The Link Between Peak Oil and Peak Debt – Part 1

The economy is closely linked with the physical resources that underly it. Most economists assume debt can rise endlessly, just as they assume GDP can rise endlessly. But if there really is a limit that prevents oil supply from rising endlessly, it seems to me that there is also a corresponding limit that prevents debt from rising endlessly.

As I analyze the situation, it seems to me that here is really a two-way link between peak oil and peak debt:

1. Peak oil tends to cause peak debt. Some will argue with me about this, because they believe it is possible to decouple economic growth from energy growth, and in particular oil growth. As far as I am concerned, though, this decoupling is simply an unproven hypothesis–the normal connection is that a flattening or decline in energy supply causes a slowdown or actual decline in economic growth, and this slowdown causes a shift from an increase in the amount of debt, to a decrease in the amount of debt, as it did for US non-governmental loans in 2009 and 2010 (Figure 1).

Figure 1. US Domestic Debt, split between government debt (excluding Social Security) and non-governmental debt. Based on Federal Reserve Z.1 data.

Governments try to step in and keep the growth rate in debt up, but the gap is too great for them to make up. This tendency of governments to take on new debt (together with problems related to the original slowdown in economic growth) are reasons many governments have been getting into financial difficulty recently, in my view.

2. Once debt growth peaks (shifts from growth to decline), we can expect a feed-back loop that will tend to make the peak oil decline even worse than it would otherwise be.

In the current post, called "Part 1", I will cover the first of these two issues; I will cover the second issue in Part 2.

The Relationship Between Growth and Debt

I have talked many times about the need for economic growth, in order to make our current system of borrowing money, and paying back loans with interest, work on the extensive basis that it is used today.

Figure 2. Two views of future growth

As long as the economy is expanding, as in Scenario 1, businesses feel confident that their future prospects will be better than they are today. As a result, businesses will borrow funds for new equipment and will be fairly confident they can pay back the loans with interest in the future. Governments will also borrow, knowing that they will likely have higher tax collections in the future. Because of these higher tax collections, the governments can expect to pay back the debt plus the interest on the debt.

In Scenario 1, even common citizens feel that debt is a reasonable prospect. If the individual loses his/her job, there is a good chance of getting a new one. With prospects for better wages in the future (or at least no worse wages in the future), it makes sense to take out an automobile loan, or a student loan, or even a loan on a new home.

If the economy is expanding, promising Social Security benefits to future retirees looks like a safe prospect, as does promising Medicare benefits. Just as a “rising tide lifts all boats,” an expanding economic circle leaves room for more and more types of payments (Figure 3).

Figure 3. A growing economy makes allows room for interest and other payments, without crimping budgets.

If the economy starts contracting as in Scenario 2 of Figure 2 (or even stays the same size) then it becomes much more difficult to repay debt with interest, and to fulfill promises of future benefits, as illustrated in Figure 4.

Figure 4. Paying promises becomes much more difficult after economic decline.

Of course, in a contracting economy, there may still be a few instances where debt “makes sense.” These might include very short-term business loans, for example, covering goods in transit. They would also include some business loans where the economic return is high enough so the loan would make “economic sense” even if the interest rate includes a fairly high charge for risk of default (because of the declining economy) as part of the interest rate.

This decline in the level of debt becomes a real problem for countries, because the availability of debt tends to add to reported GDP. For example, if a person takes out a car loan and buys a car, the cost of the car gets added to GDP, even though the car is not yet paid for. The availability of debt financing also makes it possible for businesses to obtain capital for expansion, so the business can, for example, build more cars, without waiting for sufficient profits to accrue to have enough revenue to finance the expansion. Both of these activities tend make it easier to increase reported GDP.

What has happened in recent years, at least for the US, is that it seems to be taking greater and greater increases in debt to create a given increase in GDP.

Figure 5. Relationship of change in debt (private and government combined) to change in GDP.

This changing relationship may reflect the greater headwinds the economy is encountering, now that oil supply is tighter and oil prices are higher.

Declining oil availability (manifested as high oil prices) tends to lead to economic contraction

Oil use, and energy use in general, tends to be tied to economic growth in many ways. Clearly there is a need for oil (or another energy product) to manufacture and transport goods, and to grow and transport food. Given the cars, trucks, trains, and farm equipment currently in use, it is not easy to change the dependence on oil quickly, either.

James Hamilton in his paper Historical Oil Shocks has shown that 10 out of 11 US recessions since World War II were preceded by oil price shocks. Charles Hall, Stephen Balogh, and David Murphy have shown that high oil prices tend to be correlated with recession. Robert Ayres and Benjamin Warr have analyzed the amount of work (in a physics sense) that is done by energy of various types. Using this data, they have developed a model explaining the vast majority of US real economic growth between 1900 and 2000, except for a residual of about 12% after 1975.

A comparison of annual increases in oil consumption with annual increases in world GDP in constant 2005 $ shows a close correlation.

Figure 6. Percent growth in world GDP vs percent growth in world oil consumption. World GDP in constant 2005$ from World Bank; Oil consumption from BP.

In spite of all of this evidence, there are some who argue that it is not clear which direction the causation goes with respect to oil supply and economic growth–perhaps the only issue is that the world uses more oil when it is expanding, and less oil when it is contracting. With this belief, it is difficult to explain why oil price shocks would precede recessions, but some economists have learned this view in the past, and seem not to be open to looking at the evidence.

There is also a question as to whether we can move quickly away from this close relationship between oil and the economy. Vaclav Smil in Energy Transitions: History, Requirements and Prospects has shown that because of the very large amount of built infrastructure in place, in practice, energy transitions from one fuel to another take a very long time–30 to 50 years.

In spite of what Vaclav Smil has shown, there may be some possibilities for short-term decoupling. For example, if car-pooling suddenly becomes much more common, it could tend to change this relationship. It is not clear that such a change would be fast enough, or significant enough, to change the basic relationship, however.

Recent Debt Problems of Governments

Recent debt problems of governments seem to be related to a combination of (1) the tendency of high oil prices to cause recession and (2) the additional debt the governments have tried to take on, to stimulate the economy and to bail out failing banks and other businesses. Part of this debt may be taken on, to try to offset the decline in private debt.

In the United States, federal external debt started increasing more quickly immediately after oil prices hit their peak in July 2008 (Figure 7).

Figure 7. Average quarterly oil price and US Federal External Debt

Even with these huge increases in federal debt, the increase in governmental debt has not been able to offset the decline in debt held by businesses and private citizens, as shown in Figure 1 near the top of this post.

Governments around the world have been finding this additional debt burden increasingly difficult to handle. If nothing else, if interest cost of this debt becomes very burdensome, unless interest rates are very low. Furthermore, even when they do try to intervene, their debt doesn’t have quite the right effect–their new debt may buy a new road, but it doesn’t buy a new car for the consumer.

This combination of problems–recession caused by limited oil supply, increasing need for government debt because of shrinking private debt and need to stimulate the economy–is likely the cause of the debt problems that so many governments (including the US government) are experiencing today. Many European countries are experiencing problems as well–Greece, Portugal, and Spain, for example.

In Part 2, we will look at some of the feedbacks of peak debt that may have an impact on the shape of the peak oil downslope.

This article was originally posted at Our Finite World.

Very clear article and I would like to add two points,

1. Recently a study was done that by 2037 the debt will be 36 times GDP (any much more than one times is possibly not sustainable). The govt. agency that plotted the debt stopped the chart in 2037 (but it would have kept compounding).

2. Not all nations are in debt. Countries like China, India, and oil producers in the middle east will continue to grow rapidly and so will energy consumption in other emerging markets.

Not all nations are in debt. Countries like China, India, and oil producers in the middle east will continue to grow rapidly and so will energy consumption in other emerging markets.

What do you base that conclusion on? For how long do you really expect those countries to continue growing? China is not in debt? I think I can still find the links to back up exactly the opposite view.

Fm - I wonder if the proper phrase would be "net debt"? Of course, the key here would be the definition. Has China borrowed much capital? How much compared to our debt we owe them? I have no sense of even the scale of the answer. Be nice if someone has some real numbers to flesh it all out.

Fm - I wonder if the proper phrase would be "net debt"?

Got me on that one, ROCK.

Anyways here's a link from February 2010.
I don't think things have gotten a whole lot better since then.

Actually, Chinese Debt-To-GDP Is Enormous, And Regional Governments Need The Real Estate Bubble Stay Solvent

Read more:

Sound Familiar?

I wrote a little about the debt issue in China is this post on Our Finite World. Many of the individual people now have a lot of debt, in comparison to their incomes. This, plus all of the other debt issues, is likely to be unsustainable, especially if rising coal costs lead to rising electricity costs, and people find their incomes squeezed. So far government has been trying to hold down electricity costs.

China uses so much coal that it is more vulnerable to rising coal costs. As the easy-to-get coal is exhausted, the coal that is extracted becomes more expensive. Imported coal (being used more now) is especially expensive. The situation is not too different from here with oil, but with coal, it seems to me.

FM - A real eye opener...thanks. Yes..sadly familiar. I guess communism and democracy have a lot more in common then I would have guessed: pandering politicians.

China has a fair amount of crony capitalism just like most places.

"Money poured into Greece, and was used to fund a huge boom in public-sector jobs, most of them linked to political patronage. Various forms of corruption permeated the system, where cash gifts in fakelaki or "little envelopes" were a fact of life, and where, crucially, the rich regarded paying tax as something that only the poor and stupid would ever choose to do. This latter fact meant that Greece was in certain vital respects a country without a functioning version of the social contract."

The empty distraction, posturing, and rousing of ideology does not matter.

Timely Posting

While there are similarities, the differences are not unimportant.

Unlike China, almost all new US debt over the last 20 years was acquired not by the Federal or local Governments, but by private individuals. Even most of the unfunded obligations of the US government were acquired decades ago.

Let us be clear, almost the entire US problem that has developed in the past 20 years is due to the behavior of private individuals. Government bashing, is an attempt to hide from the truth. We are a nation of hypocrites. Further, the claim that the US Gov is close to insolvency is an absurd projection of fear and guilt.

The US gov debt as a percentage of GDP (~65%) is among the lowest in the West. There is simply no other place excess capital can go, both because other countries and borrowers are even less dependable and because they lack sufficient size to absorb this much capital. Indeed, US bond yields, including 10 year note, are at or below inflation. In essence, the government is making money by borrowing (inflation is decreasing real debt at a rate above the interest paid for the debt). Dramatically more so, if inflation is understated.

Given these truths, Krugman recently tried to explain the insanity of political efforts to restrain government spending now. I think he hit it on the head. Smart money recognized real returns on investment had become so absurdly low (given associated risks) that they moved into bonds. These individuals are terrified of inflation and may gain wealth during deflation.

Cheap money encourages debt. From an individual, it matters little whether debt is incurred by the gov't and paid by taxation or incurred by the individual and paid out of wages. If the the total load increases, his spending must decrease elsewhere.

The notion that bigger gov't debt is somehow preferable, or that the gov't should inflate to save the bad loans of major banks and investors, is laughable. The gov't should encourage employment and low inflation, not gov't growth and high inflation.

Let us be clear, that just because other nations have a more centralized economy is no reason to say the US should have one as well. The US has no business making money by borrowing if that money is made either by tax payers or by foreign obligations. The Constitution says we have to pay the US debts -- that's a far higher standard than any unsecured personal debt.

Truth is not the same as wisdom. That's like saying debt with positive cashflow is wise. Debt presumes upon the future and eliminates options, and our gov't has no blanket right to so bind its citizens.

What you find laughable, experts, who studied the last time the US found itself in a liquidity trap, call essential.

Incidentally, I am pretty much a founding member of Concord Coalition (the debt reduction group) and believe strongly that Gov debt is generally bad. In almost all cases, deficit spending should not occur during periods of economic growth.

Unfortunately, there is currently an atypically low level of aggregate private demand and investment opportunities, leaving the US Gov as both the spender and investor of last resort. Depression is one policy mistake away.

Last time was last time. There is no reason to expect that the same treatment will work again for an evolving illness.

This time we have fewer resources available and way more people. Then we were entering industrialization; today we're post-industrial. Then we were a farming country; today we're more of a service country. Then we had a small gov't; today we have a much larger one.

Lack of investment opportunity probably reflects the reality that banks can make better money on gov't investments. Heck, even I can make more on frequent flyer programs than I can in my bank.

To me, more easy money is a poor cure for easy money problems. It may have been a perfectly good cure for a resource-rich era with slack trade.

At some level, I probably agree with you. Reasoned government spending on investments with long term payoffs make sense. BAU (tax cuts) in the face of depleting resources cannot work for long.

However, the concepts behind a liquidity trap still seem valid. We have a demand deficiency problem.

Our apparent disagreement has to do with the underlying reasons for the lack of investment opportunities with reasonable return. If you or someone could explain to me where these opportunities will come from in a shrinking economy, perhaps then I could understand the viewpoint. Honestly, I am mystified.

I do not think transition and environmental protection will happen in a depression.

So we walk the razors edge. Life was never going to be easy.

I do not think VOLUNTARY transition will happen unless we have a major drawn out depression. As for environmental protection, unless the environment is seen valuable for survival, it most certainly will not be protected. Perhaps after a massive die off of humans, whatever is left of the environment as we know it will get a chance to begin to recover on its own... Who know in another 10 million or so years it might even be quite pleasant again.

And I, appreciate the consistency of your doomerism. While I am teasing you, I recognize you have good reasons for these beliefs. Could well happen.

One of my happy memories was the day I learned there are micororganism spread miles deep throughout the Earths crust. Life will survive, even if we nuke the planet.

Speaking of which, I lived through that period when planet nuking appeared imminent and I have to say that my personal survival seemed unlikely at the time.

Hey, perhaps we will find a way to reach sustainability.

Good to read an optimistic appraisal.

Frankly, I doubt that AGW will continue much more than 200 years after the die off, after which the natural cycle will resume. Of course, some believe that we will hit a tipping point, and the global conditions will never return to the past cycles, remaining 15 deg. C above present. If so, the tropics will be pretty much wasted, and the far north and far south will be uncomfortable. Persistent drought, wide spread desertification, and intermittent deluge are forecasts I read from some sources. Mostly I don't think anybody has the faintest notion what will be. Like you, I remember duck and cover in school drills, with a gloomy view that nuclear war was almost certain. Glad we made it past that (so far) at least.

Best hopes for sustainability.


One of my happy memories was the day I learned there are micororganism spread miles deep throughout the Earths crust. Life will survive, even if we nuke the planet.

Indeed! I think I heard something in the news about those very microorganisms in just the past couple of weeks or so. I had the exact same thoughts and feelings of elation.

I too have lived through a few interesting events in my life so far. My one and only deep regret in this life, despite my love for him, is having brought my son into this world. And I can't even bring myself to tell him how truly sorry I am. To be clear, I don't hide the truth as I know it, from him. He is just still too young and optimistic for the realities of life to have sunk in yet.

Hey, perhaps we will find a way to reach sustainability.

Yeah, let's keep on trying!

One of my happy memories was the day I learned there are micororganism spread miles deep throughout the Earths crust. Life will survive, even if we nuke the planet.

I suppose I shouldn't quibble about philosophy under a finance keypost (and a good one, thanks!). But the slow-living biota of deep rock probably aren't going to do much interesting between now and when the expanding sun boils the seas away. The earth is an old planet and doesn't have a lot of time left to evolve new lineages of complexity, which we large multicellular critters have come to value. Large critters are a statistical fluke; single-celled organisms rule. The leap to multicellularity is not an easy one, and there's no time for it to happen again here. Mars may still be full of bacteria, but odds are there ain't much going on macroscopically.

Obviously, we all must take our comfort where we can find it, like Frodo looking at a star and taking some consolation that Sauron might not corrupt it. However, the probable survival of bacteria would amount to a poor substitute for the dazzling array of complex beings, and of conscious awareness, which now exist, and could exist in the next half-billion years. We are thermodynamic beings all, and bacteria are arguably closer to convection cells or whirlwinds than they are to us. The qualitative difference between a bacterium and a sea lion is significant.

I realize this isn't the position of your post, but I've often heard people say "we can't hurt the planet, it will continue" as though that string of words meant something useful.

What is in existential jeopardy is evolved multicellular complexity, conscious awareness and thought. Thought may become a failed experiment, but the experiment is still running. I hope some of us will consider it worthwhile to undertake the metaphorical trip to mordor and use our resources to alter the odds in favor of conscious thought surviving. (disclaimer: this recommendation is a result of conscious thought)

What if there are no sound ways out? Nobody ever said every problem has a solution. If there is none, anything done is simply a waste, making the problem worse.

A year ago, there was a graph showing the falling marginal increase of GDP with each dollar borrowed. It was nearing unity -- if it crossed, then additional borrowing would only make things worse.

I don't think transition or environmental protection will happen, period.

Efficiency, reducing trade imbalance (especially energy imports), and bringing more labor-intensive manufacturing back home would be reasonable to attempt, at least.

Otherwise, investing in long-term durable goods (multi-generational) is at least more sensible than throw-away products.


If there is no way out, then so be it. I have found no way to cheat death (yet). Doesn't keep me from planning for tomorrow.

Sorry, can't believe the graph you mention. Again, US gov debt is not that high as a percentage of GDP and the interest paid on the money costs nothing.

Further, I can't see how money invested in wind or solar can lose, particularly if things get worse in the future. Energy production in the bank for years.

Most of the arguments against solar and wind come from those who posit a brighter future. If these folks are right hallelujah, we made a less than efficient investment - you know like wasting 2 trillion or so on homes that are too big, use too much energy and are near nothing.

We are talking primarily about non government debt here. You seem to be focusing on government debt. It is private debt that is vital to the economy.

the interest paid on the money costs nothing.

??? I don't see how you can reasonably believe that? If there ever was a self evident false statement that is one. Interest must come out of profit. If there is not enough profit to pay the interest then a business must go under because it is losing money. Interest paid on money cost dearly. When there is not enough profit to pay interest then the economy sinks. That is the whole argument. And you think that interest money cost nothing???, that it is free???.

The argument is not against solar or wind. However the EROI on solar and wind is very low. But the point is that it will not be enough to save us.

Sorry, can't believe the graph you mention.

You must be referring to the chart posted by George below and explained very well here. You make no argument whatsoever, you just say that you can't believe it. But I understand very well why you can't believe it if you believe that interest paid on loans is free. If that be the case then you cannot understand anything about the economy.


I was thinking of this Seeking Alpha article instead:

The posting by Lounsbury is very confusing. Not once in the entire piece does he state that he is talking about National Debt. This is implied in his quote of Fekete “Keynesians take comfort in the fact that total debt as a percentage of total GDP is safely below 100 percent…”

With more digging: From his earlier post on the Welsh piece he is talking about total debt (public plus private).

In this light, the graph showing decreased return from increasing total (mostly private) debt makes more sense. The graph shows return on private investment has been steadily dropping, consistent with too much capital chasing too few opportunities. [Or the private sector investment is increasingly directed by idiots who do not know how to invest.] In either case, no argument from me, far to much of the increasing US income has been directed to the investing class.

Fundamentally different from the value of debt used by government to build infrastructure – ahhhh he seems to suggests this as a course of action several lines from the end. In my opinion, also different from most transfer payments that go to individuals who spend them (and thus raise aggregate demand).

Also, he notes that the value of increased debt generally spikes during recessions.

I don’t see how the facts presented even relate to direct government spending. It seems more like an argument against monetary expansion that places capital in the hands of private individuals. Or against further tax cuts for the investing class.

Indeed, the point of my initial comment was that private and not public debt was the cause of the current problem. Relatively speaking the US government is quite solvent.

About Interest on US debt, I quote myself from above (with an edit):
Indeed, US bond yields, including 10 year notes, are at or below inflation. In essence, the government is making money by borrowing (inflation is decreasing real debt at a rate above the interest paid for the debt). Dramatically more so, if inflation is understated.

Alright, perhaps calling this making money is not the best was to express the concept, although I don't know that there is a good way.

