The Link Between Peak Oil and Peak Debt – Part 2

In Part 1 of this post, I pointed out that an economy is closely linked with the resources that underly it. Because of this, if there is really is a limit that prevents oil supply from rising endlessly, then there is also a limit that prevents debt from rising endlessly. I talked about seeing a two-way link between peak oil and peak debt:

1. Peak oil tends to cause peak debt. This is what I discussed in Part 1.

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

It is this second point I want to discuss today.

The basic issue is that more debt tends to cause more demand, and thus higher oil prices. At these higher oil prices, oil tends to get pumped out more quickly than it would otherwise. But once a shift occurs from increasing credit availability to reduced credit availability, as it does about the time peak oil production is reached, then prices for all types of commodities tend drop. At these lower prices, oil production drops off more quickly than it would have otherwise.

Let me elaborate a bit.

The Cheese-Slicer Model

We know that there is a cycle that permits oil production, that gradually changes over time. Professor Charles Hall has represented this cycle with his Cheese-Slicer Model. In 1970 he shows this view:

Figure 1. Professor Charles Hall's cheese slicer model of the economy, reflecting the energy needed to make energy, and other aspects of the economy at 1970

As of 2030, he shows the model:

Figure 2. Professor Charles Hall's cheese slicer model of the economy, reflecting the energy needed to make energy, and other aspects of the economy at 2030.

What happens is that as we extract oil, we use some of it for investment (top big arrow with purple and blue) and some of it for consumption (arrows straight to the right).

Over time, as the “easy to extract” resources are exhausted, we have to use a larger portion of the oil that is extracted oil (1) to obtain additional oil (top dark blue arrow) and also (2) to repair the infrastructure we have built up over the years, like highways and water supply and electric power transmission lines (medium blue arrow second from the top). Since these arrows get bigger, there is less oil available for discretionary investment in manufacturing facilities for things like cars and new iPods (top red arrow).

As the size of this investment arrow grows, the size of the square orange “consumption” box gets squeezed. The size of the green arrow pointed down, called “staples” stays relatively the same size, but the size of the red arrow, called “discretionary” (for things like new cars, and trips to restaurants, and vacation trips) gets smaller.

With this scenario, discretionary goods and services we get from oil energy goes down over time. This relationship holds on a percentage basis, relative to the oil in the system. We are likely not to notice this issue much when total oil supply is rising, because total supply available remains fairly adequate. Even if oil supply is flat, this downward drift may not be too noticeable, because a shift toward greater efficiency, or a switch of some users from oil to electricity, can help cover a small drift toward less available oil for consumption.

The biggest impact of the shift shown in Figures 1 and 2 is post-peak, when users are faced with a combination of (1) declining oil consumption and (2) greater percentages needed for non-discretionary items. Thus, it is likely to be something we experience more in the future than we have to date.

Impact of Rising Debt on the Model

The model is set up based on the amount of energy coming through the system. In the real world, though, there are monetary transactions involved. These monetary transactions involved consider not only the oil that has come through the system, but also considerable lending based on the expectation of future energy resources and the goods they will produce.

In a situation with rising debt, people have more money to spend. Consumers can take out an auto loan to buy an auto; investors can take out a loan to build a new manufacturing facility, or to drill for oil and gas. It is not necessary to wait and see how much really comes though the cheese slicer, in terms of the materials that are generated by the operation of the cheese slicer; it is possible to spend in advance.

Because of the availability of loans, the demand for new cars (and many other goods using oil) is higher than it would otherwise be, and the demand for oil to operate those new cars is higher than it would be. This keeps the price of oil higher than it otherwise would be, convincing marginal producers that prices are high enough for their operations. This keeps oil production higher than it would otherwise be, enabling the use of more oil for both investment and consumption. In a sense, what the additional debt does is make the world look like it is at an earlier year in Prof. Hall’s Cheese Slicer models than is really the case.

So suppose we are in 2011, but because of rising debt, it still feels like we are in the 1991 version of the cheese slicer model. What happens when instead of rising debt, the situation suddenly changes to falling debt? Then many people can no longer get loans to buy new cars, and they cannot afford to go on the vacation trips of their dreams. It becomes more difficult for businesses to invest in new plants and equipment.

Because there is less economic activity, the price of oil drops. Suddenly, investments in oil which previously looked profitable, no longer look profitable. We find ourselves moving out on the years of the cheese slicer. As long as there is some debt, it helps keep demand up. So maybe we move rather suddenly from 1991 to 2001 in the cheese slicer models, when we really are at 2011.

As debt declines, the cheese slicer model gets more and more “gummed up.” It becomes more and more difficult to make investments, because investment funds need to come from accumulated profits, rather than be borrowed in advance. Potential consumers find it more difficult to buy cars and houses and new appliances, because they have to wait until they have accumulated funds.

These reasons are the primary ones for my statement at the beginning of the post that the switch from increasing debt to decreasing debt will tend to make the downslope steeper.

I should mention that there may be some other reasons that will also tend to reduce people’s ability to buy oil, besides the cutback in debt. As you will recall, the reason for the cutback in lending was related to higher oil prices causing businesses to raise prices on many types of goods, and requiring people to cut back on discretionary goods of all kinds–the types of changes that go with recession (see Part 1). In a finite world, oil supply shortages are likely to get worse over time. Other non-renewable resource may also be in short supply, as limits are reached on other resources, such as fresh water from aquifers that replenish very slowly. These issues are likely to make the recessionary influences worse over time. If many people are without work because of recession, they will find it impossible to accumulate funds to afford expensive new consumer goods. This lack of income will tend to produce a similar effect, namely reduced demand for oil products, and a move to lower outputs of the type expected in a later year of the cheese slicer model.

I should also note that a major cutback in debt is likely to affect all aspects of the economy–not just oil and gas. I wrote a post in late 2008 called Impact of the Credit Crisis on the Energy Industry – Where Are We Now? In it, I surveyed all of the kinds of energy, from oil to gas to coal to uranium, and all of the prices were down, because of the credit contraction at that time. In retrospect, we find that even electricity use was down. US electricity generation showed a 5% dip between 2007 and 2009, instead of the 3.5% growth that might have been expected in that two-year period, in the absence of recession.

A Partial Offset

If we are moving from an expanding to a contracting resource base, saving and spending behaviors are likely also to change.

Figure 3. Two views of future growth

One reason for a change in savings and spending behavior is obvious–if there are more resources to buy now than later, it might be better to buy now while goods and services are available. Furthermore, if the economy is really declining, money will cease to be a store of value, in the way it is today, because less goods and services will be produced in the future than today. In this environment, it might make sense to spend money rather than save it, especially if it can be invested in something of long-term value to the person with excess funds.

There is a second reason for a change in savings patterns. There is a tie between debt and savings. The debt of one person is for the most part the savings of someone else. A bond sold by a company as financing for its debt may end up in someone’s pension fund, or on the balance sheet of an insurance company. To the extent that there is less in the way of debt, there is also going to be less in the way of savings.

With peak oil, what is likely to happen is that the default rate on existing debt will rise, so many people who own bonds (or other debt instruments) will discover that they are worth less than they thought, perhaps nothing. And banks and insurance companies and pension plans will discover that quite a few of their assets aren’t what they thought–they will never be repaid with interest.

In this environment, the world will change. Insurance companies are likely to stop selling annuities, because they really can’t make good on long-term promises any more, if there are too many debt defaults. Pension plans will become uncommon. People will figure out that they really can’t save very well for retirement–they will have to depend on their friends or relatives, or perhaps a government program funded by taxes.

In this environment, buying patterns will change. People with money may decide to take a vacation trip now, rather than waiting until later. They may make other choices as well–they may try to buy more land, for example. It may be that the price of land for farming is bid up. They may buy tools for working the land. With these new buying patterns, some of the demand for oil and other fuels may return.

The reason why this activity is not likely to completely offset the current bidding up of energy prices with debt is because quite a bit of current debt may ultimately vanish as worthless. It was created using assumptions that held at a different time–back when the economy was fueled with cheap oil–but are not valid any more. Prices of homes have dropped, so huge mortgages on them no longer make sense. Bonds from companies (and countries) in financial distress will not be paid back, especially if we stumble back into recession. We don’t know yet how this will play out, but we can see distress signs around the world, suggesting that more defaults are not far away.

This article originally appeared on Our Finite World.

Gail, I was wondering if anyone had done a study on what effect inflation will have on the overall picture. If we have runaway inflation, which I am expecting, will this make things worse, better or have little effect at all?

And another question is how will this affect inflation? This is not a chicken or the egg question but I am expecting inflation to increase because of different reasons. Will peak oil make it better or worse?

Question 1. What will be the effect of inflation on this model?

Question 2. How will declining debt caused by peak oil affect inflation?

Ron P.

I am not sure that we will have inflation, at least with respect to salaries, since that is where we will need inflation, in order to pay back debt with interest. We also need enough people working, so that they actually receive these inflated salaries.

The Federal Reserve at this point hasn't been able to do much on the salary side of things, to make things work. I suppose if the dollar drops enough, and the government prints even more money, there is a theoretical chance things could work--but the Euro is also under pressure, with so many countries having debt problems.

It seems to me that at all of the debt defaults make it harder to get the salary-inflation that one really needs for this approach to work. It causes a trend toward deflation, because the "assets" that people think they have keep disappearing. Also, companies are still very much in competition with cheap overseas suppliers, and consumers are still being stressed out by high oil prices, so there is not much room for a rise in prices/ sales of products.


As more investment moves to infrastructure maintenance and energy production, so also will jobs. Of course, with less investment capital available to producing luxury goods and discretionary goods, jobs there will diminish. Eventually everyone will be working in energy, food, etc. In other words, necessaries.

This will have much to say about our activities at home, and where we work. The real crunch, it seems to me, is going to be when investment capital is not avaiable for energy production, maintenance, transportation of foodstuffs, etc. And, when food supplies drop, either from production shortage or impossibilty of transporting it all, the real unrest begins. This is the story in MENA; it is looming in SEA; eventually coming to a neighborhood near you.


When this video was made, Bailout Big Lies & Your Savings, in September of 2009, the share of government obligations was 2,250,000 per taxpaying household. Mind you that is not per person, or even per household, because many households do not pay government income taxes, but per taxpaying household.

The video makes the case that taxpayers cannot possibly pay this debt therefore it must be inflated away. That is there are only two options, default or inflation. And since there will be no default inflation is the only option left. And I believe it, inflation is a given.

True, salaries do not have to increase as the dollar inflates. That simply means that people get poorer. And the greater the amount of inflation, the poorer they get. But I think it will be a little of both. Salaries go up of those people lucky enough to be employed, but not as fast as inflation.

But concerning the government's debt obligations, something must give. It is already starting to happen today. That should be obvious to anyone who watches the news.

And you are correct about the Euro. Because of the heavy debt burden of many nations, like Greece, Portugal, Spain and Ireland are already having serious problems. Things are starting to crack all over the world. Any nation can only pile so much liability on future generations before that trick don't work anymore.

Yes, there will be inflation, serious inflation, unless the economies of the world crash first. But which will come first?

That reminds me of a cartoon I once saw. A banker was sitting in jail talking to his cellmate. The caption: "Actually it was a calculated risk. I thought an all out nuclear war would come before the bank examiners did."

Ron P.

Another cartoon, the Chairman of the board is addressing his board of directors, "Gentlemen, while the End of the World scenarios are quite grim, we have found that the Pre-End of the World scenarios can be quite profitable."

Click on below "i" for image of the board and then + for grim meeting notes:

[ i.mage.+]

Greece, Portugal, Spain and Ireland are having serious problems because Germany and the ECB won't allow the inflation that these countries need.

Austerity and unemployment is the worst possible response to this economic shock which may or may not have been triggered by energy constraints (I think it's likely but the evidence is not overwhelming) but whose severity was caused by the financial accelerator of debt. If there was work to do when we could share the burden with energy guzzling machines then there's certainly work to do when we have to do it all by overselves because we have no spare energy to give to the machines.

"Salaries go up of those people lucky enough to be employed, but not as fast as inflation" - that's a given in a contracting real economy, but governments could and should ensure that it's not a case of "lucky enough to be employed".

that's a given in a contracting real economy, but governments could and should ensure that it's not a case of "lucky enough to be employed".

Now I understand your thinking Dcomerf. You believe the government has far more power than they actually possess. Perhaps you shouldn't make that assertion on your dissertation. I doubt seriously that your professors hold a similar view. Or perhaps I am wrong. Perhaps that is where you got the idea. If that be the case then they should call Obama and give him the formula.

But perhaps the government can do that. Just give all the "job creators", the millionaires, a big tax cut? Yeah, that's the ticket. ;-)

Ron P.

My formula would be public investment in renewable energy and energy demand reduction infrastucture, on a scale where this investment reaches the proportions of GDP that war effort reached during 2nd World War.

Create fiat currency and use to pay the wages of workers covering deserts with solar panels, give this currency to households as grants for insulation and microrenewables. Invest in trams and electric trains etc etc etc.

Creates productive assets and causes inflation which reduces the debt/balance sheet problem.

I don't see any "power" reasons why governments can't do this. The reasons they don't are idealogical.

Ya know I think something like that is more likely than what Gail outlines, because what she outlines ( falling debt ) is so bad if it were to happen. I think she's absolutely right about the effect falling debt would have, I just don't think it's inevitable that governments will let debt fall.

I think governments would rather stabilize or increase total debt by creating more government debt when push comes to shove ( remember that a fiat currency note IS government debt bearing 0% interest, and governments outside of Europe can print all they like, whether bonds bearing small interest rates or notes bearing zero percent interest rates ).

d - I think I understand your proposal. But then why stop half way: why not eliminate all taxes allowing all those monies to stay in the economy and just create more fiat money to replace that tax revenue? That would seem to be a simple and logical expansion of your idea. But, then again, I'm just an oil patch geologist and Ron will readily tell how we tend to not understand cr*p about economics. LOL.

In the absence of a debt problem to solve though it would be hyperinflationary - which has its own costs. The "opportunity" that a debt crisis presents is a way to justify, temporarily, such intervention.

d - Seriously...I'm out of my league: so since we have a debt problem printing lots of fiat money won't be hyperinflationary? And if popular opinion says doing so is "justified" and temporary it won't generate hyperinflation? Or are we talking about the lesser of two evils?

Hey, just printing lots of money works. Germany tried it in the 1920s and Zimbabwe has recently tried it. It causes a boom for the wheelbarrow business. Wheelbarrows are needed to haul all the money in. Works both ways also. You haul your money to the grocery store in a wheelbarrow and then you can haul your pound of rice and loaf of bread back in the same wheelbarrow.

Ron P.

Printing is so old fashioned.

All that is needed is for the Federal Reserve Bank to add some big numbers to the balance in the US Treasury accounts and then the US government buys lots of goods and services to put the money into circulation.

Seems that having the Fed in the loop says that they are getting paid interest on the money created?

Why doesn't Congress just print Treasury Notes to pay off debts, and then print them and mail them to each of us to inflate to their heart's content?

I think it is instructive to look at who benefits from debt interest flows as well as who is hurt by inflation and taxation.

Private debt interest goes to banks and individuals -- banks pay you a pittance, and charge a good bit more. If they don't make enough, they invest in the Fed, and get money from the gov't. It would be interesting to see what fraction goes to banks versus what goes to little guys.

Public debt interest goes to those who own bonds. A lot of the time that's Fed stakeholders, or foreigners, or private investors. It would be instructive to see what fraction goes out of the country, what goes to wealthy holders, and what goes to mom and pop.

Taxes come from taxpayers. We know it isn't the rich (they pay a lot in dollars, but not a major fraction of their income), and it certainly doesn't come from poor people who pay nothing. It comes from middle-class people.

Inflation penalizes savers, and favors those with fixed-rate debt. Banks don't care -- they make money on the spread. The gov't cares -- they like to borrow low and then inflate, so they walk the line. Middle-class people have home loans and credit cards. Those who are prudent will refi when inflation is low, and pay off their home with inflation. Those who are not, plus the poor, will ride their credit card rates up until they are at the brink of the default, or beyond.

So, rather than bailing out banks and keeping inflation low while funneling money to bondholders, why not print some money and give it to the people? Those with debt could pay off the worst; those without could spend some. Those with newly re-fi'd homes would get ahead. Those with low-rate bonds would probably take a bath.

If I'm correct in this, the big banks and investors (including China) would want to see a flat inflation rate and debt moving from private to public hands, paid by taxes. Taxpayers would want to see less Fed debt, lower taxes, and accept modest inflation if it meant getting jobs and raises.

I think this means the debt ceiling WILL go up, and so will taxes, to siphon money from the public to those who have (or can borrow cheaply) cash. Am I wrong in my thinking?

Deposits of the U.S. Treasury

The Federal Reserve is the fiscal agent of the U.S. Treasury. Major outlays of the Treasury are paid from the Treasury's general account at the Federal Reserve.

The Treasury's receipts and expenditures affect not only the balance the Treasury holds at the Federal Reserve, they also affect the balances in the accounts that depository institutions maintain at the Reserve Banks. When the Treasury makes a payment from its general account, funds flow from that account into the account of a depository institution either for that institution or for one of the institution's customers. As a result, all else equal, a decline in the balances held in the Treasury's general account results in an increase in the deposits of depository institutions. Conversely, funds that flow into the Treasury's account drain balances from the deposits of depository institutions. These changes do not rely on the nature of the transaction. A tax payment to the Treasury's account reduces the deposits of depository institutions in the same way that the transfer of funds does when a private citizen purchases Treasury debt. Both actions result in funds flowing from a depository institution's account into the Treasury's account.

I don't think that the Federal Reserve earns interest on balances in the Treasury's accounts. It just process transactions between those accounts and the accounts of other financial institutions.

When their is a treasury auction falling short, and the Fed steps in to buy them up, do they not earn the interest paid on those bonds?

If the Fed has Treasury Notes or Bonds in its possession as assets, then the Fed earns interest on them. However, earnings from all sources after expenses that exceed paid in capital are remitted to Treasury.

After expenses are paid, Reserve Banks are required by law to pay net earnings into surplus so that surplus equals the amount of capital paid in. Earnings by the Reserve Banks in excess of the amount needed to equate surplus with capital paid in are remitted to the Treasury.

