same time I do believe that fraud is rampant in the entire banking system and no one is playing by the rules anymore.
It is explained here by the Chicago Fed.
http://upload.wikimedia.org/wikipedia/commons/4/4a/Modern_Money_Mechanic...
Could debt expansion be a self-organizing adaptation to exponential population growth?
that assumes you can't loan money you don't have. (Which, with a fractional reserve system, isn't true.)
That depends on how you define "money". The number of pieces of paper didn't change, but if you let people exchange the promisses to pay (in "you give me that good, and I'll transfer the debt A has with me to you") you'll have a lot more exchange medium.
On your previous comment, yes, if you count credit as negative debt, net debt is always zero. They probaby didn't do so. More likely, they subtracted the credit from the debt of each country (getting the country's net debt), and added only the countries with positive net debt.
As a side note, debt doesn't change the average wealth (altough debt based investment does), but it does increase the GNP, because it makes people trade goods for promisses. The GNP catches that exchange.
I'm not even a biologist although I do have a lot of credit hours in the field.
Nevertheless I find that basic biological principles serve very well to explain just about everything about our situation, including our tendency to overexploit the environment for short term gains.
Personally I believe there is something fundamentally wrong with banking and money theory but I can't put my finger on it, precisely.
But the circle doesn't close in the sense that I can see a closed circle in terms of other subjects.The water and the carbon go round and round,and while I don't know all the details,I can see why and where the action is taking place , at least in general terms.
But for the life of me I cannot see why ANYBODY with a modest amount of brains would believe in long term debts of the types govts run up ever being paid;
why anyone would ever believe that a system such as social security can ever be stable over any long period of time;
that institutions such as insurance companies and labor unions should be expected to last more than a few decades;
why any country would be willing to hold huge amounts of another country's ious indefinitely;
why any country should be expected to survive as a going concern more than a few decades without a major change in the power structure within that country.
It seems perfectly obvious to me that while the whole of the monetary and banking system cannot be described as a house of cards,it is certainly no more substantial than a well built sand castle only a little way beyond the usual high water mark.
Of course a lot of people do appear to understand the system and why the circle cannot close;they say correctly (so far as I can see) that the current banking/money system requires continious and permanent growth to function.
The circle can't close because perpetual growth within a physically limited environment is contrary to the laws of nature.
What I can't understand precisely is why this isn't perfectly obvious to anyone smart enough to be a lawyer or a cpa or a banker or a federal judge or an ecomomist.
I guess everybody should go to a good cow college instead of to the Ivy League business schools.
Much of what passes for education is actually propaganda for various ideologies--this is especially true for most economics and business ed. Much of the rest does a good job of narrowing students' focus so extremely that they not only can't see the forest for the trees--they don't even think a forest exists.
And I speak as an educator.
I've mentioned before that you would find much in common with Wendell Berry (a farmer himself), especially his book "Life is a Miracle," and David Orr. Here are each of their bio's on wiki, if you care to learn more.
http://en.wikipedia.org/wiki/Wendell_Berry
http://en.wikipedia.org/wiki/David_W._Orr
Hmmm, not much on that Orr bio. Here's his home page:
http://www.davidworr.com/articles.php
Scroll down to the bottom and download his essay "What is education for" I think you'd enjoy it.
And here's an audio of a chapter from Berry's "The Unsettling of America"
http://www.archive.org/details/UnsettlingCh4
"Much of what passes for education is actually propaganda for various ideologies"
Hear! Hear! And you can add to 'education', media/reporting, advertising, entertainment, political debate... In short, the cultural soup in which we swim blinds us from the realities of our existence.
And it is done both intentionally - a la Edward Bernays, and unintentionally - as when a reporter who himself knows nothing of the relationship between money (a marker) and wealth (real assets) writes a story about 'economic growth'.
We are blind from the moment we are born.
Some of our cultures make us yet more blind.
Everything we "see", "hear", "taste", etc. is a distortion of reality. Evolution did not form our eyes to see across all wavelengths (heck we don't even see in 3D but rather in stereoscopic 2D).
Experiments have repeatedly shown that for many of we we
we only see that witch we expect to sea.
Nicely said.
At some point in the "high" education of many professionals (lawyers, cpa's, bankers, federal judges, economists, etc.) they become so intoxicated on the fumes of their specialization that it becomes the ocean in which they swim as if fish.
A well known proverb is that fish can't see the water in which they swim (just we can't see the air in which we pollute)
Greetings Mac.
The way I see it is that 98% of money is digits in a computer. Someone lost the decimal point.
Remember the Powerful Wizard in the Wizard of Oz?
We tend to believe what we evolved to do. Our species expands to consume all resources until some constraint stops us. Fractional reserve banking fits our evolutionary behavior very nicely.
I am going to greatly oversimplify here, but I believe that the financial system was in synch with available energy resources due to two main factors. 1) For the most part, there were no major limitations to accessing more oil until recently. The most notable and glaring exception to that was in the 1930s where the US discovered large oil fields and Japan/Germany were in search of them. Since money from both the latter countries was not widely accepted in the 1930s, the financial system did not facilitate those countries getting more resources. Then came along the Bretton Woods system, which essentially spread out energy deficiencies accross the planet - with the US getting a kind of bonus payment by its issuing paper money. That worked as long as the US would not get too greedy. 2) The other less visable reason the system worked is that efficiency gains mostly paid for the fiat interest.
Of course the system did not function smoothly at all times but the combination of increasing oil use and increasing efficiencies kept up with interest payments necessary. More recently, due to the momentum of imbedded energy in infrastructure and still some more efficiency gains, the economy was more or less able to keep above water in the last few years (from 2005 to 2008). From 2009 and forward as infrasturcture wears away and oil use starts declining, the ability to make interest payments on debt will be, well, not fully successful.
I guess you can then say the circle can no longer be closed naturally, and the only way to 'close' the loop would be to cut out parts of the system before the whole thing breaks down.
If the debt equation was, "I borrowed $1,000 from Sam Silly; I promised to pay $1,000 in 1 year," that would be of no effect. The fact is that the equation is, "I borrowed $1,000 from Pawnbroker Pat; I promised to pay $1,500 in 6 months." This is the 'poor people's' equation. For the rich it is more like borrow $1,000 and repay $1,100 in 2 years, 6 months. (editorial: Congress is making feeble efforts to remedy the Payday Loan, Pawn Shop, and similar cons, with little success)
It is the interest promised that is the problem. Without growth, there is no way to expect to be able to repay with interest... look at the Sovereign debt problem. Greece, Hungary, Spain, Portugal, UK, and US all have the same problem. With no growth, it becomes impossible to repay. Even with 3.18% interest on a 10 year Treasury.
And, the contries are indebted to the same people that individuals are... the moneyed interests who control most of the wealth of the world. These are the people who are being bailed out by the US Congress. They are the ones who benefit from the influx of money through the stimulus program, from the wild infusion of money by the Fed through 0.25% rediscount rates, and from the Euro Countries' guarantees of Greek debt just a few weeks ago. Not the consumer; not the worker; not the 'common man.' They are the people who invent strange new 'investment vehicles,' as if they are automobiles, or gadgets. And, they lobby for deregulation so that are allowed to market them to the investors who, in their greed, do not understand the risk (though it is well hidden and not discussed. Remember, without regulation there is no need for full disclosure, and due diligence is not easy when the trail is muddied so well), and believe the hucksters whose Ponzi schemes they purchase.
So, yes. Doubling debt in a decade is dramatic, at least. Doubling again in 3 years is priceless.
Craig
Really wealthy people buying government debt? The debt has low ROI. The wealthy are going to tend to look for higher rates of return.
Debt is bought by pension funds and other sovereign governments. It is also bought by investors with low tolerance for risk. I doubt the latter category includes many billionaires. They didn't get rich by investing in treasuries.
I agree, E is likely a function of the current oil price relative to the prices of other things. If oil is relatively cheap then the marginal benefit of conservation is small. If oil is relatively expensive then the marginal benefit of conservation is great. The data above seem to suggest that decreasing the annual increase in oil supply by about 2/3 led to a decrease in the annual increase in GDP of only 1/5. That is, the marginal oil was not that important to GDP because there were easy ways to conserve oil and substitute for oil - think coal powered electricity generation vs oil powered electricity generation.
It's worth noting that because it is technically possible to completely replace oil, GDP =(approx) O*E is only meaningful as long as the assumption that most of GDP is still dependent on oil holds. As oil supply goes away this will become more and more important somehow.
But continuing on with GDP = O * E, we see oil supply increase dropping another third. Noise caused by the financial system will obscure the effect until things settle down. It's clear that debt continued to increase as people expected to be able to pay it back and had their expectations dashed either because of rising oil prices and/or other factors.
Sorting through this noise is difficult, but it seems to me looking at Core CPI vs CPI would be a way to get a picture of what oil 'is doing' relative to other things that would be somewhat immune to the financial and monetary noise. I find I was not the only one to think this http://seekingalpha.com/article/206268-inflation-cpi-vs-core-cpi-vs-food... . There's also the PPI to look at. I wonder what trends have prevailed over time.
enemy of state wrote:
I object to the charcterization of debt as borrowing from the future. From the standpoint of the overall economy, debt is a wash.
Government debt -- financed by the creation of new paper money -- is a massive transfer of wealth.
The vast increases in federal spending in the last 18 months have been made possible by the Federal Reserve creating 1 tillion dollars in new paper money and giving it to the Treasury Department to spend. That new paper money will, inevitably and over time, simply make all the previously existing money worth proportionally less. It is thus a means of indirectly looting the American people of a trillion dollars to give to politically-favored groups, i.e. to Democratic voters in public employee unions, state governments, bailed-out entities like GM, etc.
Exactly, only W did it first and on an even more massive level with TARP, and that was all given to those most responsible for crashing the world economy, and to people who needed it least, with no strings attached.
TARP ended any shred of illusion that we have any control over the money we give to the government in taxes. At least with the more recent stimulus some is going to people who actually need it.
Debt is also a way of increasing demand now. For example, debt allows someone who could otherwise not afford to buy a car to buy one, and allows a homeowner to withdraw equity to pay for new home improvements. The businesses who receives these funds use them to pay their employees, and to buy additional goods to sell. Prices for commodities tend to stay higher than they would otherwise be (because of the additional debt), encouraging more exploration and production.
A lot of the products produced in response to this increased demand can show up as GDP. So increased debt can stimulate GDP growth.
Debt is also a way of increasing demand now. For example, debt allows someone who could otherwise not afford to buy a car to buy one, and allows a homeowner to withdraw equity to pay for new home improvements. The businesses who receive these funds use them to pay their employees, and to buy additional goods to sell. Prices for commodities tend to stay higher than they would otherwise be (because of the additional demand/debt), encouraging more exploration and production.
A lot of the products produced in response to this increased demand can show up as GDP. So increased debt can stimulate GDP growth.
With you till the end when you list where the money has gone. In fact most money has gone to the rich, the financial institutions are accounting for about 50% of all profit in the US economy, and the wealth of the poor (your list of beneficiaries) has shrunk. Does tis compute?
You can't REALLY borrow from the future. All that there EVER is is what exists at that point in time. Government spending shifts PRESENT resources from private ends to public ends whether the government obtains it's money by taxing, borrowing or printing the money. Nothing is borrowed from the future. Time machines don't exist.
Present investment and consumption that may or may not bear fruits in the future is crowded out by the government expenditure, but then that expenditure may be more or less fruitful than what the private sector would have done.
As a side track, it's kind of funny the perception people have of the social security trust fund comprised of T-Bills. They think the government has 'saved up the money' and that there won't be an impact until the fund is dry. The *money* HAS been saved but who knows about the resources. Money is just paper that can buy some amount of resources WHEN IT IS SPENT FROM THE POOL OF RESOURCES AVAILABLE AT THAT TIME.
Surplus money collected for SSI is spent when it is collected, and the 'fund' gets a t-bill. When SSI needs to spend the money to provide benefits as the bills mature it does so. The maturing T-Bill is not rolled over and so another T-Bill must be issued in addition to fund other government spending or spending must be cut, or additional taxes raised, or money printed. Each dollar spent out of the SSI 'fund' will result in the rest of government having to make the choice of where to come up with it AS IT IS SPENT IN THE BUDGET YEAR IT IS SPENT.
The spending on SSI will shift resources from the rest of the economy toward SSI benefits AS IT IS DONE. The fund 'running dry' after years of expenditures exceeding recipts is just the point when government gets the opportunity to decide whether to continue paying benefits by raising taxes or cut benefits. The taxes/cuts/borrowing levels necessary will already have to be in place at that time to continue other spending, and the choice will be whether to continue that way in order to supplement SSI.
It may be that you can't borrow from the future in financial terms, but in terms of real, physical "capital," we certainly have--actually stealing is a more accurate word than borrowing, since we have no intention of paying it back.
The species diversity, fossil water, fossil fuels, relatively stable climate...that were there when I was born will not be there for any future generations in any reasonable time scale.
Yes that is what happened after the last oil shocks E improved by nearly a factor of 5 and yes we need to improve E on the downside of the Hubbert curve. But as happened on the upside growth always trumped improvements in energy efficiency, on the downside it will be the same, depletion will always trump improvements in energy efficiency because there will be a minimum energy needed for any GDP output and time goes on forever. Re debt as borrowing from the future see the comment by Kay Bye
Hi Bob,
As a Jafa, I have always wondered who at Otago U was following the various energy blogs :-)
The factors that appear to me to be missing are:
1. The impact of inflation on GDP.
2. The impact of the huge surge in M3 - affecting inflation.
3. The impact of the radical growth of real government spending (of an inflationary nature)
4. The impact of the use of CDOs and CDSs to leverage property price growth
5. The development of the USD quadrillion of the unregulated derivatives market.
Now that M3 has turned strongly negative, I suppose we will see an escallating drop in global GDP (i.e. deflation, no matter what governments do) because the size of the damage to the global financial system simply cannot be compensated for by running the printing presses. An apocalyptic view perhaps, and certainly one that few keynesian economists would consider possible.