Paying negative real interest clearly means the real size of the debt decreases by an amount that is larger than the size of the interest payment.

Okay, got it. Although absurd, this example illustrates the point. In a year with no inflation, US treasury bonds are at -1% interest. Every year 1% of the bond value simply becomes the Govs for holding the money in an account. If someone gave me 1% of principle each year simply for keeping their money in my account, I would consider that making money. Of course the Gov does not keep the money in an account it spends it. Nevertheless, in contrast to paying 1% real interest, for example, the Gov appears to be making a 1% profit.

I am running with this. As of the 13th the 1 year treasury bill was yielding 0.16% annually versus a current inflation rate of 2-3%. Simply holding the note would yield nearly a 2-3% profit. Maybe we could fund the Gov this way! I know, it is not scalable.

About solar and wind:
Fortunately, if we build them now we can use energy from a variety of sources with much higher EROIs. Future energy in the bank that has increasing value as other energy becomes more difficult to produce. No question, solar and wind cannot support BAU. However, we do need saving; from our ignorant, materialistic, self-adsorbed viewpoint. Ron, you know this viewpoint would not possibly have changed if BAU continued. Energy decent will change societal dynamics creating the possibility of a better America.

I will check out the graphs and comment tonight. I have to work sometime.

Most of the arguments against solar and wind come from those who posit a brighter future.

There was an article with aerial photos of the richest American CEOs mansions posted on Yahoo news recently.

It was interesting to note the vast solar arrays all over Bill Gates' property. I guess he must be hedging his bets about the future.

Remember how George Walker Bush had solar on his ranch in Texas?

How about Ted Turner's farmland holdings?

Or the acres of land that gent from Enron bought? (the last one out the door with the big payoff just before Enron blew up and made it into the Enron movie)

You need to believe in quite a bright future for wind and solar to make sense, because they are generally add-ons to the electric grid. The electric grid needs oil to maintain it, both directly (to power trucks and helicopters to do repairs) and indirectly (to make and transport new parts, and to make roads to make it possible to transport repair trucks and replacement parts. Trains, if they are used, as they operate today, generally require diesel as well.

The financial system for the financing of all of this (wind, solar, electric grid, electric company selling the electricity) also depends on maintaining BAU. An electric company that cannot pay its workers doesn't stay in operation for long, even if it has wind and solar inputs.

You need to believe in quite a bright future for wind and solar to make sense, because they are generally add-ons to the electric grid.

Gail I'm not sure we are envisioning the same thing when you or I talk about solar. When I talk about it I'm referring to highly distributed relatively small scale community level and as much as possible off grid.

I think the more of that, that is built out while we can, the less anyone will have to rely on the centralized grids which are under the control of utility companies whose sole purpose is to make a profit off the backs of its consumers. I believe the entire profit motive paradigm needs to be reexamined but that's a project for another day...

The electric grid needs oil to maintain it, both directly (to power trucks and helicopters to do repairs) and indirectly (to make and transport new parts, and to make roads to make it possible to transport repair trucks and replacement parts. Trains, if they are used, as they operate today, generally require diesel as well.

Certainly true! However I am yet to be convinced that we can't prioritize our remaining fossil fuel use by drastic measures such as eliminating entire areas of it, say for instance the manufacturing of automobiles and their use for personal transportation. Make private cars untenable either by decree or by extremely severe disincentives such as taxing fuel for private consumption at exorbitant rates.

The financial system for the financing of all of this (wind, solar, electric grid, electric company selling the electricity) also depends on maintaining BAU. An electric company that cannot pay its workers doesn't stay in operation for long, even if it has wind and solar inputs.

I guess if the financial system collapses then people will have work for food. I can certainly imagine an entire community getting together and pooling their resources in order to survive. If it means everybody getting together for a wind turbine raising so the community center can have electricity and freezer storage I don't see such things as being completely unlikely. Even if it means some people will get paid in buckets of humanure to fertilize their crops.

Yes, I have deliberately made statements that push the envelope of the credibly possible under our current BAU system, but that is precisely the point!

Efficiency, reducing trade imbalance (especially energy imports), and bringing more labor-intensive manufacturing back home would be reasonable to attempt, at least.

Otherwise, investing in long-term durable goods (multi-generational) is at least more sensible than throw-away products.

I agree with you. I suggested in a post called How to develop a more rational energy policy that if we expect anyone to take a responsible approach for manufacturing, we need to do it ourselves. We probably should be taxing imported goods and services. I know I used to be involved in with captive insurance companies set up in pleasant offshore tax havens. The boards of directors got nice vacations there every year (or more often). The companies paid very little taxes anywhere. Actuaries put together nice reports for them, showing how their insurance companies were doing, and how they might be expected to do in the future. Actuaries got to fly to the these nice islands themselves.

We now have many versions of these companies around the world (manufacturing as well as services), taking advantage of favorable tax laws or favorable wage differentials (or both). In some of these places, the energy is from cheap coal. The people there are happy to have work and any energy supply, so are not as offended by using coal.

Perpetuating the current system just leads to job loss in OECD countries and rising world CO2. Anyone who looks closely at the current "system," if you can call it that, shows that it isn't working. We need to quit pretending that minimizing CO2 emissions inside our own borders is a reasonable goal. We need to be looking at the problem more broadly, so that indeed, we end up with a reasonable results--jobs sill in this country, and world CO2 declining.

The way I see the downturn playing out is through more and more job loss, and more and more government programs being cut back or eliminated. There may even be worse things--governments themselves encountering huge problems, and defaulting on loans, or even ceasing to operate (possibly being replaced by a new government).

The problem of transition is one of finding things that people without jobs in the traditional economy can do to support themselves, and also ways that they can get around, when they cannot afford cars or much of anything else. They also cannot afford to pay taxes for new train facilities. It is questionable how much they need these trains as well.

Much "transition planning" is to me based on a wrong picture of the future, and the issues that need to be mitigated. The issue is how to take care of your sister's family, when no breadwinner in her family has a job, as well as your parents, when their social security income has been cut off. Government's taxes are likely to be way down as well, so it really can't help out.

finding things that people without jobs in the traditional economy can do

We could shut down all traffic control lights and replace them with human traffic controllers.

In a modernized version of the old street-cop-on-every-corner, our traffic control people would be outfitted with head-worn web cams and radio connections to a computerized traffic control center. The traffic control people would report (in an intelligent way) what is happening from their point of view and the computerized traffic control center would respond accordingly by coordinating the actions of all traffic control people.

In particular, the system would be set up to reduce wasted burning of fossil fuels.

There you go!
A job for everyone willing to work, and ...
we save on petro burning as well.

[ i.mage.+]

p.s. By tomorrow morning a smart person in China will have this project under way while we in America debate for the next 10 years over whether it is in line with our "free market" ideologies.

"We have a demand deficiency problem."

Where exactly do we have a demand problem in this country?

I will let someone with more expertise than I speak:

"I will let someone with more expertise than I speak"

Daniel I read it and I don't buy it, although his pointing toward Keynes and Krugman probably ruined any chance I would. Peter Schiff and Jim Rogers got it right, Ron Paul got it right in 2001 on the floor of congress, you can google that one.

One thing that Peter Schiff has said about the supposed lack of demand (I hope I don't butcher this) is that American's have plenty of demand, we demand bigger houses, nice cars, good food, big TV's, large yachts, but what we lack today is the productivity needed to be able to attain those items.

During the housing bubble our demand was allowed to take presedence over the fact that we as a people weren't productive enough to deserve what we demanded. "No income, no job, no assets no problem" That mantra made us believe that even the least productive among us deserved things we could never afford. Many of our leaders would love to re-inflate the bubble (any bubble) in order to get re-elected, they would do this by allowing our demand to make another bubble with no regard to our productivity.

They know we still have plenty of demand, but I hope we have the sense to control it!

" Then we were a farming country; today we're more of a service country"

But: according to

In 1930 farmers were only 21% of the labor force. Hardly a farming country although a much larger fraction than today. We certainly have more people and fewer resources however the fact remains that the market is not creating jobs and that is a tremendous problem. Who but the govt has any resources to address the problem? Willy-nilly spending is, of course, no cure however someone should be doing something. It is a much greater problem than a debt equal to 65% of GDP and worth some govt investment.

Here is "doing something" that would help:
- Re-write mortgages across the board to 4% and 15 years, but require 25% down on new purchases. Home values would plummet to the affordable point. Banks would scream. Those making payments would instantly have new money to spend. Those in trouble might come out OK, but some would still be in trouble. Foreclose on the latter and clear the market. Split any proceeds from short-sales and foreclosures according to an equation based on down-payment and past payments -- banks and homeowners share in the upside and downside.
- Pay for any house owned in good standing to be highly insulated and efficiency enhanced. Insulation, new windows, etc.
- Invest in X-prize projects for efficiency projects - solar A/C, high-eff HVAC, better/cheaper GSHP, simplified installations (and standards and practices!) for PV systems, thermal storage, residential batteries, etc.
- Add incentives for CNG conversions (today the rules bias against practical duel-fuels cars and conversions for residential use)
- Invest in Alan's rail projects
- Add incentives for recycling and sewage harvesting
- Fund the stranded-wind ammonia effort
- drop minimum wage and add employment incentives instead of unemployment extensions.

I'm sure there are many other small and decentralized plus large centralized efforts that would make sense from many angles, including employment. Not any/all will be popular with everybody, most will make a lot more sense than perpetuating million-dollar banker bonuses.

That's quite the list, and I agree with much of it. except this;
but require 25% down on new purchases.

if you combine that with your later idea;
drop minimum wage

then how will young people ever save up the 25% needed to buy a house?

This policy would condemn them to be lifelong renters - those who are in the property game can stay there, but the bar is set impossibly high for young, new entrants.

I think a better approach would be to say something like the first $150k of a loan can be had for 5% down, and for anything greater, you have to have progressively higher down payments. You could also make it a one -off exemption for first time home buyers - though that doesn't help the guy trying to restart after being stripped of his house buy a divorce.

i would also change the rules about interest on home loans being tax deductible. Either remove the provision entirely, or make that only interest on the first $150k is deductible - if you choose to have a more expensive house, then you pay.

The idea of your rules is to prevent lots of bad loans and rampant property speculation, but young first time buyers are generally not guilty of that, but they get caught in your net. Make the net mesh wide enough that they can slip through, but you'll still prevent all the shenanigans with people buying holiday houses, condos in vegas etc

A major issue for first-time buyers is that they tend to buy all they can afford and then some, on a 30-year note. Often Mom and Dad pitch in on the down-payment, which makes it easier to buy more than they can afford, too. Then you need furniture for the larger house, and a car to match the neighbors, and a lawnmower, and, and, and....and then you're in the lifelong debt rat-race.

It is much better to encourage young people to buy fixer-uppers. I'd promote a Habitat for Humanity for EVERYBODY -- prospective homeowners putting sweat equity into refits for other people in return for eventual equity and help on their house. It's a Ponzi scheme I could get behind.

With newly cheaper houses, a fixer-upper should be nowhere near as expensive as today's average new house.

Still, I think your idea is a good one -- cheap money (but short terms) for the first modest range, and then higher restrictions after that.

I encourage my kids to plan for their first house to be a small, cheap duplex. That spreads your down-payment across twice the space, and somebody else buys the furniture and such for the other half, and pays you extra in rent for the privilege. Double-down on the payments where you can, and when it's paid for go find a nicer place and use the income from two rentals to pay for it. We'll see in a year or two if they take my advice.

Not only do people buy a house they can only afford, often they will find out the upkeep is unaffordable. Turns out everything breaks - the furnace, water heater, pipes, toilet, roof, garage door ... homes are, especially older not-so-well maintained ones, a money pit.

Renting on the other hand has a certain appeal for those willing to pay top-dollar, allowing one to max out the level of luxury that one can afford for however long one can - walking away is as easy as letting the landlord know.

This policy would condemn them to be lifelong renters - those who are in the property game can stay there, but the bar is set impossibly high for young, new entrants.

Most European cities have a significant percentage of middle class and upper-middle class families that are "lifelong renters."
People who want to own a home often have to put down a lot more than 25%. Lifelong renting is not something that should have any kind of stigma attached to it.

I am glad you made that point concerning the Europeans, slight difference is a wider form of rent control. The concept of the necessity of owning needs to go away, there might even be some amero-centric solutions that
take advantage of some of the former bad choices. Many of the older suburb/developments (50's-70s) have pretty substantial lots, building two households into them for the future is an interesting play. Many of them
are even relatively close to commuting capabilities on bus routes. My township in Pennsylvania (2nd largest in the State), now allows two discrete buildings per lot but have to share a single sewer connection (lateral).

The thinking is (a) higher taxes (real-estate AND earned income) per lot, (2) many if not most of them are about taking care of relative in some manner - good for society, (3) a return to the original density considerations of
the 60's - 5-6 people per lot. The downside consideration had been car trips, but with the increasing fuel costs, they might just go back to the 60's level of trips even though technically there are more vehicles per lot.

There is substantial interest in the US government to design even cheaper housing to meet the financial capabilities of the US 20-30's, I'm arguing that either similar kinds of re-designing the single family home concept
or outright repurposing of emptying commercial and office buildings is where we need to focus some engineering/design/imagination.

Here is "doing something" that would help:

How about use the existing law, demand the wet ink note and see if your mortgage is bifurcated.

And if they can't produce the note per UCC or the note is bifurcated - sue for fraud and get your home free and clear.

The lack of demand for credit, to me, is a reflection of high oil prices, which is in turn an indication of an inadequate supply of cheap oil.

The reason for this connection is that businesses of all kinds find their food and fuel costs rising, when oil prices rise. They try to raise prices, but consumers don't have any more income--they didn't get raises, just because oil prices rose. Businesses often do end up raising prices to keep their profits from falling too badly, but then demand, which is sensitive to price, declines. Businesses end up laying off workers, and we see the economic contraction that is so typical.

The way credit gets involved is a business that is losing money and laying off workers has no need for additional money to expand its business, even at a low interest rate. Elsewhere, I have used the example of a pizza delivery business. If prices of food and fuel rise, it needs to raise the price of its product. But consumers have no more income, so they order pizza less often. The pizza business has no need for new delivery vans, but continues to pay off the loans on the ones it has. It also has no need to expand the facility where it makes pizza, so it continues to pay down the loan there. If business is bad enough, it may even default on its loans. Aggregate loan demand goes down, if other businesses run into similar issues.

Eventually, the reduced demand for new delivery vans, and expansion of buildings to make pizza, and for everything else that is associated with high oil price causes the price of oil to start going down. The pizza delivery business starts picking up. But the owner of the business doesn't need to start adding new capacity, until its business has built back up again, to use the trucks it already owns, and the space for making pizzas that it already has. This is the reason for the inadequate loan demand, for quite a while into the cycle.

There are similar cycles with consumer credit and with home mortgages, again built on high oil prices. People who do not have jobs generally don't buy more expensive replacement homes. Neither do people who are living at the edge, and find food and energy prices rising. It is likely that a few of these folks may even default on their loans. The lower selling price for their home means that the new loan on the home will be lower, so aggregate demand for credit will tend to drop.

There are a lot of promises that aren't debt. Social Security and Medicare falls into this category. So are guarantees on pension plans and bank accounts. There are also guarantees on Fannie Mae and Freddie Mac. Insurance companies aren't guaranteed, but we saw what happened with AIG.

As I see it, the US government has made a lot of promises that it won't be able to keep. A lot of these promises don't carry the label "debt" though--but they are just as real a problem.

Part of social security is explicit debt the 2500 billion dollars of IOUs from the federal government that the social security trust funds holds. The pols and the media want us all to forget this debt. There is likewise surplus medicare money that was "borrowed" by the federal government but I do not know how much.

These are crimes against the people of the United States of America. Not one head rolled. The money was used for improving the appearance of the political tableau.

To explain the Social Security situation a bit more:

On Social Security, at least for a while, we were collecting a little more money than was paid out in a given year in benefits. The US government promptly took the excess funds that were collected for Social Security, and spent them on whatever it else it chose--perhaps the war that was going on at the time, or for funding other government programs, like food inspection. This is the graph I made for a post on Social Security I wrote back in April 2010.

In place of the money that the government took from Social Security, it left non-marketable bonds, that are often not included in government debt calculations, because it is "internal debt". Since we "just owe it to ourselves," some folks don't think it matters. But it is the availability of this debt for funding that allows the government to say that the program is funded until the year 2036.

It seems to me that we are now collecting less in funding for Social Security than we are paying out on an annual basis, unless these interest payments are included. As you can see in the graph, the amounts are getting closer together. What is happening is that benefits are continuing to increase, but the amount collected in taxes was cut back as of 1/1/2011, from 12.4% of payroll to 10.4% of payroll (subject to the wage cap), as an attempt at stimulus, in a place where this amount wouldn't affect deficit calculations. This amounts to cutback to a cut in Social Security contributions of roughly 16%.

What shows up as Social Security debt (at least in some compilations) only relates to the amount collected in Social Security contributions that the government collected, and then spent on something else. There is no debt calculated with respect to benefits payable in the future, even if contributions now are far short of what is needed to fund these benefits.

Trying to raise the Social Security payroll tax again will have a very un-stimulating effect on the economy. But it is off in a program with funny accounting, so no one notices.

It's funny that Obama and others have included SS recipients in the leading line of those impacted if the gov't shuts down. If SS simply paid out based on income for SS alone, there would be hardly any shortfall.

The party line seems to be "SS is important, SS pays for itself, SS trust receipts aren't debt" and "SS is in the cross-hairs 30 seconds after we hit the debt ceiling". Can't have it both ways.

Do not forget that "debt" - a symbol - is measured as a "number" - yet another symbol - and the "money" - yet another symbol and is inflated as more money is printed.

To ask for real numbers of what can be argued as a construct of Man made from laws and, well, believe .... that becomes an inclined surface which a light density oil product is placed upon. And for the nearly 6 years of this OIL-ly drum there has been many an attempt to figure out the meaning of the symbols of debt, money and the numbers used for said symbols. So far - not much progress and one might say with Fosse/Gail and others going elsewhere to try and assign some kind of meaning or numbers to debt/money/energy .... odds are you won't find "real numbers" here :-(

To give a more solid, dare I state ROCK solid example:
Zimbabwean dollar. Due to re-evaluation attempts in 2006, 2008, and 2009 the "real numbers" went down because they were defined down. Just like how the number and size of the notes were "defined upwards" by the application of ink to paper and the creation of the paper.

As an aside or perhaps a happy ending for the Zimbabwean people - the Zimbabwean dollar is now gone - done away with in April of 2009 and by the end of 2009 the Zimbabwean people are now a shining beacon of hope with the new path of Fission power.

Zimbabwean President Robert Mugabe said Nov. 19 that his nation would use newly discovered uranium deposits to produce nuclear power, adding that the government has no intention of producing nuclear weapons.

Zimbabwean President Robert Mugabe said Nov. 19 that his nation would use newly discovered uranium deposits to produce nuclear power, adding that the government has no intention of producing nuclear weapons.

Somebody stop the planet, I want to get off.

We need to know net external debt on a country by country basis. Internal debt can be dealt with by the nation declaring all debts void. The same is true of external debt with the cost that no one will lend to the nation for a few years and the interest rate will be higher when they do lend.

I would find it remarkable if China were not in debt. They plan on building 50 nuclear reactors. Where did the money come from? And how will that borrowed money be paid back if all that electric power cannot be paid for as Americas lose more and more money to buy cheap Chinese goods (things generally that are not necessary from my personal experience).

China is set on a course to overbuild China thinking US consumption will resume. But US consumption cannot resume if credit is being destroyed.

China hold 1000 billion dollars of US federal IOUs. If China wants to buy 50 nukes even at 5 billion apiece that is just 250 billion dollars. I see no need for the to borrow. In fact most work will be done in China by Chinese so more like 1 billion to Westinghouse or the Korean Nuke company so 50 billion a small investment for them. Where did they get the money? Slave labor. Or rather free labor with no right to unionize, strike, or protest and so poor that if they did strike they would starve. No debt just a lot of poor broken workers.