However, in the previous post I was referring to the Treasury's bank account at the Fed, and I don't think that the Fed earns interest on balances in that account. For example, if you get a paper check for a tax refund and deposit it at your bank, the check is cleared back through the banking systems to the Federal Reserve and settled against the Treasury's demand deposit account at the Fed. If you get an electronic deposit of a tax refund to your bank account, it is cleared via the Automated Clearing House networks and settled against the same account.

Their is no evidence of Peak Debt yet.

De-leveraging by the private sector due to Peak Oil, if it is happening, is offset by government issuing more debt to make up for declining tax receipts and for funding attempts to restart the economy.

Issuing debt is the method the Empire uses to tax foreigners to maintain itself. The Treasury debt held by foreigners will be rolled over in perpetuity. This being the case, it amounts to a tax on them to support U.S. wars for oil security and other activities that are more beneficial to the debt holders than to the United States.

Foreign economies need oil more than the U.S. where oil consumption is falling. That is why the spread between Brent and WTI is so large. Except for Brazil, foreign economies have no significant alternative liquid fuel as the U.S. does with ethanol.

The wars for oil security must be financed with debt if the Empire is not to collapse overnight. Foreign bond buyers agree. The major alternatives are even worse than the dollar denominated bonds.

The Euro is not backed by any country. It has no fiscal policy. The yen is radioactive in that Japan's national debt is 200% of GDP compared to less than 60% for the U.S. if inter-agency debt is not counted.

Some think this can not continue, but there is no choice.

Prosperity through austerity is a myth when applied to the macro economy. I works for individuals, but when the government does it, it doesn't work. Paul Krugman comments on this frequently and he is correct. The government is not a business or a household.

Reducing debt is the same thing as taking money out of the system. If the government does this during a recession it just makes the recession longer and/or worse.

Republicans calling for a balanced budget and reduced deficits are nuts. They are calling for handcuffs on the government and permanent depression. Only the very wealthy will be able to survive in such and environment and they too will lose some of their wealth just as they did in the Great Depression.

We narrowly avoided a socialist revolution in the 1930's. We may not be so lucky again if Republicans get their way.

there is evidence of "peak debt" in my house.

Their is no evidence of Peak Debt yet.


In the US of A - regular reporting on the debt ceiling.
Iceland, Greece, Ireland and many other nation-states having national discussions on debt.
The lowering of credit card balances due to write-offs.

We narrowly avoided a socialist revolution in the 1930's.

Not at all.

How many of the planks of the Communist Manifesto are US National policy?
How about how the Democratic party adopted many of the planks of the socialists to prevent the Democrats becoming like the Whigs?

From the article:

The Iron Heel is a dystopian[1] novel by American writer Jack London, first published in 1907.

Generally considered to be "the earliest of the modern Dystopian,"[2] it chronicles the rise of an oligarchic tyranny in the United States.

The Oligarchy are the largest monopoly trusts (or robber barons) who manage to squeeze out the middle class by bankrupting most small to mid-sized business

London predicting that the middle class would shrink as monopolistic trusts crushed labor and small to mid-sized businesses.

Why doesn't Congress just print Treasury Notes to pay off debts, and then print them and mail them to each of us to inflate to their heart's content?

Because Congress does not actually work for you and me?

Merrill or dcomerf,

The mechanism the FED uses seems like it has serious limits.

Would the Fed be taken seriously if its asset sheet suggested it was half the size of the Federal Government?

Using the FED would mean the Treasury must first subject itself to the tender mercies of the bond market. In an inflationary environment treasury notes might work, recent experience (negative real interest rates) suggests these notes might be the asset of last resort.

In a deflationary environment a simpler savings option is available (From above: a fiat currency note IS government debt bearing 0% interest).

On the other hand, the direct equivalent of printing money is for the Treasury to simply insert money into the bank accounts of US employees, contractors and transfer payment recipients.

The choice seems to come back to whether collapse is inflationary or deflationary.

The Federal Reserve's balance sheet is about $2.8 trillion, which isn't a lot larger than one of the top tier banks. See

JPM's balance sheet is about $2.25 trillion by way of comparison.

The Fed is simply acting as Treasury's banker. In this respect Treasury can send and receive payments like a Federal Reserve member bank since Treasury maintains its account directly at the Fed, something that non-banks cannot do. Thus, it has direct access to the payment clearing and settlement electronic networks including the Fedwire, which provides immediate transfer of good funds.

The Fed also acts as the Treasury's investment banker, and provides the service of selling, paying interest on, and redeeming Treasury Notes and Bonds on behalf of the Treasury. It does so primarily through a smaller number of financial institutions who are Primary Dealers, although there is also the Treasury Direct program.

Can't eliminate taxes or excessive printing of money is hyperinflationary. For the most part, government needs to be spending the same money it taxes out of the economy or the number of notes skyrockets.

I think other options are

1. Current government is replaced with entirely new government. New government does not assume prior debt, and starts from $0 on programs.

2. Current government goes the way of the USSR government, at the time of the split.

If the options for fixing the problem get too painful, and there is too much unrest over, say, short food supply, it seems like options such as these may occur, both in the MENA region and in formerly stable good-sized OECD countries.

In principle you could now do away with money altogether. You can calculate the amounts of available raw material, labor hours, etc., that are available to the economy and the amounts of goods and services that are needed by the population.

Then you can solve the equations for the optimal allocation of primary and secondary production of goods and services needed to approximate the needed goosd and services.

All goods are rationed and all labor is forced according to the plan.

The economic optimization problem is very likely solvable with the computers now available. The electronic record keeping and police surveillance techniques are also now up to the task.

Progres in information systems now makes a completely planned economy possible.

Who would decide the value of which type of labor, raw materials, and assets? Would there be disagreements about the values from parties with different points of view?

As an actuary, Gail probably has some insight into valuation considerations.

No money = no value.

Labor would be matched to jobs based on skills, talents, and location. All people who are able to work would be required to work.

Raw materials are allocated to uses as indicated by the optimal production solution for the economy's overall input-output matrix with constraints.

You can't define optimal, and so your idea doesn't work. Besides, it's just a restatement of classical socialism or communism.

"Required to work." By who?

"Needed goods and services." Very little is actually needed. Given that we massively overproduce, how do we allocate excess production?
Are you proposing cutting back on non-essentials, such as limiting entertainment to text, which is so cheap that we could easily give everyone worldwide a simple reader and/or access to paper?

Any solution which proposes a hard, government-based curb to human consumption seems unworkable. Why would anyone vote for less pleasure?

I realize that consumption != pleasure and the hedonic treadmill is a large part of society's problem, but good luck getting people to get off the treadmill willingly once they're on it.

"Required to work." By who?

By the computer. No labor input = no right to output = starve to death.

Are you proposing cutting back on non-essentials

Cutting back on non-essentials would be good. Overproduction of non-essentials is required by a money economy where access to money (and thus a livelyhood) is mainly achieved by requiring everyone to be employed. We could cut way back on non-essentials and simultaneously cut way back on labor hours and/or fraction of the population employed.

Why would anyone vote for less pleasure?

The tradeoff is really less goods and services for more leisure time, more sports, cultural activies, community activities, social equality, etc.

I think you just proposed a benevolent SkyNet...

It is more or less what you must have in order to reformulate economics on the basis of physical flows of various types of energy, materials, labor and information instead of relying on obsolete and inadequate concepts like money and debt.

It is somewhat puzzling that the Chinese decided to adopt Anglo-American financial concepts at about the time when computing was well enough developed to create a more refined planned economy. It is probably because the Anglo-American system optimizes productivity and rate of expansion the best, and they needed to exploit their population to the maximum in order to defend themselves and keep some degree of military parity with the US.

You are confusing the technology of the day and the degree to which the leadership believes/trust them. Take a look at the biography of Deng Xiaoping the person believed to be most responsible for this choice.

From an applied mathematics course at RPI long ago, the story was told concerning the Russian who invented the mathematics for the logistics space explaining to Stalin what couldn't be done. He ended up in

Must not have been Leonid Kantorovich

Kantorovich worked for the Soviet government. He was given the task of optimizing production in a plywood industry. He came up (1939) with the mathematical technique now known as linear programming, some years before it was reinvented and much advanced by George Dantzig. He authored several books including "The Mathematical Method of Production Planning and Organization" and "The Best Uses of Economic Resources". For his work, Kantorovich was awarded Stalin Prize (1949).

I loved operations research and linear programming.

This sounds like the Technocracy movement from yesterday's threads.

Technocracy springs not from Yesterday.

It comes from the 1930's when various thinkers were looking about at the destroyed-by-bankers-and-wall-street economy and the excess of consumer goods (excess VS what was in the past anyway) and asked: Is there a better way.

The 'sovereign individual' movement has no love for Technocracy.

What is the 'sovereign individual' movement? References?

Why don't you read the message at:

Or how about use a search engine:

What Exactly is a Sovereign Individual?

Ah! A member of the rentier class who hides all his assets off-shore and becomes a traveler of the world paying taxes to no nation-state?

Thanks for the link. This reminded me of Nicholas Shaxson's book "Treasure Islands: Tax Havens and the Men who Stole the World". Amazon UK or USA.

A fascinating, if not depressing, book to read...

A large bank will have literally thousands of subsidiary corporations domiciled in various tax-friendly jurisdictions set up to optimize the tax benefits of their major customers.

Besides taxes, there is other accounting magic to be done, depending on how certain items can be classified under the legal systems and accounting standards of various places.

Wealthy Britons prepare to flee

More than half of the UK's millionaires have fled or are thinking of fleeing the country's economic "storm clouds", according to a new study.

Taxation, perceived better living standards abroad and the weather mean that only 44% are certain of remaining here.

But the survey of more than 500 UK-based millionaires, carried out for investment firm Skandia, found that only 2% were thinking of moving to a tax haven such as Switzerland or the Cayman Islands. Preferred destinations were France, the USA, Spain and Australia.

But note that where one goes to live is not necessarily where one keeps his money.

It is more or less what you must have in order to reformulate economics on the basis of physical flows of various types of energy, materials, labor and information instead of relying on obsolete and inadequate concepts like money and debt.

Houston, I think we have a problem...

Liberal abuse of the second law of thermodynamics

It has become common in recent years for environmentalists to claim that the second law of thermodynamics implies limits to economic growth. Their reasoning is that because free energy in resources such as oil decreases with time, then economic growth can only be finite. However, this simplistic liberal reasoning ignores the non-zero sum nature of free market economics, whereby improvements in technology deliver gains for all at no further cost. Indeed one of the most vital economic goods, knowledge, can be said to be free from thermodynamic limitations entirely.[2] Liberals also vastly exaggerate the limitations that natural resources impose on human economies. Some estimate that the Earth can harbor 100 billion people. God Himself gives His explicit assurance that the Earth will be generous as long as the human race exists in Genesis: "And God blessed them, and God said unto them, Be fruitful, and multiply, and replenish the earth, and subdue it: and have dominion over the fish of the sea, and over the fowl of the air, and over every living thing that moveth upon the earth." (Gen. 1:28, KJV)

Source Conservapedia

Seriously, who are these people, and why are they not safely locked up, away from the rest of society?
Oh wait, some of the geniuses who think like this, are actually launching campaigns for the Presidency of the US...

Some of them are President.

I think you just proposed a benevolent SkyNet...

It wouldn't be benevolent for long. Merrill and his buddies would quickly be pulling the fingernails off people and screaming, "WHY WON'T YOU FOLLOW THE PLAN?"

"The plans differ; the planners are all alike." - Frederic Bastiat

"No labor input = no right to output = starve to death."

Wouldn't the free market with no social safety net and no charity do the same?

With a lot more yachts and lot less distribution of wealth to actual workers.

Not that I think the proposal is in any way a good one. It might work for robots, but not for humans.

In the gulag, if you didn't work, they didn't let you in at night, out of the snow. Главное Управление Исправительно-трудовых Лагерей

"A distinctive incentive scheme that included both coercive and motivational elements and was applied universally in all camps consisted in standardized "nourishment scales": the size of the inmates’ ration depended on the percentage of the work quota delivered. Naftaly Frenkel is credited for the introduction of this policy. While it was effective in compelling many prisoners to work harder, for many a prisoner it had the adverse effect, accelerating the exhaustion and sometimes causing the death of persons unable to fulfill high production quota."

It wouldn't do the same. If you have money, then some people will accumulate more money than other people. The people with money will lend it to the people without money and charge interest on it. Eventually, if they accumulate enough, the people with money will be able to acquire a stream of interest big enough to live on and they won't have to contribute to society any more, i.e. they will be living off of economic "rents" (in this case the rent of money, although there are other economic rents, such as the rent from ownership of hard assets like land and buildings, patent, copyrights, etc.).

Eventually, if they accumulate enough, the people with money will be able to acquire a stream of interest big enough to live on and they won't have to contribute to society any more, i.e. they will be living off of economic "rents"

Isn't that exactly what the "financial" sector of the economy is, which is now 20% of GDP, and the single largest division?

And those that don't make their livings from these rents, or work fro the government, are not making much at all (on average)

So it seems to me we are already well down this path...

"Eventually, if they accumulate enough, the people with money will be able to acquire a stream of interest big enough to live on and they won't have to contribute to society any more, i.e. they will be living off of economic "rents""

I get it, what your saying is either motivate or kill off the people that aren't productive on the very top and the very bottom of our society. The problem is that some would argue with your arbitrary thought of who the productive people are. Accumulation and saving of excess money or even durable goods and food is like a battery saving excess energy. Without savings and a process to redistibute that savings at some point, there would be wanton waste with no regard of what that product is. Without a mechanism for people to use excess production for their personal benefit their would be inefficient use of excess capacity, that's one aspect that separates us from other animals.

I don't think that it would be necessary to kill anyone.

Without money, there would be no possibility of, for example, inheiriting daddy's millions and thereafter living a life of leisure and enjoyment without contributing to society. Note that it is usually the rich person's private banker who puts forth the effort of actually investing the money, accumulating the savings not disbursed to the heir, etc.

Oh there would be some "die off" in the system your talking about, at least to get started with it.

The cycle of accumulating money by the wealthy is supposed to be self correcting. The 1930s depression did a lot of equalizing by wiping out wealth in the stock market and real estate. The same should have happened this time except that the elites were responsible for socialization of the losses.

A problem no one discusses is the lack of investment opportunities. Returns today are mostly inflationary gains. The historic low dividend yields, P/E ratios and interest rates are symptoms of mature industries and saturated markets. This is what Marks predicted would happen to capitalism.

Most of great innovations like electrification, mass production and internal combustion transport matured a half century ago. The green revolution and agricultural mechanization were the last great innovations and they matured by the 1980s. Computers and the Internet barely moved the needle.

It is time for the next great thing.
A massive die-off also reseeds exponential growth.
Or an abandonment of the amazing lifestyles.
Around and around the discussions go.
Some believe in Aliens.
Some pray to God.
Me? I'm anachronistic. It's a solution for me.
You? Really, just make sure you are living life.
There is only one pass. One grows old.
Enjoy the show.

No money = no value.

More BS.

The website that TOD runs on is Open Source. FreeBSD base. Apache for the Webserver. MySQL as the database. PHP for the scripts.

None of that software costs money to get. $0.

Under No money = no value. - there is no value in that software. Yet, there is value.

Right on.

The fundamental economy is the "gift economy" (e.g. motherhood, family and social obligations, filial piety and usually, artists, who produce for the public but are rarely paid). We have had that discussion before on many occasions on TOD

The "market economy" is useful, and up to a point, can run parallel with the "gift economy", but eventually it becomes parasitic and destroys everything. That is where we are headed now.

Ugh. You've hit one of my pet peeves. Every attempt I've seen to formalize or expand the "gift economy" in a fair way inevitably finds it needs some sort of system to track generosity, and ends up re-inventing money.

Gifts are important, but they're no basis for an economy larger than a few dozen people.

Gifts are important, but they're no basis for an economy larger than a few dozen people.

*points to the left of your computer screen*

See that box that says Google?

Why don't you go and ask Google how the gift economy of Open Source is working out for them?

The "gift" economy doesn't track generosity. That would more properly be a "barter" economy, which I believe to be a subset of the "market" economy.

The "gift" economy is what makes everything in the world -- except modern human industrial civilizations -- work.

Funnily enough I think that's a good anology, as a parasite the formal ecomony feeds off of the main (household) economy, thus adding greater energy overheads. It is two way though as items of greater amounts and distances can be got through the formal economy. So it is somewhat necessary and easier in some ways.

The problem then is not the formal economy itself, but the fact that if it is too successful then it will strangle its host, and it also seems to develop parasites of its own.

Well, that's the way I look at it, too.

I don't have any fundamental distaste for the "formal" economy -- I do well enough in it to provide me and my family some comfort, and I like comfort as well as anyone.

The natural or "gift" economy is also subject to parasitism, and sometimes it requires the "formal" economy to kill off the parasites!

There just aren't any simple answers, and no "best" way. The only way forward is to foster a civil conversation, which is what is so great about TOD

"Capitalism is great, as long as it isn't for anything you really need." Like electricity (Enron), health care (!)...

Systems of people are highly adaptive. A natural goal is to gather and stock against the unknowable future. This becomes distorted in the aberrant. By gathering too much to themselves, they lower the reproductive chances of those around them while improving their own. Great unrest, war, can result. The stresses of war are transmitted to the newly born through the mechanisms of epigenetics.

I wonder just how inbred human misery is?

There were many different economic systems practiced by native peoples. Money seems to have replaced them, just as the suit has replaced native costume.

Kananginak Pootoogook

This made for an economic monoculture. The blight swept through most of it.

Labor would be matched to jobs based on skills, talents, and location. All people who are able to work would be required to work.

Since the beginnings of mass production we have required fewer and fewer worker hours to provide almost all goods and services required by the population. An exception is healthcare. The answer to unemployment since the late 19th century has been to reduce the work week. The problem we have now is that the working portion of peoples lives is shrinking in proportion to their life expectancy. People need to save more to provide for themselves in their old age. Since they will not all save voluntarily, perhaps social security and medicare taxes need to be raised, and by quite a lot. Of course that would cut disposable income of those working, but would prevent a collapse of the financial system and the government. Political instability is not something anyone should look forward to.