The problem with the debt figures shown here is that not only do people factor in the transfer of debt to future generations that is not being accounted for, but governments have guaranteed bank debts in places like NZ and Australia. Politicians are happy to give guarantees because they are unlikely to be around when they are claimed against. But New Zealand is particularly exposed with the guarantee equalling about 100% of GDP.
A sustained bout of deleveraging (perhaps due to a sovereign debt crisis in Spain or the UK) would see the popping of the Australasian property bubble and thereby the Australasian banks unable to meet their obligations.
So my opinion is that GDP figures are moderated by political pressure to provide the world's governments with the sort of GDP growth they would like to have, in order to justify re-election.
The IEA and EIA manipulated oil production forecasts to suit the same objectives (don't frighten the horses) and of course the abolition of Glass Steagall in USA allowed the unfettered growth of the broad money supply by virtue of the unfettered increase in debt - beyond all sensible notions of prudent capital adequacy rules.
Off balance sheet insolvent subsidiaries of banks effectively rendering many huge banks insolvent when one uses prudent accounting rules and conventions.
Since GFCI the problem debts have remained as toxic waste in bank balance sheets..hence the current lack of funding available for business.
So, my view is that we should have expected the historical correlation between oil and GDP growth to have continued. I expect the disconnect (one of timing now) was simply due to the market shenanigins, allied to subsequent government interference and we will soon see the delayed re-coupling. To the detriment of us all :-(
kind regards
ei
enemy of state said:
So do I (except in the sense of dohboi, above, that we're wrecking the biosphere and compromising the climate).
We really, really need to understand money. There is an academic discipline devoted to this, called Modern Monetary Theory (MMT for short), and I am convinced they have the basics sorted out. What follows is my attempt to sum up the MMT perspective on the situation.
---
Money, in a modern non-convertible ("fiat") currency, is made in two different ways.
The second, well known and understood by most readers of this site, is private money creation: A loan and a deposit is created at the same time, from nothing. They net to zero.
The first, and most fundamental one, is sadly not understood by most readers of this site. It is government spending. A government spends by debiting an account in the private banking system. No debt is created! Or at least, no debt need be created. As a matter of accounting, yes there must be a balancing item somewhere in the govt books... it could be called "Accumulated Deficit". It does no one any harm. It is simply a measure of the amount of "high-powered money" in the system.
As a matter of fact governments do sell debt. There are good reasons to do so -- to put a floor under interest rates, for instance, and to reward private actors who wish to save. And there are bad reasons for doing so -- like not understanding that the government can actually create money. Of course, if the central bank buys the debt... Central banks, despite frequently being nominally independent, are functionally branches of the ministry of finance.
Government spending can lead to crowding out, but only if there is a shortage of real resources. People are a resource in this respect; lots of unemployed people are a dead giveaway that government spending to put people to work will not lead to crowding out, at least not in the labour market.
A government that is in control of its currency (issues it, and does not do something stupid, like peg it to another currency, or gold) will never have to default. The greatest problem for Greece is that it does not control its own currency. The ECB is not a part of the Greek govt, nominally or functionally. The EMU, as is, is dysfunctional: It must either be broken up, or EU member states must cede fiscal sovereignty to the EU.
A common sentiment is that fiat money is inherently worthless; that it is an illusion.
It is not. It is said that two things in life are certain: Death, and taxes.
Taxes, payable in Dollars (and Dollars only) are a very efficient way of creating demand for Dollars. If there's demand for it, it has value.
---
Some MMT sites:
New Economic Perspectives (particularly relevant: Repeat After Me: The USA Does NOT Have a ‘Greece Problem’)
Bill Mitchell's blog (and in particular his teaching models)
Mosler Economics
Another source of money creation should be price inflation of assets.
Longer ago, if the price of real estate went up, or if the price of stocks went up, it could probably be neglected in economic models. The homeowner could not spend the money easily. Stockholders were relatively few, and they would mostly plow any appreciation back into other financial assets instead of consumption.
However, now the homeowner can tap the increased value of the house as easily as writing a check against a home equity line of credit. Stocks are widely held and traded, and money can be moved from a brokerage account to a demand deposit account automatically.
I haven't seen monetary theory adjusted to take these "innovations" in financial services into account. However, it should be important, since inflation raises asset prices which increases money supply which increases inflation which .... a classic positive feedback loop.
Merrill said:
But I think it is, sort of. It is tightly linked to private money creation (debt issuance). As the amount of debt in the system grows, the amount of money in the system grows, and consequently (govt money and physical assets flat) assets are bid up, because a larger amount of money is chasing a same-size pool of assets.
Merrill said:
See my (other) comment above: I think this is how expanding money creates economic growth. Basically the house did not increase in "real" value -- the "owner" believed, because the money signal told him so, that the value of the house was greater than it actually was, and that it therefore was safe to spend a part of it.
Merrill said:
It is important; very important! And if we modify the sequence slightly, to "inflation raises asset prices which begets economic growth which makes easier to obtain loans which begets inflation", I agree totally.
I think I understand what you are saying here but I'm struggling to understand why you think it's significant.
I agree that if a country controls its currency then it cannot default. And I agree that because taxes must be paid with the currency, the currency will always have some value.
But so what? If the government spends too much from its magical bottomless account then the amount of physical wealth you can obtain with the currency will decline, and that's the only thing that matters in the end.
There's nothing inherently wrong with fiat currencies as long as paper wealth is kept in balance with physical wealth.
Kye Bay said:
See my reply to your reply to my reply to your... er, well, see here.
Kye Bay said:
Yes. That is our predicament, and that is why it is important we find out how money works, so we can determine how much is enough, and how much is too much.
That's a very important matter, but not the only one. Distribution of the scarce resources is perhaps of even greater significance. Basically, governments can, if they use the fiscal tools available to them wisely and in the public interest, do a lot to curb the abuses of the oligarchy, and minimize the amount of pain the transition entails. (Of course, they can also use those tools to make themselves into oligarchs, so democratic control of govt is critical, likewise voter understanding of the issues). But left to their own devices, backed by draconian bankruptcy laws and allowed to dictate "fiscal austerity", the oligarchs will end up with it all.
The political implications of MMT are great, and not to the oligarchs' liking.
Of course governments can ensure a reasonable distribution of wealth in society. And of course governments can prevent abuses of power by those with capital. But what governments cannot do is create physical wealth with additional paper wealth when there exists some physical limit to growth.
It should be noted that part of the decoupling is due to large increases in the use of coal and gas energy over the last 5 years. If these could be factored in, the discrepancy may largely disappear.
Great article.
Since the credit crisis began the GDP numbers from many countries are suspect, subject to government exaggeration for political benefit. Velocity of money has collapsed since 2007.
The level of oil usage is probably a good proxy for the real level of world GDP. Figures last week show two consecutive annual declines in US electricity consumption. The first such event since 1949.
http://finance.yahoo.com/news/AEP-to-keep-10-units-off-line-apf-31600791...
Interestingly, electricity consumption has long been regarded as a better metric of real Chinese GDP growth - because their official figures are so suspect.
Would be interesting to rework the analysis using figures from www.shadowstats.com and similar sites for other countries.
Great point winter - I find it interesting that they talk about debt to GDP ratio when debt is included in measuring GDP. Strip that out and I am certain that debt far exceeds real GDP and in fact the interest alone is probably approaching real GDP totals.
Debt is a useful tool when it creates a discounted future series of cashflows that exceed its cost (interest). Positive Net Present Value.
FF
"Debt is a useful tool when it creates a discounted future series of cashflows that exceed its cost (interest). Positive Net Present Value."
That was then, this is now. Another way to state that would be
Debt is the best tool to accelerate the extraction of the worlds finite resources and convert them into trash, pollution, garbage, landfills, spills, flotsam, and what have you. Positive Net Present Value at the expense of the future.
If everything goes according to plan.... The trouble is this creates a pressure toward plans that promise to pay the most interest but which have maybe a less than great chance of working out.
But then there's always that pressure, the pressure not to be a wuss and get left in the dust.. That doesn't seem like a wrong to me. But also since there IS always that pressure, neither does it seem like a peculiar virtue of debt.
I don't think debt is included in GDP. At least not according to wikipedia http://en.wikipedia.org/wiki/Gross_domestic_product
The spending of money obtained by going into debt seems to be included, but the financial product which is the debt itself is not. ( see the section on Investment where components of GDP are broken out ).
At least that's how I read it.
The products that debt buys are included in GDP. It is really the manufacture of these goods that is reflected. But as I explained above, a more role of debt is to increase demand. Many people could not buy a new car, without debt, for example.
Wintermute,
Please start your own thread if you do not intend to reply to the previous message.
Indeed. The invention of high pressure fracturing of tight gas formations may well be a complete game changer. In the US, new NG wells are profitable at $4.00 mmBTU which is about $24 / barrel oil in pure BTU terms.
While it may take a fair amount of time to convert some fraction of oil use to natgas there is a lot of low hanging fruit which is available in the form of fleet vehicles where infrastructure and conversion cost can be amortized on the same balance sheet and the paybacks computed easily.
Since these formations exist all over the planet, this is a huge, huge win.
And imagine that just 5 years ago the then chairmen of the Fed (greenspan) was worried about peak nat gas and inexorably rising prices.....
david, I'm a bit confused why you think this is a game changer or how this one new source can scale up infrastructure wise in the current economic climate.
This is a BAU message that you're pointing too, but at what stage does all the info coming in say maybe we need a new business. http://www.guardian.co.uk/politics/2010/may/31/world-resources-shortage-...
The above gives several links.
Just because there is a huge resource base does not mean it can be accessed. I'd really like to know why you think this is a game changer, is the implication PO becomes irrelevant?
Yes, I do believe that peak oil will become irrelevant in the long run. At some point in the future fusion reactors will become a reality even if that point is 50 years in the future. To get from here to there, it is likely that we will continue to burn fossil fuels, and build more fission reactors. There is no shortage of fissile material on the planet when looking out over the century time frame. It is just a question of political will.
The reason I think that nat gas is going to be a game changer from a shorter term perspective is that the marketplace is already reflecting the real present time cost of extracting it including profits. This is no pie in the sky future prediction, it is the here and now. As I stated above, the BTU equivalent is $24 crude. So far from peak oil, the only thing we most certainly have seen is peak oil price. While the arbitrage will take some time to play out, play it will.
In general folks here tend to discount the exponential growth of the worlds knowledge base. How many of us imagined twenty five years ago that what started out as a way for scientists to share files would turn into perhaps the most transforming technology the world has ever known and that billions of people would have access to it at virtually no cost.
Electricity generated from nuclear power plants does not necessary run automobiles. Where do you get the idea that fusion reactors are fifty years in the future? Is it because you want them to be? We have heard that fusion is attainable and that it is just in the future for decades now.
Fifty years ago, nuclear fusion was only 20 years in the future... To cheap to meter
Nah, "Too Cheap To Meter" was going to be fission. Reddy Kilowatt and friends on elementary-school tours, and all that.
Fusion power might happen yet, but it isn't going to come through the big Tokamak projects. If it happens at all it's going to be through some method that none of us know about today.
Christoph-R,
I agree with you that rising gas and coal production likely played a role in the strange relationship we see in recent years. There was a huge ramp up of coal, especially, in recent years and natural gas to a lesser degree.
This is a graph I made with the new BP 2010 data. On a total energy basis, through 2008, we were seeing a rapid ramp up in fuels through 2008, when world GDP was rising.
The graph shows the BAU scenario playing out: when global peak oil arrives, the system begins switching to natural gas and coal to maintain exponential growth. Since the global production of these fossil resources will not peak for decades, economic effects from peak oil will be mitigated. I still assert that peak natural gas is more likely to cause civilization to collapse than peak oil. Malthus correctly understood the underlying principles, but was grossly wrong about the timing because substitutes were found. Global peak energy has not yet arrived.
To head off those who will remind me about energy quality, i.e. you can't run cars using gas and coal, that is not really true because ethanol and biodiesel have energy from those sources embedded in them. Diesel engines can run from natural gas. Motorists can purchase EV and PHEV's, and trains can be electrified. Efficiency can be improved. The global economy can tolerate some increase in unemployment and decrease in consumption from recessions and depressions without collapsing. These factors are presently arrayed against peak oil even though resource depletion will dominate eventually.
Indeed, electricity is not yet the main problem. But the transportation sector runs almost completely on oilproducts.
When oilproduction starts to decline, it will become clear how much ethanol and biodiesel contributes. If gas is used in the transition phase, peak gas could be there within two decades.
Yes, precisely, partially switching transportation, such as corporate automobile fleets and semitrailer trucks, to use natural gas would help sustain BAU for another 20 years. Consumers would get EV's, PHEV's, rentals, buses, bicycles, unemployment and sidewalks. I am not saying that it would be a long term solution. Because it offers the easiest short term relief from peak oil, humans will probably choose this option, endure a recession/depression/poorly performing economy for the next 20 years and then experience a collapse of society on the falling edge of peak natural gas. This projection is in stark contrast to the belief of most peak oilers that peak oil will cause a collapse soon. I think the BAU party will continue for decades longer digging ourselves into a very deep hole and dragging the ecoshpere in with us.
What percentage of increased GDP during the plateau is due to the increased price of energy?? Thirty billion barrels of oil per year at $30-60 dollars per barrel incremental price plus the increase in natural gas and coal.
There is a non-linearity buried in the correlation. One must isolate the partial derivatives.
Good report.
FF
Well offsetting this is the embedded energy in infrastructure that was built with cheap oil. Thus even though the price of oil rose most of your infrastructure was developed before expensive oil.
With that said in general you get about five years or so before roads need resurfaced and at least in the US bridge maintenance and other work was left undone reaching crisis levels.
So the relationship between energy prices and GDP is complex with a large lagging factor thats now starting to be and issue.