1. Recently a study was done that by 2037 the debt will be 36 times GDP (any much more than one times is possibly not sustainable).

Can anybody track down the truth in this statement? I've done a bit of looking, but the closest thing I can find is this:

"Based on CBO projections, by 2037 our debt as a percentage of GDP will be 200 percent. "

Where is this 36x figure to be found? 36 times would be 3600%.

Received the following, yesterday, about this post:

I follow Gail religiously.

James Howard Kunstler
"It's All Good"

Thanks! I had a chance to visit with Jim at Charlie Hall's Biophysical Economics conference in Syracuse this spring. He, Joe Tainter, and I were the anchor outside speakers at the conference. I should write about the conference.

That'd be great! I'm sure me and lots of other people here would eat it up.


Excellent article as ever, but you ignore the Elephant in the Room - Land.

As you can see, Fred Harrison was ahead of the curve back in 2005, and I find his account of 18 year property cycles pretty convincing.

The fact is that over two thirds of dollars were created and issued as mortgage loans: ie they are deficit-based, but land-backed, by the use value over time of land and buildings.

I think therefore that oil follows the land-driven GDP curve, rather than vice versa.

IMHO land is the engine of the economy, and oil the lubricant.

Having said that, I think that it is pretty clear that the run up in oil prices from 2005 as the market became financialised and supply/demand became tight was probably a strong factor in spiking the property bubble at the point of what I called Peak Credit.

In that context you might be interested in the first seminar I recently presented at UCL's new Institute for Security and Resilience Studies, where I am a Senior Research Fellow working on 'resilient markets'.

Flight to Simplicity - Slides

Flight to Simplicity - Talk

This is a start. Land is the most obviously limiting factor in any economic model. We are not making any more... and oil is the lubricant that multiplies the natural fertility of land through the use of fossil energy, reducing the need for human mechanical energy. Then science and technology is another multiplying factor, as pesticides, GM crops, weather satellites, computer controlled combined harvesters etc. etc. combine to increase the fertility further. Of course, we have to take into account other limits like water - either the limits of the local hydrological cycle - rainfall and river irrigation water, or water pumped out of fossil aquifers faster than they can be replaced. For a fuller picture you need to include the oceans and their finite supply of fish , and the finite inputs of phosphate fertilizers, and all that machinery needs to be built from ores that are becoming more and more energy expensive to mine and refine, and we need to model the waste products, fertilizer run-off, chemical and salt pollution of the land, CO2 emission effects on the climate changing the land's fertility... and before you know it, you have quite a good version of the Limits to Growth computer model from 35 years ago.

I thought the earth basically produces about 10% of the usable stuff, and fossil fuels produce the other 90%. At the end of the day, fossils make the earth more productive at least in the ways humans currently consume. But this is interesting thinking.

What % of the real cost comes from natural flows of the earth (not created by fossils) and what % of what is produced comes from fossils directly or indirectly?

Some things are coming from the earth but the fossils are killing them on the backside like with greenhouse gases. So maybe the earth production level is falling even as the fossil level falls since the climate is getting nasty due to the GHG buildup.

In any case, we will be producing a whole lot less in the years to come, which means consumption and debt both have to lower per capita. But what am I saying? I am talking like the system can be fixed.

Thanks! I am thinking that in the years ahead, interest will shift to land for its crop-growing potential, rather than land because of the houses on them. Houses in the US will still be in surplus. Of course, the situation is likely to be different in the UK, where there are more people and less land and houses.

Farmland prices have skyrocketed the past year. The article below is for the Plains but I recently saw folks were paying close to 10K an acre for good land in Iowa. Prices have tripled over the last decade for most states. If the price of oil keeps inflating then the price of grains will keep inflating and then the price of farmland will keep inflating.

U.S. Plains States Farmland Boom Continues, with 20% Year over Year Gains

I just looked at Chris' presentation.
(Thanks Chris.)
Regarding your, Gail's, point on land. With land used for cropping, I guess the key to 'value' is what surplus crop/product can be sold to the wider (mostly urban) population. Sustained high crop surplus will depend (as Ralph comments above) on sustained yields: mostly needing inputs of NPK fertilizer and water and labor/machines; in other words, in the USA, a lot of fossil fuel. Traditionally, land produced very little surplus over and above the food needed by the people doing the farming. The best historical 'pre-fossil fuel' sustainable ratio of producers to external consumers I know of was around 1:5 (in mid-19thC England); but even this ratio could not be sustained historically in much of American farming. Soil fertility in large areas of USA was essentially mined until the 1930s, when fossil fuel largely in the form of fertilizer saved the day. Similarly some places were mined for water, for example using up a large part of the southern Oglalla aquifer. Despite these inherent vulnerabilities though, the current huge surpluses of US primary production (actually in money terms a very small part of total money value of US food) would need to be cut off at the knees (i.e. serious reductions in fertilzers, diesel, machinery replacement) before US 'food production' failed? That could not happen because of a financial crisis or the earlier stages after Peak Oil; or could it?

NB I was interested in Chris' "dirty little financial secret" of the last decades; that middle-class Americans (also Brits?) have become less able to stay solvent - "secular decline of purchasing power". This reminds me of Elizabeth Warren's penetrating analysis (2006? pre-crisis) of 'US mom/pop + 3 kids' purchasing power and increasing exposure to risk. Chris says with regard to the property price bubble; "Servicing this credit finally exceeded the financial capacity of the US population ..."


Regarding whether food supply could be cut off because of a financial crisis or the earlier stages of peak oil, I think the big effects of peak oil are going to be on the political structure and also on our ability to do international trade.

Regarding international trade, this could affect our ability to get fertilizer and diesel.

Regarding the political situation, a person doesn't know where this leads. We assume that Obama will be succeeded by another elected leader, and that elected leader will be succeeded by another elected leader. If the government doesn't have the funds to pay for the services it promised, major changes could take place. See my post How can a government fix its debt problem? for more thoughts on the issue.

this could affect our ability to get fertilizer and diesel.

And that is why the 'save the oil for the farms' post was made.

The old poster stranded wind had electricity -> fertilizer plan with the only fertilizer that "renews".

All the others need the waste loop closed and cities as now done do a VERY poor job of that loop closing.

there will have to be a loop from city to farm...

When I lived in Germany, many yrs ago, there was a businessman nearby who collected human waste ("Honey") from disposal tanks. No using septic systems there!

The waste was processed and dispensed onto nearby fields. I remember watching it get literally thrown into the fields.

Plus, of course, plant stems and other organic waste was returned to the fields.

Who in the US of A still remembers how to do sustainable farming? Who makes tack for the plows and other equipment? Shucks, even the leather straps would be problematic today!

No doubt, close in farming will be needed. By the time we get to it, there will be far fewer mouths to feed. Of course that is just my opinion, and I guess I could be wrong. Someone talk me down here!


This is an interesting idea. Just fold up the remains of the Federal system and dissapear with it into the void, like grifters after a sting. Sort of a combination of creeping anarchy and the Ultimate Debt Jubilee rolled up into one event.

If you look at a Government as consisting of its laws and institutions, I suppose that it's maybe possible. A government also is a huge collection of information. Think of all the records that wouldn't exist except for the Federal system. The institutions might go away, but I bet the information doesn't.

If the information stored by the government is preserved, then it will nessecarily have some effect on the instituitions that replace it, no?

PH: do you have a reference for that 1:5 ratio in mid-XIX England?

And as I was told by an old man who was tutored by some old dude before him - Land prices are a function of interest rates. The cheaper or easier money is to get the higher land prices rise.

The demand for land is a function of 'location' and population. Land values could become far less if you are at the end of a road with no energy for transport and/or no population creating demand. Something to ponder if one is thinking about land and money.

Interest rates and expected growth rates.

Simplest model is that capital value of land is equal to:
current rental rate / (the interest rate - the growth rate)

So cheap money in an era of positive expected growth rates does imply high land values. Today's world will be one of a dawning realisation that expected growth rates are negative. Therefore even with zero interest rates (or lower!) we can expect land price falls.

The is the value of land in the market economy and then there is the value of land if you need a place to live and grow food. It may have zero sales value but still be keeping you and your family alive.

Y'all are forgetting that there are many uses for land. The one that exploded in '08 was the value as a home. Since most people do not make money from their home, that can be measured as the time value of the money it takes to purchase and own the land, and the average should be about 25% of the takehome pay of the average worker as a monthly increment driven by cost of maintenance, taxes, insurance, interest and principal payments. rule of thumb, value of home about 100 x monthly takehome pay / 4. If you make $3,000 a month, you can afford a home of $75,000. At $8,000 a month, $200,000. Homes are still way above what is affordable. The reason people still buy is because they are convinced inflation will take care of the excess, and the economy will grow, baby grow.

Arable land should be valued by the estimated value of crops that can be grown, on a sustainable basis, using diminishing mechanical (ICE powered) and increasing animal power, natural fertilizers (deposited by those animals, and of course you and your family), such water as falls from the sky, supplemented perhaps by a bit of diversion from local streams (or in extreme emergency maybe subterranean sources).

In the thread above we heard that one farmer:five urbanites was the medieval standard. We have not lost everything, and will not lose the knowledge that we have gained since then. I believe that a 30 acre farm should be able to sustain the family, plus exports to the bakers, founders, farriers, leather workers, clothiers, etc., plus a bit for trade for exotics from overseas.

I am not that sanguine that we will progress to the point that an idyllic existence will be possible. There are dangers ahead... and we have not, as a species, shown any indication that we will make the changes needed. When we do not, we will discover the true nature of Homo Sapiens Sapiens. And we will learn whether or not we, or most living things, will survive. We live in interesting times.

There's rioting in Africa
There's strife in Iran
What Nature doesn't do to us
Will be done by our fellow man.
Kingston Trio -John Foster Dulles song


Just one point.
That 1:5 ratio, of food producers to external consumers, was not the mediaeval standard. In the Middle-Ages it was much much lower ('worse'). The reverse in fact.
More like 5:1 or 10:1. That was why towns were so small. Nine tenths of the population were out there growing the food for themselves and could be 'taxed' only perhaps to the extent of a tenth of their production.

In the example I gave, mid-19thC England was after an agricultural revolution, but before the industrial revolution got significantly applied to agriculture. By 1850 some 22% of the population of England could just feed the rest in the growing mega-cities. Similarly in Scotland.(UK needed imports big time from then on - the population growth had not even reached the rate inflection point, and my ancestor farm laborers were adding 9 children to a family). Soil N had increased by as much as 3 times in parts of crop production by means of rotation of nitrogen-fixing grass/clover swards, and the animals that fed on them. Manures in that system are only recycling, with losses of course, the chemicals fixed in nature or in the case of P&K, released from minerals. Long term even 'organic' England would have needed some imported P&K.


With nutrients depleted the way they are, and without a plan for recycling waste as fertilizer, I wonder if we wouldn't do worse than the middle ages. Also, some areas that are currently arable may not be, without external fertilizer and without irrigation. Areas that are very wet or very dry are likely to be particular problems.

2 points:

1) Clearly not the case that gross debt has to peak with peak energy usage. I may only consume a bowl of rice a day, but I can agree to loan $100,000,000 to my friend if I also receive a $100,000,000 loan from a friend (not necessarily the same friend but the loop must continue until it's closed). One person's debt liability is another person's asset. Net debt could be considered to be the important quantity - but we live on a closed world so on aggregate, net debt is zero.

2) What is important is that businesses and individuals have borrowed on the basis of growth expectations which will not now be realised due to peak energy. These businesses and individuals therefore cannot repay these loans in terms of the real payments that were originally envisaged. There are two solutions to this: (a) default on the debt leading to economic collapse; (b) inflation so that the nominal repayments can continue (which therefore represents a lower real rate of repayment), allowing economic life to continue. (b) is clearly a better solution that (a) and it mystifies me to read criticism of expansionary monetary policy from people who clearly get peak energy (I thinking of Chris Martenson and his ilk). This article would be accurate if everything was real - but we can't ignore the nominal characteristics of most debt currently in issue.

This article would be accurate if everything was real - but we can't ignore the nominal characteristics of most debt currently in issue.

And how much of the 'not money' parts of the situation are not subject to manipulation? Darwinian makes a case often about veracity of the Kingdom of Saudi Arabia. Depending on the day, the topic and the TOD moderation staff the veracity of various States, Corporations and people have been topics here. There is more than just 'debt' being gamed.

What is our solid ground upon which we can take the staff of knowledge and a pyramid of information to move the boulders which block the path of progress?

*starts singing*
What is the Real life?
What is just fantasy?
On the backside of de-ple-tion, no escape to reality.
Read the new posts, reload TOD and Seeeeeeeeeee

Eric, thank you. A bit of Freddy Mercury is definitely called for here.

I'd rather see more turning of square corners by the people in charge.

I tend to stay away from the "inflate away debt" issue, but clearly that is what governments would like to do. Once potential lenders understand that inflation is likely in the future, interest rates should go up (or lending will be cut back).

I discuss the "every lender has a saver" issue in Part 2. I think the critical issue is that a lot of this debt cannot really be repaid, if we no longer have cheap oil and a growing economy because of peak oil. Thus, both the liability and the asset disappear, simultaneously. The demand pumped up by these loans is in some sense not real, or not sustained by the ability to pay back the loan with interest. We saw an illustration of what a drop in credit can do in late 2008. Oil prices dropped greatly.

debt cannot really be repaid, if we no longer have cheap oil and a growing economy because of peak oil.

Lets say there was no peak oil. Eventually with a currency and system backed by debt - any time there is a halt to growth the debt issue will happen.

Potable water is limited and so is Phosphorous as noted elsewhere in this topic.

TOD has a set of oil-coated glasses and will be biased towards "Oil is the reason'.

A money and debt system with an interest element will hit a wall when growth hits a wall. So is the problem the wall, the interest or a lack of growth?

I agree. Your comment reminds me of the first post of mine that was published on TOD, as a guest post in early 2007. What I am saying hasn't changed a whole lot.

And some religions figured that out and banned it.

Those religions are less popular in places with a growth->interest cycle and when the persons suffer from the growth->interest money cycle interest in those religions grow.

Figuring out there is a money problem will help prevent hitting THAT brick wall in the future and Man can move onto doing new and exciting things wrong VS the same old ones.

Eric and Gail,

I do not agree. Oil is unique primarily because it already consumes a substantial fraction of national expenditure. Almost all items are substitutable or non-essential.

There are other items that are not substitutable. Blood. The environments capacity to absorb abuse. While the argument that some resource will become limiting in a finite world with geometric growth is true, uncritically applying the lesson of peak oil to any commodity experiencing a shortage is not valid.

For example, certainly not water, which is so cheap we use it to grow lawns and wash shit off our cars. My apartment unit provides unlimited amounts at no cost.

Further, it is likely that many of the increases in various commodities are due to increasing price of energy. Commodity production is usually a bulk process that requires large scale inputs.


May I recommend you travel more (whilst we still can)? Visit random points on the earth's (land) surface and look at how people manage to live there, and what are their primary concerns. Given a statistical spread, I think you will find that most people place water higher than oil on their list of concerns.

Or, read the Limits to Growth book (or one of its updates). Oil is energy in a very convenient format. We can grow oil, just not enough of it for our current population and lifestyle. There is nothing unique about it.

Agreed. There are plenty of places in Africa where walking is the exclusive transport for 90% of the people, and water is the make or break issue for individual/familial/communal life.
Putting in water wells, especially highly reliable solar powered water wells can be very rewarding...following food, and work, the next issue is education for their family. I've actually never
heard an aspiration in these situations for any oil based transport.

Gentleman, that is not the point. Since I have been alive, food and water shortages have plagued Africa. Clearly in the past this was not due to peak water or peak food but local resource limitation.

Oil is unique primarily because it already consumes a substantial fraction of national expenditure.

No, its PLACE is unique because the build out of resources were done on the under-priced status of oil to date.

Almost all items are substitutable or non-essential.

Almost all about you is that. Your point?

Decomerf, I think your points are totally unrealistic. First we must agree that we are going to measure total debt in constant dollars, not inflated dollars. That being said however, since inflation favors the borrower and punishes the lender, if we have runaway inflation debt will probably shrink because no one want's to lend except at unrealistic interest rates.

But concerning point 1: You give a hypothetical example which is just not realistic. People could behave like they do in your example, but they don't. Gail is talking about a realistic situation, not something that could happen if we lived in a fantasy world.

In example 2, businesses do not willy-nilly expect growth in the teeth of a recession. They do not borrow. You will notice from the Figure 1 up top that total debt has been flat since 2008. Government debt has grown considerably but non-government debt has been shrinking considerably. That is because business' have not been borrowing and banks have not been lending like they did before the recession. Businesses and banks behave in a rational way, as near as they can.

Also defaulted debt is taken off the books as a loss. Mortgages that have been foreclosed are not carried as debt owed to the bank, or assets. As more and more loans default debt shrinks. The foreclosed homes are carried as assets but not as debts receivable.

More importantly, as oil supply plateaus or shrinks, so goes the economy, we have recession. This leads to the drying up of the money supply, fewer lenders, fewer borrowers. Debt shrinks.

However I have not been able to tie all this to government debt. It seems to me that as long as the government can print debt instruments and sell them, government debt can continue to increase.

Ron P.

But I'm not talking prospectively. There is a lot of debt now because businesses and individuals took on a lot of debt when they expected good growth. That growth has not materialised and the level of debt will kill the economy unless it's inflated away or there're orderly default arrangements. Real debt needs to shrink. That's my point. Inflation is probably the most economically efficient way of doing this. If inflation is going to be a major part of enabling real debt to shrink then peak energy need not mean peak (nominal) debt.

In the UK the official inflation figure is floating around 4-5%, banks pay around 0.5% interest. The result is that anyone with savings is being robbed. This means they spend less, which means the economy shrinks.

I would actually put the inflation figure much higher, around 10%. The government does not include the cost of housing, which has rocketed. Also most people will cut back and only spend on food and fuel, not all the other luxury items which are included in calculating this figure. Its fuel and food which is going up, not TVs, cars, computers, etc.

Add to all this the fact that a lot of people have seen their salary frozen, some are being actively cut, and other people are being forced from full time to part time work.

Inflation won't work, if anything deflation is more likely.

Inflation that erodes nominal debt has to mean salary inflation. Salary inflation has to be high and positive for people to afford debt repayments. Since the real economy has to shrink, because of energy constraints, that means price inflation has to be very very high!

Salary deflation does look likely given the current political situation (US, UK and especially EU) - but it's a recipe for disaster.

My savings are losing value rapidly. My salary has been static for years and I am now facing a pay cut of probably more than 10%.

House prices have remained more or less static these last few years, even rising slightly where I live because demand continues to exceed supply. My house is with about 12 times my current income. It is a very ordinary 3 bed semi. I am really glad I am not starting out buying it today. Prices must fall soon. Food and energy inflation are far higher than the official figures.

The best return I can get on my savings is to buy property for rent. After posts, maintenance and tax are allowed for, I should get a 5% return on investment. Not earth shattering but it will be the best pension I can hope for.

My worry - do I accept falling real value of my savings in the hope that a rapid fall of house prices means I get a better return in the long run, or do I risk losing it all in financial collapse and bankruptcy of the banks that hold my money?

I am really glad I have been out of debt this last decade. My outgoings are still smaller than income.

It seems to me that for people to have increased ability to pay back loans, salaries of people have to increase (even if accompanied by inflation in the cost of goods). It is also helpful to have more people employed, because unemployed people have a hard time paying back their loans.

We have been running into inflation in food and energy costs, but it is not feeding back into the salary system, in such a way that people are more able to pay their debts back. So it really has not been very helpful.