Prior to the 20th century it was very uncommon for people to save for old age. People generally were supported by their families and communities in their old age. While life expectancy at birth was shorter, someone who lived until 60 could expect to live for quite a while after 60.

Even social security was not instituted as a means of savings. Instead, it was set up on the basis that social security payments by working people would pay for the benefits to old people.

Attempting to base individual retirement on individual savings is possible only with very high savings rates. If these savings are invested in land, buildings, equipment, and other productive assets, you get hugely inflated asset prices. Alternatively, the government can run a huge deficit and the savers can buy bonds, as in Japan. But this amounts to essentially the same as having current worker pay for current retirees, since the bonds have to be paid off to the retirees out of current taxes. Another solution is to have the excess savings invested off-shore. These investments can be in stocks, bonds, real estate, etc. but they are often in government bonds, e.g. Chinese buying US government securities.

So paying current retirement benefits out of current receipts with a big enough trust fund to smooth out fluctuations in age cohort size and business cycle effects is really the best way to go.

What Happened to the $2.6 Trillion Social Security Trust Fund?

"the federal government has borrowed all of that trust fund money and spent it

If the budget crisis has done nothing else, it has exposed the decades-long lie about the solvency of the Social Security trust fund. The trust fund may be backed by the “full faith and credit of the federal government,” as defenders constantly remind us, but if it had real assets the president wouldn’t be talking about seniors missing their checks."

It was used for the Vietnam War and for Oil.

Yes, but consider if the social security trust fund was big enough to be solvent and had been invested in US stocks. The price of stocks would have risen much higher, the government would control a big chunk of business through the social security investments (in a bigger way than activist pension funds like CALPERS), and the ones picked by the social security adminstration would do poorly as the baby boomer retirement caused a lot of stock to be dumped.

An interesting hypothetical.
Would one invest 2,700,000,000,000 dollars all in the stock market?
And, fearing the conjectures of the hypotheses, one is better off without a retirement fund?

FDR was accused of being a socialist. It would have been impossible for him to propose a retirement fund which could buy up a good part of US industry instead of a pay as you go "old age insurance" approach.

One case is that the fund had no value.
The other case is that the fund had value.
I remember the raids. I remember the IOUs.

In some real sense, all you have in the year 2030 or the year 2050 is what is produced that year.

For the government to own bonds of businesses - that is, pieces of paper related to someone these businesses debt (which may very well not get paid back) is all that helpful.

Buying a share of previously issued stock does nothing for real investment in companies. It may decline in value, especially with peak oil.

What will have to happen is in the year 2030 or 2050, some portion of what is produced will have to be allocated to the elderly and disabled. If there is barely enough to go around for those doing the work, it will probably be very difficult to find support for giving very much to the elderly and the disabled. Current promises are likely to be way too much.

There would be much difficulty in arriving at equations that all interested parties could agree on the accurately describe the economy. Should the equations favor the near future as in a week from today, or a year from today, or ten years from today? Should the equations favor old people, middle age people, or young people? How do people with disabilities factor in? Should global warming be a concern? How does one factor in risk due to natural or other disaster? How does a persons self interest factor in?

Linear equations of multiple unknowns are very easy to solve if they are well defined as shown here :

However there are non-linear aspects to the economy which would make solving them more difficult. If a good equation model could be developed, there are approximation solutions that could be done. But I think you would find that getting a common consensus on what the equations should look like would be all but impossible as there would be so many different opinions about the variables and their weightings and there would be resistance to a transition from what we currently have.

I do find that it is very possible that most economies will be transitioning at some point in the future to some flavor of what is called a "command economy" which is very similar to the situation you describe but it would not be equation based. When the current business models no longer work, governments and militaries will likely try to adjust to keep stability and there are aspects of a command economy that do provide more stability in ways.

There are instabilities in an economic model that I would like to amusingly characterize by a comic I saw recently that opined "Socialism for the Rich, Capitalism for the Rest". I would think that places like Egypt, Greece, and a few other countries are getting close to the need for command economies.

Here is a definition of command economy.

First, your reference to a command economy says that the government sets prices. With the elimination of money, there is no need to set prices.

Money must be eliminated because it is too simplistic a concept to be used in managing a future economy. Associating a scalar number as the "value" of something is not adequate to describe the potential uses of the thing, and the leverage that using a thing in different ways has on the downstream productivity of the economy.

Values are also very imprecise and approximate. If you invest $50K in a machine, then five years later it has some value X, determined by your accountant and tax specialist, based on the original investment minus accumulated depreciation determined by expected life and a depreciation schedule. In fact, you might be able to sell it for more or less than that number. Land and buildings, for example, are often carried on the books at values wildly different from the market values.

The equations would be developed so as to first satisfy the needs of the population while minimizing the inputs (materials, energy, labor, and information), subject to constraints on availability of the inputs and constraints on the rejection of wastes back into the environment. Any production beyond the needs level would have to be done with left over inputs, but subject to the same constraints. Divergent needs of population sectors would be accommodated. For example, some number of dialysis machines, supplies, dialysis center operations, etc., would be planned in order to satisfy the needs of people with kidney failure. This can be calculated. Global warming would be a constraint on the amounts of greenhouse gases emitted by the economy.

Clearly, setting this up and running it is a big job. But the financial sector and the part of the government sector that currently manages the money financial system and its transactions is also a significant fraction of the total economy.

A fully computerized non-monetary economy would be simpler and easier to run that the ad hoc approaches of typical military dictatorships, etc.

Consider trying to set a value in your equation for religion or politics. Talk about disagreement! Should abortion be allowed? Should gambling? Do we need police or an army? At what point will the equations specify that plugs should be pulled on people that are sick?

Or how decisions should be made for tearing down old infrastructure, and where to build new infrastructure and how much of it to build.

Or what purposes we should fund research and development for.

Most of these are already big public policy questions that are being worked through the political process. The size of the police force in many communities is being reduced in budget debates. While money is involved, the debate is really about the tradeoffs between police, fire, education, parks, social services, and the other services funded out of the municipal budget. So the size of the police force is set politically today.

There were some interesting research results on a new treatment for prostate cancer recently. IIRC, the drug extended a patient's life about 5 months on average and cost about $50K. Given a prostate cancer patient who is 75 years old, should society spend $10K/month to extend such a patient's life. Questions like this will have to be answered in the negative at some point as new treatments with ever higher price tags become available. Maybe it is yes for $10K/month, but would it be yes for $100K or $1000K/month?

The local furor over whether to tear down an old bascule bridge and whether to replace it with another bascule bridge (expensive to operate) or a high fixed bridge (cheap but affects scenic views) has already brought out the worst of the political process.

About half of R&D spending is already funded by the government and is determined politically.

Or what purposes we should fund research and development for.

Here's one. We could start by funding research to define a value for a completely new kind of 'Constant', CS or (common sense), once that is accomplished, (it was probably easier to prove Fermat's last theorem), it can be plugged into all of those difficult equations that will be used for calculating when to pull the plug on those that are already brain dead, such as certain politicians.

Granted we should clearly stipulate that this 'Constant' may never be defined as a fraction or C/S where C and S are integers, with S being non-zero... because that, would just be plain irrational!

BTW the values for religion and politics are both no-brainers, they will always be less than, or equal to, zero!

There was a lot of enthusiasm about linear programming a few decades ago, but it seems not much enthusiasm remains today. It seems to me that the non-linearities are an emergent phenomenon. To create a linear programming model of the economy, one needs to model each different way engineering approach to making each product. We have all that engineering knowledge, but nobody has had the drive to actually pull it all together in a collection of linked simple models, with inputs of some models fed from the outputs of others. The non-linear aspect emerges by virtue of modeling the start-up and shutdown of production runs in the process of adjusting supply to market demand ( with suitable time lags in the perception of changes in demand ). I'm told that, in practice, it is very hard to actually make the people on the shop floor, or in the agricultural field, perform as planned. Things happen that bollix up the performance. Equipment breaks. People call in sick. It doesn't rain when needed. It rains during harvest. Etc.

Still it seems to me, a well worked out LP model should give good limits for what is humanly possible, together with good indications of why the failures to reach the upper bound are happening. It seems to me it could be a useful management tool.

But putting it in the position of issuing commands to be executed by recalcitrant de-humanized workers is maybe not such a good idea.

LOL; it's been tried, failed miserably.

To optimize anything you must set priorities. There is much disagreement about priorities. There is much disagreement about needed goods, for that matter. Some one decided I "need" an airbag in my car. And I will soon "need" traction control. But I will not "need' a manual transmission. And there is always some group or another claiming I don't "need" a handgun, assault rifle (although they can't seem to define exactly what one is) or any weapon for that matter. Others claim I don't "need" to eat meat, and certainly not shoot Bambies (even with a bow an arrow) even where there is a great local surplus of Bambies.

Some people call this determination of my "needs" by others to be slavery, but you already have that covered in "all labor is forced according to the plan."

So, now that you have identified yourself as a slavemaster wanna-be, I can now ignore you, unless you actually succeed in becoming a threat, that is.

Somebody had to say it.

As noted by one of the responses above, I was sort of inspired by the discussion of Technocracy in the previous discussion. See also

The propsal therein:

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, which could be divided equally among all members of a North American continental Technate.

seemed too limited, since it just replaces the scalar "money" with the scalar "energy".

The "cheese slicer" was also reintroduced in the original post. This is just a graphical version of the input output model which originated with Wassily Leontief. It is even more limited that the IO models developed using money, since it only considers one factor of production. However, when you build an IO model using money, you have thrown away a lot of information about how industrial and business processes utilize inputs of multiple types to create outputs of multiple types (along with more or less toxic waste of multiple types, but which is rarely captured in a monetary IO model of the economy).

Consequently, to really model the economy, you need to do the IO matrix in actual types of materials, types of energy, qualities of labor, informational parameters that express technological advances, characterization of wastes, etc., and the nodes of the flow graph have to model the implementable processes. Which is all a lot more complex.

But even then, alas, there is the problem of human behavior.

So probably the best that can be done is something similar to the existing monetary system, with a business system that uses money both for transactions and investments, and a financial system that allocates capital and provides for taxation and the running of a fiscal policy. Along with that is a political process that regulates the economy and provides fiscal and monetary incentives to steer financial, industrial, and business policy, science and technology, and public opinion in useful ways.

Let's hope that it doesn't break down completely.

I was sort of inspired by the discussion of Technocracy in the previous discussion.

VS the last 5 years when Technocracy has been mentioned?

So probably the best that can be done is something similar to the existing monetary system

So no real change then?

with a business system that uses money both for transactions and investments

No change here.

and a financial system that allocates capital and provides for taxation and the running of a fiscal policy.

Considering the Federal Reserve is a Corporation owned by the banks and with Citizens United the banks have even greater input into the legal system - how is what you are thinking of is different mechanically than things are now?

Not much dfferent, since many countries have converged on essentially this same economic system.

However, the economic and political systems of the US are probably among the most sclerotic, since they have not been recently reformed.

Plus, there seems to be a greater tendency towards adopting atavistic or heterodox theories in economics and politics in the US. Many other countries are less wedded to past concepts, and they give less credence to off-beat theories that have been already discarded by mainstream thought based on observation, rational thinking, and critical analysis.

"In principle you could now do away with money altogether."

In principle, you could do away with jobs altogether. Every thing made by robot. People live off of the value of their labor as distributed through welfare. (For the present case, just replace "robot" with "Chinese".) What we have now is a sort of non-functioning transitional case.

For illustration only

1. Current government is replaced with entirely new government. New government does not assume prior debt, and starts from $0 on programs.

Please tell me you are talking about Greece, Portugal, Spain and Ireland and not the USA. It is not clear from your post whether or not you are making this proposal for the USA or just the other countries I mentioned in my post.

If the US were to default on all debts foreign and domestic, it would mean the end of globalization. The collapse of the world as we know it would be the result.

Ron P.

Actually, for the US, my option 2 above is a bigger concern. It is hard to take over and change a big country.

I tried to come up with a list of options in How can a government fix its debt problem?

Globalism collapsed once before for the West in the 20th Century. What it meant is that people in the UK could no longer source cheap product from the entire world, but they still went to their same churches, family holidays, stores, and concerts
albiet poorer. Admittedly in some of the other sides of the UK transactions things were much worse, but the end of globalism is not the end of the world. Having your infrastructure in place (being a rich country) helps a lot in these pivots.

There are potentially other examples such as the introduction of the Portugueuse into the Indian Ocean and others in history ending globalism......

Globalism, as it exist today, has never collapsed because it has never existed, as it exist today, before. If globalism collapsed today then every nation would have to get by on its own resources, its own oil production, its own food production and only things grown and manufactured within its own borders.

Now that may sound great but if you think about it for a moment it would mean catastrophe. Japan imports virtually all its fossil energy just as Taiwan, the Philippines and at many other nations. Virtually every nation on earth imports something vital whether it be fuel, fertilizer, food or something else.

Ron P.

I am a little less sanguine about the uniqueness of the American situation and times, especially when compared to the English Empire and what happened to globalization from banking to shipping following WWI. Globalisation can turn into regionalization and even localization (including falling off the "map" as it were). I think the Japanese were trying to deal with their energy situation based on nuclear power, including breeders and transportation electrification, alas that didn't work out as planned. Continuing with the regionalization theme beside the Philippines is a huge store of coal in Indonesia, etc.....

I am a little less sanguine about the uniqueness of the American situation and times,

san·guine –adjective
1. cheerfully optimistic, hopeful, or confident.

Good Lord, did my words sound like I was sanguine? I thought they were as doomerish as they could possibly be. And the word "American" is not to be found anywhere in the post you replied to. I was talking about the World not America.

Ron P.

Apologies for adding America. You are optimistic (in my mind) about the uniqueness/specialness of this globalisation and I am not. It will play out in the manner
of the past. You definitely cast a doomer shadow on the removal of globalism, I think this has a relatively small impact and will not be the doomer forcing function
as evidenced by history.

Right, the US can get by just fine on 5 million barrels of oil per day. Japan, South Korea, Taiwan and a few dozen other countries that produce NO oil at all can get by just fine with none. Yeah right!

Globalization, true globalization, is something new. True there has been a slight form of globalization since the first sailing ships circled the world. But never before in history have we had such interdependence of nations on each other. World fertilizer trade has enabled countries with no natural fertilizer other than animal manure to expand their agricultural output many fold. Many countries have no iron oar and even countries like China imports over 30 percent of its iron oar.

The US imports virtually all its tin, most of its bauxite or aluminum oar and virtually all its precious metals. Most of our manufacturing would shut down without global imports. And of course there is oil as I mention above.

Nothing, absolutely nothing, like the current globalization has ever existed in the past. And if it were to shut down tomorrow the economy ofevery nation on earth would collapse.

But you don’t think so. So then explain how Japan and about 40 other nations could get by with NO oil imports. And many of those nations don’t even have coal. But if you can explain all that then I am all ears.

Ron P.

The way the current America operates it will not be just fine, but then again the way America operates is not fine either. If the target is to return to the "good old days" of 2007 then we are truly doomed, and unfortunately too many people
(in the US and elsewhere) think that this is the target. I (personally) am simply not interested in the rapaciousness of the US/WTO/IMF/WB/et al model of "comparative advantage" which strips the world of all resources to feed consumerism
such that countries in Africa and Asia lose all knowledge of how to feed themselves to produce industrial agricultural products such as Palm Oil (to use in our favorite beauty products) etc...

I am aware of the differences, you'll find my engineering credentials all over the creation of this thing called the Internet, but China imports iron oare to create consumer goods that it ships to others who might not really need them, they
just want them (badly). I am arguing for planned descent and deleveraging globalisation. This will require some form of industrial policy, even if it is a return to coarse import duties on manufactured goods. We actually did this once, it
was called Sematech, and it was very successful.

Until we get beyond attempting to replicate and maintain some idealized 2007 we're simply burning time and energy, one of my favorite whipping boys is Detroit and its five point theology of AUTO-ICE: power, speed, luxurious comfort no matter
what the conditions, range, size. I sat on a board for years with GM's CTO, what unimaginable backwardness he represented. For Detroit to make electric cars they need to support the five point theology, which of course requires lithium batteries,
and of course then costs unimaginable amounts of money. I own a LEV that uses lead acid batteries invented 150 years ago, of course I don't have airconditioning, nor do I go 65mph, but It takes care of 90% of the trips I need to make.

Your NO is a false choice, it is not what I have represented, regionalization and focused localization in descent is what I am talking about. Globalisation can decrease dramatically and people will still have good lives.

I totally agree.

There isn't much about "globalism" in the present incarnation, at least, to cheer about.

I suppose it is fun to have color flat-screen TV's made possible by europium from China, or cell phones made possible by tantalum from Congo, etc., but anyone over 50 can remember when these things didn't exist, and life was good then, too.

but anyone over 50 can remember when these things didn't exist, and life was good then, too.

Of course I am over 50, 73 to be precise. And I very well remember how things were when we did not have those things. And when I was born the population of the world was one third the population today.

At least two billion people are employed producing things we did not have in 1938. And if these people did not produce all that stuff we could easily do without, they would be unemployed. They would be hungry, very hungry.

People who are always carping about how much we waste and how much we could do without never stop to think about where all that stuff comes from and who makes it. If everyone made do with much less, as they did during the Great Depression, we would have another Great Depression. Only it would be much, much worse because the world has so many more people now.

The industrial evolution has enabled our population to explode, not just because it has supplied much more food, but it has also supplied the employment that has enabled people to buy that food.

There isn't much about "globalism" in the present incarnation, at least, to cheer about.

Globalization is basically world trade. Globalization is oil and coal imported by Japan and many other countries. Globalization is the haves of the world supplying energy, fertilizer and food to the have nots of the world. Globalization feeds about half the world's people and provides the means to feed the other half, there is not much to cheer about.

Ron P.

I think that "globalization" in its present incarnation, at least, is a very powerful way for the "haves" to strip even more from the "have nots".

A good argument can be made that industrial agriculture has impoverished and miserified many billions who used to be self-sufficient, and that the global "misery index" has increased, rather than decreased through industrialization and globalization. The fact that previously self-sufficient Chinese peasants can make a few dollars by manufacturing Mardi Gras beads does not mean they are better off for it.

Of course, I have never been either a Chinese peasant or a producer of Mardi Gras beads, so I really don't have a dog in this fight -- but I'm just saying.