The problem is of course we don't have a good metric for what I call capture of wealth this is savings and infrastructure and goods and services that are fully paid for. For example in the US about 30% of our homes are fully paid for but the value of the homes that are paid for vs those with loans is significantly lower. I don't have the number handy but lets say its 20% of the total nominal value of all homes is represented as paid off properties. This means 80% of the value is based on expectations of future income or wealth capture.
Same of course goes for government projects of all types very little is actually paid for. And of course we have to pay the maintenance going forward.
If your seeing a yawning cliff approach that is really just the EROEI cliff shifted via debt instruments then you nailed it.
What no one has done a good job at is explaining how the EROEI translates easily into collapsing wealth creation and then eventually into collapsing GDP as debt is forced out of the system.
The best analogy is its a problem of receding horizons indeed its like a star collapsing on itself going supernova or into a black hole. People see the debt overshoot and the disconnect between GDP and energy but thats just like the outer layers of the star being blown off and briefly outshining the host galaxy. Underneath the system is really on and accelerated collapse path.
Intrinsically whats happening is wealth creation has gone distinctly negative already with the future value of almost everything a small fraction of its current value even five years out esp 30 years out.
This might be the best way to look at it actually unless your and insane cornucopian its fairly clear that if the US manages to have stabilized at what we call a third world economy even 15 years from now that will be a hell of and accomplishment. This is a fairly obvious end point. Thus our current economy has to be connected to this third world economy of the future over some period of time with 15 years being very reasonable and probably excessive.
Its obvious that if this happens basically every single state and local government will collapse in bankruptcy over the next few years. Underlying infrastructure costs will play a big role in ensuring this happens.
Sure the Federal government can take on these liabilities but if it tries to avert the collapse then its balance sheet mushrooms. If the state and local governments try to tax their economies simply implode faster. You literally cannot print your way out its impossible.
It eventually goes back to the simple fact we captured very little real wealth to date with debt based pricing causing inflated valuations. As the system falls to its cash clearing price then the money is simply gone and with it the tax revenue all the way up the chain from Podunkville to Washington DC.
From a financial perspective whats happened is we have paid way way to much in interest over the last several decades than we could really afford. The expansion of the FIRE economy was false and driven by expanding debt that could never be repaid. We rolled it and rolled it until we failed. The fact that we did so is only obvious when we finally deplete our basic commodities esp oil.
In any case the real forces at work right now between debt, wealth and nominal GDP and energy are huge the EROEI cliff will get reflected back into the economy even if the math is hard to figure its clear that all kinds of positive feedback loops are activated and growing ensuring that the economy is pulled kicking and screaming over the EROEI cliff no matter what financial games are played.
Well I tried to explain it! Economic Dynamics and the Real Danger. Instead of GDP I relate to total assets (human-built world) measured in emergy, there should be a correlation even if weakened by out-of-whack debt. Note that in the graphs, assets decline as a function of net energy flow decline.
George
Lets just call it the graph.
However there is a bit more to it if the society has accumulated significant debt then the period where debt creation is impossible should be pushed back in time.
I'd argue this is the biggest unknown the expansion of debt itself indicates that we past the point of paying back debt otherwise one would expect it to be flat or at leas undulating. I'd argue steady expansion indicates that the feasibility of actually paying back the debt was impossible. Its interesting to consider why debt expansion continued even as it was obvious that actual payoff was impossible. My best guess is monetary inflation itself played a role in hiding when we actually crossed the line.
Perhaps your debt pay back feasible should decline in a smooth curve i.e its not a sharp cut off but only a precentage of the debt could be payed back over time. Starting at 100% and going to zero in a smooth curve. Unpayable debt is rolled into expansion of outstanding debt overtime.
The moment debt is obviously expanding the game is already up. Further declines in EROEI simply fuel ever greater expansion until as you point out credit creation is no longer possible even as EROEI has not yet peaked.
If you think about it globally the collapse of the Soviet Union and its economy was probably when overall debt creation actually failed to expand and tilted toward impossible. For the US massive inflation of home and land prices aka asset valuations made it look like credit was still expanding however in reality it was not. Basically none of these loans where viable it was faux credit based on a faux credit induced asset bubble.
The only major issue I have is that credit payable declines on a precentage basis smoothly over time.
Next observation is my assertion of a interest rate explosion near the end occurs as we leave the area where credit cannot be paid back and enter the era where credit cannot be created. Here is effectively where all outstanding loans are called in. Thats the source of the interest rate spike.
This points to one missing financial piece of the puzzle interest rates. Perhaps for external reason they fell over almost the entire time period. You can see that the spike in interest rates back in the 1970's and resulting long term fall was almost certainly artificial there was no intrinsic reason for this to happen. Even with peaking US production and efficiency gains. What should have happened is interest rates should have slowly risen following the EROEI curve and outstanding credit fallen steadily so by the time credit creation became impossible the amount of outstanding credit would have approached zero.
This is critical because the paradox of mild inflation and falling interest rates is what allowed the credit bubble to expand even as it was technically unpayable it was rolled into lower and lower interest rate loans.
Fantastic graph.
I'd like to hear your views on debt expansion or rolling unpayable debts and the paradox of inflation with falling interest rates. But to be clear all that does is cloud the picture.
Debt creation is possible, even in the red zone, and common sense would indicate that some loans will perform. I I agree that in general, enterprises will decay through entropy, but that does not mean that SOME enterprises wouldn't be successful and even grow. Less productive, less energy intensive farming may for instance become profitable at the same time that more productive more energy intensive farms go under because energy is too expensive. I have not been convinced that there wouldn't be someone with money willing to lend to a wind farm project or that the wind farm project would not be able to pay back the loan.
Imagine planting a cactus and a maple tree in the desert next to each other, and providing both with ample water. The maple tree will dominate the cactus and eventually shade it out, but then if you stop watering them, the maple tree will wither and the cactus will grow.
A couple of years ago I started to run on an annual basis regressions between
the price of oil and global GDP
and
the quantity of oil consumed and global GDP
I was pretty careful about the data – the quantity data came primarily from BP and I think the IEA and I used a variety of base years and deflators for the price data. Global GDP data is tricky because of aggregation, accounting and currency issues (among many) so I also used several data sources for that, also with different base years.
The resulting correlations though were consistent.
the correlation of price/GDP was consistently around zero whereas the correlation of the latter two datasets (Quantity/GDP) was consistently in the 96%+ range regardless of base years, deflators etc.
The high correlation of Q/GDP made sense to me because without inputs you can’t create output.
That got me to Enviromental Kutznet Curves which seems to be more of a micro/macro issue than anything else, but I have to spend more time on that.
I should dig it up and, update it and start playing with it again.
Rgds
WeekendPeak
Economists don't study economies, they study flows of money. Since money is now pretty much all fiat backed by nothing, it has only a first or second derivative relationship to reality at all... and central banks and governments can sever what tenuous link money has to reality anytime they see fit.
Pretty much all economic schools also assume infinite resources and perpetual motion. This is true of the Keynesians, the Austrians, the neoclassicals, and so on... they're all willfully ignorant of the second law of thermodynamics.
IMHO, economics as it presently exists is a sham. One reason is what I said above: they don't really study economies and they're willfully ignorant of physics. The other reason is that the entire profession is bought and paid for by monopoly banks that have a strong vested interest in the present system. Any conclusion that doesn't support some version of business as usual are peeing in the pool, and you're not going to be asked to stay.
I'm not a "doomer" when it comes to the physical realities... I do think it's technically possible to maintain a technological civilization with a high standard of living post-oil and post-rapid-growth (or post growth as we know it). We could still have certain kinds of growth: growth in knowledge, growth in technical ability, growth in stability, growth in intangible things like art, etc... but I do think that growth in absolute resource consumption and energy flows is maxed out for the forseeable future.
But I am most definitely a "doomer" when it comes to the present financial system. Peak oil is the absolute apocalypse for the present world financial system. The whole thing is going to blow up, burn, and sink.
The first stage will probably be deflationary collapse. The policy response to this will be to thump the Keynesian bible and stimulate and print money (we're already seeing this). Since no real growth is possible, this will simply result in stagflation. This will, in turn, kill the economy further and cause another leg down. Eventually either the currency will be destroyed by hyperinflation or the banking system will be destroyed by mass loan defaults.
The most important thing for us to remember though is this: this entire financial system is built on worthless fiat paper. It does not reflect reality. This means that when it crashes, after the crash we have the same things we had before the crash. A spinning wind turbine will still be spinning after the fiat money system is gone. A solar cell will still make electricity. A nuclear reactor or a producing natural gas well will still be producing too. The Internet will still work (provided it's maintained). Some oil will still be flowing (though this resource is of course waning). The laws of physics are still in effect. Farms still produce food. People can still do labor. Things still have value.
So the correct response is to, at some point, just let Wall St. and its relatives around the world burn and to pick up locally centered currencies or "hard money" (e.g. gold, silver, etc.) instead and then let the natural economic activity that's going on re-price everything in these media of exchange.
The incorrect response is to stay on the bridge of the ship and go down with it. To the extent that I do flirt with being a "doomer," it's because of this possibility rather than technical reasons. Economic systems and governments are like the vampires in the film The Lost Boys: some go loudly, some go quietly, but all will try to take you with them.
Best comment of the day.
I go further and say that economics is the study of how to increase wealth.
Econophysics is the study of what makes things tick in the economy. I think economics has to transform into the study of how to keep people busy. Idle hands are dangerous hands and further downturn will mean more people with nothing to do.
I dabble in econophysics and my favorite topic right now is labor productivity. This is a rich envrionment because so much data exists on how aggregates of workers obey the most simple behaviors of statistical mechanics.
http://mobjectivist.blogspot.com/2010/04/extracting-learning-curve-in-la...
That's a remarkably ignorant assessment of an entire discipline. Barkley Rosser, Jr. wrote a short piece to describe econophysics to economists. I'd be interested in whether you share his perspective:
http://www.lampsacus.com/documents/ROSSERECONOPHYSICS.pdf
Its not my statement, economics is the study of wealth. I shortened it because it is certainly not the study of how to decrease wealth.
I read the paper. I agree with one section of the paper that says some people apply non-Gaussian distributions to everything. That's my approach because the world is wide open for studying disordered phenomenon. I will leave the Gaussians to others.
It seems to me that if economics was that embracing a field, then the branch of econophysics would never have crept in.
Perhaps this is the analogy. Chemical engineering is to economics, as chemistry is to econophysics. The one is more fundamental than the other.
If you actually took the time to read articles in economics journals, you would realize that statement is false. I followed your link...referring to a few papers that make that claim doesn't make it true.
I hope you confused you own analogy, because it doesn't make any sense to me.
With regards to econophysics, I think the verdict is still out. It may prove fruitful, but it is probably too early to make a full assessment. I have backgrounds in both physics and economics, and tend to agree with the assessment by econophysicists that the study of economics has tended to be a priori rather than data driven. However, for a subject based on the distributions, the one limitation that econophysicists will face is that there are a limited number of areas with sufficient data to do very much. It's no coincidence that financial markets were one of the first places for studies. As far as I can tell, claims of superiority are largely based on either faith, or are attempts at academic marketing.
On the blog, I mostly report on my original research and I get ideas from papers I read.
I can't help it if most economics papers are unreadable to me, while the econophysics papers invariably make sense. I stay away from financial market econophysics topics, that stuff may be unreadable as well. Suffice to say, I have a narrow window of tolerance for how these topics are presented.
WHT:
I'm researching productivity from the fundamentals, such as timelines and diffusion curves of past great discoveries and innovations. However, I've noticed several instances in which productivity follows a constant growth rate, meaning that the percentage increase constantly declines. Examples: the amount of personal consumption expenditures(food, clothing, housing, health care, personal care, etc) purchased with one hour's work rose from a factor of 1930=2.7 to 1990=9.8. Corn yields increased 1.9 bu/acre from 1945 to 2000, and are a factor of 6 higher than 1940. Soybeans yields were also on a constant increase until recent years. There is great concern that yields have plateaued. Cotton plateaued over a decade ago.
Could happen. Diffusional processes may never hit an asymptote but they show decreasing rates of increase.
I like to start with the analogy of the steam engine. Newcomen's was 1% efficient. Utilities using single cycle steam maybe are 40% eficient. An improvement of 40 times! Best practice is combined cycle natural gas at 60%. We have a few percentage points to gain on average; most of the potential has been exhausted.
Same thing with labor productivity. The spinning wheel took more absolute labor out of making thread than (90% plus) than the entire British industrial revolution, which multiplied productivity by over 1000 times. The residual savings are trivial compared to what has been accomplished.
Well, ultimately, GDP does not depend on physical objects that need to be moved around. That just happens to be a big part of world GDP at the moment.
But the economy can't tell the difference between $100 spend on a tank of gas, $100 spend on theatre tickets, or $100 spend on teachers salaries.
I'm not so sure about that.
$100 spent on video games has likely a different economic impact from $100 spent on productivity software like excel.
Rgds
WeekendPeak
What, exactly, does one "produce" with Excel?
Seems like what is wrong with the "economy" has a lot to do with overzealous Excel projection and production.
Better for all of us if the Bankers had been playing video games and watching YouPorn.com
you can, for example, run a regression of global GDP vs quantity of oil consumed. Doing that by hand would take quite a few man (woman)hours. IMHO running doing work like that adds to the stock of knowledge in the world. Getting to level 7 of Grand Theft Auto doesn't....(again, IMHO)
Rgds
WeekendPeak
basically data manipulation that optimises the consumption of pRoN and video games I guess?
I'm one of the old school who believes that economics should have something to do with economy and frugality...
Hence OpenOffice Calc, if you don't mind, not Excel.
I agree that using a spreadsheet could have a larger economic impact than using a video game. Neither of those are physical, however.
Let's try a more direct comparison: The economy can't tell the difference between spending $500 on a new computer or paying a local tech $500 to install Free Software on your old computer and teach you how to use it.