Gail - Perhaps Houston in the oil boom of the late 70's stands as a good model for you. With the oil patch booming you would get a 15%+ raise or you jumped to another company. Made it easy to live with a 10%+ inflation rate and 16% home mortgages. And you had to buy a house RIGHT NOW! LOL. Home inflation was running an easy 10-15%. And it wasn't just the oil patch making did trickle down. Bartenders were making $50,000+ in today's $'s. Real estate agents were becoming millionaires. And then came the oil patch bust. Couldn't get rid of that 16% mortgage if you couldn't pay someone $50,000+ to assume the note. I think I recall Texas had more bankruptcy filings than any other state or combination of states. So many filings that judges weren't doing individual dismissals: would have a couple of hundred folks raise their right hand, swear an oath and then dismiss all their debt at once. A geologist with 6 years experience went from making $60,000/yr to making less than $20,000 from part time consulting.

In this recent past recession Houston wasn't hurt nearly as much as the rest of the country. Real estate values dropped some not too bad. Did have a fair bit of mortgage defaults. Unemployment numbers for Texas don't look that great but remember that even though we had more new jobs created in Texas the last few years than the rest of the states combined we've also had a huge population increase to go along with it. I contribute part of the reason wasn't hurt as bad was that we've been dealing with residual effects of the early 80's bust until relatuvely recently. Also, perhaps that bust changed our attitudes a bit about BAU and betting big time on future growth. Having a home foreclosed in the 80's might have stopped more than a few Texans from buying that bigger McMansion and the top of the line Beamer.

So Texans were forced to give up BAU in the 80's. Very painful but we survived. And maybe are a bit less likely to repeat the same mistakes to the same degree. If the country survives a big bust coming down the road maybe it will have a healthy attitude adjustment as well. I wouldn't bet lunch on it...but maybe.

The recent boom and bust in housing is essentially a replay of the savings and loan debacle.

S&Ls were renamed "thrifts" and the S&L supervisor was reconstituted as the Office of Thrift Supervision.

The shoddy real estate business moved west to Arizona and California and east to Florida.

"Innovative" lending practices were pushed by the thrifts like CountryWide, IndyMAC, GoldenWest and WaMu. The new wrinkle this time was that they didn't have to either originate or hold the paper themselves. They acted as mortgage wholesalers, funding mortgage lending shops that made the loans, and then passing the paper onward to the investment bankers like Bear Stearns and Lehman Bro who packaged the crap and sold it on as mortgage backed securities to foreign investors, insurance companies, pension funds, endowment funds, etc.

Which all went to make an even more spectacular blow up this time.

$147 / barrel oil may have lit the fuse on this bomb, but oil didn't create it.

But, if the financial meltdown had not interceded, oil price would have continued upward until some type of limit was reached.

This is how the current situation is different, for the first time resource limitation is planet wide. Even sound economic policy is unlikely to produce economic growth for much longer. Just connecting the dots.

That's a great point Rockman and it's one reason that I'm scared for people in the Bakken and Marcellus shale "mania" areas, they believe the BS that the industry tells locals about how long the boom will last. I have co-workers that were brought into the Tuscaloosa trend area in the 1980's and they were told to go ahead and build big new houses, buy trucks and boats, because the boom was good for 25 years. Well just a few years later, crash! They learned from that.

Now, your point can be seen in South Louisiana also, when you look at the South La. locals, but not the new folks in town, they think good times last forever.

The example I think buttresses your point is post great depression era folks. One reason that the depression gave way to the extended boom time that often gets overlooked by partisan economist is that people changed. The pain felt by the depression caused post tramatic stress, where the scar caused people to learn and not make the same mistakes. Business and banks learned and didn't allow the same mistakes to be made for decades. I'm sure you have heard the stories or even seen the results of older relatives that saved cash in coffee cans that were often stored in crazy places. I had a great grandfather that had eight bank accounts at eight different banks as well as having dozens of cash filled CDM cans store everywhere.

The recession needs to be allowed to happen, so people and business can learn their lessons, they need to realize that malinvestment has a painful cost, only then can we grow our economy again in a more prudent manner.

wildman - So true. being 60 yo most of my cohorts have been thru bad times more than once. PTS might be a bit of a push but we all remeber. And as sone as we can afford to go to the house for good most of us are gone. Lots of guys like my boss: had not the market crash zapped his 401k he would be out of here now.

"Lots of guys like my boss: had not the market crash zapped his 401k he would be out of here now."

Rigzone had a article called "The Great Crew change" that didn't go as deep as I would have liked on the issue of experience and average employee age issues in the oilfield. World Oil had one some years ago I think it was called "The Aging of the oil field" that was much more profound. The funny thing is that the market down turns have kept many very experienced baby boomers in the Energy workforce, without them I don't know how well our operations would run at this point. Many of our older workers are sticking around simply for health benefits one of my co-workers had a game plan, it was to work until he died.

Many of these much needed, experienced workers would have "flanged it up" and retired if Obama care looked to be the panacea that it was supposed to be.

"You give a hypothetical example which is just not realistic. People could behave like they do in your example, but they don't. Gail is talking about a realistic situation, not something that could happen if we lived in a fantasy world."

But gedanken experiments are good for clarifying your thoughts and terminology.

On the terminological accuracy: what are "constant dollars"? There are a few inflation linked bonds in issue, but the vast majority of debt is is nominal currency which is fiat currency and subject to a change in value.

Thought experiments are just that and nothing more. Most, like yours, cannot realistically be applied in the real world. But some can and when they can then they can be used to make a point. But thought experiments that posit a totally unrealistic situation cannot, and should not, be used to try to prove a real world point.

On the terminological accuracy: what are "constant dollars"?

Sorry I just naturally assumed that everyone understood the term. Contstant Dollar

What Does Constant Dollar Mean?
An adjusted value of currency used to compare dollar values from one period to another. Due to inflation, the purchasing power of the dollar changes over time, so in order to compare dollar values from one year to another they need to be converted to constant dollar values.

Calculated as:

                                                       CPI for First Year
Second Year Constant Dollar=First Year Dollar Value x -------------------
                                                       CPI for Second Year

You wrote:

There are a few inflation linked bonds in issue, but the vast majority of debt is is nominal currency which is fiat currency and subject to a change in value.

Of course! That is why debt must be measured in constant dollars. The government debt, the war debt, of 1945 was extremely high but measured in nominal dollars, unadjusted for inflation, it was miniscule. If that was the debt today, in dollars, we would laugh at it. The historical weight of any debt cannot possibly be measured in nominal dollars, it can only be accurately expressed in constant dollars.

Ron P.

Government debt can continue to increase, if people have faith in the system, and if somehow, the government can manage to provide the services it promised (schools, roads, unemployment insurance, law and order, Social Security, Medicare, etc) with the proceeds of the printed money.

At some point, though, the system is likely to start falling apart. The value of the dollar will drop, or other countries will stop trading with us, or congress will refuse to raise the debt limit. Obama yesterday raised the issue of Social Security checks not being issued.

Governments that cannot provide services promised to the electorate find themselves in very tough shape. I would not be shocked to see some governments that cannot provide services going the way of the central government of the USSR.

I remember when every politician regardless of party said "social security is off-budget, it has its own revenue stream (payroll tax), it will never be touched." What did they do? Step one, lower the payroll tax by 17% (from 12% to 10%). Step two, ignore the 2500 billion dollars owed to the social security trust fund by the federal government. To come step three, lower social security payments.

Not to mention the wearing down of social security payments by fraudulently low reporting of inflation and fraudulently low COLA for social security.

Let talk about cutting the military by 50%. Then ag subsidies by 100%. Then oil subsidies by 100%. Then all foreign aid by 100%.

(b) is clearly a better solution than (a) and it mystifies me to read criticism of expansionary monetary policy from people who clearly get peak energy (I'm thinking of Chris Martenson and his ilk).

I guess it all depends where you find yourself on the economic ladder. The current growth based economic model only benefits a very small minority of the world's population. I grant you that if it were to collapse completely tomorrow that would have dire consequences for the under privileged majority. However without collapse there can be no real leveling of the playing field. The current system with its benefits for the privileged only, has to go. Good riddance!

I think people of Martenson's ilk get that...

I don't agree that a “rising tide lifts all boats,”..


Rising debt levels and personal income don't seem to play well. It depends on your definition of tide, it seems; in this case a 'red tide'. Incomes seem to respond positively to injections of real capital (energy and resources) into the system, negatively to faux/fiat capital and 'promisses'. This seems to confirm Gail's original assertion that most economists don't get the link between energy/resources and growth. We can't imagine our economies into prosperity for all. This should be obvious.

Some discussion here.

Wow that ratio in green mirrors the rise and fall of US oil production more or less.

Maybe it is "rising oil lifts all boats"!

gail - Maybe there's another besides the Golden Rule (he who ownes the gold can control the rules). The Oil Rule: he that ownes the oil can control his debt.

Ah Rockman, we worship you. Don't worry. ;-) What can I do for your black stuff?

Oct - Blue Bell ice cream is always an acceptable barter item.

But about the Oil Rule: got to thinking about the KSA and how they control their debt. But do they? And if they do for how much longer? I've seen reports over the years how the KSA has, at least at times, accumulated a very large debt. Supposedly back in the 90's there was some serious concern they would have to default on some obligation. We hear stories about some big lottery winner being broke after a few years. IOW it's not how much money you recieve but how much you keep. We know Norway has stashed away a nice sovereign fund but we know nothing about the KSA "nest egg"...if there is one. They might be similar to a company with little or no profits and very limited capability to expand but survive/stay current on the bills by eating up all their cash flow. Not long before they're borrowing to pay salaries when they have only the ability to pay the interest and none of the principal. Works for a while...until it doesn't. I've worked for more than one company who followed that track.

We've already seen the KSA make some big handouts lately to keep the natives happy. Add that to their increasing internal consumption and high population growth and I start to wonder if they aren't seeing their Oil Rule slip away.

I bet Blue Bell will stretch far in KSA. A supertanker of Blue Bell must be worth 4 supertankers of Oil.

The natives in KSA may get more stuff but they need to buy it from the outside and well I imagine they will get less and less in return as these commodity prices keep edging up.

Something has got to give.

Debt problems? I guess that is funny and telling as to how the oil drum relates problems to the unreal concept of 'debt', which is an abstract concept and measures nothing 'real'.

Throughout history the Price System has been operated and controlled by three oligarchies: the oligarchy of organized government to maintain law and order, the oligarchy of the priesthood medicine men that preach submission and reward after death, and the oligarchy of the entrepreneurs who operate trade and commerce.
These three have either controlled separately or together in all countries.
Political State, Ecclesiasticism, and Private Enterprise.
Their role today is the same as it has always been.
Since the first concern of any government is to maintain itself, it protects its own.
Private Enterprise functions to exploit the natural resources of the land and people for all the profit the traffic will bear.
It is easy to see how the interests of the three oligarchies tie together.
I Am The Price System!
Now that resources are running out and population is growing and the worlds finite limits are being reached as to life bearing capabilities.... is it about time to 'measure' things differently???,, rather than using debt?
Energy accounting is an alternative method in a non monetary system.

It's certainly interesting that oil shocks are a common ad hoc reason thrown around to discuss economic disruptions. It's the conventional understanding of the stagnant 1970s economy, and I also remember it standing in as a cause of the 2008 recession, at least for a short time, until people also finally started questioning the screwy financials underlying everything. It's a running curiosity that a more fundamental, first-order connection isn't observed in the mainstream.

I'm not inclined to take debt too seriously from a resource economics standpoint. I mean, GDP is one thing. As a stand-in for "the economy," GDP is a rough measure of all the stuff and activity that is actually generated inside the black box. We expect GDP to be subject to conservation laws, but debt, not so much. Debt, just like money actually, is only a system of agreements which provides rules for how the GDP is distributed. It is basically a short-term extension of the status quo, the human reaction to gamble that things will soon regress to the mean. ("C'mon, hit me one last time.") When that's a reasonable bet, it facilitates activity. When not, well, not.

If the trend is actual GDP shrinkage driven by first-law sorts of pressures, then expect those agreements to stretch and become rigid (that seems consistent with a bubble economy and IMF-style forced austerity we've been seeing this last decade), and then falter in glorious financial collapse (the last one was driven by contract-breaking). It's a global behavior consistent with what you'd expect from shrinking fundamental resources, and worth pointing out. It's also consistent with what we've seen often in history when power concentrates in social and financial spheres. Some of those can probably be tied to extension beyond resource sustainability (Rome's slow collapse probably fits this model), but others maybe not (the Great Depression probably doesn't). Peak debt may not necessarily imply peak resources, in other words, but I agree that it's a strong case at this point in history.

Nice post.

Gail, I like your posts, but I'm 'one of those'.

I think the debt bubble was based on the greed of bankers, investors, and house "flippers". Greenspan eased interest rates too much and a housing mania ensued. Bankers in an effort to keep income high went to ever riskier types of loans. The revisions to US bankruptcy laws must have had some bankers fantasizing of debt slavery. Even more important and more critical was the ability of banks to off load the risk to investors, and get the base capital back, and start over. This period was a "mania" in housing. Here in Portland Oregon housing was going up 20+% a year. There is a point which more and more people fall out of the potential to buy pool. Greed chasing 20% per year unsustainable returns was helped by bankers increasing the ability to leverage loans. The wide spread use of 'non-doc', Alt-A, reverse mortgage, and other non traditional loans chasing mathematically unsustainable returns, as a rational way to run a "sound" finance system is absurd beyond belief. Bankers simply did not care, until they got hurt and then they threatened financial Armageddon.

Obviously we are in a very different situation currently, historically, with respect to energy, and specifically oil. You are dead correct that oil prices can and did cause recessions. This recession is different in size because of a lot of poor leading by extremely large banks and/or the banking/finance system in general. Banks and finacials have hijacked the political processes in many nations, and regulation was lax.

The size of this mania dwarfs all others, and why not? There are more people. The 'globalization' of production, and distribution is on a scale never dreamed of 100 years ago. All this infrastructure, outsourcing, distribution and consumption was made possible by cheap oil - yes.

The increasing rate of debt, that must be paid back with an expending money supply, based on expanding debt has a maximum limit beyond which it goes into reverse- where we are now.

Where I find common ground with you is here; the resource and environmental limits we are encountering, plus the current population, will make the down side of this financial bubble, this mania, unlike anything the world has ever witnessed before.

Debt methods are an issue. Using money to measure success is an issue.
Resources to population and the survival of civilization is at issue now.

Money choices are not real. The object of money choices are to 'get' more money.
Its not a creative society and our society is not viable now because 'energy slaves' or 'appliances' have replaced the old labor theory of value and the reward of being a consumer is no longer connected with human energy or human 'work', so this society is no long functional.
That which ceases to function ceases to exist.
Robotics A.I. etc. kilowatt hours are nearly free compared with 'man hours'.

Howard Scott and the Technocracy movement he founded proposed that money be replaced by energy certificates denominated in units such as ergs or joules, equivalent in amount to an appropriate national energy budget.
The technocrats argued that apolitical, rational engineers/scientists should be vested with authority to guide an economy into a thermodynamically balanced load of production and consumption, thereby doing away with unemployment and debt.

Since the current system does not protect the resource base and must 'grow', is there really another viable alternative?

I was trying to think of where I have a write-up showing how the timing of the housing price collapse fits precisely with when the Fed's raised interest rates in response to rising food and energy costs in the 2004-2006 period. Steve from Virginia went back through the minutes of the Federal Reserve Open Market Committee, and documented that the interest rate increases were intended to try to tame food and energy price rises.

At the same time, the biggest home price drops were in the most distant suburbs, with close-in homes being affected much less.

I wrote up some of this in a paper which is behind a pay wall for most of us--it has been accepted by the journal Energy, but not assigned to an issue yet. Oil supply limits and the continuing financial crisis

Someone pointed out Karl Denninger's article this morning. According to his calculation, all of the US economic growth reported since 1980 is pseudo-growth, based on increased debt.

I am not sure whether his calculation is really right, but there is definitely a tie. If we have less debt going forward, reported GDP is likely to look very different.


There has to be a difference between money lent between Americans and money lent to Americans from overseas. I can't see why the former would lead to excess growth.

Nevertheless, thank you for the opportunity to note yet again that debt driven growth coincidently began when the tax code was restructured so that working and middle class families no longer benefitted from increases in national income.

Now that middle class ability to maintain consumption levels through debt is gone, how can current consumption levels possibly be maintained. We have a demand deficiency problem (and an excess of capital).

I have an idea, lets take some earnings from the investor class and return them to the middle class. I imagine returns on investments within the US will magically appear, assuming we have not reached peak total energy.

We have a demand deficiency problem (and an excess of capital).

Who are you? Franklin Roosevelt? Is this the 1930s?

Actually ' bout 1933. The rhyme this time has the enhanced propaganda techniques from WWII at work.

The CCC - TSA. Yup - this time rather than having Granpa say "see that tree - I planted that" in 50 years you'll have Grandpa talk about how he groped someone. That is, if there is a Grandpa, due to the radiation from the porno-scanners.

I realize this sort of argument is not in vogue, but that is not a counterargument. We have a demand problem. In defense, I offer one article:

As has been noted above, a fundamental US economic problem is the slow flow of private funds into investments in the US economy. All sorts of explanations are given, mine is very simple. Why would anyone invest in an economy with shrinking demand?

To get to the chase, my primary position is the US Gov is highly liquid (above), can obtain capital at negative real interest and should be investing in long term renewable energy resources, while working to maintain aggregate demand.

I know that many here on "The Oil Drum" may lean toward the left for many different reasons and I bet they are conflicted with what they see coming from Washington and other western countries in financial trouble, because the people in power want to use growth and new bubbles to get re-elected, even when that growth is unsustainable.

Daniel, we will disagree with the thought that Americans and Westerners lack demand. That's just crazy talk! We have plenty of demand we don't have the capability to make that demand reasonable, due to our lack of productivity. We shouldn't be "working to maintain aggregate demand". We should be allowing the recession to changes peoples attitudes toward consumption.

We do have finite resources, we do have lower productivity, we do have unreasonable lifestyle demands, so we do need to suck it up and allow this economic process to teach the lesson of frugality and efficientcy.

" Why would anyone invest in an economy with shrinking demand?"

Your asking the wrong question. I would ask why would we think we should ever have higher demand, when we aren't productive enough to buy the things we want? Why should anyone invest in an economy that's rewarding failure such as ours right now? Our demand needs to shrink even further and it's foriegn investments that keep us supplied with the shovels we use to dig our hole even deeper.

We don't need that investment to continue, we need to stop digging.

I hear you. But, take a look at Mr. Mobus's profile of energy decent below. Only somewhat harsher than Hubbert's decent.

I have heard so many good arguments that a system based on growth cannot smoothly transition into decreased growth without a cascade of financial failure. I would like to see 20-30% of our energy coming from long lived solar and wind resources before we leap off the edge.

There is little chance we can prevent the positive changes implicit in the lessons of frugality from imposing themselves upon us in the not too distant future. I would, however, like to avoid the less positive lessons that come from watching loved ones starve to death.

I view it as threading a needle or walking the razors edge. Something our poor president is trying to do. There is no guarantee of success, but that is how life has always been.

As a recent article noted, we are looking at default or inflation on a global scale:
In the world, at the limits to growth
by David Korowicz

Across the political spectrum, people are claiming solutions for a predicament that cannot be solved . . . The only choice is default or inflation on a global scale.

Default, default, default, until the pain gets to great(revolution, dictatorship) then 'print' our way into prosperity?

Debt is not physically real. It doesn't have mass. It is easy to create, and no conservation laws apply. It is just an agreement with the "haves" to let others spend their money on things they (the others) cannot now afford. An alien viewing earth would not observe "look, those people are in debt", but rather "look, those people are churning through their resources".

The lenders lend in expectation of getting even more money back later, while (most of) the borrowers borrow with the expectation that they will find enough loose change over time to pay the loan off. If the payback doesn't come to pass (think recent history), one rational outcome is that lenders stop lending. High oil prices played a role, but there was much more going on. For example, Las Vegas really doesn't need that many houses and condos. To mangle Alan Greenspan, it's just too much excessive exuberance. The reticent lenders were probably not thinking about oil production levels.

I would agree that growth for awhile could be constrained by oil production capabilities, because current economies are rather dependent on cheap liquid fuels. And lack of available credit will certainly hinder new drilling -- and cheese production, for example. But it is best to not draw causal relationships between something that physically exists and something that exists on a whim.