In any case, evolution proceeds without any conscious direction (so far as we know), and the evolution of peasant economies to industrial economies will continue, and the results will be unpredictable. Neither the American military nor the IMF control the future, George Orwell notwithstanding (“he who controls the past controls the future, and he who controls the present controls the past”)

I think that "globalization" in its present incarnation, at least, is a very powerful way for the "haves" to strip even more from the "have nots".

I have no doubt that "you think that", but the opposite is the case. Of course there are horrific cases of plunder, especially in Africa. But by and large globalization have enabled the "have nots" to more than triple their population since 1950:


It was the globalization of the green revolution that enabled this to happen. This chart goes out 2050 and everything beyond 2010 is, of course, an estimate. I think the chart will turn down starting in about ten years. World Population Growth, 1950–2050

And as for China, good lord man, are you serious? Have you any idea what China was like before WW2. Anyway check out this PDF file: Rural Poverty Reduction in China and India. Check the chart 2 on page 7. And that only goes back to 1978. If I had one that goes back to 1950 I am sure it would shock you. Every Chinese is way better off today than at any time in history. And it is largely because of globalization.

Ron P.

Yes, industrialization and "the green revolution" have allowed populations to blossom in many areas of the world.

Increased population is not the same as increased happiness, however.

"China" is a big place, with a long history.

I try to be careful about generalizations, but I suspect there may be far more unhappy people there now than at many times in the past-- if only because there are so many more people.

On a percentage basis there are probably fewer unhappy people now.

For the last few thousand years China has been at the Malthusian limit except for short periods following plagues, famines, and wars.

Increased population is not the same as increased happiness, however....

I suspect there may be far more unhappy people there now than at many times in the past-- if only because there are so many more people.

Never, there was a reason that the population of undeveloped countries did not grow very fast before 1950. They had very little resources, very little food. There is a very good reason their population boomed after 1950, after the green revolution. They had a lot more food to eat so their population just naturally boomed.

But if you think very hungry people were a lot happier than people with a full stomach then... Well I guess everyone is entitled to believe what they desire to believe.

The Good Old Days-They Were Terrible

Wouldn't it be nice to have lived in a time when you didn't have to worry about global warming, bullying, airport searches, gas prices, acid rain, PCBs, the obesity epidemic or high cholesterol?

In fact, if you lived from the end of the 1800s to the early 1900s, such concerns would have been furthest from your mind. You'd have far greater concerns because the "good old days" of the so-called Gilded Age and the Gay Nineties, were good for the privileged class but meant severe hardships for most.

And it would have been far worse if you had lived in rural China. Those were the days when farmers often sold their daughters because they could not feed them.

Ron P.

Well, it is really silly to assert that "very hungry people were a lot happier than people with a full stomach..." and I did no such thing.

But you know as well as I do that the "green revolution" is based on "fossil" fuel and "fossil" water and will come to an end.

Furthermore, it is beyond specious to try to compare the "happiness", or lack thereof, of a 17th century Chinese peasant with a 21st century Chinese slum dweller.

I have read credible accounts that the percent of unhappy people is higher now than it was a specific times and places in the past -- but that too, seems like specious speculation.

The real question is-- if we care, that is-- how can we pull together to make life happier for as many human beings as possible without destroying our environment.

I don't have the answer, but I am quite certain that whatever it is, it is not in continuing BAU, and quite likely, not in further extension of industrial globalization and financialization.

But you know as well as I do that the "green revolution" is based on "fossil" fuel and "fossil" water and will come to an end.

Of course it will come to an end. That has been my whole point for years. And when it does those poor Chinese, those left alive, will likely be just as hungry and miserable as they were a century ago.

Furthermore, it is beyond specious to try to compare the "happiness", or lack thereof, of a 17th century Chinese peasant with a 21st century Chinese slum dweller.

Who brought up the 17th century? We are talking about the early 20th century. But as I post in a link below we do have history, and that history does go back to the 17th century. All we must do is read history for goodness sake. That can give you a pretty good indication for how happy people were. (See my link below.)

I have read credible accounts that the percent of unhappy people is higher now than it was a specific times and places in the past -

Now I would just love to read that credible account. Got a link? Have you noticed that I almost always post links that prove my positions while you post none? You have opinions that, I think, are no more than that. You really believe that back in the "Good Old Days" people were generally much happier than they are today. Nonsense, they were, far more often than not, flipping miserable, just like the residents of Sennely.

After the Black Death: A Social History of Early Modern Europe (Interdisciplinary Studies in History)

Sennely is a typical self-sufficient village near the French City of Orleans. It consists of subsistence farmers whose needs are supplied locally: rye grain for bread, cattle, pigs, apples, pears, plums, chestnuts, garden vegetables, fish in the ponds, and bees for honey and wax.

Population and resources are more-or-less in balance because of the poor health of the residents: they tended to be stunted, bent over, and of a yellowish complexion. By the time children were ten or twelve, they assumed the generally unpleasant appearance of their elders: they moved slowly, had poor teeth, and distended bellies. Girls reached the age of 18 before first ministration.

Malnutrition was the norm. One third of the babies died in the first year and only one third reached adulthood. Most couples had only one or two children before their marriage was broken by the death of one parent. 'Yet, for all that, Sennely was not badly off when compared to other villages.'
George Huppert, “After the Black Death” [p. 3]

You can click on "Look inside" and read the first six pages of the text. It is a real shocker for those who think that in those days and times people were, in general, much happier than people are today. Imagine just how happy the residents of Sennely must have been.

Ron P.

Well, I can play the sophist game as well as you. My personal opinion is admittedly of no value, but how about the Guardian. Is that better?
The Guardian

Recording the past can be a tricky business for historians. Prophesying the future is even more hazardous. In 1901, shortly before the death of Queen Victoria, the radical writer William Digby looked back to the 1876 Madras famine and confidently asserted: "When the part played by the British Empire in the 19th century is regarded by the historian 50 years hence, the unnecessary deaths of millions of Indians would be its principal and most notorious monument." Who now remembers the Madrasis?
In Late Victorian Holocausts, Mike Davis charts the unprecedented human suffering caused by a series of extreme climactic conditions in the final quarter of the 19th century. Drought and monsoons afflicted much of China, southern Africa, Brazil, Egypt and India. The death tolls were staggering: around 12m Chinese and over 6m Indians in 1876-1878 alone. The chief culprit, according to Davis, was not the weather, but European empires, with Japan and the US. Their imposition of free-market economics on the colonial world was tantamount to a "cultural genocide".

Different places have had different histories, different resources and different economies-- and one can always cherry-pick to prove a point. I said the "17th century" to get away from modern colonialist and industrial incursions into the discussion.

In an agrarian society based on patrinomial kinship groups, women had few rights.

Men also were fettered by numerous responsibilities to their ancestors, parents, kin, landlords, etc.

And now we are fettered by obligations to the banks and the government.

Ancestors and kin relationships are so passe'.

But I suspect that will all come back, because that is really the primordial economy. The money economy and "liberal" thought depends on a lot of cheap energy.

Ancestors and kin relationships can be very onerous. A common arrangement is for a woman to leave her own kin group and live with her husbands. She has no status within here new kin group until she has born an heir, in which case she now has status as the mother of her son.

That sort of sounds like the modern soccer mom.

I was told that the usual greeting in China, somewhat equivalent to, "How are you?" is "Have you eaten?" This is a holdover from the time when people often didn't have food. Now I have been told it is most commonly used as a greeting around meal times.

And if these people did not produce all that stuff we could easily do without, they would be unemployed. They would be hungry, very hungry.

Right - because Human beings are SO rigid in their habits and place in the world that they would not take the time or effort to grow their own food.

Or find some other thing to do.

But again, if 'the hungry' is the worry - The lack of potable water and the limits of Phosphorous are hard limits that no amount of jobs making cheese doodles are gonna fix. Some kind of neigh-infinte energy source that can extract both from sea water would be a fix - but then what's the plan for population reduction? The other horseman who ride with Death - War and Pollution (pollution got pestilence's job) are still gonna have a job.

Only it would be much, much worse because the world has so many more people now.

Thus showing that Malthus was right.

Population reduction is gonna happen, its happening already with 1/7th of the world being hungry on a daily basis. And when people in places with a history of hunger - Ethiopia - are willing to grow food to send it to Saudi Arabia for money .... how seriously should outsiders worry about people who'd send their soil fertility out of their home for 30 pieces of silver?

It is pretty hard to make things like computers and today's automobiles and cell phones without imports.

The imports are "more economical" to obtain outside the borders.

Water is 'the universal solvent' and the Sea has a whole lotta dissolved minerals in it.

Any nation-state with access to the Sea would be limited to mineral access via how badly it wanted to extract from the Sea.

Alas, with overfishing, the Sea isn't gonna be the source of food it once was :-( And now humanity has parts of the Sea filled with toxins from industrial discharge the animals should not be eaten. (*coff* Fukishima *coff*)

If the US were to default on all debts foreign and domestic,


it would mean the end of globalization.

Non effect.

Globalization started long ago. In fact, Global trade has been in effect for longer than the US of A has existed.

But somehow the US of A going *poof* will cause the end of globalization?

Pull the other one, it plays the Star Spangled Banner.

The collapse of the world as we know it would be the result.

You say that like it would be a bad thing.

The World as We know it is ending. The World built out on under priced oil has ended - now its only a matter of waiting for the effects to ripple up and down that supply chain.

Would tariffs have anything to do with past globalization?
That's what it's about isn't it, free trade.
Tit for tat tariff imposition would be a site to see, maybe we will soon.
It will be the first step towards war I suspect, for many countries will find themselves in a flight of fight situation.

Would tariffs have anything to do with past globalization?

Some tariffs upset the property holding class and that helped push the separation from England by what became the United States.

But I was thinking of the sea faring wooden ships that prove globalization started a long time ago. And that fact shows the "end of global trade" is not supported by history.

many countries will find themselves in a flight of fight situation.

Nations or leaders who believe that by being a "war leader" they will keep the population following 'the war leader'?

I wrote: The collapse of the world as we know it would be the result. (of the end of globalization)

Eric replied:

You say that like it would be a bad thing.

Well yes, but only if you think about six billion people starving to death is a bad thing. Wait, many of them would not starve, they would be killed in the fight over scraps. Most of the children would just starve however.

Yes, I think that is a bad thing. What about you?

Ron P.

Those 6 billion are going to die anyway -- we all are. What a stupid truism, you say.

The question really is, what are the conditions of their (our) deaths going to be, and are they (we) going to be replaced by another 6 billion or more? People, just like yeast, will expand to fill their container and consume all their resources.

Pretty obviously, in some places, the death conditions will be horrific, and in other places, we will continue to pretend there is no problem. Just like now.

Reducing the human population of the world need not be catastrophic, even to the humans -- and for the world as a whole, it is not likely to be noticed.

Reducing the human population of the world need not be catastrophic, even to the humans -- and for the world as a whole, it is not likely to be noticed.

Of course it need not be catastrophic, as long as it is reduced from 7 billion to less than 1 billion over a period of at least 200 years. If it is reduced to that amount in less than 50 years then we are talking catastrophe pure and simple.

Of course everyone is going to die but how and at what age is a very important distinction that separates BAU from catastrophe. If there is famine, the very old and very young will go first. It is the starving of the very young that makes it a catastrophe. And of course, another mark of catastrophe is the fact that many young and strong men and women will die fighting over scraps of food.

Don't try to sugar coat the die-off Never, it will be catastrophic.

Ron P.

I hope I don't come across as "sugar coating" or worse, uncaring. But you know very well, Ron, that "catastrophes" generally last about 1-30 days in the news cycle.

"Catastrophic" die-off in the Gulf due to the "oil spill" is now a completely forgotten matter, except maybe on TOD. If 100,000,000 babies and old folks die in India in a mass starvation, we most likely will only be dimly aware of it, and certainly won't be affected by it -- in fact, it might improve our (American) lifestyles.

I'll take catastrophe over anything humane any day. Humane population control leads to Idiocracy. Catastrophe kills indiscriminately. Then again, life IS suffering... maybe being humane does have merit...

Well yes, but only if you think about six billion people starving to death is a bad thing.

What would Malthus say on the subject?

Yes, I think that is a bad thing.

There are already 1+ billion who wake up hungry and go to bed hungry across the world.

What about you?

Are you trying to stake out that you are somehow more moral than others?

Think you're really righteous? Think you're pure in heart?
Well, I know I'm a million times as humble as thou art

Are you trying to stake out that you are somehow more moral than others?

Morality has nothing to do with it. But yes I think starving children is a bad thing, a very bad thing and it makes me sad. Whether I am moral or immoral has nothing to do with it. And don't bring "others" into the debate. By lumping all "others" on your side you are saying that "others" do not think starving children is a bad thing. If indeed that is what you think. You need to clear that point up. But you should let "others" speak for themselves.

Ron P.

In re. point 1:

The debt in question is properly called sovereign debt, not government debt. So it is the sovereign who needs to be replaced. If the sovereign were a king, and the preponderance of other sovereigns were also kings. then the sitting king would have to be replace by a usurper. In an orderly succession, the new ruler would be expected to honor the debts of his predecessor. For a usurper, there is the option of repudiation, followed by a resort to force, if the other kings choose to use force.

But in a democracy, the people are sovereign. Or, at least that is the story told to the people. Having the people be both sovereign and usurper doesn't make for a plausible story line.

To some extent, when I am talking about governmental debt, I am talking about all levels of government--municipalities, and states, as well as federal government. In that context, I don't think it is really sovereign debt--although part of it is.

Ron - You've got the numbers so give this a shot please: Let's say in theory, at least, we can inflate away that $2.25 million per TPH debt. But we wouldn't be inflating away the interest payments on that comes out of the govt revenue stream every year (i.e. our taxes). So how much is each TPH paying in interest every year. And assuming some inflation rate of X% eliminates that debt in Y years: how much interest we each TPH pay during that period? I suspect if it's anything like a typical credit card amortization each TPH might pay more in interest over time than the actual debt amount itself. And, if so, the TPH can't do that either so the govt will have to keep borrowing the interest payments for us. Does that make sense?

But we wouldn't be inflating away the interest payments on that debt...

No Rockman, it don't work like that. The interest on the debt is, and still would be, what the current US debt interest rate is. Currently that is about 4 percent on a 30 year bond and about 3 percent on the 10 year note. Shorter notes and bills have an even lower interest rate.

If we had such inflation that the current dollar would be worth 10 cents in five years, then the interest rate would still be 4 percent on all 30 year bonds and 3 percent paid on all 10 year notes. Of course all new debt would likely have a higher interest rate but the current heavy debt burden would be relieved by 90 percent due to inflation.

The value of the interest diminishes with inflation right along with the value of the principal of the current debt. All new debt of course would be in nominal dollars with a likely higher interest rate because interest rates are always higher when inflation is high.

Ron P.

That works if the borrower has scheduled debt so that it matures when the borrower has expected income with which to pay off the debt.

One of the issues recently is that borrowers have not been matching their maturities with their ability to retire debt. Instead, they have too often succumbed to the temptation to make money like a bank does, i.e. borrow short and lend/invest long.

If Greece (or the US for that matter) had debt expiring in even amounts over 30 years, their would not be so much of a problem.

However, when a government has large chunks of short term debt to roll over every couple of years, then speculators can create runs against the debt that drive up interest rates. This impairs the fiscal situation of the government, resulting in a downgrade. This drives up interest rates still more, etc, etc. This is what was done wrt the investment banks in the US and Britian in the financial crisis, and it worked so well that it is being tried against smaller, shakier European countries.

While the US is not yet vulnerable, it does have a lot of short term debt outstanding. Since short term rates were really low under Greenspan, Treasury stopped 30 year bonds and went pretty short. I think average maturity of US debt is about 7 years.

The US' need to roll over short term debt is a constraint on using high rates of inflation to cure the debt problem.

Merrill, of course higher inflation causes higher interest rates so rolling short term bills and notes would cost more. But high inflation still greatly lessens the debt even if the interest rate doubles or even triples. Interest on the One Year Note is currently less than two tents of one percent! You can roll a long time at that rate. And you are still rolling notes of diminished value due to inflation.

And as for longer term bills and bonds, you must look at it from the view of the lender, not the borrower. Once the government sells a 30 year bond it doesn't care what happens to it after that. It must redeem it in 30 years and not before. If interest rates skyrocket then the bond will shrink in resale value. The bondholder could easily find his $1000 bond selling for $500 or less. But the lender, that is the government, does not suffer because the resale market discounts that particular bond or bill.

Ron P.

What if the US simply prints cash to roll-over problematic debt? Having debt denominated in your own currently should allow you to inflate directly, rather than borrow?

You start you email with a statement about the share of government obligations per taxpaying household: "2,250,000 per taxpaying household"

The points you make about the process of decline are all quite believable. But there is another point: the number of taxpaying households will surely decline very rapidly as more people lose their jobs. And there is no prospect of the debt declining proportionately. So, if $2.25 million is shocking, the future value of this static will be utterly dumbfounding.

Interesting points Ron remind me much of the situation in Germany after the first world war. The reparation payments demanded by the allies saddled them with a debt repayment problem that was crippling the economy. The solution was inflation after the French invaded the Saar land in 1923, literally, emasculating there ability to pay. Seems rather ironic that Greece and Ireland are in the same position as Germany was 90 years ago and Germany is playing the role of France. Debt forgiveness might be the way forward either that or runaway inflation which is virtually the same thing.

Debt forgiveness might be the way forward

If one looks at Religion as a way to codify good advice as a tradition, various Religions warn about Interest and offer up debt Jubilees.

The debt part of the growth economy is gonna be reputed once the growth economy stops.

Given the accepted growth economy model is fueled by cheap energy - unless some other energy source shows up as under priced as oil was - the growth model is toast.

since there will be no default

Gentleman of the Jury:

Unless Mr. Darwinian has a time machine which he's seen the future and decided to come back here to testify - the above statement is nothing more than a guess.

Nations have defaulted in the past. In fact, the government of the land mass of the United States has defaulted on obligations many times in the past. The Money known as the Continental. Confederate Notes. If one believes that Silver and Gold are money, the Government of the United States defaulted years ago.

In fact, the "united states" is on its 3rd government from 1776:
The Articles of Confederation.
The Constitution.
The time when the Constitution was not in effect due to the War between the states.