GDP is indifferent to the false dichotomy between goods and services. Hence we can have the same economic performance without physical products (including oil) being a significant part of the economy.
its a closed system.. the guy using the spreadsheets is only able to do it (in part) because the other dude is playing video games
At first thought, it seems those tickets expended no energy. But on deeper consideration those theatre tickets quickly turn in a demand for power for lighting, building heat, building maint, staff driving, staff heating homes, staff buying food, staff using electric appliances. The "non-physical" economy can only work if no one needs food, heat, housing, travel, etc while performing job duties, which does not happen.
In reality the economic sectors are so tied together that it has long been found that most sectors, even service sectors, use very similar amounts of energy per $ spent.
Read this paper for a background:
Cleveland, C.J., R. Costanza, C.A.S. Hall and R. Kaufmann. 1983. Energy and the United States economy: a biophysical perspective. Science 225: 890-897. http://www.esf.edu/efb/hall/pdfs/energy_US_economy.pdf
Thanks for the link. What they say, (re the entanglement of the economy etc) is backed up by what I found, that global GDP and the quantity of energy used are very closely related.
Rgds
WeekendPeak
I don't find myself quoting Greenspan often- but several years ago he put out the idea of the "mass" of GDP and pointed out that on a relative basis it has been declining- as the mass of the GDP declines so to does the energy used to move it around. The declining mass is a combination of miniaturization and greater role of services within GDP. I think one additional contribution for the dramatic change between GDP and energy is the full scale adoption of the internet and the build out of the cheap telecomunication infrastructure earlier in the decade.
This too.
Think of it this way: 25 years ago I would have a television, a VCR, a cable box, a full size 400W computer or two, a cassette deck, a CD deck, a tuner/amplifier, and who knows what else to have home entertainment.
Today I have a laptop, a small projector, and an amplifier with speakers. All of these things use less energy than their counterparts 25 years ago (sometimes by orders of magnitude... my laptop uses like 40W instead of 200-400W), and I need at least one order of magnitude fewer things.
By contrast, I have orders of magnitude more things I can do with these things. Also: I take my laptop to work everyday and use it there too, so my company no longer maintains a separate work computer for me either.
You could call this "demand destruction through efficiency improvements" and "demand destruction through consolidation of function." I expect these to be huge economic trends in the future as resource constraints apply pressure in this directly. This is great for our personal future, but is not great for the world financial system (see my other financial system bashing post in this thread).
Of course, a Macbook Pro, a projector, etc. have pretty high embodied energy... I'm not sure how their embodied energy would compare to, say, a tower computer 25 years ago... but I'm pretty sure it's less than the embodied energy of all that separate stuff I used to have!
It's also getting more reliable and more recyclable. I think my current laptop is over 90% recyclable materials, and I've had it for over two years and it's still quite fast and works perfectly.
This is yet another reason I'm not a "doomer." The amount of stuff that we need to maintain our standard of living is falling, not rising. So while the pie might not be getting bigger, the nutritional value of a slice of pie is getting higher thus requiring less pie per person to feel satisfied.
(This also ties into what was by far the most interesting article I've ever read on The Oil Drum and one that utterly rocked my thinking: the one on whether there are demand limits to growth.)
" I think my current laptop is over 90% recyclable materials"
"recyclable" is of course a very slippery term. Will it in fact get recycled? At what expense and what circumstances? Have you heard of the horrific conditions and the devastation of individual health and local ecologies in the the third world recycling facilities?
Miniaturization is an important development, but, like Jeavons' Paradox, it also allows for the sale of many more units, even as the units get smaller. Three billion cell phones have a larger negative impact than three hundred million old conventional phones--especially when the latter last decades, while the former often only last weeks, sometimes less.
I see Jevon's Paradox get thrown around a lot in these discussions, and I always have a question: does Jevon's Paradox hold in an environment of decreasing resource availability?
For example, if I trade in my guzzler for a Prius that gets twice the gas mileage, it means I burn half the gas. If gas is cheap, then I might decide that now I can double my commute length! But if gas too is doubling in price, then now I've just treaded water... my drive costs the same thing as before.
It seems to me that all the examples of Jevon's Paradox I've read are in economic environments where there's no strong supply constraint, so there's nothing stopping consumption from increasing. But what if efficiency improvements are being driven by supply constraints? I can't see why Jevon's Paradox would still hold there.
Well, no one knows, since we haven't been there yet.It probably doesn't "work" in the classic sense that it is not likely to _increase_ total energy consumption. The relevant question in this context is whether efficiency alone will lead to the flat total use you describe rather than prompting the actual reduction such efficiency would be thought to produce.
The lesson of Jevons Paradox to me is that efficiency alone won't be sufficient to significantly reduce total energy (or other resource) use. Some combination of taxes, rationing and general public commitment to reduces use is necessary for that, as was seen, for example, in WWII, when England reduced its domestic (non- military) use of petroleum by some 95%.
It's possible that "decreased cost through increased efficiency" (with Jevon's Paradox as a possible consequence) and "demand destruction through increased efficiency" are very different economic processes. The latter might be something we haven't really seen before in an industrial economy.
Just speculating, but one possibility I can envision is a "nominal depression" where the standard of living seems to stay more or less constant but all the economic indicators are collapsing. Economists and politicians are running around with their hair on fire, but everything else looks far better than the economic numbers would lead you to believe. The nominal economic numbers say apocalypse, but the subjective experience is one of treading water.
Stranger things have happened. "Stagflation" (high inflation plus high unemployment plus slow economy) used to be considered theoretically impossible before the late 70s happened.
I think my overall point here is that as peak oil takes hold we might see some very strange and so far unprecedented macroeconomic creatures rise from the lagoon, especially with the complexity of the financial system and the extent to which leveraged fiat money systems can decouple from reality.
"Just speculating, but one possibility I can envision is a "nominal depression" where the standard of living seems to stay more or less constant but all the economic indicators are collapsing. Economists and politicians are running around with their hair on fire, but everything else looks far better than the economic numbers would lead you to believe. The nominal economic numbers say apocalypse, but the subjective experience is one of treading water"
This sounds like Japan for the last two decades. Economists point to their lack of fiscal growth as some kind of horror story, but most people were getting on with their lives quite well, thank you. And with a good health care system and public transportation, even the relatively poor could get on ok in most cases.
But for us, this now looks like an extremely rosy prospect. We are headed for major meltdowns on every front, not the least of which is the meltdown happening right now in the Arctic, which will likely spell all of our doom in short order.
I saw an article in the New York Times a year or two ago where the author pointed out that the savings rate in Japan had collapsed over the last two decades, from around 20% to around 5% (IIRC). Now obviously that's still a whole lot more than in the US, but it seems Japan might have been "going into debt" (that is, saving less, that is, buying less of other people's debt) to finance their flatline, and if they hadn't things might have become worse.
Well the problem is the flat use case is fairly impossible as population growth continues and oil depletion marches on.
Not only do efficiency gains have to overcome previous use levels but they also have to cover outstanding debt for the system to survive. Using the prius as and example to have the system actually work you need 4X increase in fuel effeciency and a 2X reduction in usage to allow wealth to grow to balance the system. Flat which is questionable does not even come close to cutting it.
Realistically what has to happen is whats happening right now demand destruction takes place by marginalizing ever larger segments of the society and forcing them into ever deeper poverty. Its not that everyone get super efficient prius's its more like at first 10 people get SUV's then 9 etc each round one person is basically dumped to ever more squalid fringe economic conditions.
In the extreme 80% or more of the population can live in abject poverty and a viable government and economic system is possible.
Shocking for Americans today but what we consider the end of the world is daily life for billions.
I don't see anything preventing such and outcome. Eventually sure the middle class will wake up and fight back but just the act of fighting back ensures that those in power will clamp down even harder and strip people of their rights.
Thus as resources decline esp vs population its difficult to understand a way that this route can be closed off.
We have done little to address poverty at the global level as it becomes more pronounced in the US I just don't see the fact that its no longer isolated over there as a real reason to cause any sort of substantial change.
But in general as the pie get smaller the game becomes one of elimination of those who get a slice keeping the amount constant if not growing for the remainder.
"Eventually sure the middle class will wake up and fight back"
What middle class?
Were you around 25 years ago (1985? The most popular home computer, the IBM PC used a 63.5 watt power supply. Other home PCs, such as Commodore 64s and Apple IIs, used much less. Telephones were land lines and used nothing while not in use--and most were rarely in use as toll charges were expensive--and they did not double as notebooks or cameras or TV sets. There was no endless texting or gabbing while standing in line in the supermarket or flying as a passenger in an airplane. That would have been viewed as incredibly rude behavior.
The largest power supply in a PC up until about 1995 that I owned was 220W--and it was a monster tower with a 486 CPU. On the other hand, the system I'm sitting in front of is a desktop mATX unit with a 350W power supply--but I know gamers with 600W units; their graphics card eats more power than that IBM PC.
Most people I know have at least a 32" LCD TV in their "media room". Compared to their smaller CRT versions, these things use much more power. Amplifiers are now 6 channel surround-sound with attached subwoofers--no savings there.
I grew up in a home with 60 amp electrical service; my current home has 200 amp service and my neighbors have 400.
Where savings in energy has largely come from is the weatherization programs of the late 70s and 80s.
A good deal of our energy consumption has been shifted overseas, where manufacturing of goods that are obsolete almost before they hit the street takes place. The telephone that you leased from Ma Bell had a design life of 30 years--and many are still in service today. Show me a cellphone that lasts 5.
Of course, my parents' lifestyle probably seemed to be wasteful to their parents. My grandmother finally got electrical service on her farm in the 60s.
The most popular home computer, the IBM PC used a 63.5 watt power supply.
How much power did the monitor use?
A good deal of our energy consumption has been shifted overseas...
US manufacturing is 50% larger than in 1980. US manufacturing employment has dropped in absolute terms because of fast labor productivity growth.
Probably substantially more than a typical modern TFT flat screen monitor. Probably less than the most recent CRT monitors made. Much less than a plasma TV.
But this is all very confusing, a sterile line of inquiry. UL-listed amps meant almost nothing on low power devices owing to their tradition of exaggerating in order to discourage people from Christmas-treeing their outlets (not that anyone was checking.) Power consumption was often less than nameplate watts, too. I got my hands on a big clunky iron-laden wattmeter back in the day, and measured a number of monitors because I couldn't believe that they could draw nameplate watts without something melting (or an electrolytic capacitor blowing up.) Sure enough, real world draw for the color ones was mostly less than half of nameplate. Didn't bother much with the computers since they would have melted down entirely if they drew nameplate; most of the time they didn't draw much on average (the power supply rating has to fully cover transient stuff like the hard drive motor spinning up, which was a really big deal in the early days.) Nothing at all anything like 400W. (The consumer computer monitors had transistors and integrated circuits, not the jampacked array of tubes historically found in early color TVs. Fire was a problem with those and attracted Federal regulation - phenolic circuit boards disappeared.)
For modern equipment, best to get a kill-a-watt type device and actually measure it; the nameplates are still not reliable indicators of what to expect. Oh, and forget about comparing to 1985 unless you have some antiques handy to actually measure.
That's been my experience as well, using a Kill-A-Watt meter.
Put the outlet meter together with a whole-house monitor (I like GE's), and you get a pretty good sense of what's going on.
A monochrome CRT monitor used ~30 W in the early 1980's. By 1990 the color RGB CRT monitors consume at least 80 W.
anything...and everything
going to bee massive inflationary forces on deleveraged monies as the market tries to pour that money into "something"
at the same time different types of money will decouple... all those investment and hedge funds floating around will simply have no where to go except into inflating the cost of labour/resources or into a fantasy future were it eventually awaits the same fate..
destroy the money or inflate away your pension.... pick one
vast measurements of GDP will be truly meaningless as trying to cash in the fund monies will be akin to trying to land on a aircraft carrier in the dark during a storm with no instrumentation... destroy the tecno-structure
suspect "the market" will try an invent more new financial instruments that keep the money "at altitude" for as long as possible
its interesting how the OP points out GDP growth decoupled after 2005 (May 2005 anybody?) the money just carried on doing a wild "b" Coyote running in the air trick for 3 years then kerplunnnkkkkk! (it's not ideal)
and they say there is no connection between PO and the 2008 crash?
Great topic, thanks.
You said;
"Money is not a disembodied quantity; it is related to the real world by means of what people can exchange it for."
This is no longer true. Money has become "disembodied" a long time ago. I believe Steve from Virginia nailed it with his 1998 date, but is probably started edging that way earlier.
Interesting on topic article;
"50 Statistics About The U.S. Economy That Are Almost Too Crazy To Believe"
http://www.shtfplan.com/headline-news/50-statistics-about-the-us-economy...
Thank you for this excellent analysis. I think debt and energy are central to understanding our future. I am of the opinion that we can expect global economic collapse because all governments have resisted a natural rebalancing of paper wealth with physical wealth by creating even more paper wealth, and thus have created a critically unstable situation. And because of an imminent decline in oil energy I think the post-collapse depression will be permanent (or at least until population resets to a much lower level).
You end your analysis with a comment that climate change must be considered to understand the complete picture. I recently wrote the following message for family and friends to clarify my thoughts about the connection between debt/energy and climate change.
------------
I just finished James Hansen’s 2009 book “Storms of My Grandchildren”. James Hansen is the most respected climate scientist in the world. He is naturally shy and avoids publicity but decided to write this, his only book, after the birth of a grandchild. He wanted his grandchild to know later in life that his grandfather had done everything he could to warn the world. I’m of the opinion that Storms of My Grandchildren is the definitive book on climate change.
The density of information in the book is very high so it won’t be possible for me to summarize all of it. Instead I will try to convey the big take aways for me. Hansen did a remarkable job of summarizing all of the important science. This science is much more complex and nuanced than I had previously thought. I was surprised how deep our understanding is, and the stability of the foundation upon which it rests. I was under the mistaken impression that most predictions had been drawn from computer models, the accuracy of which is of course dependent on model assumptions. It turns out that most of the important predictions are drawn from studying climate change throughout the geologic history of our planet, and they know a surprising amount about past climate.