Joules, I am a great fan of yours. I love everything you write on oil and energy related subjects. But I am sorry to say that you do not understand debt at all. Debt is more, a lot more, than you seem to think.

The world runs on debt. McDonald's could not meet its payroll if it were not for debt. Every major corporation runs on debt. That is what corporate bonds are, debt instruments. I know of no corporation that does not have outstanding bonds though I am sure there are a few. General Motors and Chrysler were raised from the dead with borrowed money.

Everything from cars to hamburgers are made with borrowed money. Homes are built with borrowed money. Homes are bought with borrowed money. The industrial world runs on borrowed money. The government runs on borrowed money.

Lenders are not just fat-cat bankers. Lenders are, far more often than not, the public. Retirement funds are primary holders of debt instruments, corporate bonds, municipal bonds and government bonds. Bonds are held by mutual funds. Almost every kind of investment instrument is heavily invested in bonds.

If credit were to completely dry up all over the world tomorrow then the end of the world as we know it would happen tomorrow. McDonald's would lay off all employees, just as almost every corporation would also, because they could not meet the payroll. Hardly anyone would buy a car, house, boat or any other major purchase because there would be no credit.

Fiat money exist because it was lent into existence. People curse fiat currency but without it we would have to barter for everything we buy. And that would be the world we would have to live in if there were no credit, no debt.

Ron P.

Fiat currency need not be lent into existence. That is the system at the moment (due to fractional reserve banking) but fiat currency just need some sort of trust underlying it and once this is there it could be created and distributed in other ways e.g. governments could control the supply and distribute supply increases in government salaries.

Decomerf, of course physical currency that you can put in your pocket, or stuffed into your mattress, need not be lent into existence. The currency the world used for over two thousand years was not lent into existence. It was stamped into existence by the government mint. But even then it had some physical value in gold or silver. Then later copper, bronze or other metals that had much less physical value.

But only a very tiny fraction of money in circulation actually exist as paper or coin. It is simply an electronic entry on some computer somewhere. That fiat money was lent into existence.

It is all explained here: Crash Course Chapter 7: Money Creation

John Kenneth Galbraith once famously said, “The process by which money is created is so simple that the mind is repelled.” We’re about to discuss that very thing. Money creation is a bizarre thing to ponder. It is actually a very simple process, but it’s really difficult to accept.

Money is loaned into existence. Conversely, when loans are paid back, money ‘disappears.’

If there were no credit then you could still have money as the Romans did. But it would have to be a world such as the Romans lived in, where all real wealth was produced by peasants in their fields. Of course they also had looting and pillaging but... well I guess we could do that also. ;-)

Ron P.

I was talking about fiat currency, not gold backed or anything like it. Fiat means Let it be and as long as the users have some sort of faith in the issuer then this type of currency can be printed, debts can be denominated in it. The world need not regress to Roman standards to eliminate fractional reserve banking.

Fiat means Let it be and as long as the users have some sort of faith in the issuer then this type of currency can be printed, debts can be denominated in it.

Well no, that's not what "fiat" means at all. All you need to do is check

fi·at –noun
1. an authoritative decree, sanction, or order: a royal fiat.
2. a formula containing the word fiat, by which a person in authority gives sanction.
3. an arbitrary decree or pronouncement, especially by a person or group of persons having absolute authority to enforce it: The king ruled by fiat.

Fiat basically means "by holy decree" or a declaration made by the king, pope, or some other authority. Fiat money is declared, by the government, to have value. Without the government's holy fiat, or government fiat if you will, the money in your bank account, as recorded on their computer, would be worthless.

I have put in bold your statement that "currency can be printed". Of course it can but only a very tiny fraction of money in existence exist in the form of printed currency. With Google I could not find the actual amount but I would bet that it is way less than one percent. The overwhelming percentage of money exist only as a bank entry or an entry on some debt instrument, which these days is also a digital entry on some magnetic disk or other form of computer memory.

If you choose not to call that fiat money, then fine but it is still money lent into existence. And it disappears when the debt is paid off.

Ron P.

I think dcomerf wasn't denying that this is how things are, but just saying that they don't have to be that way (i.e. you could have a system of fiat currency without fractional reserve banking).

Well, you don't understand me at all. Of course the current economy requires debt to function. A lubricant without which things would grind to a halt. But nothing that you said justifies the conclusion that the "peak" in debt is related to the peak in oil (crude + condensate, actually). Peak planet, perhaps. Maybe peak hubris.

It was not my intention to justify the conclusion that peak oil is related to peak debt. I thought Gail did that very well above. And nothing you wrote even came close to refuting her argument. Not that you really tried to do that. Your argument was:

It (debt)is just an agreement with the "haves" to let others spend their money on things they (the others) cannot now afford.

My argument was no, no, that is not what debt is at all. Well, that might be a very tiny fraction of what debt is but debt is something far, far, larger than you seem to realize.

Both debt and oil are an integral part of the economy. But that is Gail's argument made so very well above. Did you really read it?

Ron P.

OK, Ron. Define debt without raving about how useful or important it is. Whether business, person, or country, it provides a mechanism for doing something now as opposed to later. And no, I don't think you will be happy with that definition either. But the earth doesn't really care about debt, but rather about how much we are demanding of it.

Are both oil and debt integral to the economy? Yeah. And so are a lot of other things.

Gail writes:

1. Peak oil tends to cause peak debt. Some will argue with me about this, because they believe it is possible to decouple economic growth from energy growth, and in particular oil growth. As far as I am concerned, though, this decoupling is simply an unproven hypothesis–the normal connection is that a flattening or decline in energy supply causes a slowdown or actual decline in economic growth, and this slowdown causes a shift from an increase in the amount of debt, to a decrease in the amount of debt, as it did for US non-governmental loans in 2009 and 2010 (Figure 1).

I'm not sure what the first sentence means (tends?), because by definition, peak oil should happen once. But then she conflates oil (C+C?) peaking with energy peaking and then claims that the decline of loans is directly caused by the slowdown in energy use. Yes, if the economy tanks and people stop buying/making stuff, people will use less energy. Duh.

The economy is complex, and attempts to reduce everything down to one factor with handwaving doesn't satisfy.

But the earth doesn't really care about debt, but rather about how much we are demanding of it.

I assume you mean "nature' does not care about debt and that is correct. Nature does no care about human welfare and human welfare is very much dependent upon the debt based economy. Human welfare cares a lot about debt. And of course the demand for better human welfare is raping the earth but that is not the argument.

Human welfare would suffer immensely without if there were no credit to run the world. But then you would say that this is not the argument either. The argument is: "Does peak oil affect the level of debt in the world?" I would say yes and you said, something to the effect, "I see no connection."

Gale's argument, as you posted, is that oil cannot be decoupled from the economy. And it is quite evident that a slowdown in the economy leads to fewer loans being made and a decrease in debt. Debts would be paid off and no more issued or they would be defaulted. Either way this is a decrease in debt.

Peak oil = decline in growth. Decline in growth = decline in debt. Self evident! How can anyone argue otherwise?

Ron P.

It isn't a question of effect vs. no effect or coupled vs. uncoupled. Everything has an effect, and everything is coupled. The world runs short of cheap oil to power transportation and has to adjust to that. There are many outcomes possible from that, tho I don't want you to feast on that at the moment. But if you claim that the downturn in lending after the latest crash was due solely to the peak in C+C production, or that the crash itself was due solely to the spike in the price of oil, I must disagree.

But if you claim that the downturn in lending after the latest crash was due solely to the peak in C+C production, or that the crash itself was due solely to the spike in the price of oil, I must disagree.

Bold mine. Of course no one is claiming that the crash was due solely to the peak of C+C, only that it was a major contributing factor.

Ron P.

Edit: I misspelled "major" in my earlier post and just wanted to make sure everyone knew that I meant major and not minor.

Cheap oil, cheap energy. EROEI it is everything.
If on reaching peak oil, we found a way to gradually make the use of oil (and other energy types) more efficient, extend further for a given amount) in a meaningful way would that not affect the economy in a positive way, would it affect debt levels?

Of course the situation is the exact opposite. The cost of energy is increasing because we have not found a way to replace the practically free energy provided by FF's that kicked off the population explosion, building spree and wealth creation of days yore.

So EROEI has us by the nuts, there is no way out, any efficiency gains are offset by higher production costs and the increasing energy needs to produce the stuff. IMO rising debt is a response to the ever increasing capital required to produce energy from FF's and renewables.

The energy slaves no longer work for free, they are demanding ever higher wages to do the same work. Like any business if higher wages are not compensated with increased profits the business will fold.

So there is your connection with peak oil and debt, it's EROEI and it will break the back of the financial world as well as the consumer market.

IMO rising debt is a response to the ever increasing capital required to produce energy from FF's and renewables.

I thought the premise of this article was that debt has peaked...

In any case, as pointed out by Nate further down, the amount of debt out there is staggeringly large compared to the total amount spent on oil. Seems like a rather excessive "response". Debt has been zooming up since Reagan, right through many years of rather cheap oil.

When debt peaks I guess it means the wages of the energy slaves is beyond the capacity of the present system. So some slaves will have to be let go (unless more money can be borrowed to pay them all). IMO with fewer slaves there is less productivity, it's a downward spiral directly related to the availability of debt and the cost of energy.

You said debt exists on a whim. That whim kicked the can down the road, does it get kicked again, picked up or run over. Debt feels very real to me and I bet it does to a lot of mortgage holders, businesses and countries. edit

I didn't say that debt necessarily had peaked --just that that is what you would expect to happen with peak oil. There is a chance that things will go back up for a while--although with the current high price of oil, and the debt problems of governments, that doesn't look terribly likely.

If governments try to fix their debt problems with a round of layoffs and cuts in government programs, the combination is likely to bring on more recession, and more decline in debt.

Human welfare would suffer immensely without if there were no credit to run the world


The PRESENT SYSTEM is set up that way.

Gale's argument, as you posted, is that oil cannot be decoupled from the economy.

Except that oil will be decoupled. Oil at the past unreasonably low price has been decoupled.

And because all the stuff that was built around a low un-reasonable price is now at risk, people are complaining.

Your obviously have not thought this thing out Eric, you just made a knee jerk remark without really thinking about it. The PRESENT SYSTEM is the only system we have. If the PRESENT SYSTEM collapses most of us die.

Except that oil will be decoupled.

Of course it will be decoupled. But it cannot be decoupled without the PRESENT SYSTEM, our economic system, collapsing. And when that happens... Well that requires some very hard and deep thoughts, and they are not pretty. But a knee jerk response might find it quit desirable.

Ron P.

The present system will die.

Its dying all around us.

Now humans should be planing for the NEXT system/next path to take VS dumping more energy into a known doomed system.

Let go of the material objects so they do not own you.

In the old paradigm, before the peak, yes... "..., if the economy tanks and people stop buying/making stuff, people will use less energy." Just as, in the past, the temperature rose due to natural cycles, which cause co2 levels to rise (as a following circumstance), which created a feedback loop. New reality: Cost of energy goes nuts, people cannot borrow money to drill for oil, much less pay for gas to drive their SUV, and the cycle is entirely different. It was a chicken/egg question until PO. Now there is little to guess. Environmentally, CO2 is now the leading indicator, with temperature increase following - and the increase happens during the down cycle in natural environmental theory.

Things change, JB. And, to make matters worse, change is the absolute worst thing for humans. As a group we hate it, individually we deny it, and yet it is what is essentially real. Politicians use fear of change to drive voters. Industries use fear of change to "create demand." It is why people act irrationally.

So, maybe Gail should be more forceful in her assertion: "Peak oil causes peak debt because ..." And, "Peak Oil causes peak energy because..." I am satisfied with her presentation.

I wish it was not true, and yet I recognize that oil is needed to transition to sustainable energy sources; J.M.Greer and Jim Kunstler both have written chapters on these themes. Disagreement seems more widespread on how low we will go and how fast than on whether we will fall. I wish we knew. I wish things would not change and we could grow forever. We all do!

A man is his own easiest dupe, for what he wishes to be true he generally believes to be true.


I'm glad somebody is satisfied. No need to try to cheer you up, then.

Debt ... doesn't have mass.

I am often disappointed, but not surprised, that people use sound buzzes like "debt", "money", yaddah, yaddah without truly understanding what the implications are.

While "debt" does not have physical mass, it does have psychological momentum.

To appreciate what is meant by that, first one must understand that "debt" is a fancy way of saying, "making promises".
("Money" is also a fancy way of saying, "making promises" for less obvious reasons.)

A real world example of "debt", its psychological momentum and how the making of one set of unrealistic promises leads to the making of yet more unrealistic promises might go according to this hypothetical dialog:

Loan Officer: The value of your real estate will always go in only one direction; up, because land is a finite resource.

Home Owner: "That's great and it makes absolutely clear sense. Land is finite. It means that as long as I keep my job, I can cash in on the ever increasing equity in my real estate assets and keep buying more and more "stuff". And of course my "job" is absolutely secure because I am special and the company I work for can never replace me or make obsolete the work I do!"

Loan Officer: You a very smart, and not at all vain, human being. Now just sign here and we will move forward. I have a very busy afternoon today. A gentleman by the name of Bernie has made me a promise that he can double my money in 2 years flat. I can't wait to meet with him today and to cash in on his unquestionable promise. He is a man of honor. After that, I'm running over to my stock broker to buy some default swap options. The promises of our "innovative" economy just keep getting better and better. And heck, if everybody else is doing it, why should I miss out on the party?

Debt can be inflated away. It can be "forgiven". Jubilee. And if the lenders have amnesia, it can start all over again.

I'm not at all saying that debt is unimportant. But different parts of the world get along just fine on different amounts of debt. And I am not buying the idea that, because debt is important to economic function, that it follows that debt is declining because of peak oil or vice versa.

Very important question: Would you buy the argument that peak oil affects the economy? If your answer is "yes" then nuff said, argument over.

But if your answer is "no" then I am at a loss for words as to how to reply. I don't think I would even try.

Ron P.

Yes and no.


That's a shallow way of approaching a complex issue.

"Debt" is the making of promises about future performances.
Implicitly embedded in those promises are numerous assumptions, too many to list:

1. The world will have not yet ended
2. All the relevant parties to the agreement will still be alive
10. Cheap and abundant energy will be available for actualizing all the energy-dependent parts of the deal
45. A court of law will enforce the promise even if the "unforeseeable" surprise surprise of Peak Oil comes into the public conscience.

Figure 1 does not appear to be in constant dollars, i.e. inflation adjusted. The increase in debt is less than it appears in Figure 1.

If the thesis is that debt is correlated with oil consumption, then it would be useful to plot US oil consumption with US debt levels. The EIA graph of US oil consumption is by no means as steep as the graph of US debt. The graph of US debt does not show a dip in the early '80s coincident with the dip in oil consumption, though it might if constant dollars are used, since that was a period of high inflation.

The recent dip in non-government debt is due mainly to the roughly $2.95 trillion decline in financial sector debt as the financial crisis unwinds from 2008 to 2010. The decline in consumer debt was $0.46 trillion and the decline in business debt was $0.27 trillion. See table D3 in the Federal Reserve Flow of Funds for the composition of debt.

You are right, the graph of debt is not in constant dollars.

The recent dip in debt has been widespread, on everything from credit card debt to domestic non-revolving debt (like auto loans) to home mortgages to business non-financial debt. The peak in consumer credit came at precisely the same month as the peak in oil prices - July 2008.

Card users' dent in debt an illusion

In 2009, banks wrote off a record $83.27 billion in credit card debt. A study by consumer credit research site CardHub found that accounts for the bulk of the of $93.2 billion drop in consumer card balances reported by the Fed for last year.

Consumer credit balances declined largely because lots of credit card, auto loan, and HELOC debt was written off as uncollectible.

That is one way debt goes down. I expect that will be a big part of the way debt goes down in the future. A whole lot of what we think are assets (say, bonds is in our pension plans) are going to prove uncollectible.

Consider where we have been on the Hubbert Curve for the last 50 years. During that period, there was growth in oil production and a reasonable expectation of continued stable growth for decades to come. Hence it made good business sense for banks to make 30 year loans on housing during that period (especially in the 1950 to 1990 time frame), as there was little risk that a typical loan would default. These 30 year housing loans were very solid investments for decades. However, as we neared peak oil (and surpassed the peak and got onto the downslope of the curve), housing investments and 30 year loans started getting riskier. The implications of where oil production will be in the next 30 years started to get factored into the world economic situation due to higher oil prices. Those higher oil prices caused higher prices for basic necessities and all downstream goods. A combination of higher actual prices for goods and services and a higher awareness of forward looking risks to the economy in the coming decades started triggering growing worldwide unemployment. It may very well be that the rise in oil prices to $147 a barrel triggered higher unemployment and that helped to trigger the subprime and other housing crises, which are now helping to trigger and expose the macro crises of PIIGS, Egypt, Libya, Tunisia, etc, and the food crises too. The banking powers (FED, IMF, ECB, China, etc) have tried with difficulty to address the debt burdens and debt related links to the world economy to preserve the status quo. But structural changes associated with several flavors of resource depletions (for which there are no easy substitutions available) will force changes to the status quo. These changes are first shunted by the government and corporate interests onto the general population with austerity measures and higher government debt levels. As a result there will be higher unemployment and less government services available as we are currently seeing in not only PIIGS, but in China and America too if one has been paying attention to local and regional economic affects.

Looking forward to the coming years, what are the reasonable expectations for housing and all other aspects of the world economy if oil production does decrease as projected by the Hubbert Curve? Is the banking business model of providing 30 year home loans at risk? It would seem so. I have seen reasonable projections that expect oil production to decrease by anywhere from 2 to 6 percent year after year after year. Do 30 year home loans (or any long term loans of any type) make good business sense under a 2 percent decrease in oil production which is the worlds most critical natural resource? Would they make good business sense under a 6 percent decrease? I think the banks are finally starting to "get it" and so are other smart investors too, and long term credit is tightening as a result.

As an engineer, I like to deal with equations, and it would seem to me that there are some fundamental relationships at work here. When considering the world economy as a whole, the economic relationship of certain aspects of the economy to the production of oil might be quantified by a few approximate linear equations.

I think that credible arguments could be made that the linear equations below are approximately correct and applicable. The equations imply that for any given amount of Oil (X) produced in a given year that there would be corresponding amounts of various outputs (Y) that can be economically supported as a result. From an engineering mindset, it may be more correct to rephrase this to say that "For any given amount of Oil (X) produced in a given year that there would be corresponding amounts of various outputs (Y) that can be ENERGETICALLY supported as a result.

X amount of Oil = Y amount of Total Jobs
X amount of Oil = Y amount of Middle Class Jobs
X amount of Oil = Y amount of Food Produced
X amount of Oil = Y amount of GDP

These relationships could be approximately extrapolated to other things too such as

X amount of Oil = Y amount of New Clothing
X amount of Oil = Y amount of New Shelter

Please note that money is not a part of these equations. Money is essentially a derivative that has value only due to it's acceptance as collateral for future product or services. With decreasing energy, the value of money can be expected to decrease as well, as there will be less products available. Indeed, the printing of money to support the debt burdens would tend to quicken the decrease in value of money, as when there is more money in the system and less products available, the price of the products would tend to increase.

So, if oil production does decrease by 2 % a year, do you think that might cause a decrease by 2 % in Total Jobs, Middle Class Jobs, Food Produced, GDP, New Clothing, and New Shelter? How would that tend to ripple through an economy? Wouldn't it in fact look a lot like Austerity measures? The evidence does suggest that we are there now.

On a lay man level, consider that for each typical production job in the world, something is made that must be sent somewhere else. It takes energy to ship that product somewhere, and the energy we use mostly today to do that is oil energy. If oil production is reducing by 2 % a year, wouldn't it be reasonable to expect that jobs will decrease by around 2 % a year, and hence unemployment may increase by near 2 % a year?

The militaries of the world are finally waking up to the systemic nature of the economic crises that are currently being experienced. Several credible military organizations have recently written reports documenting how there may be a need to react to civil unrest in other countries as well as their own in the near years due to oil production decreasing worldwide.