Of course it is just a guess Eric, but it is a near lead pipe cinch that the government will not default. To default would mean the end of the United States as we know it. If the government were to default on debts, foreign and domestic, it would most definitely cause the collapse of the government and no government in history has voluntarily collapsed.

I was not trying to use a crystal ball or time machine Eric, I was only trying to use common sense.

Ron P.

To default would mean the end of the United States as we know it.

Should it continue as we know it?

no government in history has voluntarily collapsed.

That's bull. In fact the Nation formed under a document known as The Constitution was under a document known as The Articles of Confederation - and that collapse is tied to the fate of the money known as The Continental.

I was only trying to use common sense.

Common Sense goes with History.

History says all things Man make fail. Including Government.

And, These "United States" you speak of - Does this follow the rule of its own laws?

Does a government have its legitimacy from the Rule of Law or as Mao would say from the barrel of a gun?

Depends on what default means.

If it means repudiate all US debt, I am completely in agreement with Darwinian.

If it means miss a fews days of payments, default is possible if unlikely.

Yup, the inflation/deflation thing isn't going to work the way some people think. I think we'll get more of the same thing we're getting now. The Fed will have to create more dollars to "inflate" away the enormous debt, but this will only continue to raise the price of things like oil, gold, food. We will not get "true" inflation, that is, inflation supported by rising wages. Right now, for the first time in something like thirty years, there isn't a strike happening anywhere in the U.S. Labor has been thoroughly run to ground. People who work for their salaries have absolutely zero bargaining power and this, I'm afraid, is now a permanent feature of the post peak economy. So, we're going to see deflation in the value of "work", deflation in the value of assets such as homes, stocks, cash savings. This, plus continued defaults, will continue to support "flight to safety assets" such as U.S. Treasuries for the time being.
Next, look for the U.S. government to require that a portion of savings be put into Treasuries; savers will be required to lend their earnings to Uncle Sam.

Money in circulation can be considered cash plus credit. If you use this definition of money, inflation means money (cash + credit) is added to the economy at a rate higher than the economy is growing. Deflation is the opposite, there's less and less cash and credit (debt) compared to the economy.

If debt is declining, you would have to inject cash at a higher rate than the debt is declining to have inflation. Throw money out of helicopters?

At the moment, there's way more debt than cash in the world, so declining debt is inherently deflationary. Money disappears into thin air whenever it's defaulted or paid off.

So it's very difficult to create inflation whenever there's a lot of debt being (or about to be) defaulted, at least within our current monetary system where money is lent into existence. It would be much easier to create inflation after a significant portion of debt has disappeared.

I'm not sure how Robert Mugabe is creating hyperinflation in Zimbabwe. He's probably just printing money and giving it to government employees or friends and relatives. I'm sure he's not lending it into existence.

I still maintain that governments could (and should) ensure that the nominal value of the medium of exchange increases even as the real economy contracts due to resource constraints. If the medium of exchange is debt based then this implies that debt continues to increase even as energy inputs peak.

I agree that in the, as seems likely, absence of rational government policy, debt is likely to peak with energy and the economy will go down the pan...

Anyway, I loved the first reason for savings to decline in the partial offset section. I expect that this is true but it is difficult to reproduce this behaviour in a first principles based economic model. Models of this sort usually assume that agents equate marginal utility across time periods, and so if lower consumption is expected in future then resources will be saved for the future. I need to come up with a microfounded model that reproduces this behaviour for my economics PhD!

Decomerf, you talk like an economist. ;-) By "medium of exchange" I assume you mean "money". If that be the case then your opening statement is clearly false. There is no way that the government can ensure the nominal value of money. Sure there are steps that they can take to try to decrease inflation but they don't always work and they always have side effects, usually adverse side effects.

Your next statement: "If the medium of exchange is debt based then this implies that debt continues to increase even as energy inputs peak."

Huh? I don't see this implication at all? If the medium of exchange is debt based then as energy inputs peak... and decline... less work is done. Less work means less economic activity. Economic activity is based on debt so there will clearly be less debt.

Ron P.

Axiom: Governments can control size of total issue of medium of exchange.

Theorem: The size of total issue of medium of exchange can grow even if real economy declines.

Proof: Since governments can control the size of total issue of medium of exchange (by assumption) then they can ensure it grows even as the real economy declines. QED

So the implication is really a theorem, whether you see it or not. Obviously it relies on the assumption that I stated, and which you think is clearly false. I don't think it is clearly false, though it is perhaps not clearly true either. I think it probably is true in principle, though you might need some institutional change to make it true in practice (see early comments on fractional reserve banking not being necessary for fiat currency).

"you talk like an economist" Why thank you! I really hope the university department agree once I've completed the PhD!

I think it probably is true in principle, though you might need some institutional change to make it true in practice (see early comments on fractional reserve banking not being necessary for fiat currency).

Yes, I am sure it is true in principle, just not true in fact. That's what I meant. I know of no major government that has ever been able to control inflation though many have tried. And I seriously doubt that I, or anyone else, ever will. We can create situations in our minds, and on paper, that never work that way in real life. So I must restate that governments cannot maintain the nominal value of the currency though you can show me on paper how they can.

You never addressed my second point. "If the medium of exchange is debt based then as energy inputs peak... and decline... less work is done. Less work means less economic activity. Economic activity is based on debt so there will clearly be less debt."

Yes, I knew from your post that you were an economist. I feel sure you will make a good one. But if things get really bad a lot of people will be throwing rocks at economists. ;-) Of course it will not be the fault of economists but you know how some people like to throw stones. They will have to blame someone and that someone will be politicians and economists.

Ron P.

I did address your second point. Indeed I proved it wasn't true, conditional on governments doing what they should be doing at the moment: as Gail alludes in her reply to your first post, governments should be so expansionary that they cause salary inflation. In these circumstances debt could grow even as real economic activity necessarily declines.

"If the medium of exchange is debt based then as energy inputs peak... and decline... less work is done. Less work means less economic activity. Economic activity is based on debt so there will clearly be less debt."
This is true if debt obligations are in constant dollars. But they're not. If you have a mortgage for $100,000 then you haven't promised to repay the bank with whatever $100,000 purchases now. All you've promised to do is to give them a piece of paper that has $100,000 written on it. The government should be ensuring you have such a piece of paper by making sure this piece of paper represents very little in the way of real resources.

I suspect that $100000 will still maintain it's value relative to one's paycheck even if it does indeed represent a diminishing amount of real resources.

The Federal Reserve taming inflation during the early Reagan years. Agreed with Reagan on that one.

Query: does "issue of medium of exchange" include creation of fiat money be bank loans? It seems to me that the only real control the central government has is on the amount of physical money, that is e.g., dollar bills, tens, twenties, fifties and hundreds (oh, and don't forget Jeffersons). However, it is the 'money' we have in the bank... the ledger sheet stuff... that concerns me. The Fed inflates money by loaning it out. After a few trips into circulation, the volume has increased greatly. Since the Fed controls the money supply, and is in turn owned by the banks, it seems to me that your theory is false because the Axiom is false. Any argument based on a false assumption is logically invalid. Not that the conclusion is necessarily false, but that it is not necessarily true.

For instance, if my axiom is that all animals w/3 legs are dogs (because, of course, my dog has 3 legs), then seeing a 3-legged amimal, I say, "That is a dog."

Now, it may be true. That could be Fred's dog, which as everyone knows has 3 legs. Or it could by Ron's 3-legged cat.

And, this my friend, is what is wrong with legacy economics. It is largely based on false pemises. Of course, also uses mathematical applications designed for other disciplines (where they are valid), but that does not change the fact. What you assume directs your patterns of thought. In economics, the axioms are virtually a religion, held without proof and asserted loudly and incessantly by persons who are granted "Nobel" awards for creating invalid statistical models incapable of and having no predictive value.


I think you're mainly sneering at that which you know little of, but there is a grain of truth. But don't kid yourself that there is a unified economics viewpoint that is completely false. For instance, I think you've described the Chicago school fairly well here - but that's just my prejudices coming through.

Anyway, I don't believe my axiom was false and I definitely do believe that the Fed (and more urgently the ECB) could expand the money supply in such a way as to create salary inflation even in the face of declining energy inputs to the economy. This would have the effect are removing some of the debt caused balance sheet constraints on the economy and increase economic output because at the moment it's not just that we have less energy inputs, but also that we are allowing labour to sit idle.

Such apolicy would mitigate the problems that Gail is describing in the main article.

Actually, my point of reference is the Chicago School and the Austrian School on which it is based. Most economic models I have seen are developed to try to show why what has happened occurred. Not predictive, but exculpative.

There is much to be said for studies of velocity of money and its impact on inflation, together with the relationship between interest rates and velocity. All very nice theoretical applications.

In the past we have dealt with individual nations in an world economy, and with many currencies, largely being arbitraged by speculators. In the 'standard' model (BAU if you will), a nation can inflate its currency - since it is relative to others. What happens to the world economy when most nations try to do the same thing, at the same time?

Just as a reminder, hyper inflation in Germany took place with a backdrop of deflationary depression in the United States. Today, every time we see the 'value of the dollar' discussed, it is always as related to another currency. Some times we want that value to drop, and some times to rise. But, always as it relates to those other currencies. Is that possible with the entire world's economy impacted?

Final question: The Fed can create an abundance of money. How does it direct that money into wages? It seems to me that wages are a product of availability of labor to demand for that labor. If the inflation does not drive demand, how are wages affected? More to the point, if price inflation from higher energy costs is the driver, and economies are in depression, won't those prices excaberate the situation, further reducing demand, forcing massive industry drawdown and RIFs, and otherwise making labor less expensive? Hence, won't we see inflation in commodities and deflation in wages? With concomitant deflation in housing, rent, and recreational/discretionary spending?

Some times when I read one of Gail's posts, I get really depressed. Especially when I think through all of the nuances and intracicies.


Great points. You question on how the Fed directs money into wages I believe can't be answered, outside of say the Financial Industry itself. Since you have brought up the old German situation, and in line with some
of the earlier postings, inflating wages as so far discussed is idealized. Wage inflation (or income) was uneven, and went like this:

(a) rentiers got killed throughout
(b) union labor in various "industries" stayed above water until the end when they finally got killed
(c) pensioners got killed
(d) government employees got killed
(e) farmers did exceptionally well
(f) traders/speculators did well until forced out of the country (if they were currency speculators)

Some context here was that Germany exported energy (coal), and had a consumerism boom as he money was worth less and less (might as well buy more beer tonight!)

The whole range of issues under discussion would benefit from separating broad terms such as debt into internal and international components. Your point relating price inflation to higher energy costs has completely different answers depending on whether this money is paid to American producers or goes overseas to exporters. Money paid to American Producers may be part of inflation but much of the benefit will remain inside the country and some will go to American workers. None of this is true for imports, it represents net loss with inflation attached.

This is not an esoteric point, as world oil prices rise, net exports drop and our share moves toward none, we may soon be using only domestic and Canadian Oil.

... we may soon be using only domestic and Canadian Oil.

Or none!



In support of what I think is your position. The government does control the money supply, and can extend its control wherever its current powers prove to be lacking:

1. Money is paper money and coinage, and demand account balances in anything the government has designated as a bank. Without government authorization an institution or individual cannot participate in the demand account clearing process.

2. The government also demands payment of taxes in the form of legal-tender money. This guarantees that legal tender will always be in demand at some level of valuation.

3. The government can and in some countries does, regulate the import and export of money.

Admittedly, government has often screwed up badly in the exercise of these powers. But I read you as claiming that the government *has* these powers. I think this is true.

I think one of our problems is that we have accustomed ourselves to getting back more than we pay in. Even if we inflate away today's debt, we won't solve our problem, because then we will need to pay a higher interest rate in the future--if we can continue to borrow. Besides inflating away our debt, we will need to live within our income, when that income may well be declining.

Just a guess -- but I'll bet that the vast majority of people who comment in this forum could easily live far below their current income and level of consumption.

I do not believe it would be the "end of America" or "end of the world" or "end of globalism" or any of the doomer scenarios that are written about if 50% of the current debt were arbitrarily declared noncollectable.

Obviously, there would be severe, and probably lasting dislocations -- but it wouldn't be the end of the world.

*clap* *clap*


Plenty of people would be hurt - but at the end of the day it's only money. Yet - taking that hit is hard for the fish trying to understand the water that is all around them.

In the summer of 2000, I asked a group of 100 people at a conference of spiritually committed people who would push a red button if it would immediately stop all narcotics trafficking in their neighborhood, city, state and country. Out of 100 people, 99 said they would not push such red button. When surveyed, they said they did not want their mutual funds to go down if the U.S. financial system suddenly stopped attracting an estimated $500 billion-$1 trillion a year in global money laundering. They did not want their government checks jeopardized or their taxes raised because of resulting problems financing the federal government deficit.

We can live pretty well on rice and beans and a few bits of meat.

Modern houses are nice, but 20 people could easily live in the rather modest place my wife and I inhabit.

I don't see any "end" in sight except the obvious end of my own personal life.

Thanks for your support, EB.

Posts about barrels of oil devolve into 'they are liars' 'technofixes can save us' and other things that eventually tie back to physical things. Provable in some way or even somewhat repeatable things.

"Economic" posts go downhill in the same way the 'this religion is better than that religion' go downhill. Austrians think the Kenyansians are deluded fools, the gold bugs VS the Fed supporters, et la. has years of reading material - most of it conflicts with other documents on the same site. Woe be any thread try to argue "human nature".

At the end of the day - the Earth is a finite hunk of rock in space at the bottom of a gravity well - and any growth economy model is doomed to fail because of the nature of Earth. It would be wise to spend time trying to figure out what model is gonna do better than the present feed the interest-obtaining/rent seeking/whatever other parasite classes. I'm not remembering anyone in part 1 or part 2 claiming the present system should be saved because it is the most flawless system ever. Most of the 'save the system' argument is 'the end will be painful' - face it ... there will an end to it.

And collapse has happened to Humanity before. Its gonna happen again. Why spend so much emotional energy denying that collapse can't happen THIS time when History says it will. If its not oil, it would be one of the many other Malthusian limits. Or an external one like virus/big volcano/big asteroid or perhaps a nice big war. Try to figure out what can be done to make the post collapse better, or at least try to pick a new way to fail a little less painfully next time.

Yes, I don't think it is too useful to spend a lot of time planning on how to make the collapse more comfortable. ("The best-laid schemes 'o mice and men gang aft agley")

To A Mouse, On Turning Her Up In Her Nest With The Plough


Wee, sleekit, cow'rin, tim'rous beastie,
O, what a panic's in thy breastie!
Thou need na start awa sae hasty,
Wi' bickering brattle!
I wad be laith to rin an' chase thee,
Wi' murd'ring pattle!

I'm truly sorry man's dominion,
Has broken nature's social union,
An' justifies that ill opinion,
Which makes thee startle
At me, thy poor, earth-born companion,
An' fellow-mortal!

I doubt na, whiles, but thou may thieve;
What then? poor beastie, thou maun live!
A daimen icker in a thrave
'S a sma' request;
I'll get a blessin wi' the lave,
An' never miss't!

Thy wee bit housie, too, in ruin!
It's silly wa's the win's are strewin!
An' naething, now, to big a new ane,
O' foggage green!
An' bleak December's winds ensuin,
Baith snell an' keen!

Thou saw the fields laid bare an' waste,
An' weary winter comin fast,
An' cozie here, beneath the blast,
Thou thought to dwell-
Till crash! the cruel coulter past
Out thro' thy cell.

That wee bit heap o' leaves an' stibble,
Has cost thee mony a weary nibble!
Now thou's turn'd out, for a' thy trouble,
But house or hald,
To thole the winter's sleety dribble,
An' cranreuch cauld!

But, Mousie, thou art no thy lane,
In proving foresight may be vain;
The best-laid schemes o' mice an 'men
Gang aft agley,
An'lea'e us nought but grief an' pain,
For promis'd joy!

Still thou art blest, compar'd wi' me
The present only toucheth thee:
But, Och! I backward cast my e'e.
On prospects drear!
An' forward, tho' I canna see,
I guess an' fear!

But it is fun, and personally useful in sorting out my own thoughts on the subject.

Agreed, finding that better way is a goal of many, once you adopt a decline/descent or doomer mindset. I spend a bit of time in Swaziland and southern Africa and read a lot of history books (many not written by Americans)
for some context. Swaziland is the only 3rd world country with a declining population, and dependent on the largess of the EU, US, UN - in that process it has forgotten how to feed itself. It is a scary place. Scarier as the 1st world dollars recede
as the largess evaporates in those 1st world places.

But I think of my US neighbors, professionals and not, and they would have no idea how to grow food, provision for water, or take care of sewage very well either. They are dependent on a small cadre of people with dirty
boots who are running a fairly sophisticated infrastructure with a whole bunch of interesting dependencies. Grid down, or an 8/24 hour grid as in Pakistan would not only wreck their current lives, but cause them to
either abandon their place or die.

One physician (who grew up on a farm, and a Major in the Army) came to me last year with his particular "what if" combination, his son takes necessary and very expensive refrigerated medications, I asked him if he had backup power, sure he said, and
he showed me his generator which he had for 10 years, never started, and he had 1 gallon of gas. I still haven't talk him into starting his generator. His pool I explained was a great source of hydration with a bit of filtering
(he hadn't considered that), etc.... Aside from giving him a moderate intensity book, what I impressed upon him was to learn how to garden and to teach his children how to do it as well.

I think this is how we make it better, teaching the young people not to be totally dependent on big {business,government,whatever} and having some skills to take care of themselves that don't require
college certification (and debt).

His family is my 10th convert to extensive raised bed gardening, a tiny building block for descent.

Out of 100 people, 99 said they would not push such red button. When surveyed, they said they did not want their mutual funds to go down if the U.S. financial system suddenly stopped attracting an estimated $500 billion-$1 trillion a year in global money laundering.

I didn't realise 99 out of 100 spiritual people had mutual funds which they know attract $500 billion in money laundering. Do spirituality conferences come with obscure financial facts and mutual fund options?

Methinks someone is fibbing about their "survey".

Methinks someone is fibbing about their "survey".

Why not do some reading.

And, once you have, do explain why Richard Grasso is in a picture meeting the FARC.