Before I discuss Hansen’s conclusions, I need to digress for a moment. Experts in the fields of energy, economy, and climate tend to have narrow fields of view. Economists generally know very little about or deny the physical realities of energy and climate. Energy experts frequently dismiss climate change or are ignorant of the science. Climate scientists frequently do not understand or include the implications of peak energy and peak debt in their forecasts. These blind spots are remarkable given the intimate interdependencies of energy, economy, and climate.
James Hansen is no exception. From his book I conclude that he does not understand the implications and timing of peak oil, and seems to be unaware of our monetary system mathematics that guarantee collapse in the absence of growth. Therefore it is very important to place Hansen’s climate predictions in the context of his energy and economy assumptions.
Hansen assumes the economy (and hence energy consumption) will continue at roughly its current level. He makes a very compelling case that if we continue to burn coal, oil, and natural gas at the current rate, then global warming will make the lives of our grandchildren miserable at best, and unlivable at worst. The most important impacts being significant sea level rise, agriculture disruption, storm damage, and species extinction.
He further asserts, with no uncertainty, that if we burn all of the remaining coal plus non-conventional oil (tar sands and oil shale) then the planet will experience runaway warming and will end up like Venus with all life extinguished.
Hansen concludes (with supporting analysis) that there is only one possible solution to maintain a planet that is hospitable (if somewhat damaged) for our grandchildren:
1) We must reduce CO2 from today’s 392 ppm to below 350 ppm, and very soon. It was refreshing to hear him acknowledge how difficult this will be. For example, every single country that signed the Kyoto protocol, which promised CO2 reductions, actually saw CO2 increases, and CO2 is still increasing today. Furthermore, even countries that signed with honest intentions and worked hard on renewable energy and conservation, like Japan, still saw CO2 go up. In case you are puzzled by this, it is exactly what one would expect given that GDP is proportional to energy consumption, and 90+% of our energy comes from burning fossil fuels.
2) To achieve 350 ppm we must stop all use of coal, plus stop non-conventional oil (tar sands & oil shale), plus implement a carbon tax, plus stop deforestation, plus control population growth. Again, it was refreshing to hear him acknowledge that we cannot stop using our remaining conventional oil because there is no alternative and because we will need it for the following step.
3) To maintain civilization as we know it, and to have any hope of public support, we must replace most of the electricity that was previously generated by coal. Again I was impressed that Hansen understands that the low power density and intermittency of solar and wind eliminates them as candidates for coal replacement. Hansen says our only choice is nuclear. But current nuclear produces too much waste and consumes too much depleting non-renewable uranium. Therefore we need a crash program to develop 4th generation nuclear and a little luck. If successful, 4th generation nuclear will burn waste from today's reactors and will produce very little new waste.
I have studied energy in sufficient depth to know that Hansen is correct about the need to replace coal with nuclear, assuming lifestyles as usual. More specifically, I agree with Hansen that when you hear people promote clean coal (which means carbon capture and storage) you can rest assured that this is greenwash that will never happen for a variety of solid technical and economic reasons.
It’s worth reflecting on the precariousness of our grandchildren’s situation, when the only possible solution that maintains current lifestyles and a livable planet requires a new nuclear technology that is still in the R&D phase and may not work.
But now we need to circle back and revisit his initial assumption that the economy (and hence energy consumption) will continue at roughly its current level. As you know from my analysis of energy and the economy, I am certain that we are facing a global collapse. What does this mean for Hansen’s climate prediction and prescription for avoiding a disaster for our grandchildren?
When collapse occurs we can conservatively expect half of the wealth and economic activity on the planet to be wiped out. And it’s entirely possible that the decline will be much deeper than 50% given the huge levels of debt and derivatives that need to be unwound. This means that there is no chance of us being able to afford the nuclear replacement of coal given the many trillions required for the switch. Which means we will continue to burn coal but at a reduced rate because of reduced economic activity. Will this reduced energy consumption be sufficient to save our grandchildren?
But it gets more complicated. At the end of his book Hansen summarized the key uncertainties in our understanding of climate science. One of the big uncertainties is the effect of aerosols on the earth’s energy balance. Aerosols are the particulates (soot) that are emitted from the combustion of coal and diesel and other industrial processes. Aerosols tend to mask the effect of CO2 by blocking sunlight. But unlike CO2 which remains in the atmosphere for centuries, aerosols fall out of the sky after a week or so. So when economic collapse occurs, we can expect energy production and industrial activity to dramatically drop and thus aerosol production to dramatically drop. Which means that in a very short period of time we will experience increased effect of our CO2, which means we may experience a global warming “surge”.
Climate scientists acknowledge the presence of a tipping point beyond which the climate will warm no matter what we do. Many scientists are very scared that we are close to this tipping point. Hence Hansen’s call to arms for us to get back below 350 ppm. Will the warming surge caused by economic collapse push us past the climate’s tipping point?
So now let me try to sum this all up.
If you do not believe Hansen’s predictions and prescriptions, then you really should read his book. It is very persuasive and I think it will give you confidence that he knows what he is talking about. In fact you should read it regardless. We all need to understand this stuff given the stakes.
If you do not believe that the economy will collapse, and you believe Hansen’s science, then you know exactly what needs to be done. You should push the Canadian and Alberta governments to shut down the tar sands immediately. You should push for replacing all of our coal fired power plants with nuclear plants. You should support a carbon tax. You should support sending aid to developing countries to discourage deforestation. And you should support government policies to control population growth.
If, on the other hand, you believe my prediction of economic collapse, then our actions are less clear. We need to ask our scientists to answer the questions: 1) How much economic activity reduction is required to get us back to below 350 ppm? 2) What are the implications of a sudden drop in aerosols? With answers to these questions we can derive any further actions required to protect our grandchildren. Hopefully nothing more will need to be done than to survive a permanent economic depression.
I shortly talked to Hansen when he was in Sydney in March this year when he presented his book "Storms of my grandchildren"
When showing him a graph with Australia's steep crude oil decline
17/3/2010
Australian crude oil production to decline 85% over the next 10 years
http://www.crudeoilpeak.com/?p=1243
he was surprised. That's what he said in his lecture at Sydney Uni:
8/3/2010
"Australia doesn't agree now that they got to stop their coal, but they are going to agree. I can guarantee you that within a decade or so because the climate change will become so strongly apparent that's going to become imperative"
http://www.usyd.edu.au/sydney_ideas/lectures/2010/professor_james_hansen...
ABC TV had interviewed him end of last year:
8/12/2009
James Hansen: Storms of My Grandchildren
http://www.crudeoilpeak.com/?p=767
His latest temperature assessment is here:
http://columbia.us1.list-manage.com/track/click?u=0ebaeb14fdbf5dc6528911...
I wonder whether there is any think tank team working on my worst case scenario:
"By the time the world wakes up to what global warming really means (say, Hansen's 10 years, that is 2020) peak oil and declining oil production will have damaged our economy and the financial system to such an extent that we'll neither have the money nor the diesel for all the massive infrastructure projects to get away from oil and to replace our coal fired power plants"
The conclusion is that we have to stop business as usual immediately but even that we are not doing. Example: the Road & Traffic Authority in Sydney plans a widening of the M2:
http://www.hillsm2upgrade.com.au/project.htm
In recent seminars I got following responses from RTA engineers to peak oil questions:
(1) "When the going gets tough, let us see how we perform"
(2) "I think they are testing hydrogen cars in California with electric motors in the wheels"
Following Westexas' repeated posts on net oil exports I have started a new menu item on my web page with graphs showing production and consumption in various countries:
http://www.crudeoilpeak.com/?page_id=1571
The latest Arctic sea ice report has come out
http://nsidc.org/arcticseaicenews/
showing sea ice extent now below the 2007 minimum. There is also an interesting link to sea ice VOLUMES
http://psc.apl.washington.edu/ArcticSeaiceVolume/IceVolume.php
Dr. Maslowski's February 2010 update shows Arctic sea ice thickness only 0.6 m on average by 2015.
http://www.cgd.ucar.edu/csm/working_groups/Polar/presentations/2010/masl...
Thanks for all the links. I intend to read them all.
If even one percent of the 10,000 gigatons of methane under the East Siberian Arctic Sea escapes from this increasingly ice-free area, it is game over.
I am reminded of the lyrics of "Before the Deluge" by Jackson Browne:
Some of them were angry
at they way that the earth was abused
by the ones who had learned how to forge her beauty
into power.
And they struggled to protect her from them
only to be confused
by the magnitude of the fury
in the final hour.
http://www.youtube.com/watch?v=i4CHRHo35Bk
Yeah, that sea ice volume chart on your penultimate link speaks, well, volumes.
Good, if rather long, post. Just one point for now:
"need to replace coal with nuclear, assuming lifestyles as usual"
"assuming lifestyle as usual" is the crucial point. Our lifestyle is going to change, no matter what. Why risk the world on trying to preserve something that can't be preserved?
As you point out, nukes are going to be enormously expensive. And in a period of rapidly shrinking availability of money, this is all capital that could be MUCH more effectively used in:
>Education to explain our current predicament and the adjustment that must be made, including doing without many things, reusing almost everything, and recycling nearly everything else.
>Massive crash programs to super-insulate nearly all structures, and to strongly encourage/require car pooling, mass transit use, biking and walking.
>More massive crash programs to raise gardens everywhere and to teach people how to grow, cook and preserve their own food.
>Lower priority than all these (and other) conservation programs--rapid build out of wind, solar, geothermal and other truly renewable energy sources, combined with other improvements of infrastructure and energy storage, along with further education on handling intermittent nature of electricity we will have in the future (a fact of life for most people who have electricity everywhere in the world outside of the most advanced countries).
These all take capital to implement, capital that will be a vanishingly rare commodity.
We have to start consciously planning a power DOWN to a much less complex system, not a power UP to a more complex system. In a situation of ever decreasing energy inputs, small scale and simple systems are going to be much more resilient than large scale, complex ones.
Yes, but what are we actually doing? Countries are jockeying over rights to oil & gas in the arctic made available by global warming induced ice reduction. The US is subsidizing car sales and China is building a massive highway system. I often wonder when I am going to wake up from this bad dream.
" I often wonder when I am going to wake up from this bad dream."
You and me both, bro.
Well done.
Realclimate references a study by Hare and Meinhausen says ZERO emissions would get us back to 1980s global temperatures (when it was about 350ppm) in the year 2150.
Otherwise we are looking at 500 ppm and 2 degrees C higher than pre-industrial for MANY centuries(say bye bye to ice caps).
Thanks for referencing this important study and discussion. As I and other pointed out, even this may be optimistic, since there are known unknowns--feedback such as seabed methane--that seem to be kicking in and will likely accelerate GW further than the bump shown on the first curve (the bump due to loss of aerosols from coal plants that currently block enough sun to counter a degree or two of warming that would otherwise already be with us).
Since we have now broken well out of historic ranges--even ranges predicted for a linear decline--of ice coverage, and since mean ice thickness has collapsed dramatically, it is hard to think of any mechanism that will prevent massive offgassing of the 10,000 some gigatons of methane held precariously in place by a thin layer of frozen clathrates on the edge of melting, and probably in the process of doing so now.
See legal analysis by Jason Scott Johnston, Professor and Director of the Program on Law, Environment and Economy at the University of Pennsylvania Law School. He found that
See Global Warming Advocacy Science: A Cross Examination
Time for more critical and legal examination of the facts vs advocacy.
Well, from reading just the abstract this does look like something from the Lomborg-camp or perhaps the"Copenhagen Consensus" .
Quite telling when already in the first paragraph the "Intergovernmental Panel on Climate Change (IPCC)" is referred to as "this group of activist scientists - what may be called the climate establishment".
Never the less, I shall procede to skim through the paper.
"Professor Jason Scott Johnston is an ass hat shyster who has adopted
various rhetorical strategies that seem to systemically conceal or minimize what appear to be fundamental scientific certainities or even agreements".
Works for me.
Climate change and sea level rise leads me to question why we should try to protect south Louisiana from the oil slick. Within a few decades they will disappear under the sea because the world will not stop using fossil fuels until it is no longer profitable. Baton Rouge will have beach front property for sale.
Kay Bay - " Again I was impressed that Hansen understands that the low power density and intermittency of solar and wind eliminates them as candidates for coal replacement. "
With you all the way until this. Low power density and intermittency are not reasons for renewables to not replace coal. Hansen, as you said, could well be ignorant of the work of a group of renewable advocates that have proven, with peer reviewed work, that steps to mitigate the intermittancy of renewables such as dispersal and connection of wind farms and solar thermal with storage allow renewables to completely replace coal. However a program of energy and efficiency plus conservation must be put in place first. My guess is that a transition to a no-growth economy is a pre-requisite for a continuing technological society.
Given your views on debt and how our paper system of debt will collapse, I find it contraditory for you to be advocating nuclear that has a staggering cost and very long build times. Surely borrowing money to build all the required nuclear reactors will only hasten the end. Additionally none of the 4th Gen nuclear that Hansen advocates are in the even pre-prototype stage. A crash program to develop them will cost trillions - where is that to come from?
EE&C is the cheapest, fastest and easiest way to reduce energy requirements. Along with a change in energy attitudes from consumerism to sufficiency we can hold these gains and avoid Jevons Paradox.
I posted your original post against nuclear power advocates. I think that I am going to get this post thrown back at me - Dohhhhhhh!
I guess I was not clear.
If BAU lifestyle is the goal, then I agree with Hansen that nuclear is the only choice. I don't think BAU should be the goal because if we solve the energy and climate problems then we will soon bump into other limits to growth.
I tried to make the point that nuclear will never happen because we won't be able to afford it post collapse. I didn't state it, but I also believe we won't be able to afford massive wind/solar either.
Kye Bay - " I didn't state it, but I also believe we won't be able to afford massive wind/solar either."