Yes Gail, the economy is closely linked with the physical resources that underly it. Looking at the economic system as an engineer would, the resources are inputs to the system, and the outputs are jobs, food, services, finished goods, and a growing population. If one increases the inputs (as was done in general in the years from lets say 1900 to 2000) then one can expect an increase in the outputs and that is exactly what happened in general throughout those years. However, if one decreases the resource inputs, then it would reasonably be expected that there would be a decrease in the outputs. The governments and monetary powers that be can try to recognize this and make tradeoffs and sacrifices to preserve certain aspects of the status quo.

The problem is that humans have tended to be very short sighted and self concerned, possibly in part due to most individuals being unaware of the predicament that we would eventually face collectively on the city, county, state, nation, and world levels. It is only relatively recently that a good understanding of how the economic system truly works has come to light and only a small percentage of the people understand this. Most people are still in the dark on many of the issues, and there is an inertia in the economic system to preserve the status quo. However, it is late in the game and a decrease in the outputs such as with austerity will not be readily welcomed in Greece or elsewhere. Since we have now gotten to the point where serious structural resource issues are rippling through and affecting economies at every level, one would then expect some serious economic and social restructuring to be an output of this process. On almost every level, people will have to dry to do more with less.

Let's hope that wisdom and compassion are used to guide most people in how they confront their individual situations. In many ways, a simpler life can be comfortable and maybe even happier in ways.

Michael, good post.

I think that perhaps TPTB did make a decision on how much credit to allow into the system, hence the fact that credit is declining. The big banks just reigned it in according to the current scheme, which was decided circa 2008.

The level of debt will fall to the level pre-arranged by TPTB and sustained at that level.

The people that make decisions understand, but they also have a lot of business interests to protect. You know the mafia has certain ways of doing things, i.e. in the manner that makes them the most money.

But credit must be reigned in. The growth in credit during the last 20 years is a joke and certain age demographics in the US and Europe and certain parts of Asia got to live it up on that easy credit. They alo feel that it was 100% entitled to them. LOL.

The younger set gets to clean up their mess. I guess I am the guy with the broom and pail.

Americans under 35 are screwed. The highest standard of living my 27 year old son has had since graduating college was the year he worked in China, teaching English at Southwest University. The year before that he was living in the US the only jobs he could get were chopping firewood, yard work, cleaning out freezers, etc...

I think you have the connections of oil with the economy about right. I put up a post about the connection between Employment and the Oil Consumption on Our Finite World a while back. It seemed to confirm the connection you are talking about--less oil consumption, fewer jobs. The only way you can undo that link is by switching to doing more things with manual labor. That approach is so much less efficient, I don't think anyone will voluntarily take that approach.

I don't know how many people are "getting it" right now. It is hard to change the way things are run.

Conversion over to manual labor would still result in less of everything. At approximately 23,000 man hours of equivalent work being producible from one barrel of oil, just the loss of roughly one percent of world oil production (900,000 barrels per day) would result in a loss of (900,000 x 23,000) around 20 billion man hours of equivalent work per day. With an 8 hour work day, it would take around 2.5 billion people to do an equivalent amount of work just to make up for a one percent decrease in oil production. If production decreases by 2 percent a year, then in just 2 or 3 years, the amount of work potential missing from the decrease in oil production would overtake the work potentially gained if everyone alive today (including the the old and young) were able to contribute an extra 8 hours of day of labor. It is interesting to note that even if employment levels were to increase to approach full world wide employment, there could still be less food, less new clothing, less new shelter, and less GDP if oil can not continue to do the heavy lifting for us as it has in prior decades with all the extra man hours of equivalent work that it has been providing for us.

The farther we go on the downslope of the Hubbert Curve the more obvious the effects will be. In general what we are experiencing now is a situation where the energy that was expected to be there for growth is not available to us. And after some time the energy that was expected to be there for sustaining operations and for repair and maintenance of infrastructure will no longer be available either. The system will have to figure out ways to keep operating in a degraded mode, always trying to find ways to do more with less. Hopefully, we will not slide all the way back to a mostly agrarian society which was the relatively stable and sustaining business as usual model for thousands of years. The pace of life will slow, and the world will become a much larger place again. But our knowledge of math and science should preserve some things for us. In the long run, maybe we will all end up in a more advanced version of the Swiss Family Robinsons.

Gail's figure 2 makes the point that in the future there will be less of everything. That to me is the main message. Debt is the medium of the message. No government can manage contraction and be popular.

Well, in times of real, full scale war, governments can be quite popular even while asking for extreme sacrifices from people.

Whether such an attitude is transferable to equally threatening times when the 'enemy' is essentially us, is a different question.

If there was a perception that everyone was sharing equally in the pain, it might help.

But we are a long, long ways away from equality in this country.

That is why failing governments love war.

Yes, but there will be scapegoats which can be used to focus the anger of the people. It will undoubtedly be unproductive in the long run, but in the short run there will be demagogues who can use this for short-term political gain.

The other tactic is used to divide people by race, immigration status and so forth. This gains you political advantage in the eyes of the people who are denied credit, jobs, etc.

Yes divide on abortion or gay marriage and fight to your hearts content on those issue just never ask where does the money go.

There is more than one thing in play now. Part of the problem is that social security and medicare are Ponzi schemes. The demographic bubble will break them. Yes if the federal government honored the 2500 billion owed social security it would be in fairly good shape but the truth is the federal government will not honor that debt (it may in the technical sense of inflating it away and then paying the principal but not honestly). And we have PO, peak cheap oil, etc...

Probably they should start by saying if you did not work then you do not get Social Security. But of course we pay people that did not work Social Security. Madness. Is that called Debt too. Paying out a bene to people that never worked a day in their life. Technically they were married to someone that did work and that person died so the bene is paid to the partner as if the original worker never died.

Beautiful scheme to keep my grandparents happy, but my kids will get jack squat. LOL. I wish I could tell them in a way that would not upset them that great-grandma ate theirs with trips to Bingo night where she blew that money on gambling but then I would sound a little mean toward my elders. But the reality is grim no doubt.

This is a good article, but might as well add "peak global civilization" to the list.

Look, we are in the beginning of a massive collapse unprecedented in history. That much is clear. The population will, soon enough, start to peak and then decline. People can't live forever. Heart disease, cancer, dementia, infection, starvation, war, take your pick. Or "old age" or "natural causes" which are absurd terms, considering all of the above are quite natural, as is every single thing that humans do or have constructed. Even the electrons speeding along our information grid, which enables us to to think we can expand either debt instruments or fiat money infinitely, bypassing even the requirement for pulp and ink to create paper. Obviously, if the grid fails, the digital money fails along with it.

Meanwhile, idiots talk of "singularities" or the "end of history" as if humans can escape this world and its physicality. Whether it's metal hips and heart valves or facebook profiles, this escape is finally revealed to be absurd.

The easily accessible, low hanging fossil fuels - whether oil, coal, or gas - have been exploited the world over, their chief use being not in materials, but in being burned, obliterated, powering the engines and turbines that give us transport and electricity. The waste products, not escaping the Earth's gravity, as it were, are inevitably absorbed by our ecosystem, resulting in the now unmistakable and appropriately named AGW.

Attempts to make up for this - Macondo, Fukushima - inevitably fail as, even in the most advanced, productive societies, humans are shown to be, well, only human. Meanwhile, the more optimistic and hopeful cling to "alternative" energy, as if it were actually an alternative to our hubris, and forgetting for a moment that humans lived on such energy for tens of thousands of years until we discovered how to put coal in steam engines, and that we didn't have 7 billion mouths to feed, not to mention the infatuation with consumption that underlies economic activity the world over - McMansions and cars for all of the nouveau riche! Meanwhile, the genuinely rich live in a world so divorced from the rest of us that their "wealth" and power are incomprehensible. Will their dollars still be accepted when they abandon their jets and yachts and art collections and come for the farms and fisheries?

All of this happening as the West - that beacon for human progress - still can't decide if it believes stories concocted by Middle Eastern pastoralists 2000 years ago, or whether it believes its own great creations, empiricism and the scientific method, which have given the world the amazing things above which we will soon have to do without. Count me unimpressed by the inability to resolve this conflict. In a unique twist of fate, "developed" people refuse to breed, preferring to be entertained by the machines, or chasing digital money, leaving the future to be inherited by the poor and religious amongst us.

Of course, the coming crash will be corrective, in some ways. The birds and beeds will return, with a vengeance. The aforementioned AGW might stop altogether, before feedback effects turn our planet uninhabitable for all mammalian life. But don't be mistaken - the crash implies the end of everything we know, and a return to a dark ages, this one global, that will make the previous one seem like a speck of time - which it probably was anyway, given the millions, nay, billions of years that it takes for life to actually evolve on this sphere.

When they come for the farms and fisheries - Ted Turner is already one of the largest owners of farm land in the US. They are way ahead of you and I. They already own the farmland. I expect they will buy the fishery rights for pennies on the dollars of there real value when the federal government sells off all public property the way Argentina did 15 years ago.

Yes, I too find the fact that the smart educated folks have few or zero children and the non-smart non-educated have many sad. It is a mechanism that will make the country poorer in the future.

I think there will be groups and areas that do not fall as far as most and that they will recover much faster than you expect.

Well I think it goes beyond that really.

Nobody really knows what happened thousands, much less tens of thousands of years ago. Were babies with deformities, for example, abandoned? Some historical records from ancient places reveals this to be the case.

Immune systems evolved within a milieu of all sorts of pathogens. Those with functioning immune systems survived and reproduced at greater numbers.

Today, we spend millions of dollars keeping premature babies alive. Some of them thrive. Some of them go on to have major developmental problems. On the other end of the spectrum, the elderly with dementia are put on respirators.

Industrial civilization is actually completely unsustainable as well as self defeating. The only inevitable result, if it continues indefinitely, is Idiocracy. I'm not trying to be oversmart on this, I'm merely making an observation. Moreover, I'm not some sort of "elitist" or a model human specimen; as a person with terrible vision, for example, I would be the first to be selected against without the corrective lenses provided by the machines.

I suppose it's like "peak everything." Peak population, peak pollution, peak warming, peak food, peak fish, peak obesity, peak exploration, peak medicine, peak science, peak technology, etc. Unless we explore space or the deep seas, which seems unlikely, we are pretty much at peak, it's only downhill from here, in whatever field or endeavor you wish to name.

Most of the heavy medical care costs occur when the patient is almost dead or very nearly dead or the patient is so debilitated they will never be able to function in society.

This is true. Our evolved moral sensibility, however, prevents us from rationioning such care. "Death panels."

Of course, such care will likely be unavailable due to cost/collapse factors alone. But then the blame game begins. My grandmother was on a ventilator, and all I get is this morphine?

See there's the rub, and why it isn't worth participating in society anymore other than the bare minimum. Any such participation will be in the context of ongoing, relentless contraction. The leaders will have it worse than most, because what answers do they have?

So the decline is going to test us in many ways, mentally, spiritually, etc.

Very good post. Nothing to add!

Our "modern" world is a self-destructing system because of the facts you mentioned. It's absolutely clear and pure. The rise and the fall. I's marvellous how the system regulates itself.

All of Asia does not participate in this excess of medical care. So we have an evolutionary competition. We will see who wins.

So glad to see folks catching up.

Been saying for years!


Hi George,

It looks quite interesting. Would you care to add some comments to explain? Or link to a specific article on your blog?


George, you insult us. Gail, I and a few other folks on TOD are not catching up. We have also been saying this for years. As for a few others, they have not caught up yet. ;-)

But your chart is very interesting. Like Jon, I would love a deeper explanation. Perhaps I do have some catching up to do.

Ron P.


Didn't mean to sound insulting. Actually Gail was at the BPE meeting where I presented these results. The idea of debt infeasibility had not really shown up quite this explicitly as far as I could tell and the graph generated considerable discussion at the meeting. Gail was certainly concerned with the debt question long before. I thought this gave some theoretical underpinning to that concern.

Jon, Darwinian, and others, the article is: Economic Dynamics and the Real Danger.

Note key findings include the peak of net energy coming long before the peak of raw energy extraction, and the peak of total assets (including biomass - us) following the peak of net energy. Also note the shape of the curve, very non-Hubbertian!


Thanks George. That puts it all in a nutshell. From your site linked above:

It takes energy to do work. And work, constructing real assets (vs. paper assets), is necessary to create real wealth in order to retire debt obligations.

That puts it in plain black and white, an undeniable assertion. Without growth in net energy we cannot have growth in the economy. Truly, the end of growth is the beginning of collapse.

I must confess that statement about the beginning of collapse is not mine, I plagiarized it from David Price: Energy and Human Evolution.

People who believe that a stable population can live in balance with the productive capacity of the environment may see a slowdown in the growth of population and energy consumption as evidence of approaching equilibrium. But when one understands the process that has been responsible for population growth, it becomes clear that an end to growth is the beginning of collapse. Human population has grown exponentially by exhausting limited resources, like yeast in a vat or reindeer on St. Matthew Island, and is destined for a similar fate.

Ron P.

work, constructing real assets (vs. paper assets), is necessary to create real wealth...


One of the points I make frequently is that it is the application of labor to things that creates value. Without value, there is no wealth. The very wealthy have historically stolen the value added by their workers by inadequately compensating them.

My example: A stick lies on the ground in the commons. It has no real value; it belongs to no one. Fred picks up the stick, using a knife he whittles off the branches and makes a groove at one end, to which he attaches a blade. Now, the stick has become a plow; it has value. It is Fred's stick!

Real wealth has been appropriated by the few, some simply very lucky, some just in the right place at the right time, others born to those who were, and even more by force of arms. Then the complain about taxes by saying that it is taking from them what they have 'earned,' while they continue to take from their workers what their workers have earned.

Sadly distorted, and hipocritical. At least in my POV.

And, St. Matthews Island conveys to us the lesson that the die off will not be to sustainability, but far beyond that. The last I read, St. Matthews Island has zero reindeer.


Anyone interested in an extremely rare, hand crafted, plow?

Make me an offer!




Szia Fred!

Tiz forint.


I offer you 50 lbs of potatoes 10 years from now. I'll even write you a note for it ;) Let's call it the 2021 homegrown potato bond.

While I believe that you are right politically or in mass psychology that the end of growth is the beginning of collapse. It does have to be that way.
In the US we live lives of great surplus, returning to the economic state of 1960 is not collapse, it is retreat, this is independent of any efficiency argument.

Having read the paper, I'd like to understand the math a little more, is this a lumped elemental model? Is this all ODE's?

From the paper, the idealized suggestion is that all the net energy will go into maintenance of the current state/situation/infrastructure where in fact
things/processes/programs will simply be removed from maintenance to create new somewhere by someone. Being of a certain age I remember
when dialysis became a right under all medical programs, it is possible that it might not be so in a regression to 1960. Other societal "norms"
such as universal handicap access to all buildings, right to an attorney, guardrails on all embankments, airbags, etc. all requiring incremental
energy could be removed in the regression to a 1960's capitalistic democracy.

In the paper George does state that certain portions of the economy do not require fossil fuels, and then points to nuclear as an example. I'd point
out that in the 40's Great Britain supplied 40% of its vegetables without fossil fuels and in the US it was 50%. If you have ever seen a cyber charter
high school in operation in PA, you might be able to imagine similar decreases in fossil fuels for secondary education.

All of this might allow for the building of the new $50,000 modular home in the US that are located in the ex-KMart parking lot (representing
enormous embedded energy of site flattening, electric power, water, sewer and gas installation for its original retail purposes). This re and continued
use of the embedded energy would also be interesting to see in a model.

Thanks for reminding us of graph. I know I have seen it before--forgot it had debt on it too.

I have been talking about the connection with debt, forever.

This is a link to a post written before I became a staff member, saying some of the same things as I am saying today.

I find this chart nothing more than an hypothesis created out of thin air with no data to back it up.

The energy units scale clearly implies there is a limit to energy units, i.e. BTUs. This may be true in the case of oil and other fossil fuels, but it is not true over all.

There is no limit to solar for example. Nor wind. Gravity is unlimited as far as I know, so hydroelectric is here to stay.

I have not noticed objects flying off into space due to lack of gravity. The universe is billions of years old and has not yet run out of energy units and is not likely to in the near future.

So the energy units scale should clearly say fossil fuel energy units to have any legitimate meaning.

Of course I totally reject the concept of net energy when applied across different forms of energy. It is as erroneous as the idea of net metal or net grain. It is meaningless.

Clearly, before the oil age, debt had little problem being created.
Lenders have little choice but to lend or sit on their money. If there were such a thing as peak debt, it implies that lenders would do just that.

I don't think lenders think that way. They are greedy to make a gain and that is what gets them in trouble.

From accounting we know that Owners Equity equals Assets minus Debt.

If debt goes down due to whatever, it is clear that assets will also fall if owners equity stays the same. If assets do not also fall, then owners equity increases as debt falls. Is that bad or something to be feared?

I learned from watching the end of the Clinton Administration when a balanced budget was projected that it caused in a near panic on Wall Street. Without debt, Wall Street has no bonds to trade. They would be out of business.

It was the goal of Bush II to increase debt by starting wars and giving out tax cuts. Wall Street loved it. Its power was secure.

It is hard to understand why less debt is a bad thing. When an enterprise borrows, its balance sheet shows the debt and the asset acquired with the debt so as to balance. No one in their right mind acquires debt with no offsetting asset.

The issue in regards to peak oil and debt is that without changes in energy systems, the return on assets is reduced by the increasing cost of oil.

The resistance to moving away from oil as the major energy source for transport is the problem. Many peak oil followers see this as impossible. And given recent events it is hard not to agree.

But the world had debt and asset accumulation for thousands of years before the discovery of oil. There were wealthy empires around the world that did such things as build the Pyramids, accumulated the gold of the Incas, and built Rome all without oil.

France managed to accumulate enough debt without oil that it had to sell the Louisiana Territories. Likewise with Russia and Alaska.

I simply do not believe there is such a thing as peak debt. If debt is money, it implies peak money. Money is a human construct and creation. It does not occur in nature like oil.

It can be created out of thin air. It can be lost or made. Likewise for debt. It is created out of thin air. And it can be destroyed by default of the borrower.

IMO peak debt and peak money are impossible.

Wind is limited there was a post about that on TOD within the last four days or so. Limited in the maximum amount producible not limit in duration.

I'm reposting this with Warren Mosler's specifications, which he was kind enough to send me.

See Michael Hudson's "Why the Miracle of Compound Interest Leads to Financial Crises" []

One key point: one has to distinguish between federal debt and all other debt. The various states of the US, all private business and households, are users of the currency. They must "balance their books" to stay solvent.

The Federal government is the issuer of the currency. The currency acquires its legal status and practical reality owing to the fact that it alone is accepted as payment of taxes. This point is absolutely fundamental.

No currency, no credited accounts in the entire economy of the US would exist without it first having been spent into existence by the Federal government OR ITS DESIGNATED AGENTS, LIKE ITS MEMBER BANKS. If this point isn't grasped, it is not possible to think accurately about our present economic system. It isn't a debatable point. It is simple fact.

The "debt" of the Federal government is the LIABILITY side of the ledger. Thus, when the government spends the money to buy goods and services in the private sector in order to accomplish its purposes, it creates a CREDIT IN THE PRIVATE SECTOR ACCOUNT, WHICH IS AN ASSET TO THE PRIVATE SECTOR, AND THE GOVT ACCOUNTS FOR ITS POSITION AS A LIABILITY . In an ordinary household economy A LIABILITY would represent a debt WHERE THAT AGENT WOULD NEED TO OBTAIN DOLLARS THROUGH INCOME OR BORROWING TO BE ABLE TO MEET ITS OBLIGATIONS, but the government, being the issuer of the currency, literally creates WHAT IT OWES with the stroke of a computer. The problem here is that most humans are superstitious, and believe that money must be a "thing"; they must reify what is really a concept. Hence they confuse currency, WHICH IS CALLED NOMINAL WEALTH, with WHAT IS CALLED REAL wealth- REAL GOODS AND SERVICES. AND If the country is incapable of producing anything of value, all the currency issued is worthless.