I still maintain that governments could (and should) ensure that the nominal value of the medium of exchange increases

Then most nation-states are not valid governments as they are printing more money, thus making the money less valuable via inflation.

Now that it is established Governments are invalid - what is your position on their replacements and how that replacing will be done?

Just wondering where a vendor of solar panels, windmills or energy efficient light bulbs would sit on your Sankey Diagram?

Clearly their wares are being 'consumed' but also the money spent is being 'invested' on energy generation...

Maybe what this diagram points to is the possibility that the 'Consumer Of Tomorrow' will be much more efficiency and energy aware and less bothered about things that -in 2030- seem transitory or overly lavish, like $1000 handbags.


Don't solar panels, windmills and lightbulbs require plastics and exotics in their manufacture? And, transportation of materials for production and for distribution?

As EROEI nears 1, production must increase. And, yet, when it reaches 1, it must stop! The end will, therefore, be brutally sudden!


EROI of solar panels are not that bad. On the very best site the can run at 15. However, in northern latitude is much less than that (EROI<5). And, some argues that is even much lower. Nevertheless, EROI is improving. In 10 years, EROI might be in better shape. Nevertheless, getting the exotic stuff to make them might be a bottleneck unless we go organics, but this is not a battle won yet.

The issue is not EROI so much, as how long the system that uses the solar panels can work. If they are just part of the grid, they last no longer than the grid does. If they can be put to use elsewhere, it depends on how long that system lasts.

A better use for solar panels than the grid would be pumping water directly, in my opinion. There they might be truly useful, at least until the pump breaks, the solar panel breaks or is stolen, or until the water table drops.

I think the chances that we will be able to continue making solar panels for very long is pretty low, because of the exotic import requirements and the inability of governments to keep up subsidies for them.

Concentrating solar thermal power generation at utility scale (in appropriately sunny locations) has a lower average cost per kWh than PVs, and does not require any exotic materials.
Just steel, glass, and copper, so I expect CST to get built out in the deserts of the world for a long time.
Certainly wind power can be used without exotic materials as centuries of use prove in the Netherlands and elsewhere.

Concentrating solar thermal power generation at utility scale (in appropriately sunny locations) has a lower average cost per kWh than PVs,

I think the preponderance of utility scale PV installations, and complete lack of non-demonstration CSP's suggests otherwise.

So, if solar is pretty much ruled out long term, what is available by way of sustainable electric power generation. First thing, we need to replace the grid with a more efficient distribution paradigm. Next, determine what we can get along without, and what is absolutely necessary. Triage!

I suggest, for the longer term, wind, hydro, geothermal and tidal sources are practical and sustainable. Turbines can be produced and maintained using fewer (or no) exotic materials. We are talking about needing labor the keep things running, but then labor is not what will be in short supply. At least not right away. Wind (though we must recognize that eventually even wind will deplete - eventually), and tidal (so long as Luna is nearby) that will sustain well past the death of Planet Earth. Water in hydro power is transported by heat into atmosphere, falling as rain and recycling naturally. Problem there, holding on to the water until it can be used, and maintaining despite droughts. Geothermal seems a good bet, and can be done in many places at low cost. There the major requirement is an available water supply (mostly the H2O can be recycled, but there needs to be some replacement in the best system).

Still, I would want to hold open the solar option... at least a directed reflected solar array would be okay. Again, like geothermal, local water sources would be important for periodic recharge.

I think the real challenge is going to be the triage. Like the use of the remaining hydorcarbons, purely economic triage favors the established wealthy, and perpetuates their control over everything else, and everyone else. I doubt the masses would be particualrly enamoured of that solution, and so expect that the ballyhoed urban uprisings might result in democratic forcings, lowering living standards for the very wealthy and increasing that of the workers who will be providing the grunt labor to maintain, produce and distribute mass transit, power, water and waste removal services. Artisans won't suffer or benefit much from that - their products will be in demand, and I would expect they would be protected by both extremes, from both extremes.

Like I said elsewhere, your posts are entertaining, but can be perplexing. You make me think! Thank you.


You make us all smarter, there is no question about that. iron sharpens iron. but in this area i'm still holding on to my disagreement. Grid tie systems can fairly easily be used without a grid to have power during the day. I have one 7 miles from a powerline
(because it was cheap) and can do exactly what you suggest - pump water into my attic. i can also charge some lithium based battery lighting, do some cooking, etc. Is it Disney's "modern electric living"? no. The PV panels represent putting energy in the bank for 30-50 years, if i can get my lead acid batteries reconditioned (invented 160 years ago), I may even have night power for decades as well. I am willing to trade the embedded energy of that PV by not buying a new combine and tractor.

Don't solar panels, windmills and lightbulbs require plastics and exotics in their manufacture?

Exotics? What is "exotic"?

Plastics can be made from actual renewable sources like plant oils.

Solar hot water panels need nothing more "exotic" than glass and metal.

As EROEI nears 1, production must increase. And, yet, when it reaches 1, it must stop!

Not at all.

If I'm a 60 year old man and I want to be warm in the Winter - a evacuated glass hot water system is going to get me that warmth without the labor version of getting organic matter, storing the material and then bringing the material to a location to be burned.

It makes sense to invest more energy than the item will give up as the alternative is cold or injury from the harvest of organic material.

I agree that oil consumption in developed OECD countries will probably continue to fall, but as we know that is not where the recent growth in demand had occurred. Following is a chart of normalized oil consumption (1998 = 100) for the US and four developing countries through 2009 (EIA):

At Chindia's 2005 to 2010 rate of increase in the ratio of their net oil imports to Global Net Exports (GNE), Chindia would consume 100% of GNE in about 20 years.

On the supply side, if we extrapolate the 2005 to 2010 rate of increase in the oil consumption to production ratio for the (2005) top 33 net oil exporting countries (99%+ of GNE), we would appear to have approximately 45 years of net exports left globally (after 2005). Based on this extrapolation and based on numerous case histories, it's possible that by 2020 globally we will have consumed about half of post-2005 CNE (Cumulative Net Exports).

And as I have noted several times, it appears that global oil consumption only fell one year in the Thirties, in 1930, rebounding and increasing thereafter. US average oil prices hit bottom in the Summer of 1931, increasing at an average rate of 11%/year from the Summer of 1931 to the Summer of 1937.

I'm not saying that the change I talk about is happening yet--it is more a future change, as we go forward.

I think the people and businesses of China have loans that cannot be paid back, if growth slows very much.

wt - And one more brick in the wall: a recent report - Dubai just signed a contract with China to supply them with 400,000 (?) bbl/day for the next 20 years. No details on the trade terms, of course.

And the USDA recently reported that China's imports of US corn for the next year or so are expected to be four times larger than earlier estimates.

Regarding the Thirties, there were reportedly three million more cars on US roads in 1937, than in 1929. The difference today of course is that hundreds of millions of consumers in developing countries want to buy their first car, and in many cases they can pay cash for a small car, like the Tata.

As previously noted, I think that the US is well on its way to "freedom" from our reliance on foreign sources of oil.

the US is well on its way to "freedom" from our reliance on foreign sources of oil.

"Freedom is just another word for nothing left to lose."


I need to remember that one!

"Freedom is just another word for nothing left to lose."

Or could it be nothing left to buy


It doesn't seem to be such a major deal on closer inspection. The agreement is for 200,000 bpd from 2014 (for 20 years though which could well be a big deal if contracts are still being honoured in 2034!) from Abu Dhabi. Current Abu Dhabi exports to China are about 100,000 bpd. Total crude exports from the United Arab Emirates are currently around 1.8 million bpd.

According to the EIA, most of the UAE crude is currently exported to Japan, South Korea and Thailand.

tow - I agree...not a big deal. And thanks for clarifying my numbers...memory slipping more every day. LOL. But take that deal and multiply it by 15 or 20. It's going to add up. Look at Vz: they have long term contracts to ship around 450,000 bopd to China today. That's why I said just one brick in the wall. But China has been building this wall for over 15 years. ..long before "PO" became a common part of the language.

As far as contracts being honored the public generally thinks sovereigns get away with such moves all the time. But they don't. A few years ago Ecuador wrote a $450 million to Chevron to settle a little game the country tried to play. You never saw a published report of the settlement nor ever will. Very strong non-disclosure rules. I aware because I knew someone involved. And who put the arm on Ecuador to force payment? The IMF. That might also surprise some folks.

IOW I expect China to be very good at enforcing contracts and ownership of its various oil interest for a long time.

Having read a little bit about it, countries v. corporations in international court usually goes badly for the countries. The corps have lawyers that know the countries' laws (and the contract) better than the countries do. Pretty sad, if the countries weren't usually run by generals, colonels, dictators, and other assorted trash.

you have tickled my curiosity, lets have the whole story, have you signed a NDA? I suppose one or two here the oil drum might be surprised that the IMF was involved, but once they knew that the beast was the child Breton woods, they would realise that it was the bitch with the switch, the Frank (the Enforcer) Nitti of Global capitalism.

yorkie - I'm much more restricted than a NDA (non-disclosure)...I live my source's momma. I may be a simple geologist but I ain't that dumb. I was clearly warned not to make details public by a woman I sleep next to every night. LOL

The IMF being an enforcer surprised me also. But the simple explanation given was that no country can function in the global financial markets without IMF support. Way beyond my understanding of such matters.

One of the top hits for Confessions of an Economic Hitman for a tale of the IMF and enforcement. Up to you to decide if its truth, a story or a mix.

Query: Is energy used in production of oil included in the numbers above?


For the chart, it was domestic oil consumption, which would include oil consumption for all purposes (EIA), but not other energy inputs. For GNE, we used BP's data base for production & consumption, with minor input from the EIA data base.

So, am I correct in thinking that the energy inputs into production are a factor in the ELM? And, as EROEI decreases, exports decrease at an ever higher rate?

If so, is there a statistical model that incorporates all of those factors, so as to have some predictive value in determining where the real 'cliff' is?


We haven't focused on net energy per se; we have focused on the relationship between rates of change in production, consumption and net oil exports. Here is a link to our essay on Peak Oil Versus Peak Exports:

Given an ongoing production decline in an oil exporting country, based on the ELM we can conclude that unless consumption falls at the same rate as, or at a rate faster than, the production decline rate, the resulting net export decline rate will exceed the production decline rate, and the net export decline rate will accelerate with time. Furthermore, in the case of the ELM more than half of post-peak CNE* were shipped only three years into a nine year net export decline.

*CNE = Cumulative Net Exports

in the case of the ELM more than half of post-peak CNE* were shipped only three years into a nine year net export decline.

Now THAT is scary! And, it is one of the most important points in the argument for reductionist planning. Yet, seldom discussed except on 'doomer' sites like TOD. The news is not good, so let's not present it.



Here are the rates of change numbers for the ELM and three case histories, along with "Half Life" calculations, i.e., how long it took for half or more of post-peak CNE to be shipped:

Many economists seem to be differing on whether the economic system will head towards inflation or deflation. My insight reasons that both inflation and deflation will be occurring but they will happen in differing areas of the economy. Assets that require loans to purchase where there is a forward looking expectation that the debts incurred in today's transactions will be able to be repaid in future years will suffer deflation and falling prices and asset valuations. The Hubbert Curve strongly implies that future real economic activity will be decreasing since there will be less energy available in each successive year, so less will get done in each successive year, which implies that there will be less jobs in each successive year. With less jobs available, and more unemployed people competing for any job openings that do become available, the wages for jobs will be dropping too, as there will be more competition between the unemployed to get any given job. Employers will be able to do price discovery for wages where supply and demand work somewhat in reverse (but not counterintuitively). With a high demand for jobs, and a small supply of jobs, the price (or wage) of jobs goes down! So, with less jobs in the system, and a tendency for there to be less wages paid for existing jobs, we can expect the funds that will be available in future years to repay long term credit to be decreasing. This is a fundamental change for the long term credit business model used in prior years. Prior to peak oil/debt/GDP/etc, the trends and expectations were that there would be more funds available in future years, and 7 yr. loans for CRE, and 15 and 30 yr. loans for housing made good business sense. Now that we are post peak the long term credit business model is structurally challenged with higher risks of defaults due to an expectation of less wages being available to repay loans.

Inflation can be expected in the price of real/hard assets and commodities that don't require long term credit, especially where basic necessities (BN) are concerned. Discretionary spending will obviously decrease, but BN purchases will be made first. With money printing increasing the funds available, more money will be competing for BN and for real assets where there is immediate value and need. And the Hubbert Curve implies that there will eventually be less supply of BN and real/hard assets, so supply and demand will tend to drive prices up in these areas and cause inflation in them.

One might consider that even if there is a level plateau on the Hubbert Curve that population is still trying to increase and as a result the competition for BN and real/hard assets (for which production has now leveled) increases and that could drive prices up too.

Good description of what will happen if we don't do something about it.

both inflation and deflation will be occurring but they will happen in differing areas of the economy
Good description of what will happen if we don't do something about it.

And to think - you can get a PhD in Economics for calling what IS happening as something that will happen.

Price inflation in energy and food while price deflation goes on in real estate.

Let's consider the affect that austerity measures and weak economies have had in Egypt, Libya, and Greece in recent years, and what the Hubbert Curve implies about the future. People have gotten out into the streets seeking change, and some change has occurred but it was difficult to obtain. In Egypt and Greece the change was mostly non-violent. A show of force and collective action by the poor and economically disadvantaged has resulted in changes in the leadership for Egypt and for public and world awareness of the push back to austerity in the Greece case. In Libya violence and disruption resulted.

For the people seeking change, typically they want more of everything, they want stronger economies, and they want jobs. Most of the people in those countries only see the deceptive causality of money, as more money typically means more goods and services. The poor and middle class might think that by leveling the playing field between rich and poor, that things will improve. But the Hubbert Curve implies that there will be by definition less goods and services available. Hence, the change that the people in those countries are looking for will be very hard to get. Even in leveling the playing field, with the Hubbert Curve forcing a decrease in goods and services, the people in the streets might not get the change that they seek. They may be better off than they would have been under other conditions, but they may not even recognize that relativity and so they will keep seeking more change. Indeed, I just saw news articles that the people of Egypt are back in the streets as many aren't happy in the changes that have been made so far. But at least Egypt and Greece hasn't been losing infrastructure, as is the case in Libya with the violence and destruction.

As austerity measures kick in around the world, the importance of preserving the infrastructure is paramount. With less energy available, and less goods and services available to do maintenance and repair, losing infrastructure will only exacerbate weak economies.
The Global Temper Tantrum

“The Indignant”—los Indignados—are now a distinct group in Spain. They are the young people who take to the streets to protest against high unemployment, government spending cuts, and anything else that ticks them off. But this is no longer a purely Spanish phenomenon. The Indignant are everywhere. They were in the streets of Athens, throwing-Molotov cocktails at police while the Greek Parliament debated its latest austerity budget . . .

What all the Indignant have in common is the refusal to address squarely the problem that nearly all Western countries face. That problem is that the welfare systems that evolved in the mid-20th century are unaffordable under the demographic and economic circumstances of the 21st century. The financial crisis has merely exacerbated what was already a severe structural crisis of public finance, boosting deficits while slowing growth.

The discussion in the media and various blogs and such often makes reference to "slowing growth" or "soft patches" as either a symptom or part of the problem in national and world economics. But the Hubbert like Curves for oil and other resources will be enforcing contraction (and not growth), year after year after year. "Slowing growth" is a phrase that we try to fool ourselves collectively with to keep hope. Many can't mentally or emotionally handle the type of change to be expected when a comprehensive forward looking economic analysis and risk assessment is done under the constraints of the declining inputs. There may have been some benefit from spin using that deceptive phrasing. In ways for some, it is better to be hopeful than worried and concerned. Fooling ourselves collectively in some ways worked as the various economic crises were not anticipated by the general public and the status quo was mostly preserved for years. Only now, when the contraction affects are really taking hold and cannot be ignored any longer by the masses are serious changes to the status quo looming/possible in many places. Change is dangerous, just like a box of chocolates. "You never know what you are going to get" as Forrest would say.

Perhaps what they are indignant about is that most of them should never have been born into a world without the resources to support them, especially while supporting their political betters in the matter to which they too have become accustomed.

As I said above, coming soon to a neighborhood near you.

It is lack of jobs (and food) that is driving unrest where it is showing up. Need I add, "first"?

With endemic unemployment in the 16%+ range, base level at 9.2%, upper range (inclding underemployed and those who have given up) in excess of 20%, we are perilously near the tipping point.

Which is why a year or so ago we had those items about the US Military preparing for unrest during the winddown of oil (2012 to 2015?).


Gail, very well argumented and clear expose of the oil / credit compound. Thank you.
Writing it you must have had thoughts on its implications for food production - less / transport - less / consumer prices -higher, and in its wake social unrest. Those too, have a role to play in the downturn, haven't they. Maybe, stuff for a Part III extension?

What comes first, the cooked chicken or the boiled egg?

Forgive me if someone already pointed this out up thread.

Gail's article finally solves the "What comes first?" debate between Stoneleigh and the TOD community.

The answer is that we both go sinking down together, the financial sector and the oil patch.

No jobs means no consumption.
No consumption means lowered demand for oil.
Lower demand for oil means the more expensive kind can't be produced (depleted).
Lower oil production means the economy tanks even faster and there are yet fewer jobs.

Rinse and repeat.

[ i.mage.+]

Someone sent me some very interesting things about how important credit is to the agricultural community. It looked like farmers were having to borrow more and more, and quite a few were having their credit rating downgraded. I will have to look at in more detail.

The credit for farmers would seem to be short enough term, that it could pretty much continue, but it is an interesting thought to consider.

The information I received was from Australia, but I am sure that the situation wouldn't be too different here.

In the case of Denmark, where modern-day farming is done by people who own and operate very big farms, substantial debt load is clearly becoming more and more of a problem. The players in the agricultural sector have really ramped up their PR effort in order to smooth out their image and the newspaper media in Denmark regularly run whole-page adverts by agricultural interest organizations. The farmers in Denmark are partly responsible for messing up the lotic ecosystems as well as the estuaries and coastal seas. The agricultural sector in Denmark is heavily subsidized - by national and EU coffers both - yet it's not uncommon for farmers to have interest loads where they have to meet monthly 60.000 dollar payments on their loans. I think it's reasonable to say that in further economic contraction the already disenfranchised farmers will only get more and more belligerent(as will most everybody else).