I completely agree. The only way we can preserve what we have is to change. However while we still have the resources a start on a renewable solution will leave us with a far more resilient energy system. Some of this, due to the nature of renewables, will still continue to function with little maintenance so that islands of energy will exist if anything does happen.
Good article, and conceptually sound.
I can't put much faith either in GDP or the various forms of debt as all represent different things to different people. Some forms of production are impossible to 'categorize around' (like wasteful military spending which is real but outside GDP) and some forms of 'debt' are simply emppty promises/wishful thinking (Medicare).
At bottom, what matters is production today. What is produced of value today is expected to carry all the burdens including all the claims both required by the day's production as well as 'others'. It gets interesting as the superflous claims are pressed with great vigor. In the end something must fail as today's production is falling somewhat less than yesterday's ... and the previous day's.
Well ... not yet, not quite ... but, when it finally gets there the highly non- linear event will be breaking on our heads like an avalanche.
Oil did not cause the present financial crisis; however, it was a contributor. Exhaustion of technologies in developed countries coupled with debt financed spending to compensate for lack of real growth were the problems.
There was a noticeable slowdown in growth in the US by the late 1960-1970’s. This was discussed by many economists including Denison’s Accounting for Slower Economic Growth : The United States in the 1970s, a very boring statistical book.
Factories had been electrified as part of Fordist mass production by the 1930’s. Electrification of households and farms was complete by WW2 and farm mechanization was complete by the 1960’s. Farmers were alreading using considerable quanties of fertilizers, pesticides and herbicides. The highway system was nearly built out by 1980.
Real productivity growth was stagnating, so borrowing was a major source of consumption growth. Some productivity growth was due to computerization and such things as point of sale terminals with bar code scanners that tracked sales and inventories, along with computers doing payroll and billing.
My crude analysis showed total US debt from 1985 to 2006 grew at a compounded rate of about 2%. Debt plus population growth and not productivity probably accounted for most of US economic growth since the 1980’s.
The oil and other resource crises are yet to hit!
In relation to Fig. 2, is that real GDP? In order to understand the gap opening after 2005, one would need to do separate GDP/oil consumption graphs for
(1) OECD countries (oil price sensitive)
(2) OPEC countries (low domestic oil prices)
(3) Others (maybe subsidised oil prices)
The government will simply have to write off a portion of the public debt;50 cents on the dollar. More honest than letting market 'inflation' screw the whole country.
Likewise the banks will have to write off their debt also. Investors will be hurt but 'C'est la vie'. Taxes will go up. The government will have to regulate more and more. Profits will be small.
As far as declining energy goes, we weren't doing anything about that recently when we were flush with cash. The government must simply mandate changes; closing coal plants, except CCS, raise CAFE thru the roof, producing flex-fuel and hybrid cars, banning (or crushing) SUVs and giant light trucks, providing free mass transit.
It turns out that people are terrible consumers of everything, utterly deluded by advertising.
BAU capitalism will not get us out of this method. We need a 'dictator' to do what needs to be done.
There was huge debt when Julius Caesar became dictator.
http://divusjulius.wordpress.com/2010/05/14/globaldebtcaesar/
Note that over time the Roman emperors debased the currency until the denarius was worth a tiny fraction (less than one percent) of its value under Julius Caesar. When the Roman emperors couldn't get enough tax revenue they invariably debased the currency more and more to finance wars and bread and circuses for the growing ranks of unemployed Roman citizens.
We now are in a deflationary depression. That won't last. Within a few years we'll be in an inflationary depression prolonged by falling oil production to The Long Descent.
http://ideas.repec.org/p/wpa/wuwpeh/0204001.html
http://en.wikipedia.org/wiki/Denarius
Bold-faced type statement is wrong. If inflation is defined as a change in the price level of a standard basket of goods, there was horrendous inflation over the centuries of the Roman empire. Debasement of the coinage is a very common type of inflation in countries that use copper, silver, and gold as money. The copper coins get smaller (or are replaced by cheaper metals, as the U.S. debased the penny by substituting zinc for copper, then just putting a coating of copper over the zinc). Eventually the silver coins are just copper covered by a wash of silver.
In the U.S., back around 1964 our silver coinage was debased by substituting an alloy of copper and nickel (I think) in place of silver for coins. Note that U.S. coins from dimes to quarters pre-1964
are worth roughly ten times as much as current dimes and quarters, depending on the price of silver.
As so often happens, you should not depend on Wikipedia.
+10.
That ought to go up in lights, and it ought to go into the rotation at the upper right of the TOD page. Wikipedia is often a decent starting point, but if you know little or nothing ahead of time about what you're looking up, it can mislead.
"Two Intellectual Systems: Matter-energy and the Monetary Culture" (summary, by M. King Hubbert) During a 4-hour interview with Stephen B Andrews, on March 8, 1988, Dr. Hubbert handed over a copy of the following, which was the subject of a seminar he taught, or participated in, at MIT Energy Laboratory on Sept 30, 1981.
"The world's present industrial civilization is handicapped by the coexistence of two universal, overlapping, and incompatible intellectual systems: the accumulated knowledge of the last four centuries of the properties and interrelationships of matter and energy; and the associated monetary culture which has evolved from folkways of prehistoric origin.
"The first of these two systems has been responsible for the spectacular rise, principally during the last two centuries, of the present industrial system and is essential for its continuance.
The second, an inheritance from the pre-scientific past, operates by rules of its own having little in common with those of the matter-energy system.
Nevertheless, the monetary system, by means of a loose coupling, exercises a general control over the matter-energy system upon which it is superimposed.
"Despite their inherent incompatibilities, these two systems during the last two centuries have had one fundamental characteristic in common, namely, exponential growth, which has made a reasonably stable coexistence possible.
But, for various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over.
The monetary system has no such constraints, and, according to one of its most fundamental rules, it must continue to grow by compound interest.
This disparity between a monetary system which continues to grow exponentially and a physical system which is unable to do so leads to an increase with time in the ratio of money to the output of the physical system.
This manifests itself as price inflation.
A monetary alternative corresponding to a zero physical growth rate would be a zero interest rate. The result in either case would be large-scale financial instability."
"With such relationships in mind, a review will be made of the evolution of the world's matter-energy system culminating in the present industrial society. Questions will then be considered regarding the future:
* What are the constraints and possibilities imposed by the matter-energy system and/or how can human society be sustained at near optimum conditions?
* Will it be possible to so reform the monetary system that it can serve as a control system to achieve these results?
* If not, can an accounting and control system of a non-monetary nature be devised that would be appropriate for the management of an advanced industrial system?
"It appears that the stage is now set for a critical examination of this problem, and that out of such inquiries, if a catastrophic solution can be avoided, there can hardly fail to emerge what the historian of science, Thomas S. Kuhn, has called a major scientific and intellectual revolution."
Source.
The above ^ information is sourced from this site --> HubbertPeak.com
More about the basic design concept by Steven L. Doll, the removal of purchasing power by energy conversion Technate Design: An Idea For Now http://docs.google.com/Doc?docid=dfx7rfr2_55dh6wv9&hl=en
M. King Hubbert main author of the Technocracy Study Course.
Investigate the Technocracy technate design for a viable alternative.
"The world's present industrial civilization is handicapped by the coexistence of two universal, overlapping, and incompatible intellectual systems: the accumulated knowledge of the last four centuries of the properties and interrelationships of matter and energy; and the associated monetary culture which has evolved from folkways of prehistoric origin."
The idea that the monetary system is the cause of our problems is incorrect. It is a symptom of our problems, not the root cause. The root cause is the competitive pursuit of economic security. Real physical interest is improvement in productivity as a result of improvements in methods of economic production. We could leverage physical interest to reduce our ecological footprint or to develop infrastructure that anticpates long term resource depletion, but we inevitably choose to to leverage it to produce more stuff for sale. It is absolutely true that as long as interest based monetary debt is the primary engine of infrastructure investment that we will never make choices which lead toward long term economic stability. However, while the elimination of interest based monetary debt is a necessary precondtion for making ecologically intelligent investment choices, it is by no means a sufficient one.
One can imagine a system of community investment which socializes risk and can therefore either create interest free debt or make investments without demanding repayment, but which nevetheless is highly growth oriented. In fact such a system could be more efficient at producing growth than the current system because it could more easily avoid financial bubbles and it would not have to make payments to parasitic financiers. The interest would be distributed in the form of higher incomes. As long as competitive private savings is the primary path to economic security such a growth orientation is inevitable.
Physical savings either take the form of infrastructure investment or stores of valuable commodites. You cannot invest in infrastructure without building stuff and you cannot squirrel away goods without manufacturing them in the first place. For society as a whole savings cannot grow without economic growth. Society as a whole can decide that their infrastructure and their inventories of goods are sufficient and concentrate on maintenance, but the individual in a competitive economic environment is inevitably anxious about saving up enough for any possible future contingency. This anxiety inevitably produces a growth orientation to the economic system. A sustainable form of economic production requires replacing competive accumlation of economic security by cooperative maintenance of the means of production, which means naturally include ecosystem services. Much more than monetary reform is required to bring about such a state of cooperation in the realm of economic production.
Well it is kind of a chicken-egg argument. The very nature of money is one of competition via price point auctions for scarce resources. And they HAVE to be scarce or the are not worth anything(contradictorily, growth based economics requires infinite resources to be sustainable). 1) Price points don't have a clue how to value resources which should be apparent with PO 2) Often times over the decades producers regulate production to produce a price.
Arraya,
It is obvious that the poster you answered is ignorant of the basics of money http://web.archive.org/web/20010514114733/www.technocracyinc.org/pamphle...
Also it is obvious that the larger group of people on the OIL DRUM have no clue about what is going on http://money.cnn.com/2010/06/10/news/economy/unemployment_layoffs_struct... and that includes the person that wrote the so called 'article' here.
Adam Smith throwback economics Sumer economics,,, . Keynes... etc... are pretty much laughable now.
World energy resources and consumption has a graph showing global energy consumption of oil, coal, gas, nuclear, and hydro from 1965 to 2005. Most recently, the graph shows a major increase in coal, which may explain part of the recent disconnect of GDP from oil. Also, increases in world GDP in the last couple of years are coming from countries with low GDP per capita and relatively low energy use per capita, while high energy use per capita countries are mostly stagnant.
Note that during the '70s and early '80s, although oil was roughly flat, coal and gas continued to increase. It was also during that time that significant nuclear generation came on line. This continued in some countries, such as France, which now generates about 80% of its electricity from nuclear, with the rest from fossil and hydro.
The early '70s saw the first development and application of the integrated circuit. This not only led to the digitization and eventual packetization of all communications networks, but it also led to the revolution in information processing. Businesses are now run more efficiently than they were in the '60s due to a myriad of process optimizations. Services, such as downloading an iPhone app or a song from iTunes, are part of GDP. In fact, the shift of GDP away from goods and towards services has been a major trend.
There are many other technological advances since the '60s and '70. Cars, even big SUVs, get far better mileage than the very inefficient V-8s of the '70s. Air transport has switched over to more efficient high-bypass engines. Construction has become more energy efficient due to new materials, many of them plastics made from oil.
There are also some macro-economic effects. The Soviet Union was a very inefficient user of oil due to its economic system. The fall of communism has resulted in a more efficient use of Russian production. Developing economies in China and India also are improving the global average for GDP per unit of energy used.
I have sometimes wondered if the Chinese economic growth "miracle" is partly a result of high-EROEI but environmentally destructive runaway coal use. Google "Asian brown cloud."
If you count environmental costs as debt, then it's really "debt financed" just like our 2000-2010 phony economy was.
Coal is still by far the cheapest source of power on Earth, but it's also the dirtiest. Renewables, gas, and nuclear are all more expensive. (Interestingly, it almost looks like those are converging in cost and EROEI... I wonder if there's some natural maximum EROEI somewhere that's achievable without horrible environmental damage...)
The greater use of coal is probably a factor in the Chinese economic growth "miracle". But I think that the changes to the economic system and their focus on limiting population growth are probably bigger factors.
Limiting parents to one child meant that parents (and grandparents) invested a lot in the upbringing and education of their children. This meant that they developed a large, well educated cohort of young people.
Changing their economic system to "state capitalism" means that they freed up the real goods and services economy to self-optimization through market mechnisms, while at the same time they maintained tight control over the financial economy so that it could be directed to invest for long-term economic and social goals. An excessive focus on short-term finacial gains through financial manipulation could be avoided, as could an excessive focus on domestic consumption instead of investment. Savings rates remain high.
Another important factor is that most of their leadership have engineering degrees, rather than law degrees. Most of their college graduates have degrees in science, technology, engineering, and math.
The last part is a good point. There was a time in America when engineers and other people who actually understood things ran things. Then we had this huge shift toward the idea of management and "doing things" being separate career paths that do not intersect.
I call this the "those who can do, those who can't lead" phenomenon, and it's probably one of the greatest diseases of American and European civilization.
The MBA in particular is a disease. MBAs are the western capitalist equivalents of Soviet apparatchiks. It's basically a degree in hot air, posturing, creative use of leverage, and sociopathic behavior. As an engineer who's dabbled in business and business consulting, I've been utterly shocked by the overpowering stench of the ideas that come out of MBA-land. It's really a sewer of aggressively stupid narcissism.
I was watching a program about energy the other night and the Chinese engineer heading up their research into alternatives, when asked about their reasons, said "all the conventional forms of energy are already spoken for.". That was about as well as I've ever heard it put.
Funny how one statement from a 2 hour long program sticks with you.
In graduate engineering school, the Chief Petroleum Engineer of Chevron and this wealthy independent oil man gave a Saturday morning 4 hour course in Engineering Economics. It was an excellent and easy diversion for all the graduate engineering students who spent most of their time writing reservoir simulators, or solving PDE's with Laplace Transforms, Green's functions, and method of characteristics.