It goes without saying that the private debt in the US represents a very serious situation, and much of it is the result of the extraordinary corruption of the financial industry. See the articles of William K. Black at the "New Economic Perspectives" blog.

The Federal government, as the monopoly issuer of the currency--as distinct from the various states, which are users of the currency--does not need taxes TO GET THE DOLLARS to buy anything. Federal--not state or local--taxes serve a quite different set of purposes in a fiat system, among them being REMOVING OUR PURCHASING POWER AS a control on inflation, should the economy approach a condition of full employment (something we are very far from indeed). It can also serve various other political purposes, as should be evident.

The entire debate over the "debt ceiling" is essentially wrong-headed, as economists such as James Galbraith and Marshall Auerback, Michael Hudson, Warren Mosler, Randall Wray, Bill Mitchell, Scott Fulwiller, Cullen Roche, and others, have valiantly tried to explain.

I agree that the distinction between debt issue by somebody who can issue currency and debt issued by somebody who can’t is absolutely crucial.
In the case of private parties, one person’s debt is another person’s asset, and it nets out to zero. The person who lends the money / buys the debt likely does his/her due diligence to assess whether the borrower / issuer of debt is likely to repay it on the terms agreed on.
In the case of a currency issuing entity however one can repay by turning on the printing press, thereby not only decreasing the real value of the person who lent to the government but also reducing the real value of all other debt sales / asset purchases by entities who cannot issue currency.


Nice distinction. I wonder... consider that much of the 'money' created is in the form of debt. When a debtor defaults, the lender's net worth declines, and the borrower's net worth increases.

Most of the laws being proposed and passed have been to maintin the lender's net worth.

Why, I wonder, is the lender's net worth(eventually to be passed to his/her heirs, who have not earned it!) is more important than the borrower's? Why are the lender's heirs entitled, and the borrower's are not?

Just fuzzy questions bouncing around in my head. Considering that all wealth is the conseqnecy of either an individual not consuming, and saving, or, as in most cases today, especially of extreme wealth, by underpaying workers and stealing the value of their labor. Labor, of course, being the value added to anything to create ownership in that thing.


Excellent article, Gail. You are stating thoughts that I too have had bouncing around in my head for a while now. I have a couple of points though..

In the very long term (>100 years), oil and the economy will be decoupled. We just don't know what it will look like, and I suppose some would argue that this is a question for our great grandchildren, and of less interest to us.

I suspect it is probably a mistake to look at the economy as one monolithic object. There are many different types of goods and services - some are very oil intensive, others not so much. As time goes on, the more oil intensive parts of the economy will gradually wither away. The less oil-intensive parts will survive and in some cases even thrive, I guess.

But your more fundamental points have to do with debt, and I agree on these points. I suspect the coming decade or so will involve a lot of deleveraging, but the fight will be between the debtors and the lenders to determine who takes the haircut. For the case of PIIGS, the lenders have so far been insisting on 100 cents on the dollar, but that situation just can't hold. Just as we have been having periodic price spikes, I wonder whether we will have periodic financial crises where some quantity of debt is defaulted on and then there is all kinds of collateral damage amongst entities that either hold the debt or insured against default..

Back when oil was being first used, there were a lot of farmers who lost their jobs, because oil could do things so much more efficiently. I ran across some correspondence one time regarding concern that there would be many unemployed, because of all the people losing their jobs on the farm. It wasn't until World War II that employment was really found for everyone, plus even quite a few wives.

I think that as we transition off oil (if transition is the right word), we will have to cover the basics first--food and water, and maybe clothing. It will only after those things are covered that we will be able to "afford" workers doing less productive things. So piano lessons and artwork may not hang around, other than as occasional leisure activities, or something that a few rich will have time to indulge in.

Peak oil tends to cause peak debt. Some will argue with me about this, because they believe it is possible to decouple economic growth from energy growth, and in particular oil growth

Gail, I'll argue that point, but not because i think its possible to decouple economic growth from energy use. Cheap energy, and then cheap credit have been the primary 2 drivers of growth for past 50 years. I agree that peaking of energy resources and peaking of abstract financial markers (debt) are related, but I think the causation, in this case, is backwards. Non-govt GDP peaked in 2003 and has only been 0.7% since 2000. The credit orgy that started in the 1970s started to lose steam a decade ago, and only because of no-doc, low-doc loans, and repeal of Glass Steagal did private/corporate credit growth have its last hurrah. This credit growth made it into asset/commodity markets and pushed oil demand beyond where supply could keep up. I think its more correct to say that peak credit caused peak oil, though peak oil was about to happen soon in any case as we were running out of hydrocarbons we could extract at a rate society could afford.

We consume ~30 billion barrels of oil per year. At $60 per barrel (average of past 5 years), that equates to $1.8 trillion per year in cost for oil. This compares to ~$250 trillion in total financial claims (excluding derivatives). Even at 4% interest that is $10 trillion per year in interest payments - over 5 times the cost of all the oil we use - I.e. the long term story began with such abundant fossil energy that we NEEDED to bring more money/debt into the system so that technology/consumption could keep up with the pixie dust coming out the ground. But eventually, and with increasing speed in the last 10-15 years, we passed an inflection point - energy wasn't as dirt cheap as it had been, and the system itself was much bigger and with more momentum - that credit growth became the primary driver (oil/gas/coal being secondary).

Basically to see whether peak oil caused peak debt or vice versa ask yourself two questions: 1)if private/public credit had NOT peaked in 2007 would oil production have continued higher? (I would guess yes) 2)if oil production had continued higher after 2008 would aggregate credit been able to march higher? (I think not). Ergo, peak credit caused peak oil, but now that oil has peaked I agree with you, going forward aggregate credit can't continue to grow as the fundamental basis of economic activity is energy.

In any case, it is enough to know that the two are related and I agree with your description of feedbacks down the road. At this point it doesn't really matter which caused which and to what extent. What matters is that global growth is over and we have to a)navigate how to get through this period while maintaining social stability and b)design a future (more) sustainable system that better aligns our supply (natural resource) and demand (human behavior) balance sheets. So its semantics, but I still think the story is not as simple as you have laid it out here.

M. King Hubbert was an avid non political technocrat. He co-founded Technocracy Incorporated with Howard Scott and contributed significantly to the Technocracy Study Course, the precedent document of that group which advocates a non-market economics form of energy accounting in contrast to the current Price System method.

'What matters is that global growth is over and we have to a)navigate how to get through this period while maintaining social stability and b)design a future (more) sustainable system that better aligns our supply (natural resource) and demand (human behavior) balance sheets.' End quote, nate hagens

Am I missing something here or was a system designed as a transition system to a science based society already designed in the early 1930's?
Or is this just a rehashing over and over and over of what we already know... that money is not a good way to measure anything important in 2011?
Technocracy Study Course
So assuming teachers like Charles Hall understand where thermoeconomics comes from, as did Odum, et al... of the actual energy economics biophysical ideas of non market economics.... could we please point to the intellectual/science/viable thing... in the room a little?
Energy accounting was made up in a time and place, which was desperate and creative,... maybe North America can incorporate those ideas now... or is it a given that we must wait for the roof to cave in on us, while we talk about debt to resources and growth and other silly mainstream and dysfunctional antique economics ideas?

Technocracy didn't (and still doesn't) understand human social behavior side of equation. But yes, the supply side framework was put forward long ago (though we have better technology and better understanding of resource base now).

Try reading the chapter on 'The Human Animal' in the Technocracy Study Course and then repeat that again Nate Hagens, that the technocrats did not understand human behavior.
Ah and keep in mind that Thorstein Veblen, and Margarete Mead, and countless other intellectuals and scientists from H.G. Wells to Theodore Dreiser to Upton Sinclair... to the person that invented the Peak Oil idea were integrally involved.
Your friends here have that kind of notability?
No offense... but no.
Most all aspects of human behavior were figured out in the teens and twenties of the last century, and human behavior is not really the issue is it?
Has physics changed from that time period?
Has some data?
Are the ideas viable?
Maybe you do not think so.
Is there a viable alternative?
Not really. Its a default position now and has nothing to do with the original group of technocrats. Now biophysical economics in a non market system is a possible survival mechanism... its not a social movement.

Or are you saying that the present system is better at interpreting human behavior?
I think not.
The current society maintains a contract society run by corporate fascism to maintain a class and caste system that originated around 4500 years ago.
Google Price System and see what Hayek says about it!
Do you really think the current method is good?
Do you really think the present price system is not on a collision course to destroy human society, as it destroys the natural world?

1930s era social science addressed human behavior but not in the evolutionary context w/ neuroscience integration available today. All Technocracy discussions Ive been involved with gloss over human reactions to the necessary iron fist that would accompany such a transition, and frankly, in very naive ways. I don't think we (society/scientists) have it figured out yet but are much closer than in 1930s understanding real human motivations/drives and ways to satisfy them with less throughput. So I'm not saying the present SYSTEM is better at interpreting human behavior but present SCIENCE is - orders of magnitude better. Any system that doesn't align with biology will be shortlived. And of course there is
the issue of quis custodiet ipsos custodes?

Not to mention the supply chain disruptions that emanate from an abrupt moving away from just in time international trade embedded in basic need chains. It is naive to think we can produce basic needs in this country without component supply chains currently extant. We are utterly dependent on trade right now. Ie if it worked it would almost have to be all countries. Just look at world geopolitics right now and tell me how technocracy could be implemented and by whom? There are so many 'workable' futures to choose from - but almost all are idealistic at this point as they ignore the initial condition constraints.

It may be one viable future trajectory but not from this starting point. And, most importantly, others are working on 'what a future sustainable system might look like' (technocracy, etc.). I am more concerned about keeping the wheels on the bus so to speak if/when there is a currency disruption (supply chains, resilient networks etc.) We need to navigate that first for ANY future system to have a chance...

Yes, it did not matter much at the time how we used the 'pixie-dust', as long as we used more of it. Of course previous systems from the coal era could be revamped, revved up, including sophisticated financial instruments.

It occurs to me that the advertising industry has grown up a bit using neuro-adaptive(?) techniques since the 1930s? Bigger 'industry' than farming these days perhaps? Some unintended consequences? The obesity epidemic spreading outward from the USA. Those poor / rich people in Quatar for example; diabetes capital of the world?

There was some technocratic planning before WWII. The UK started planning its emergency food and farming response in 1936, not a moment too soon. We were utterly dependent on trade - 70% of our food as calories, for starters.

Do we need to dismantle the advertising industry, or what?

Meanwhile I am reminded of George Orwell writing in London as the war started. People still walking their dogs in the parks, listening to the band playing. Youngsters with their arms round one another.


The UK started planning its emergency food and farming response in 1936, not a moment too soon.

Phil, I didn't know that - do you have any links/info on that?

1936 is when they started the committee work. Execution started as I remember in 1939. This is the basis of an argument above which says
that large segments of fossil fuel usage can simply be lopped off in certain areas if you can localize. This past example might be used again
in agriculture and then applied in areas like secondary education (Pennsylvania continues to grow its cyber secondary education very
quickly), or elder care (controversial details later).

Sorry I am so long replying. Only just back to the computer.
I am looking at a copy of a short book, "The Battle of the Land", (N Gangulee, 1943. Forward by Sir John Russell FRS, Director of Rothamsted Experimental Station; Lindsay Drummond, London.) Russell was UK's leading soil scientist, and Gangulee was a research scholar at Rothamsted, which was our leading agricultural research institute. (Comparable perhaps with USDA Beltsville, Washington DC?) Gangulee had written a book about agriculture in the First World War, when we came close to starvation.
The quote is on page 106. "As early as November, 1936, the Board of Trade set up the Food (Defence Plans) Department and formulated certain broad principles that should guide the policy of feeding the nation in wartime."
The book was intended as a morale raiser but is full of nuggets of information (and photos). I vaguely thought of scanning it and making it available online.
They just about doubled British agriculture in 3 - 4 years.
(slightly edited comment)

In the Technocracy Study Course M. King Hubbert called economists apologists for businessmen or special interest groups.
More recently Howard T. and Elisabeth C. Odum charged that
"....the economists have not been educated in energetics and therefore
have not understood the second law of energy and the fact that energy is not reused."

Science writer Malcolm Slesser criticizes economists, since they "tend to take technological progress for granted as if they could buy their way around the laws of thermodynamics."' Hence, antipathy toward economists is common both to Technocrats and net energy analysts.
By presenting just the mainstream ideas the Oil Drum ignores all the interesting and creative ideas developed by science about science based social systems not dependent on debt/money or debt tokens.
In other words non market energy accounting.
Is there some way to get through here that money is an abstract concept as is the money concept of value and judgment based on profit or lack of that?
Money controls no longer work.
Labor exchange for consumer rights no longer works because of humans puny amount of labor compared with energy slaves.
Around 125,000 kilogram calories are burned/converted for most North Americans per day.
Probably that number was 5,000 around 1900.
Maybe the number in Mesopotamia was 3 or 4,000 with the wheel and livestock and hydrology.
How is it that people do not get the idea that the social system we now use, the Price System,... invented in the Middle East in the 4th mill.b.c. is still viable??? and how is it that on the Oil Drum most all discussion involves the money, debt, mainstream approach of standard economics and ignores all the creative approaches of the past?

There is no longer a Technocracy movement.
They were only consulting engineers and had no real assumption to power theory anyway.

However if industrial society is interested in its own survival, mainstream energy economists or biophysical economists could get more involved in repackaging the ideas of the technocrats because all the careless tossing about of the concepts of growth and money debt, is a resounding dead end that destroys the natural world for pointless and desultory reasons.
Two intellectual systems are at odds.
A nonsense one and a science one.
Arguably the one we use now worked in the past for better or worse, but arguably it is not going to work in the future because it is no longer viable.
If something ceases to function it ceases to exist, so most of the basic arguments here pro and con of this and that, how to run society and manage it... are pretty much tail chasing money points and counter points.

John, Hubbert link is a link to a study! It proposes to study the world as it is, not change it. From your link:

An outline of those elements of Science and Technology essential to an understanding of our social mechanism...

The purpose of the Study Course is not to give to any person a comprehensive knowledge of science and technology, but rather to present an outline of the essential elements of these various fields, as they pertain to society, in a unified picture.

John, the world is the way it is. You cannot change the world by simply bitching about things as they are. A technocracy may be better than what we have now but simply stating that fact changes nothing and has no hope of ever changing anything. Even if every poster on TOD started preaching the virtues of technocracy it would not make one whit of difference, it would not move the world one millimeter in that direction.

I grew up in a religious fundamentalist family. The preacher, every Sunday, would tell us what a better world it would be if only everyone would change their behavior. All those sermons, and all such sermons in the world combined were not worth a bucket of warm spit as far as changing the world. And you're preaching the virtues of a technocracy, or even the whole Oil Drum preaching such, would be worth just about as much.

Ron P.

the world is the way it is

Yes it operates according to the laws of thermodynamics not imaginary debt schemes.. wether Technocracy as an organization exists at all makes no difference, the trends they are pointing out are "unidirectionnal and irreversible".

I grew up in a religious fundamentalist family. The preacher, every Sunday, would tell us what a better world it would be if only everyone would change their behavior. All those sermons, and all such sermons in the world combined were not worth a bucket of warm spit as far as changing the world

Yea exactly you said it... human behavior is not important then why in the world are you bringing it up then least it looks like the "preacher" had no problem in successfully managing to brainwash you into thinking it was important though, worked like a charm.

Eventually "rugged individuals" might want revenge when they find out the reality about the kind of system you are apologizing for...if we even survive that long. See Technocrats are trying to avoid that for you.

Yes it operates according to the laws of thermodynamics not imaginary debt schemes..

Nonsense. The way the economy works is not imaginary! How on earth can you make such a silly statement and still expect to be taken seriously. Gail describes, in this key post, how the debt system works and how it is tied to energy. And you have the audacity to call it imaginary. Just where do you get off?

Yea exactly you said it... human behavior is not important then why in the world are you bringing it up then...

I never said human behavior is not important. Human behavior is extremely important. In fact nothing is more important than human behavior when describing overshoot and the predicament we find ourselves in. The point is that you do not have the power to change human behavior.

Eventually "rugged individuals" might want revenge when they find out the reality about the kind of system you are apologizing for.

You have a very bad habit of just making up thing. I have never apologized for any kind of system. Explaining how something exists or works is not an apology. Calling a description an apology makes about as much sense as calling how oil is created an apology. And that sentence blames me for the system and you threaten that "Rugged Individual Technocrats" will come after me. Good God man, what kind of logic brings you to that conclusion.

- As for pointing to our mental failures with scorn or dismay, we might as well profess disappointment with the mechanics of gravity or the laws of thermodynamics. In other words, the degree of disillusionment we feel in response to any particular human behavior is the precise measure of our ignorance of its evolutionary and genetic origins.
- Reg Morrison, The Spirit in the Gene

Ron P.

Nonsense. The way the economy works is not imaginary!

Tell that to Marion King Hubbert co-founder of Technocracy and his Nature of Growth we are discussing here. That is no secret to anyone.

"The world operates on two economic systems. The one is our true wealth, the physical planet we inhabit and its many diverse and interconnected systems -- of which we are a part. All activities of this economy are concrete, measurable quantities, based in physical science. The other economy, that dictates the thoughts and actions of commercial society, is the financial one whereby we decide who gets how much of the product of the natural economy. The principles of this artificial economy are not found in any book on physical science. They exist only in the murky and unfathomable depths of human imagination, opinion and desire. You can't eat this economy, drink it, or build a house from it. In this age of electronic funds transfer, it doesn't even require physical evidence of itself." -Stephen L. Doll

Umm no your saying it is important because people told you probably told you it was your whole life and you feel an inclination to beleive it. We are saying its not.

Excert from an interview given to Charles H. Wood, Associate Editor, The NEW YORK WORLD, February 20, 1921

For lack of anything better to say, I asked him a question which every advocate of a new order will recognize as an old acquaintance: "Won't you have to change human nature first?" Mr. Scott smiled dryly.

"Did you have to change human nature," he asked "in order to keep passengers from standing on car platforms?"

"Go on," I said, "I'm listening."

"They put up signs first," he continued, "prohibiting the dangerous practice, but the passengers still crowded the platform. Then they got ordinances passed, and the platform remained as crowded as before. Policemen, legislators, public service commissions all took a hand but to no effect; then the problem was put up to an engineer."

"The engineers solved it easily. They built cars that didn't have platforms."

According to Mr. Scott, the same course will have to be followed in the matter of a still more familiar prohibition. THOU SHALL NOT STEAL. Church and state, he says, have united unanimously throughout all history behind this law, but it has never been enforced. Technical administration alone, he maintains, can enforce it. How? Let him answer in his own words.

"By coordinating the industrial process; by operating all industries as one agency for one definite purpose; producing and distributing the things that people want so that an abundance of everything shall be accessible to all."

"Private property," he said, "is generally recognized as a burden even today, and few people would want to carry it if they could be rich without having to do so. For the first time in history, though, humanity has a machine at hand which is productive enough to make everybody rich, and it has the technical knowledge at its disposal to run such a machine."

"But do you expect the engineers to agree upon a program?" I asked. "They have prejudices and differences, don't they, just like the rest of us?"

"They disagree as politicians," he said, "but not as engineers. We are not trying to organize them, however, into a society to debate something, but into an alliance which will discover the facts. Engineers do not disagree on facts. They all know what direction a stone will drop. They all know that a straight line is the shortest distance between two points. If there is anything else they want to know as engineers, they find out; and when they find out, there isn't the slightest disagreement. Engineers are not radical or conservative. As engineers, they are no more radical than a yardstick and no more conservative than so many degrees Fahrenheit."

There is only one science. Physics, chemistry, geology, biology all fall into the social picture. The Technocracy Study Course, just like any other physical science textbook, should make that clear.

Howard Scott, the founder of Technocracy, "was a child prodigy who read (and understood) evolutionary biology by the time he was four years old."
He had "the cognitive capacity to mentally calculate linear vector analysis with six factors, an ability that made him one in a billion."