That is well worth watching in its entirety.

He points out that banks make money through industry... but make obscene money through Ponzi schemes. He offers that the "quantitative easing" is criminal in that it transfers the peoples money to cover the private gambling debts. Further, that the banks should have been allowed to go bankrupt and been reorganized. This all agrees with my reflexes at the time of the crash.

He adds that peak oil and global warming are frustrating any recovery.

Bankrupt comes from banka rupta. The banka was a table used by money changers. If they were found... negligent... then their table was rupta: broken.

"The story of 1"
Terry Jones
"Decimation" at about 26:00
"Bankrupt" at about 43:00
zero at about 44:00
usury at about 45:00

When we get out onto the Hubbert Curve where the decline in oil production might be at a rate of 2 to 6 percent a year, I think many people don't realize how quickly that becomes troublesome. If there is a corresponding drop in employment and wages of the same percentages, then in 5 short years we could be adding between 10 and 30 percent more unemployment worldwide. What would the countries of America, China, Greece, Egypt, Spain, etc. look like with even just a 10 percent increase in unemployment from the already high unemployment levels everybody already has? It will quickly be impossible to pay back the debts on the book now with decreasing wages underfunding every level (city, county, state, national, international) of funding available to make debt paybacks.

Many sources posit the timeline for events to be in the "coming decades", and the media likes to project various trends in the 2030 or 2050 timeframes. But if we are past peak, we could already be on a decline rate of 2% year over year. The media and TPTB do make it hard for the general public to assess exactly where we are at. The fact that military studies are signaling possible near term affects in the 2012 to 2015 timeframe that they may have to respond to suggests that they have better information than most, and their outlook is pessimistic. Systemic factors like the struggle in Libya can quickly take 1 to 2 percent of production offline unexpectedly and this could cause a steeper downslope in production as Gail has suggested many times is possible for various reasons.

Peak oil tends to cause peak debt. ... The basic issue is that more debt tends to cause more demand, and thus higher oil prices.

1st - Correlation is not Causation.
2nd - If debt in a money-gets-created-when-lent-into-existence-system, is it not the other way round? More debt -> more money. More money "chasing" a fixed amount of goods == higher prices.

Oil is just the expression of a broken money system.

But a whole lotta this smacks of us being the fish trying to understand/explain water:

Like the proverbial fish who doesn't know what water is, we swim in an economy built on money that few of us comprehend, and, most definitely, what we don't know is hurting us.

Over time, as the “easy to extract” resources are exhausted

And if it wasn't oil, it would be some other 'peak' something. Here on The Oil Drum - we look at oil. On "peak potable water" - water. On "peak crops" - the draining of fossil water and the arrive in the lifespan of todays kids - Peak Phosphorous.

As an aside: An observation of KMO of the C-Realm: Many of the early Peak Oil authors are now writing on the money system.

My problem with the "peak debt=peak oil" sort of analysis remains the same as it always has:

If we accept as correct, the weakest national economies in the world should be those with the least ability to produce or procure energy, i.e, Japan, South Korea, Switzerland, fact most of the European community.

I have left for seperate discussion Germany: Germany has been considered financailly stable enough to carry not only themselves but most of Europe on its back. How could this be possible for a nation with essentially no home energy resources and no real energy gathering industry abroad (no BP, Agip, or Total in other words)?

How can it be the nations in the world least able to produce energy have been (and in most circles still are)viewed to be amoung the most financially able?

This is why at the most fundamental level I cannot in any scenario see the European Community surviving in anything like its current form. Essentially, all the EC idea accomplished was to group the rotten fruit with the still clean fruit, allowing the rot to spread very fast.

So interesting is the case of China: Unless we assume fast adoption of renewables, China must go on a nuclear and coal binge to assure its growth. We have seen China going down all three paths (nuclear, coal, renewables) knowing what the West seems not to know and what Matt Simmons told us years is not one energy source vs. another, we will need them ALL. The question however becomes: How will China pay for all of this new capacity if its wealthiest customers (U.S., Japan, Europe and even other developing nations) are suffering energy starvation and recession (including the prospect of "peak debt" default)?

Take away point from the above: If I accept Gail's overview, I must accept the order of outcome in essential ascending order based on the most energy vulnerable: Europe and Japan suffer first and worst, followed by other energy hungry nations (South Korea, Singapore, Malaysia, on and on), then U.S., Canada, and Latin America (nations with energy resources, but who must bring down consumption VERY HARD to survive in an energy constrained world).

China and India? Still in play...if they are able to balance energy consumption with new and fast developing renewables, balanced perhaps with some nuclear), they could pull it off, but would be cash strapped by the collapse of their wealthiest customers...they would have to fund from the inside out.

In 1987 Professor Paul Kennedy, in his book "The Rise and Fall of the Great Powers", described the link between financial power and military power, dating back to year 1500. In the book, Kennedy states as a given the basic need for a world power to have implemented the most modern energy production system technology could provide (i.e., steam had displaced wind and water, and at the time of the writing, nuclear in the form of the 'nuclear navy" had displaced steam). IF, and this is a big if, China and or India can pull off the implementation of advanced renewable technology and make them economically feasible, they almost certainly inherit the mantle of world leadership...and they would have earned it.


We have seen China going down all three paths (nuclear, coal, renewables) knowing what the West seems not to know and what Matt Simmons told us years is not one energy source vs. another, we will need them ALL.

And the evidence of actual use shows coal is not maintainable over the long run, Nuclear Fission is not able to be run in a safe manner and Solar PV as now done has limits on the materials if the energy input levels are to get to present levels.

China must go on a nuclear and coal binge to assure its growth.

Which brings the discussion back to - a biological model of binge growth is Cancer.

At least the heavy metals and radioactive material of nuclear/coal will help create more Cancer.

At the end of the line - the Earth is a finite planet - there is only so much material which can be processed to "fuel" the "growth". At some point, economic growth as now known on Earth will end.

But hey you Economists and Wanna be Economists - show how the present debt/growth model can continue on a finite sphere of material at the base of a gravity well.

If we accept as correct, the weakest national economies in the world should be those with the least ability to produce or procure energy, i.e, Japan, South Korea, Switzerland, fact most of the European community.

Roger, that does not follow at all. It would be true if those countries were not able to purchase oil at the same price we purchase oil. All importing nations are in the same basket, even if, like the US, they produce a small portion of the oil they consume. We all must buy oil on the open market. And in all cases, of all importing nations, the world price of oil is reflected in the price to the consumer.

Of course their case is the same case as ours, but not a worse case. The very high price of oil hangs over their heads like a sword, just as it does ours. Of course if there were no imports then that would bring on a different situation entirely.

Ron P.

This comment is really in response to Part 1 of Gail's essay, but it's posted here to get more attention.

I keep returning to the core assumption in all of this: do historical oil shocks actually cause recessions? It's easy to understand how they *could*, harder to see whether they actually have. I come at this from my background in climate science, where figuring out whether one climate phenomenon causes another based on their time series is an exercise fraught with peril.

Gail quotes several papers which claim to prove this link. The first (Hamilton) uses no statistics, and makes eyeball connections between oil price spikes and recession dates. This sets off alarm bells for climatologists: we know how the human eye is drawn toward patterns even when they don't exist, and understand the perils of wiggle matching. The other two papers she quotes do use statistics, but their methods detect correlations, not causal relationships. They tell you that oil consumption and GDP are related, but not which causes which.

So what can we do? As I said, this is an old problem in climate science, and there's an old solution: the lag-correlation graph.

Reminder if you're not up on your statistics: the "correlation" measures how similar the shapes of two graphs are. If GDP was exactly proportional to oil consumption, their correlation would be 1.0. If they were totally unconnected, the correlation would be 0. Negative correlation indicates what when one is high, the other is low.

The *lag*-correlation looks at the relationship between the two data sets, shifted in time. So for example, we test whether GDP changes in each year are related to oil price changes which occurred the previous year. Or two years earlier. Or one year later, and so on. If GDP is a slave to oil consumption, then the lag-correlation should be highest when oil consumption leads and GDP follows; GDP changes should not precede oil consumption changes, since the putative cause must precede the effect.

I took the data from Gail's Figure 6:

and ran it through a lag correlation analysis. Here's the result:

As you can see, oil consumption is highly correlated to GDP at lag zero. This we already knew: the graphs in Figure 6 look similar. But what's interesting is the lag correlations. The graph is asymmetric: the correlation is stronger when GDP leads oil consumption by 1 year. That means that when there's a spike in GDP, oil consumption tends to increase *afterward*, not before. In contrast, the correlation on the right side of the graph, where oil consumption *leads* GDP, is weaker. (Experts note: The lag +1 correlation is not zero because the individual datasets are autocorrelated.)

The dashed lines indicate the 95% confidence interval: there's always a possibility that a certain amount of correlation will be observed by chance. Correlations weaker than 0.37 could be a fluke, and should be ignored. (Experts note: my confidence intervals don't take into account the autocorrelation of the data, but including it makes the "Oil->GDP" link even less significant.)

The results are:
* There is no significant correlation between oil consumption in a given year and GDP in the following year.
* There is a stronger, possibly significant correlation between oil consumption in a given year and GDP in the *previous* year.
* This suggests that, if there is a causal relationship, it's in the sense that GDP changes cause oil consumption to change, not the other way around.

I should emphasize that I *do* believe that eventually oil scarcity will limit economic growth: the point I'm making is that that link is not yet significant in the historical data.

That seems about right.
But this is world numbers.
Some (very large) parts of the world are still growing GDP and their resource use, including oil, and are still not at zenith rate for industrial energy use, and are creating more infrastructure and etc.; some of it 'useful'.
Other older industrial parts are barely growing and are in aggregate decreasing their resource use, in particular petroleum, and/or are scraping round for petroleum substitutes. These places are struggling to produce more 'useful' infrastructure. 'Oil scarcity' in these places could be limiting 'growth'? Scarcely maintaining infrastructure (housing, roads and other transport, schooling, heavy industry, and etc.) and not building out enough energy infrastructure e.g. CAPEX not giving the returns it did even 10 years ago in primary energy?

It ocurs to me to look at perhaps contrasting cases of Japan and USA; Japan having 'topped-out' about 1990, well before petroleum became more 'scarce' post-2005. What ever it was that succesfully 'grew' Japan, stopped working. For the prime-example USA more recently, perhaps it is burning petroleum just to get to 'work' (absolutely huge by everybody else standards) that no longer seems to 'hack it' as an economic strategy? Perhaps more and more 'work' just becomes another form of consumption?

But, why in both of these cases?
I find your point and analysis useful food for thought.

Phil – Your thoughts on this line of reasoning: oil hasn’t become scarce…cheap oil became scarce. Japan appeared to be doing OK for decades even though a much larger percentage of their energy was imported than the US. But they were also the Masters of Conservation compared to us. They did have their big financial meltdown in the 80’s and some folks have blamed their unwillingness to take the pain fully and instead stretched recovery ou much longer. And now their economy wasn’t very robust when they’re hit with nuke problems and high energy costs.

Might be a bit of a stretch but do you see a parallel with our current situation: govt bailouts that helped soften the blows from our meltdown have also stretched out the adjustments many folks feel we need to make: i.e. getting away from BAU. And just as with Japan oil is not scarce for the US. But cheap energy, which fueled our perpetual BAU growth, is all but gone. If we were hit with a megacatastrophy like Japan we may be looking back on the summer of 2011 as the good ole days.

If we were hit with a megacatastrophy like Japan we may be looking back on the summer of 2011 as the good ole days.

It doesn't have to be a 'megacatastrophy' - something as simple as other nations deciding 'your Federal Reserve Notes are no good here'. What's the US gonna do? Go around with guns demanding that you take our money and trade with us or else?

For years there have been boycotts of US products over conduct of the product makers by consumers. Nation-States deciding to not do business with other Nation-States has happened in the past. Would there be National Support to raise an Army to force others to trade?

Re: eric blair...of course, we would wonder what other nation can produce the volume of consumers the U.S. has been able to willing to buy cheap plastic decoration, strings of Chinese Christmas lights, kitchen junk, bad pet food, plastic toys for the brats....etc. etc. etc. In other words, if a nation wants to declare U.S. currency non grata, they would need to find some other extremely wasteful and consumptive consumer to peddle to, someone with "real" currency (and exactly what would that "real" currency be...(please don't say the Euro or I may do damage to myself falling down in laughter). I think this is a major crisis coming fast for China/India, in that as recession presses down, and I mean REALLY presses down (not like this little piffle we have been calling "the crash" since 2008, but the real thing), who is China and India going to sell all this crap to?
The Europeans (for all of their weaknesses) seem to show more restraint in how they spend their money...


Thanks for your thoughts.
No obvious answers from me, but I agree, 'cheap' energy, and 'cheap' food, did seem at the root of the post-WWII boom-time for US industry; rising wage rates; and one thing fed another. If you could make it, you could sell it!

Europe, and then Japan, followed the US in to 'the oil age' (nobody forgot coal - after the initial 'oil-rush', coal remained a lot cheaper for electricity), but oil meant it was a lot easier to further 'motorize' industry and diversify its component parts, while electricity 'motorized' the home, and freed-up time. And personalized means for getting to work meant more flexibility of labor. Suburbs 'worked'.

So: all the old tricks still worked, and even more so: division of labor, lower unit costs from scale-up, flexibility of diversified labor and so on; and in the USA the motor car really 'worked', and new logistics 'worked'. Also, all those old, but now more sophisticated, financial tricks helped turn the wheels faster? Now apparently, less so.

My guess is that ratios are the places to look for why things got (get) different.
Perhaps those factors which 'grew' the industrial economies (people seized on them), are the very same things that will slow it down, and eventually bring decline? The heavier you get, the more you have to lug around? Others have put these thoughts better than me. There are real limits: the whole world is not, despite the very real momentum and whatever anybody says, going to become 'American'.

Another problem in climate change is analyzing the wrong problem. It is not changes in oil production that induce recessions, it is changes in oil cost.

In contrast, oil production attempts to meet rising demand during growth and very rapidly reflects demand decline during recessions, particularly given the Saudi's start pulling oil from the market.

Another problem in climate change is analyzing the wrong problem. It is not changes in oil production that induce recessions, it is changes in oil cost.

I used oil production, not price, because my goal is to show that the argument that GDP is a slave to oil is unsupported by its proponents' own data.

However, your point is very well taken... and can be tested using the same analysis. Here's a lag-correlation graph showing the relationship between oil *price* and GDP -- I'm using a slightly longer data record than Gail did, mine goes back to 1970/1971, but it makes no difference.

If oil price spikes caused GDP to decline, we would see a significant negative correlation on the left side of the graph. However, the only significant correlation is the reverse: GDP increases lead to oil price increases the following year.

To re-emphasize: I'm not saying your hypothesis is impossible, I'm saying it's not supported by the historical data.

Okay not significant, but in the paper one would mention the trend.

Correlations weaker than 0.37 could be a fluke, and should be ignored.

Well then, it looks to me like you did not find any statistically significant correlation, except for an extremely small one based on a single data point favoring GDP first. Not very convincing, to say the least. Perhaps all you've really done is make Gail's point that the correlation probably goes both ways.

Either way, the lag would be measured in months not years.


Well then, it looks to me like you did not find any statistically significant correlation

I'm not trying to build a strong case that GDP drives oil consumption. I'm arguing that the opposite conclusion, that oil consumption drives GDP, is unsupported by the data.

Either way, the lag would be measured in months not years.

This may be true, though in my experience with these graphs a strong lag-correlation with a several month delay is still visible in annual data. However, I can't find monthly data, and these annual data are what Gail uses to prove her point.

To recap: I'm not saying I have all the answers, and I'm not saying Gail is wrong. (In fact I think she'll eventually be right.) I'm saying that Gail's data don't prove her claim.

I will agree that there are differences in views on the subject of the extent to which oil supply influences the economy, even among Oil Drum staff members and editors. The post is not intended to be a complete justification for the connection between the two, and the exhibit is not intended to be mathematical justification. Like many posts, this post went through an evolution. I originally showed a graph by someone else showing fewer years, that looked like there was a closer match. One of the other editors suggested that I swap out the original exhibit and make my own graph showing all years available (which I did). This made the exhibit look less convincing. In retrospect, I should have added other information, to make it clear that this exhibit was not the sole justification for my belief that the high oil prices have an adverse influence on the economy.

I have been writing a lot on this subject, but most of it is not on The Oil Drum. I now have a paper that is "In Press" (accepted but not assigned to an issue for the Journal Energy). It is called Oil supply limits and the continuing financial crisis. I am also writing a book as part of Charlie Hall's "Brief's in Energy series under a contract with Springer. It is tentatively called, "Beyond Hubbert: How Limited Oil Supplies Cause Economic Crises."

I have also been talking at a number of conferences, somewhat related to this issue. I gave a talk at the 3rd Biophysical Economics Conference this spring called, Beyond Hubbert: What kind of down slope can be expect? I also gave a talk (on Saturday a 10:00am) and wrote a paper for the peak oil conference in Barbastro, Spain in May.

I write more on this issue on Our Finite World. I suggest starting at the Getting Started tab.

We know that it takes energy of some type to do "work" or to create movement. Some of the debate relates to whether oil energy is required for economic growth, or whether it is really total energy. In some sense it is total energy. The problem is that we have so much built infrastructure, that it is very hard to change quickly. It also takes money to make the change. China, that doesn't have so much oil infrastructure, is able to ramp up its economic growth with coal.

I think the major issue is the fact that we live in a finite world, and are starting to reach limits. These limits cause extraction of all kinds of things to become more expensive. At the same time, we have a financial system that needs growth. The credit issue is related to rapid growth in a lot of things coming to an end. Once we change from growing blue dots to shrinking (or even same-size ) blue dots, the system where we pay back debt with interest doesn't work anymore. It doesn't matter whether we are talking about crude and condensate, or all liquids, or GDP--they are all very closely tied together. It doesn't have to be all energy, because our infrastructure isn't interchangeable. So even if we could ramp up natural gas and coal tomorrow, we would have a problem, because the liquids fuel part would be short.

No need to prove your credentials, Gail, and I have read most of the material you present in your links, either at the source or repeated on The Oil Drum.

To re-emphasize, I totally agree with you that oil production absolutely can limit economic growth, and inevitably will in the future. The only question is, is that cause-and-effect relationship already visible in historical data?