You could tell the engineering students, no shave or shower, flip flops t-shirts and cut off jeans. Bleary eyed from the Friday afternoon SPE beer bash and a late night. There were 4-5 guys from the MBA program and they showed up every Saturday morning dressed to the nines. They would stroke the hell out of the PE from Chevron for an hour after the class. I never saw an engineering student say more than Hi to the guy. The power of pull you know.
The course work basically involved calculating before and after tax cashflows for increasingly more difficult business ventures. This guy from Chevron was doing this with Kenneth Derr (Chevron CEO) all over the world on a HP 41 CV (no Excel then) , he was damn good and the logic of those international JVs got pretty complex. Compared to advanced reservoir simulation though, it was an easy A.
I come to find out that all of those MBA majors had to drop the class early and were sitting in as "observers". He blew them away.
I'm sure they got big jobs with investment banks and have had very successful careers.
In my business, I have always found that what everyone (the employees, investors, management, and royalty owners) want is the person who uses the technology to figure out where to park the rig. Everything else is really just fluff.
FF
Did you actually "solve" PDE's or did you just plug in some formulas?
"The MBA in particular is a disease. MBAs are the western capitalist equivalents of Soviet apparatchiks. It's basically a degree in hot air, posturing, creative use of leverage, and sociopathic behavior. As an engineer who's dabbled in business and business consulting, I've been utterly shocked by the overpowering stench of the ideas that come out of MBA-land. It's really a sewer of aggressively stupid narcissism."
Perfectly stated.
Everything else equal the simple fact that the Chinese leadership is primarily educated in the sciences is enough to tip the scales heavily in thier favor in respect to succeeding in becoming a wealthy first world country and eventually becoming a super power-perhaps the only superpower.
They may bet the ranch on coal for now, but as long as thier current leadership structure holds together,they will do more to get ready for the time when the oil and coal are gone than any other country over the next few decades.
I kinda like democracy, such as it ids, but our leadership will be focused almost exclusively on the short term-the next election.
Oil use was roughly flat due to the consequences of the OPEC embargo and the Iran-Iraq war. More fuel efficient cars were produced and, at least in the U.S. for the sake of energy security, all electrical power plants that used fuel oil were converted to something other fuel, such as natural gas.
Just came across this article on World and Chinese CO2 emissions:
http://www.scientificamerican.com/article.cfm?id=china-fossil-fuel-co2-j...
And thought perhaps it would be interesting to use CO2 emissions as a proxy for oil/gas/coal use... you could then reach farther back in time to before oil coming on scene and see if the relationship holds. I'm not sure where you would find a long dataset for global CO2 emissions but surely the IPCC must have something along those lines.
I think that the disconnect between developing and developed countries' responses to rising oil prices is fascinating. US crude oil prices rose at an average rate of 20%/year from 1998 to 2008. In response, many developed countries showed flat to declining oil consumption, especially after 2005, with 2008 US oil consumption falling back to the same level as 1999.
In contrast, many developing countries, especially "Chindia," showed increasing oil consumption over this time period. And when we extrapolate rising oil consumption, and especially rising net oil imports, in developing countries we get some interesting projections, especially given our outlook for declining global net oil exports.
Chindia's net oil imports, expressed as a percentage of net oil exports from Saudi Arabia, Russia, Norway, Iran and the UAE (about half of global net oil exports), rose from 19% in 2005 to 27% in 2008. If we extrapolate this trend, then some time around 2019, Chindia's net oil imports would be equivalent to 100% of the combined net oil exports from Saudi Arabia, Russia, Norway, Iran and the UAE.
Therefore, our outlook for developed countries like the US is that in all likelihood we are going to be forced to make do with a declining share of falling global net oil exports.
However, governments in developed countries require continued high levels of overall consumption, in order to maintain tax revenues, thus the tendency, as noted in the article, to borrow against the future in an attempt to maintain close to current levels of consumption in developed countries.
As the saying goes, "What can't continue, tends not to continue."
You are so right. What can continue for a long time (but not forever) is declining real GDP based on declining oil imports. If our oil imports decline at four percent per year, then I expect real GDP to decline at three to five percent per year. If oil imports to the U.S. decline at eight percent per year, then I expect real GDP to decline along with it at five to ten percent per year. This decline will go on for a long time, as pointed out by John Michael Greer in "The Long Descent."
Ah, yes, extrapolation. ;)
The EIA table browser indicates that all of Asia, not just China and India, increased oil consumption by ~5.4mbpd over the past decade (2000-2010). At that rate it would be ~+/-2035 before they consumed all the exports of the countries you mentioned. Besides, there's no guarantee they will increase oil consumption at a percentage rate from 2005-2008 like you mentioned or at an absolute rate over the past decade like I mentioned. I imagine it's likely lower than both because higher prices moderate consumption.
Granted, extrapolations are usually wrong; it's just a question of how wrong. However, it's difficult to see what would cause the rate of increase in "Chindia's" net oil imports to materially slow, at least in the short term. Ten years hence, the net export market will definitely be "interesting."
Regarding price, the point is that it appears that most developing countries showed increasing consumption, even as oil prices rose at 20%/year on average from 1998 to 2008 (from $14 to $100, average annual).
Regarding the exporting countries mentioned, they were the top five net oil exporting countries in 2005, and Sam Foucher and I have spent a fair amount of time studying these countries in the context of net export math. Sam's best case is that the (2005) top five net oil exports will be down to about 15 mbpd in 2018, versus about 24 mbpd in 2005. If we extrapolate Chindia's 2005 to 2008 rate of increase in net oil imports (9%/year), they would be net importing 15 mbpd in 2018, i.e., equivalent to 100% of best case projected (2005) top five net oil exports in 2018.
For more info on our work, do a Google Search for: Net Oil Exports + Jeffrey Brown.
As noted above, if we simply extrapolate the rate of increase in Chindia's net oil imports as a percentage of (2005) top five net oil exports, we get a similar answer--with the Chindia net import demand and (2005) top five net export lines crossing around 2019.
I estimate that Chindia's net oil imports are already equivalent to about 33% of (2005) top five net oil exports, versus 19% in 2005.
As stated above, my outlook for the US is that we are going to be forced to make do with a declining share of a falling volume of global net oil exports.
I have started a new menu item on my web site with graphs on what you are saying. Still work in progress:
Net oil importers
http://www.crudeoilpeak.com/?page_id=1571
Suggestions for improvements welcome
Thanks Bob.
Would you mind refraining from quoting growths in % terms, please?
I found myself having to convert everything to doubling times to get a feel for time scales.
Percentages are misleading.
I work at the Port of Esperance.
I wrote a Haiku.
"There are no poems here.
The sea level rises and
wipes the slate clean."
Is it any good?
None of the other workers were amused.
I scored a copy of "The Last Whole Earth Catalog" today.
The concerns then (1974)were the same concerns today.
Is this why this site resonates?
Economic growth
Dependent on fossil fuels
Unsustainable
{edited}
The world GDP
Powered by ancient sunlight
Slowly comes unwound
{edited}
What value money?
Sans embodied energy
Long emergency
"Value" is in the mind's eye of the beholder.
This week's Financial Sense Newshour interview with Chris Nelder on the energy crisis is quite good. When discussing the developing world's ability to out-purchase the developed world for scarce oil I loved his comment that a soccer mom in a SUV cannot complete with 3 guys and a chicken on a scooter.
http://www.financialsensenewshour.com/broadcast/fsn2010-0605-2.mp3
I am doubtful soccer moms are competing against people driving scooters. They may have been competing against the wealthy in or industry relocating to those countries. Has anyone performed a careful analysis?
I have not seen an analysis but I think his point was that a gallon of gas accomplishes more useful work in developing countries and therefore they will be willing to pay more than a soccer mom.
Best historical records of carbon dioxide emissions, for many countries, are at
the Carbon Dioxide Information Analysis Center
http://cdiac.ornl.gov/
one interesting factoid: USA annual emissions a century ago, in 1910, were higher than current emissions from all but five countries
Great site, and really interesting, but...
http://cdiac.ornl.gov/trends/emis/top2006.cap
What are the top three emitters per capita doing? Driving 100 miles a day to barbecue outdoors on charcoal for every meal?
They using the profits from exporting crude oil to run air conditioners and desalinate sea water.
Terrific discussion - this non-economist, non-scientist hanging on to understanding by the skin of my teeth - tho I fully understand the resulting issues.
(and not 'interesting' enough for other newbies to sit around flaming each other)
thanks!
The dont call economics the dismal science for nothing :)
See Tad W. Patzek Exponential growth, energetic Hubbert cycles, and the advancement of technology May 17, 2008, Accepted by the Archives of Mining Sciences of the Polish Academy of Sciences, May 3, 2008
Note particularly:
Patzek shows a strong break between high development growth and lower developed growth.
Correlation is not causation.
Correlation does not imply causation. But causation always implies correlation, usually with a time lag between cause and effect. There is heaps of strong evidence to show that increasing energy consumption of fossil fuels was necessary and sufficient to explain the centuries of economic growth that started with coal and the steam engine around 1800. We're at or past Peak Oil now and close to Peak Fossil fuels. Energy production will decline, and real GDP all over the world will decline as a result of decreases in fossil-fuel energy.
When I saw the graph and the discrepancy, my first thought was, "Oh-oh". :) But then...
As for the economy, I think it's bullshit... Actually, I take that back: Bullshit's worth something. Value-added.
Rich (H); the party has yet to begin. My world may be right around the corner...
When I look around at all the cars and trucks (and leaf-blowers and lawnmowers and mindless automatonic workopolism) noise and smell and danger and pollution, I think to myself, "What's the holdup?". It's a shitty party. The shittiest. But the toxic shit, not the good stuff. Let it end...
"The Quiet Earth". Let it happen.
Kia Ora. :)
The entire post WWII economies of North America, Europe and Japan were built on the availability of abundant cheap energy (that is, oil). The success of the Marshall Plans for Europe and the US (yes, there was one, not named for political purposes, partially implemented under Truman, Eisenhower).
You very correctly point out that energy has been kept cheap (that is, easy to buy) through borrowing from the future and massive debt. Add to this the enormous costs of the Afghan/Iraqi wars funded entirely through borrowing from China. And the Bush tax cuts and you have a subversive Reagan libertarian's dream come through: government approaching paralysis.
BUT ... if oil can be replaced by a domestically produced energy supply, then the debt is far less of a problem because the future can produce great prosperity and increased taxes because energy can be bought cheaply again, without borrowing.
Big gamble, let's see who wins.
P.S. In effect the US dollar is a currency backed by something, namely oil. Since oil must be bought in dollars the value of the dollar has two foundations: the strength of the US economy, and worldwide oil purchases. In effect. the US is an oil state, and is suffering from the fate of being dependent on a commodity: a country increasingly controlled by an economic "royal family" or kleptomaniacal narrow elite, namely Wall Street.
We don't have an oil problem. We have an economic, structural and belief system problem. I suppose PO could be the solution these problems. It's only a problem if you believe we have to keep increasing business activity. We don't really.
If the population continues to grow but the economy doesnt then you can expect a decline in living standards. This might not be too much of a hardship for those living under OECD governments but for half of the worlds population, living on 2.5 dollars per day or less, the situation could be disasterous.
I agree, but that is a structural problem, along with a resource distribution and allocation problem. And we are on the precipice of disaster and it has nothing to do with oil or resources. Our economy is one big massive misallocation of resources.
you can't call it a population problem like you would the oft-cited yeast and sugar analogy when some use 100 times more that others. That is a distribution problem. The US is a population of 20 billion in terms of resource usage compared to somebody from Bangladesh.
Population of Bangladesh:
71 million in 1974
87 million in 1981
110 million in 1989
From The CIA World Factbook for Bangladesh:
population: 158,065,841 (July 2010 est.)
total land area: 130,168 sq km
Average population density: 1,214 people / km2
The population doubled in less then 35 years.
Statistics for Iowa, USA:
population: 3,007,856 (2009 estimate)
land area: 55,869.36 mi2 = 145,000 km2
average population density: 20.7 people / km2
I suspect Bangladesh's higher population density creates problems with water supply, sewage disposal and the destruction of wildlife habitat that are 58 times greater than Iowa's. Lowering the standard of living in Iowa to the level of Bangladesh would not allow Bangladesh to raise theirs to the level of Iowa. Their local environment could not adapt to the pollution. A large population with a low standard of living does not automatically reduce the negative environmental impacts relative to a small population with a high standard of living. Before population collapse occurs, everyone's standard of living will be degraded toward minimum subsistence. Population collapse occurs after the environment is no longer able to provide minimum subsistence. Equalizing consumption of resources among people would allow population to grow larger. Thus it is not a distribution problem. It is a population problem.
Think of it this way: in terms of preventing population collapse, it does not matter whether the resources are spread uniformly through out the Petri dish or whether they are concentrated on the western end with fewer yeast and rarefied on the eastern end with a greater population. When the critical irreplaceable resources deplete, the end arrives for all the yeast who do not turn into spores. Your desire to give the yeast on the eastern side of the Petri dish some of the surplus on the western side would not prevent population collapse. Lowering everyone's standard of living could postpone collapse, but exponential population growth in a finite environment will always deplete the resources irrespective of their distribution.
If humans have indeed exceeded the carrying capacity of Earth and we can not expand off world, then the only way out of the predicament is through population reduction. The majority of humans do not appear to be intelligent enough to accept and proactively act upon this concept which places us on the same path as yeast.
This is ethnically biased conjecture saying if we give those poor brown people food the will just have more babies. Why are people of the first would, with immense amounts of resources, populations leveling off or going into decline. Resources also include education.
No, it's a cultural problem of which, in part, our reasons for increasing population is part of. I'm not saying paying attention to population and resource consumption habits is not important to look at, it should be top on our list. I'm saying how we relate to the earth is much more important than what the quantity of humans is at this point. We are anything but materially efficient. In fact, we could not be a more inefficiently run planet given that fact that we have created a race to use resources as fast as possible for profit with the whole world trying to emulate this behavior
First of all, who says our cyclical consumptive, wasteful, irrational habits bring a better quality of life. Physical and mental health trends dictate otherwise. Second, it's not a population collapse with such disproportionate resource distribution, it's a "kill-off" because it's a conscious choice. With no lessons learned. Third, it would not kill us to monitor and budget resources as culturally distasteful as that is, it is also common sense. After all they are finite.