Any system that doesn't align with biology will be shortlived.

Yes theories of democracy fall to pieces when confronted with biological fact. Also biology tells us that there is a definite physical limit to human consumption as well as energy output over an extended work period (33 watts per hour). Technocracy would allow the North American Continent to deliver goods and services in such a way that those physical limits will be covered, thus physically eliminating all special interest groups which would no longer be able to operate using money schemes to control other human beings. Technocracy is a truly unique concept, and it bears close examination. The Encyclopedia Americana has said: "Whatever the future of Technocracy, one must fairly say that it is the only program of social and economic reconstruction which is in complete intellectual and technical accord with the age in which we live."

Nate, I think the neurosciences are not where I would look for this argument. I'd take any empirical psychology over the speculation of the neurosciences any day.
Interestingly it is much less dependent on any of the idea-of-the-week from some corner of evolutionary anthropology, or other camp.

Empiricism has driven physicists for a long time - centuries.

As for your biology statement, i'm sorry. Any system (or meta-narrative) that does not align itself with mathematics and empiricism will not last, or taking
a further step, is in the realm of metaphysics.

Most all aspects of human behavior were figured out in the teens and twenties of the last century, and human behavior is not really the issue is it?

If it is not the issue then why do you mention it. Also why do you mention an economist and three novelist when you talk about figuring out human behavior? Only one of your list, Margaret Mead studied human behavior, and she got everything wrong. She got snookered by young teenage Samoan girls who thought it was so much fun to tell her silly stuff.

Anyway, she was a behaviorist like B.F. Skinner. Behaviorism was overthrown by Sociobiology, better known as Evolutionary Psychology. In the teens and twenties almost every anthropologist was a behaviorist. Now only a tiny fraction are. But that is another story for another time.

The point is human behavior was not figured out in the teens and twenties. It is still not completely figured out but we know many times as much as we knew then.

The idea that technocrats understand human behavior is a little silly. Even if one or two of them do, the vast majority of them clearly do not. But the main point is that the economy is not controlled by human behavior experts, it is controlled by politicians and business people who know absolutely nothing about human behavior.

Ron P.

Google 'behavioral economics' please Darwinian..
It is a price system abstract concept pseudo 'science', how to give people just enough to maintain the status quo class caste system, while caring nothing for the environment, or destroying the environment according to 'cost benefit analysis'.

Much like theories of fattening hogs for slaughter this 'science' figures out ways to tighten the economic screws while leaving enough breathing room to maintain viable interaction of the societal participants.
Maybe Google Neuro Linguistic Programming also. That is a form of programming peoples consciousness through either being manipulated or manipulating themselves to believe 'in' certain things.
Human gullibility or behavior was figured out around 5,000 years ago when the political establishment made up the Enuma Elish and it was taken to heart as being 'real' and formed the basis of Mesopotamian culture.
It was rejiggled by Freud and Jung and others in the early twentieth century.
P.T. Barnum also played with those concepts.
Time to take a science based social design now and not a Voodoo Hoodoo Ju Ju one.

Also why do you mention an economist and three novelist when you talk about figuring out human behavior?

This high quality interview of the American genius Howard Scott, Engineer-in-Chief of the Technical Alliance and Director-in-Chief of Technocracy Inc. gives an idea of that environment:
The legendary giants of the Technical Alliance are the scientist founders, the forerunners of Technocracy:
Check out "History and Purpose of Technocracy" by Howard Scott also.

The idea that technocrats understand human behavior is a little silly.

Every consequent developpement in the fields of neuroscience or any other scientific endeavor proves Technocracy more accurate with every passing day. However Technocracy has no need nor desire to control human behavior in any way whatsoever. It is concerned primarily with monitoring the rates of growth of energy consuming devices on this country and this continent and presenting a design that will ensure sustainability within the resource base into the indefinite future. If there was another alternative Technocracy would probably be the first to be advocating it.

1) How are these goals different that Communism guided by scientific principles?

The reason why communism is a failed system is that it is part of and partial of a Price System... "The term Price System must not be confused with such terms as profit system, or capitalist system. The factor of ownership does NOT alter the mechanics of operating a Price System, and it may be added in passing, that unless it be in some remote and primitive community, none other than Price Systems exist at the present time."

Howard Scott makes some nice statements about that issue in these interesting audio speeches and interviews of him on Technocracy Radio:

He says for example: "No, were not deprecating the Russians... Communism is sufficiently radical and revolutionary for the whole world. They still have alternatives in Europe. There are no alternatives in this country and this continent..."

"In order to accomplish such a proposal without turning to Communism or other isms which so far have proven as unsatisfactory as the economic system under which we now suffer, a new foundation must be found."

The movement is lauded in "Vanity Fair"
which says, "Whether Technocracy is the final
solution remains to be seen, but it is certainly
the most vital movement in the direction of
economical rationalization which is being contemplated
in any country. Compared to Technocracy,
Communism is a sentimental deification
of the worker and Socialism is a romantic
intellectual movement."

2) What happens if there aren't enough resources to meet the Utopic goals?

Technocracy have been the first to suggest that natural resources may one day run out. Marion King Hubbert who discovered his now-famous peak resource extraction theory in the laboratories of Technocracy was laughed at and called a "communist" at the time for suggesting that possibility. Today he is the world's most famous geoscientist for discovering that. The Price System needs exponential growth to continue and that isn't possible today in a finite world. Technocracy as proposed by the Technical Alliance, Howard Scott and Marion King Hubbert is a viable design for sustainability within the resource base of the North American Continent which is the minimum area for operating a contiguous continentalism with a governance of function, a Technate. That's the whole point. Today all traditional Price System have been discredited by the famous saying: "Anyone who believes you can have exponential growth in a finite world is either insane or hes an economist." However no alternatives have been proposed other than that of Technocracy Inc., which has never been "disproved" and which has been consistently supported by some of the world's greatest scientists during almost a century.
Groundbreaking Technocracy article by famous arachnologist Wilton Ivie entitled "The Ecology of Man":

Marion King Hubbert liked to talk about the "window of opportunity" for the adoption of this survival design. Let's hope it's not too late.

And 30 years from now, no one will be a sociobiologist.

M.King Hubbert was thinking way ahead of his time. In 1934 he called mass production a “one time event”. He also called for a four hour work day. See: Man-Hours and Distribution

Hubbert was one of the first to see the decline in man-hours as a having a limit. (Cesare Marchetti would have applied the logistic function.) Once mass production and the replacement of muscle, wind and water power with fossil fuel, internal combustion transport, etc. had completed their diffusions, economic growth would end.

Hubbert failed to see a few things like the green revolution, semiconductors, computers and fiber optic communication. Of these, the green revolution and powered farm mechanization were by far the most powerful economically. Peak productivity occurred within three decades of Hubbert’s initial writings on the subject.

We have been deluding ourselves thinking today’s technologies were comparable to the great innovations such as electrification. The reported productivity numbers are based on such innovations as finance during the real estate bubble. Corrected for bad debt, productivity growth was probably negative.
We will never be able to grow our way out of the debt without increased productivity. At least during the Great Depression of the 1930s we had decades of rapid productivity growth ahead.

Charles Proteus Steinmetz, the famous electrical wizard of the Technical Alliance talks about this in his speech:

Also an article by the great master architect and Technocrat Frederick L. Ackerman, entitled "The technologist looks at social phenomena":

"a)navigate how to get through this period while maintaining social stability and b)design a future (more) sustainable system that better aligns our supply (natural resource) and demand (human behavior) balance sheets. So its semantics, but I still think the story is not as simple as you have laid it out here."

maybe it is" socially stable" because of stability possible in contraction?

"design a future"? the present wasn't conceived and then built it grew ad hoc . the idea that we could design a future on paper or with CAD then collectively build it is far fetched.we are not in control. we've been trying since the whole tree of knowledge thing but i don't think were close.

the story is never as simple as can be writ

In any case a "planned economy" using money is really no planned economy at all, because money is not a tool for measuring anything, but rather it is only a tool for controlling people; it has value, and evaluation is not the same thing as measurement.. Howard Scott liked to call it a "rubber yardstick". It's just a system of erratic exchange. The real plan, based on energy measurements, and not control of people, was put forth by the Technical Alliance almost a century ago and hasn't changed since. It will have to be adopted if we are to survive as a high energy civilization.

I don't have a problem with a 2007 peak in credit being related to peak oil. Oil production has been essentially flat since 2005. Whether the peak in credit is 2007 or 2008 does not matter much.

There was definitely an intent to raise debt/homeownership in the early 2000s.This did push demand up, as did the growth of China, India. The decrease in housing prices started about 2006. This, and the subprime lending collapse, corresponds closely to when the Federal Reserve raised interest rates in response to rising food and energy costs, so in a sense that part was self-inflicted, but indirectly because of higher oil prices. Higher oil prices contributed directly to the competition for disposable income, but I agree it wasn't the oil prices by themselves.

An energy scarce future will undoubtedly lead to further economic contraction over the next few decades. Peak oil will surely cause a collapse of many debt arrangements that assume cheap oil. But peak oil is not needed to explain our current mess, and I don't think it can.

During the past 4 decades, the US has moved most of its manufacturing overseas, while economic growth has been in real estate, the medical sector, and financial paper shuffling. The current state of the US economy is rather similar to what happened in Japan after they kited up real estate and that bubble burst - expect a decade or three of stagnation just from a normal depression brought about by wild speculation. Energy issues may have put pressure on the bubble, but were not the driving force in its collapse - and the cycles in oil pricing resemble the cycles in commodity prices, which seem to be more related to speculation and manipulation than to supply and demand.

You don't need speculation to have cycles -- all you need is gain greater than unity and a phase shift of 180 degrees. The control loop driven by supply growth, pricing pressures, labor, money and so forth just needs to have a time constant that of a few years, and that's what happens. It is the case in many systems which are not intentionally damped. Regulations and prudence act as damping factors on occasion, and certainly many associated aspects lead or lag, but it's not an unexpected phenomena with nothing but people.

In 1894 (that's 18xx) John Astor wrote a book "Journey in Other Worlds". In the book he makes the point that the Rockefeller ICE powered by oil is a bad idea because the oil will run out. Hurray for the hometown (Rhinebeck, New York) boy. 50 years before Hubert.

US Government Bonds are simply Treasury Notes that pay promissory interest.

If we wished, the US Treasury could issue new US Treasury Notes paying 0% interest and pay off all the debt by calling the promissory notes.

This wouldn't be inflationary as no one would have any more money at the end of the process than they had at the beginning. A bondholder with $1 million in bonds would now have an account with $1 million in paper cash to invest in something else - no net gain.

The only difference is that a huge chunk of the US tax income would no longer go to enrich bondholders, and the banks which are owners of the Federal Reserve would no longer get first crack at newly created dollars brought into existence out of thin air by the Fed.

That this is not being done to solve the debt crisis shows where the real power is in this country - on Wall Street among the bond holders, traders, and brokers.

The power to issue debt is the power to emit bills of credit.

That was my thought for the looming shutdown -- if necessary, pick a few debts and pay them off in cash instead. Congress can issue money anytime it wants, but it can't renege on debts.

If we wished, the US Treasury could issue new US Treasury Notes paying 0% interest and pay off all the debt by calling the promissory notes.

Who is going to invest in a note paying 0 interest?

If it sells for 80 cents on the dollars and is short term I will. It is all a question of what price will be paid for a bond at zero percent yield.

If it sells for 80 cents on the dollar then it is no longer zero percent yield. The price of traded bonds is how the yield fluctuates. For example, if I buy a 120$ one year zero percent bond (worth 120$ in a year), turn around and sell it for 100$, I loose 20$. But the person buying it gets a 20% bond (paid 100$, worth 120$ in a year).

No one is going to invest in notes paying 0% interest. You are missing the point. The government can simply pay off the debt by crediting all bondholders with "dollars" in their account. Its called printing money. Only in this case, the money was already printed when we issued the bonds by spending more than our income, so its not inflationary to pay them off with newly created dollars, because every newly created dollar being used to pay off the bond is extinguihsing another dollar that exists in the form of the bond.

Unlike a person with a mortgage who must work to pay it off, or even a state government which must balance its books, the US Government has the power to create money out of nothing by emitting bills of credit.

Let me make it simple - you have an account with 100 T-Bills worth $1 million face value that you bought by handing over $1 million cash to the government. The government now prints up (either physically or electronically, as you wish) $1 million in cash and hands it over to you and takes your bonds back. At the end of the transaction, you still have just $1 million, so you have lost nothing. The government still has zero dollars at the end of this transaction, as it already spent the $1 million you gave it to compensate for its lack of income relative to spending. However, the government (read: US Taxpayers) no longer owes you 30 years of interest.

Re: economic growth has been in real estate, the medical sector, and financial paper shuffling.

Yes, it's the so-called FIRE sector. But let's not forget the elephant in the living room. The American Empire needs a monstrous Pentagon budget and a corresponding armaments industry. The business of America is War.

You mean it is the "FIRED" economy!

It appeared briefly on the front page of the Guardian (online) yesterday - and by today it's been relegated to the Business section.

Age of austerity to continue for decades, warns OBR

Britain must brace itself for decades of austerity, even after enduring chancellor George Osborne's spending squeeze, to pay the price for an ageing population, according to the independent Office for Budget Responsibility (OBR).
The OBR, which was set up by the chancellor to produce independent projections of the public finances, says in its report that the rising cost of health care and pensions, and declining tax revenues from the North Sea, will mean future governments have to take action to prevent debt levels rising inexorably.

Interesting to note that whilst the Norwegians with whom the UK shares the bulk of the North Sea fields have accrued one of the largest Sovereign Wealth funds on the planet .. the UK is looking at decades of austerity.

The Export Land Model strikes again.

Norway is the UK's Canada?

We do not share a land border, language, political or economic policies.

We import natural gas from Norway. Apart from that, we have little to do with the country, for which they are probably very grateful.

Once upon a time there was an ant and a grasshopper......

Good article. I think the link between total sovereign debt outstanding and a country's ability to pay might be helped by a bit of explanation. The following table isn't scientific, but it gives some idea of how much interest on government debt a country in a fairly slow growth mode can stand. Less than 3% is probably OK. Greater than 5% is probably NOT OK. Note that it doesn't take very much of a change in non-productive expense that sends money out of the economy as percentage of GDP to cause a serious deterioration in a country's finances. Theoretically, any number of expenses for goods purchased from foreign sources could cause problems.

TABLE Interest Expense as % of GDP
UK debt at 60% of GDP, interest at 3% of GDP
US debt at 120% of GDP, interest as high as at between 3 to 4% of GDP
Italy debt at 120% of GDP, interest a bit over 4% of GDP
Greece debt at 160% of GDP interest at 5 to 5.5% of GDP and essentially in default
References for these numbers included at the end of this post

If there is a choice on whether or not to buy the foreign goods, then if price rise the imports stop and the problem is solved. If doing without the foreign goods is hard, then the problems can be serious indeed. Note that sovereign debt is one of those things that are easier to get into than out of. Barring default, the payments can't be stopped without paying off the debt.

Imported oil and food also come to mind as goods that are hard to stop purchasing. It should be obvious that a price increase that causes the expense for either of these commodities to increase by 1% of GDP is serious. If interest payments are at 4% of GDP, an increase oil prices sufficient to cause a 1% of GDP increase in oil expenditures is an excellent way to drive the amount of money taken out of the economy to dangerous levels.

North America is a net food exporter so an increase in expenditures to purchase imported food doesn't apply here. Food shortages and consequent riots have occurred elsewhere for the same reason.

I can conceive of a societal organization that uses less oil, but, with current technology, it would be necessary to reconfigure land use, the vehicle fleet, and power sources in general in a massive fashion. If this reconfiguration had already been started, it would take decades. As the process hasn't been started, it will take even longer.

Keep up the good work.

Hi Gail,

It almost sounds like you're legitimizing the Republican attacks against unionized public workers when you say that the government cannot sustain greater debt burden in a contracting economy. I think there are two major flaws with this concept at least in the short and medium time frames:

First, there is still an enormous amount of slack in U.S. oil consumption relative to GDP that could be eliminated with little effect on production. You give the example of car pools, but I would guess we could cut oil consumption by 50% with limited effect on the GDP. They've been doing it in Europe for decades.

Second, the distribution of wealth in America is so extreme that demand is constrained by the "middle class" having less discretionary income. Bring back the 90% income tax on rich people and use the money to put people to work. Call it the "New, New Deal".

I'm not saying either of these possibilities has a chance in hell of coming from our corporate controlled government, but they are real alternatives to the Republican plan of giving the rich an even larger share of an ever shrinking pie.


Car pools are what the Europeans might have done decades ago, but what they are doing now is a bit different. Going to a meeting in CERN last week I was stuck/struck by the elimination of much of the four lane road
infrastructure to a two lane road system with 2 center lanes of electrified trolleys. My Benz driving UNOG host was not amused, but the Swiss canton/commune leadership simply doesn't care about irate drivers (I guess
they don't have a Dick Cheney talking about non-negotiables). Geneva is not alone in this.

It is hard for me to see a fix, because income / outgo are so badly out of line. I think we need to be thinking about taxing imports of goods and services, because without taxes they compete unfairly with US production. Taxes on high income probably make sense, as do taxes on high accumulated assets.

I tend to agree with Gail on this one. The oil price increases that we have seen seem to have driven up the proportion of GDP used for oil by a percentage point or two. A percentage point or two may not seem like much, remember that the percentage of GDP used for debt service is well less than 10% and to have a sustainable debt service should be 4% or less. Spending an extra 2% of GDP on imported oil makes it very hard to find an extra 2% to service debt.

Passenger cars, trucks, diesel powered trains, and diesel power plants are the largest users of oil. In order to bring oil prices down, land use patterns would have to densify enough to make transit/walking a viable alternative and the movement of goods would need to switch back to electrified trains. It would also help if the US stopped using oil for home heating. These are massive changes in societal organization and are unlikely to be done quickly once the changes are underway. They are not underway yet.

I doubt that all is lost. A well thought out combination of lower spending, higher taxes, policies to increase economic growth, and a lower US dollar should bring the debt situation under control after a painful period of adjustment.

I expect that after everything has been tried they will get to it.


I'm all for import taxes as well as taxes on stock trades, plastics, carbon, and animal fat (yes animal fat). Tax policy should be based on discouraging those products and activities that are destructive. While income taxes on the rich should be raised to discourage capital accumulation, taxes on the incomes of working people should be eliminated to encourage work. With tax policies like this, the middle class would capture a greater share of the accumulated wealth of our economy while buying products and services that are truly productive and necessary. Government spending and debt are simply fiscal policies to achieve these goals. Current fiscal policy is reverse Robin Hood.


It almost sounds like you're legitimizing the Republican attacks against unionized public workers when you say that the government cannot sustain greater debt burden in a contracting economy.

I don;t see that these two things are strictly related. Overpaid, over-benefited, government workers are an inefficient use of government money at any time, whether the economy is contracting or not.
if we assume the services in question are needed (police, fire, teachers etc) the question is what is the appropriate pay/benefits/job security, and it would seem that in some, and possibly many cases, they are overpaid/benefited. if they were not, then they would not be clinging to their government jobs for dear life, they would be happy to leave them for private sector opportunities.

Then there is a separate question about whether the services they are providing are really needed. Does the postal service really need to deliver on Saturday? Can residential mail go to every other day? Does the California university system really need this many administrators per teacher?

You could say this is declining ERO$I (education returned on $ invested).

The fact is, that many government services seem to become inefficient over time, and are often very difficult to change in the face of changing needs (e.g. postal service).

In a contracting economy, if the government is trying to keep the economy going with spending, it should be spending on productive stuff. Every dollar spent goes into the economy, but those spent on something useful, be it actual teaching (not admin), building a train, improving energy/material efficiency, research and development, repairing buildings, etc, actually achieve something positive.

Simply paying to keep staff that are overpaid and/or underproductive is not a winning strategy - just ask the the automakers.