The first in the cue for die-off is americanus pathologus consumerous. That is just the dynamics of the situation. What ever is born out of the ongoing debt-monetary collapse will set the stage for the future of our planet. Lets hope we don't completely loose our humanity because there is more than enough to go around and learning to share is not inherently evil
I'm surely not saying we aren't a giant clusterfuck heading for disaster, just that our completely irrational and wasteful use of resources is just as at fault as population, if not more. And pointing to poor brown people that have too many babies is a distraction and pointing to population charts only tells a fraction of the story.
Reducing consumption for the reason of "equality" is foolish, the reason western nations are so advanced is because they learned to master technology and thus have allowed for a better quality of life. Individuals are not going to live in squalor for egalitarian purposes. Limiting consumption due to resource constraints would require a paradigm shift in thought, it would require most individuals to realize that growth does not occur forever. Meanwhile, the U.S. population continues to explode due to bad policy.
However the Bangladeshis have no one to blame but themselves although TFR continues to fall.
Of course, we deserve to kill of the planet because of how smart we are. It's often said that a near death experience can change a persons life, I wonder if that works for a civilizations as well.
This sentence expresses your moral anguish over human suffering which is distracting you from the underlying problem of overpopulation. The only moral judgments I am making are that population collapse is bad and should be avoided. The racism is in your imagination. Bangladesh's problem with poverty directly relates to their excessive population density of 1,214 people / km2 for which they are solely responsible. They need to reduce their population so that they can live within the carrying capacity of their region with a standard of living that they (you?) think is appropriate. Mimicking the OECD economic model of exceeding the local supply and then taking and depleting resources from around the world to briefly achieve a higher standard of living is not a solution. It is part of the problem.
Because we greedy bastards care more about our quality of life than having many children who would degrade that quality. Bangladeshis think conversely. OECD countries wipe out the environment by depleting resources and generating pollution with excessive consumption while countries like Bangladesh do the same thing with overpopulation.
Reducing consumption to minimum subsistence would simply allow more people to be born until the total consumption exceeds the ability of the ecosphere to provide. The group behavior of humans is not smart enough to overcome its instinctive drive for exponential reproduction. One must convince everyone to overcome their instinctive drive to multiply to successfully correct overpopulation using the moral high ground. If just one group refuses to restrain itself, its numbers will multiply overwhelming the efforts of all the others. Think about the things that limited human population before the industrial revolution: high infant mortality, famine, disease, war, resource limits and reduced longevity - not pretty. What allowed the population to explode from about 1 billion toward 7 billion during the last 210 years?
I do, and so do you by asserting that OECD countries should help Bangladesh approach that ideal. All of the kids said it when they escaped the farm life in search of a better way. Look at what people have actually done, and why they do not go back.
The choices, selfishness, local altruism or regional altruism versus global altruism, you present me with are idiotic. I am supposed to ignore myself, my family and my community to help Banglaeshis half way around the world fix the mess they made for themselves so that you can feel good about uniformly allocating resources among all of humanity. An individual does not have the ability to save everyone. Grow up and get off your moral high horse because your fanciful ideas will kill all of us. Population collapse is cruel and ugly and ineffective ideas born from misplaced morality will make the matter worse.
Sure it would not kill us, but it would not address the underlying problem either.
Herein lies the dilemma: there is not enough to go around. Humans are already in population overshoot depleting resources that required millions of years to accumulate. Your notion of uniformly distributing resources around the planet to sustain population at the current level requires vast amounts of depleting fossil energy. Bangladesh is overpopulated, surviving near minimum subsistence and dependent on resources from the outside to continue. Despite this state their life expectancy at birth is 60.63 years compared to the U.S.'s of 78.24 years (Source: CIA World Factbook). Giving them ample food produced from depleting American supplies of arable land, phosphorus, natural gas, water and transportation fuel would decrease their mortality and increase their birth rate. Giving people food is not the same as earning the money to buy stuff that has increased the prosperity of OECD countries making them desire smaller families.
In your case altruism is the distraction, and population density tells the story to those objective enough to hear.
It ain't altruism
A dramatic depiction of the issue:
The richest 10% account for 60% of all private consumption
The richest 20% account for 77% of all private consumption
The richest 30% account for 85% of all private consumption.
And the remaining 70% -- ALL the people on the planet who are
either poor or of modest means -- consume only 15%. And we're
telling them that the problem is that they are having too many
kids, which is causing resource and environmental problems?!
That ain't a population problem
Yet they wouldn't be living in squalor had they not overpopulated their living space.
Sorry, dude, poor brown people living in densely populated poor areas does not nearly have close to the environmentally damaging effect on the planet as the upper 20-30%, illogical and wasteful resources usage. you can't escape it, the rich are the problem.
Sub-Saharan Africa had 18.5% of the world’s population growth and just 2.4% of the growth in carbon dioxide emissions
--- The United States had 3.4% of the world’s population growth and 12.6% of the growth in carbon dioxide emissions
--- China had 15.3% of the world’s population growth and 44.5% of the growth in carbon dioxide emissions. Population growth rates in China have come down very rapidly – but greenhouse gas emissions have increased very rapidly
--- Low-income nations had 52.1% of the world’s population growth and 12.8% of the growth in carbon dioxide emissions
--- High-income nations had 7% of the world’s population growth and 29% of the growth in carbon dioxide emissions.
Just accept you are a bigger part of the problem than they are an move on.
It's money, not sex
In terms of fossil carbon emissions the United Kingdom used to be the largest contributer, then the United States and now China has risen to the forefront. Pollution and environmental degradation occur in many ways besides anthropic climate change. Loss of wildlife habitat, sewage disposal and chemical runoff from farms using industrial fertilizers and pesticides are but a few that are directly related to human population density.
Imagine what Bangladesh, a country the size of Iowa, would be like if half of what is left of U.S. manufacturing was located there to give them all an American lifestyle. Perhaps it would be like Dhaka times 67 (The Dirty Dozen Plus Thirteen (March 13, 2010)). Forbes Magazine lists Dhaka, Bangladesh as the second dirtiest city in the world.
Bangladesh river pollution threatens millions, Reuters, May 18, 2009.
Abstract of Urban Air Pollution: a Bangladesh Perspective (2006)
It is not an American problem nor a Bangladeshi problem. It is a human problem as we act like yeast wiping out the ecosphere necessary to sustain life. We all have to do our part to overcome our yeasty instinct.
Why are they the richest 10% rather than the richest 30%? Answer: fewer babies. White people are 10% of the world's population (and dropping rapidly). They used to be 25% of the world's population in 1900.
The lack of awareness does seem to be perplexing.
James Howard Kunstler, in The Long Emergency, deals with this issue by writing:
Thanks for an interesting post. Gail's first comment begs me to ask a perhaps dumb question: Where does Greer's "Long Descent" fit in here? Will the economy, the recently increased debt "step down"? Tainter's portrayal of Collapse of earlier civilizations suggests "collapse" unfolds over about a life-time or so. This somewhat fits into Greer's view as well except I feel "something" is missing with Greer's account as well as Tainter's study of past civilizations.
Like an xkcd comic said somewhere... I don't know what's gonna happen next, but we're probably gonna go extinct in really cool ways ;)
--
Men are from Mars, Women are from Venus and since we like to give gifts to our women, we'd like to turn Earth into Venus!
Sunson, I hope you don't mind if I field this one myself! Remember that the Long Descent isn't a smooth curve; the end of a civilization is a protracted process, but it consists of a series of crises interspersed with periods of stability and even partial recovery. Think of it as sliding down a rocky slope, going thump-thump-thump into sharp rocks at intervals.
The disintegration of today's financial economy is likely to be one of those thumps. It's not the end of the world by any means, but those who are dependent on paper wealth for survival are going to have a very rough time of it, and goods and services may get hard to access for a while.
Tainter's claims about quick collapse, by the way, are contradicted by the data in his own book; he claims that collapse happens over a time scale of decades, but the examples he cites all took one to three centuries to complete the collapse process. I don't have my copy of Tainter handy so can't cite the page, but he gives the dates in one of his tables early on.
JMG! It feels good to hear about the Long Descent from the Horse's mouth :)
I just have a few basic questions to ask:
1. Are you suggesting that the complexity will devolve over a period of time into simplicity as the complexity pyramid decreases in height and width? I can easily imagine this happening, however, what is difficult for me to comprehend is the interconnectedness of everything today. How would food be allocated without the future's market which needs telecommunication operating at suitable profit margins which further relies on mass-consumption that relies on prosperous employment opportunities. I'm not even talking transportation and it's direct impacts here.
2. The Long Descent relies on a nominal decline rate. Agree? :) If yes, what do you think should be the decline rate to allow the Long Descent to unfold (as opposed to Mad Max).
That's it in a nutshell - ouch! That was my take on what was going on to keep BAU going, but I use to explain to friends by saying it was borrowing against wealth created during times of cheap oil to keep the ball rolling - but that only lasts so long. And now we are reaching that point where investors are wary of further debt entrenchment, and the game must change in some fancy economic or energy way or it all slip slides away.
Ok, so how do we do this then? Let's see, we've run through the cheap easy to get oil and now it must sell for more to substantiate offshore drilling and tar sands, but we've borrowed what we can without spooking the markets completely, and now we...? hmm, not sure what the next step is...and neither does anyone else.
So what happens now? Do the wheels start to come off?
Marc Faber recently debated prospects for China with someone more bullish. His counterpart expects 8% GDP growth in China, to which Faber replied that this assumes world GDP growth, which in turn means oil at $200 to $300 per barrel, which means war. Faber strikes me as someone who earns his media attention by fronting a character while subverting that character. Oddly compelling.
http://insider.thomsonreuters.com/link.html?ctype=groupchannel&chid=3&ci...
Urbanization and declining birth rates combined with longer lifespans mean fewer people working as a percent of population even under conditions of full employment. This challenge is every bit as real and inexorable as peak oil.
Something not many people are talking about is the end of privacy and its effect on the development of technology. What happens when information can no longer be proprietary? I got several tweets today about penalties assessed for sharing data being large multiples of what BP is on the hook for under existing law.
An issue that will be coming to the fore is encapsulated by Bernie Madoff's recent remark, "Fuck my victims." From his point of view, the fellow rich Jews who gave him money knew he was cheating and wanted a piece of the action. This is a metaphor for the "Washington Consensus" which crumbled in the wake of the late '90s Asian Crisis. It's time for the US to follow Bernie's lead, confess that the game is up, and pull back from globalization in an orderly fashion. Preferably this will be accomplished using Warren Buffet's idea of import credits rather than some ad hoc and readily perverted scheme of tariffs aimed at specific products and/or trade partners.
The big energy issue for the US is whether the vast supply of "negawatts" (waste) will be put into production. Where I live, for every Prius there are at least ten F250s with chrome wheels, 8-inch lifts and loud exhaust pipes being driven by *grown men* not high school hot-rodders. How many volumes of the "Left Behind" series have been purchased compared to "Twilight in the Desert"?
The focus on debt, which presumes rule of law, side-steps deeper issues. Nevertheless an excellent post, cheers for the provocation.
This is an oft-cited - and very poorly thought-out - rationale to explain why GDP continued to rise while oil production flatlined.
When speaking in terms of energy consumption, it makes no difference where the money comes from. For example, let's say you bought your first car today, paid for entirely with money you had saved up the past 5 years. So, starting today, you would be consuming additional oil which was not being consumed before.
Alternatively, let's say you bought your first car today, but you paid for it entirely with a bank loan. So you have gone into debt . . . but you are still consuming oil starting today which was not being consumed before.
So, as I said, it makes no difference. In both a non-debt, and a debt, situation, the purchase of the car creates additional demand for oil starting today. Though you may be borrowing money from the future, you are not consuming oil from the future. And since the purchase of the car adds to GDP, if GDP is rising because of car purchases (among other things) while oil consumption remains flat, you cannot invoke the forwarding effects of debt on this phenomenon because, as I just explained, it makes no difference. The oil consumption does not care where the money comes from.
Now, in the example where you bought the car entirely with your savings, this implies you refrained from purchasing things in the past 5 years you might have otherwise purchased, and that could mean you consumed less energy/oil (perhaps indirectly) in the past - but you may purchase more items in the future since you do not need to save money anymore (and do not have to make car payments). In the example where you bought the car with debt, since you will be making car payments, you will have less money to buy things you might have otherwise bought, and that could mean you will consume less energy/oil (again, more indirectly) in the future. So, not only does the debt example mean you will not be consuming oil from the future, you might actually be consuming less oil from the future indirectly via fewer purchases of other things because of the need to make car payments.
This whole "GDP is only increasing while oil production remained flat" nonsense is just another failed attempt by the doomsday/tree-hugger crowd to try to explain away something they do not understand. And they do not understand it because they have not thought it fully through.
in which case a GDP increase is exactly the thing you say it is not?
I would like to inform you that However, when one digs deeper, it is obvious this growth is unsustainable because it is predicated on a reduction in savings rates and a re-leveraging of the household sector. As a result, I expect weak GDP growth in the second half of 2010.
live dealer casinos
While a certain amount of causation seems obvious in the correlation between energy and GDP, I am confident that the trend ratio overstates the importance of energy. GDP is not an end in itself, it attempts to measure an underlying reality which is that end. One of the issues with GDP as a measure of well-being is that waste increases GDP, while efficiency decreases it. Thus, if I maintain my house at the same temperature for less money by buying insulation and natural gas rather than just natural gas, I have reduced world GDP (while actually increasing well being by freeing up resources, without giving anything up). In other words, part of the correlation is broken windows.