Gail - Maybe I look at the world too simply but I don't see the basis for any debate. Lets start at one extreme: since the end of WWII lets assume the US economy had zero oil available. How much would the economy had grown? Difficult IMHO that we would have seen anything close to the growth we've had the last 60 years. Yes...extreme example. Now lets go to the other extreme: what if the economy had access to an unlimted amount of oil at $1 per bbl even to this day. What would the economy look like now? Obviously we've lived between these two extremes. So the argument would be that yes, at either extreme economic growth was obvious determined by oil but not between the end points. I don't see the need charts or stats to see the obvious. But maybe my common sense view isn't that sensical.


Thanks for the posts. I think many including myself still have a lot of work to do in terms of understanding the connections between financial catastrophe and peak oil.

The scenario of cascading financial failure, initially created and then reinforced by energy limitations, is quite terrifying.

I am sure that you realize that you have offered a very different savings response from that usually associated with a depression and I quote:

“One reason for a change in savings and spending behavior is obvious–if there are more resources to buy now than later, it might be better to buy now while goods and services are available. Furthermore, if the economy is really declining, money will cease to be a store of value, in the way it is today, because less goods and services will be produced in the future than today.”

This set of responses is usually associated with hyperinflation when spending money today prevents the loss in value that occurs over days or weeks.

During deflationary recession, it might seem rational to believe that a constant amount of money chasing fewer goods would decrease the value of the money. However, the fact this did not happen during the Great Depression is one way of explaining why Keynes developed his economic theories. I believe you know this, but some may not.

Taking a Keynesian view, during depressions scared people hold onto their cash decreasing aggregate demand and leading to job losses that further depress the economy. In this situation, the size of the money supply decreases faster than the economy and money becomes more valuable. People begin to expect falling prices as the economy shrinks and those who have money hold onto it because deflation makes it yet more valuable.

While avoiding most theory, I am trying to understand the basis for your belief that future peak oil associated recessions/depressions will be so different. Perhaps you are suggesting that any government is this situation will always inflate the currency destroying its value.

I think it was Jeff Rubin that stated that oil prices had been what pushed the economy over the edge in 2008 and I tend to agree. I also think that many of us that were focused on peak oil had tunnel vision. The housing market and the banking industry wasn't at all on my radar. My political leanings didn't let me hear the Peter Schiff's and the Ron Paul's of the world, but I do think there are connections between financial catastrophe and peak oil.

To get back to your post I don't think peak oil is the mover right now, I think we possibly have stagiflation. I think had we not been destroying the dollars value American purchasing power would be very powerful abroad, especially against the Euro with all the problems with the PIIGS.

I'm not a Keynesian, so I don't worry about people saving money when they are scared, because they probably were right to save rather than being in debt or even bankrupt. I just don't see how it's at all responsible for a government to debase a currency, which will deflate the value of the peoples savings in order to bail out an economy that was ruined by groups that were irresponsible.

We are not talking about the traditional depression.

In some sense, what we are talking about is inflation, due to a mismatch between the amount money available of goods and services available. As we go down the downslope, it seems likely that the quantity of goods and services will decline. Even the amount of food available will decline, if less fossil fuel inputs are available, for irrigation and fertilizer. But at the same time, the amount of money in bank accounts will stay constant, so what we will have is inflation. If the government is silly enough to print more money, there will definitely be inflation.

Of course, we were talking about the disappearing asset issue earlier--the debts that wouldn't be repaid, and appear as assets for someone else. Disappearance of these assets would tend to offset the inflation problem. But if you hold a bond that may or may not be worth anything in a year or two, you may want to exchange/ spend the bond so as to pass the risk on to someone else, to let them deal with the risk of default.

Well I think you hit my problem on the head. It is really hard to know how much money is being destroyed by the decreasing value of debt.

I have major problems with current financial practices. By appearance, mark to market accounting can charitably be described as an educated guess made by individuals with serious vested interests, subject to minimal oversight. Really hard to know where banks are at right now. One can look at the rather low fractional reserve ratios (~13 to 1 is mentioned) and be cheered. Or one can imagine that they are keeping high reserves because their assets are so poor.

It is hard enough to talk about the issue of inflation by itself given that the measures of money supply have so many holes. When one can use stock and bond funds as savings accounts, why place money in banks at 0.25% interest, which is really -2 to -3% in real dollars. Relative to most on the Drum, I appear to have more confidence in the core inflation rate and CPI as measures of something related to money supply.

Nicole Foss claims money supply is a leading indicator of inflation but what good is that if the numbers are not an accurate reflection of the supply. Ms. Foss seems to believe that Financial collapse, when it happens, will be fast and brutal as well as deflationary.

Anyway, onward Ho.

If many people are without work because of recession, they will find it impossible to accumulate funds to afford expensive new consumer goods. This lack of income will tend to produce a similar effect, namely reduced demand for oil products, and a move to lower outputs of the type expected in a later year of the cheese slicer model. End quote G.T.A.

Because of recession?
Its because of digital information, robotics, A.I. and energy slaves. Labor theories of value no longer work. Hello?

In Part 1 of this post, I pointed out that an economy is closely linked with the resources that underly it. Because of this, if there is really is a limit that prevents oil supply from rising endlessly, then there is also a limit that prevents debt from rising endlessly. I talked about seeing a two-way link between peak oil and peak debt. End quote G.T.A.

Huh? If there is really a limit that prevents oil supply from rising endlessly?????, that is a given. Its a natural resource. It is a limited quantity. Peak oil. We can make more but that would be pointless. Thermodepolymerization but not a good idea. Climate change.

What about debt?
Debt is not real.
It controls the current operating system.
It is make believe. This is the issue.
We are using an abstract value concept to measure something real.

How can this connection together (peak oil/peak debt, then be taken seriously?? as an intellectual/science connection/issue and a supposed given?
In other words the premise or logic here is wrong. Really wrong. Totally wrong. O.k.?

How is it that debt, 'debt tokens', or 'money', is part of a serious discussion on peak oil except to illustrate the point that debt is fake and oil as a mechanism to run society is real and never again will the twain meet in a happy medium because of the current time period of digital information being free... robotics having taken over most human labor... a.i. taking over multiple jobs, etc?

Also the idea of peak oil??? Hubbert pointed out that our current 'operating system' the price system is the problem, having or not having oil to 'sell' is a side issue. A commercial concern.
The basis of the way society operates is the actual question, and there is no Hollywood ending for the current situation except a tragic disaster movie Hubbert and Manhours & Distribution

So, the problem is not oil, peak or other, or debt. Alternatives exist. The problem is the operating system of money systems, that only are concerned about profit.

Solar is the future if there is a future. Not oil. Burning oil made climate change and climate change is real, unlike debt tokens.

I see the focus (money), the questions (money mostly), the supposed answers (money related), on the Oil Drum as being about as wrong headed as can be possible, and still be in the remote context of this subject.

The most farm labor is done by guest workers. Mind you, one guest worker with a bulldozer or a tractor can replace an entire little town of long-handled tool users... but that happened long ago. It is not "robotics"

The most manufacturing is done by hand in China. They have machines, too... but are not seriously displaced by robots. If you design for the assembly of a low-volume item by "hard automation" and send it to China, you have done the wrong thing. These are also machines, not "robots".

There are two energy streams into the American economy. One is oil mainly for transportation. The other is coal, gas, nuclear, and all the rest used for stationary applications. Any operation takes energy. It is the source of "money". Even mining gold is an operation. The subjects are intertwined.

Debt is not real.

I find virtually all criticisms of Gail's post to be embedded with such banal remarks.

So, the problem is not oil, peak or other, or debt. Alternatives exist. The problem is the operating system of money systems, that only are concerned about profit.

Right, peak oil is not a problem at all, the problem is all the economies of the world that are concerned with employing and feeding their populations, and oil companies that expect to be paid for supplying the oil, the lifeblood of all those economies.

We should just switch to those "alternatives" and solve this problem. Simple, so simple. Why can't people understand that?

One of the problems is people, that the majority of the people of the world, like John here, see such simple problems to the very complex problem of overshoot. We could just get off the oil that got us here and jump on the solar bandwagon and everything would be just fine. Well that would be after we all switched from an economic system that is concerned about profit to one where all companies did not care one whit about profits. I am not sure how John would say we could pull that off but I am sure it would be very simple also.

Ron P.

You hit the nail on the head, of course. Overpopulation is the underlying "500 pound gorrila in the room" that no one mentions in discussions, at least in the MSM.

Look at the places that are now experiencing widespread civil unrest. The cause is (almost) always food and/or water. And, the fundamental of that today includes unemployment, since food must be purchased. Of course, it could be purchased using debt, but unemployed people have no credit.

That this difficulty presents first in MENA is disturbing. Malappropriation of the national resources by a ruling elite is the obvious cause. Those elites, in MENA and here, control the government by bribery. Of course, 'lobbying' is legalized bribery. Campaign contributions do not come from the poor, but from the wealthy. Candidates for office recognize this fact. They also know what the wealthy want, and since the source of their funding demands it, they pay off.

I wish there was a simple solution to the problem. Over time it was the unemployment in America that lead to unrest and a significant (if inadequate) political change in the 1930's. Increasing underemployment of Americans will most likely precede the next upheaval. Unlike the last one, this event will almost certainly include both political change and dramatic societal dislocation. Though I have never see a statistic recognizing it, the chance that the 'Great Depression' caused many deaths seems likely to me. Perhaps not from starvation, but poor nutrition also leads to disease, and my family history includes the death at young ages of a number of infants and young children. Older people may have been include in my family, but cause of death was not officially from disease.

The new depression, either already upon us or looming like the Sword of Damocles, may have statistics that include deaths from starvation, as well as disease. Oh, and from heat, as power is turned off to the unemployed during Summers of extreme heat. Or from cold, in the Northern tier of states.

Our task, if we choose to accept it, is to make a total paradigm change to no growth, downsizing, and minimal sustainable energy use, with wealth distribution and food production matching population sizes. Our alternative, should we neglect that assignment, is sudden, radical population loss, civil unrest, and perhaps global conflict. That the last feature includes nuclear exchanges seems a given.

The problem today is one of distribution, mostly of wealth. The next problem will be supply. Things simply cannot continue as they are... not population, not the economy, and not energy. We 'cannot' wait, and at the same time we 'cannot' change. Between the horns of that dilemna lies perdition.


Ah Ron P. sorry. You lost the argument.
It seems you are uninformed or uneducated about biophysical economics and their origin. Debate is pretty much over in your context of thinking.
It is a kind of 'mud in the last ditch' way of looking at the world.

The Price System dead ends itself probably in a very spectacular way soon, mostly because so many people follow information they think they know, going in the direction that their nose is pointing, to things they 'know'.
That is not critical thinking.

Do some research on non market biophysical economics, sometimes referred to as 'thermoeconomics'.

Suggestion... brush up on history and American history in particular from the 1930's.
It was a creative time.
The Technocracy movement and its ideas were the largest social movement in the U.S. and Canada at that time, and for a brief moment, it was thought by serious people, that we could move into a science based system.
There were 18 former Technocrats in F.D.R.'s administration.

I have tried to give you a little information on that and you keep referring back to 'price' and 'debt tokens', or money in context with corporations?

Right, peak oil is not a problem at all, the problem is all the economies of the world that are concerned with employing and feeding their populations, and oil companies that expect to be paid for supplying the oil, the lifeblood of all those economies. End Quote Ron P.

No that is not correct.
The 'expecting to be paid' thing is the problem and it is a problem because of the current and past methods of the political price system.
Money does not measure anything real.
Using 'debt' previously worked to keep society going, more or less.
Now it won't. So we are going to go through some extreme trauma as 'energy' economics comes face to face with 'debt/money' economics, and society is torn apart as our resource base is destroyed for 'money' and we find ourselves in a new planet wave of change.

No one knows how it plays out but the 'next most probable' says, that we are going to adopt a new operating system based on energy if we are interested in keeping industrial civilization or civilization in general on a high level of energy conversion.
Probably the early technocrats struck on the best presentation of that, or maybe the most creative humanistic presentation with their suggestions of 'energy accounting'.

Its the operating system we are using that is the problem Howard Scott: Science v.s. Chaos.

It appears that we are going to destroy the world for no particular reason than making money for people that are not aware of the current dynamic green house gas's explained.

Ron P. give this a read Biophysical Economics by Encyclopedia Of Earth E.O.E.

The problem is John, that you do not live in the real world. We live in the real world where debt, money and an economy that depends heavily on oil are real. This debate is about:

1. Peak oil tends to cause peak debt. This is what I discussed in Part 1.

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

And you bring in abstract arguments like "Debt is not real... It is make believe... Money does not measure anything real." Poppycock! Peak oil causes peak debt and peak debt will cause the economy to decline even faster. Private debt is clearly declining and has been ever since the price of oil peaked in July of 2008. Debt unwind has already started.

Abstract economic theory cannot change the facts. We, Gail and about ninety percent of contributors to this list, are talking about what is happening in the real world, not what abstract economy predicts if only...

Ron P.

You bring in abstract arguments like "Debt is not real... It is make believe... Money does not measure anything real." Poppycock!

Actually, Darwinian, he (John Carter) is correct.

"Money" is not a physical thing that is part of the physical universe.
"Debt" is not a physical thing that is part of the physical universe.

Both are mere fabrications of the human mind --just as Santa Claus and the Tooth Fairy are.

Each of our mentally-fabricated concepts of "Money" and "Debt" represents a "promise" that is made from a first believing human to one or more other gullible humans.

But of course, you are right also!

The gullible humans who drill for oil will refuse to do so if they come to believe that they will not receive more of the "money" stuff for the end result of their efforts than the amount of "money" stuff that they need to stuff into the start of the oil extraction enterprise (what they "invest") in the first place.

Therefore, the fictitious beliefs in our minds (about "money", "debt" and probability of an ROI$$ greater than unity) do end up having real world consequences on how we behave and how much oil is attempted to be extracted from deep under.


In this Monday's Cluster-you-know-what post, Kunstler muses over the same issues:

This is the way the world ends ... This phase of globalism is certainly not the end of history, but it is looking like the end of accounting tricks, and possibly democracy, which has discredited itself with accounting tricks.

At a certain point in time, the sickening recognition sets in that appearances are not the same as reality - and then, all of a sudden, you're in a political maelstrom.

Citizens of the various lands will discover that the money being argued over, shifted around from column A to column B, assigned to this or that actuarial table or budget line or account or obligation or vault or "structured vehicle"- that money is just... not... there. There's no money. It was pretend money. From now on, none of you will get paid. Imagine a world where nobody gets paid.

No, Kunstler is not saying what you seem to think he is saying. At this same link says;

Europe is arguably worse off money-wise, more broke, flimsier, crapped out, crippled, and paralyzed.

Now how can someone be out of something that is not real? What does "broke" mean when you are saying you are out of something that never existed? Or:

Our money problems will not go away and after a while this land will not be governable by familiar means. In case you haven't noticed, the rule of law is already AWOL in many sectors of our national life, most particularly money matters, but before long on every street-corner, every highway strip, plus every GMO cornfield, and brownfield.

There can be pretend money and there can be real money. True, money is a rubber yardstick, it's value keeps changing, but it buys real commodities in the real world. Money is a medium of exchange. Debt is money owed.

Also money can be loaned into existence and when it is paid back it disappears like into thin air. But while it is there it is real as rain and it causes things to be done. Money is a claim on either labor or goods. And without it you can buy nothing. But you can sell your labor in order to get money.

Ron P.

How can someone be out of something that is not real?


On Day 1, a 5 year old child is waiting for Santa Claus to grant his wish (a new sled he will call Rosebud).

On Day 2, the child learns that Santa was never real.

Now the child is "out of something that is/was not real".

The same analogy can be made using citizens of the former Soviet Union who thought the promises of Communism were "real".

Communism made "promises".
Capitalism makes "promises".

Communism did not deliver on its promises.
Capitalism will ... (yes/no?) on its promises.

Same difference.

At least by the Gov. I keep trying, just does not work.

"Money" is not a physical thing that is part of the physical universe.
"Debt" is not a physical thing that is part of the physical universe.

And this, you imply, means that debt and money are not real and/or not a measure of anything. Step, come on now man, you know better than that. An inch is not a physical thing that is part of the physical universe. It is a unit of measure, a real unit of measure.

It is a mistake, Step, to assume that because you cannot put your hand on something and feel something firm, that it is not real. I can think of thousands of things that are not part of terra firma that are real, very real. The roar of a lion comes to mind. Would that be real?

John was just trying to sound really smart and wound up sounding the exact opposite.

Ron P.

The nature of money
All money is decreed money, fiat, whether of silver, gold, paper, barley or shells.
The top says this is money... or else?

You farmer are on the land owned by the LORD of the land and will pay tribute to the LORD
of 1 Gold coin a year...
Where do I get this GOLD coin?
You can take one short ton of grain to the granary of the LORD and there you will be given a GOLD coin for it and then you can give the gold coin to the servant of the LORD...

What if I refuse?
Then the LORD will drive you from the Land that the LORD is the LORD of...

There you go... an abundant supply, of free food to power your wildest hopes and dreams... lies and delusions...

22 And The LORD said, Behold! The man has become as one of Us, to know good and evil. And now, lest he put forth his hand and also take from the Tree of Life, and eat, and live forever, 23 The LORD sent him out of the garden of Eden to till the ground out of which he was
24 And He drove the man out.
And He lodged the cherubs at the east of the Garden of Eden, and the flaming sword whirling around to guard the way of the Tree of Life.

Well... what is done with all that food the tillers of the Lord's land give the LORD as Tribute? It powers the Political Price System.
The city state... or Civilization...

Though the basic idea or system from Mesopotamia (political government invented religion and contract society) more or less worked when we were flat lined as to energy conversion for thousands of years... it no longer works.

The amount of kilogram calories burned or converted for the average North American is staggering compared with the number converted in the social system designed in Sumer, for a low energy conversion culture. Staggering also compared to the amount of calories converted for the average North American around the year 1920.

And that is the idea.
That idea. Its the system now that needs changing.
Peak oil or peak debt are non issues except in the current operating system and technology destroys the Price System because it eliminates the ability to consume for a variety of reasons.

And yes, that is partly what Kunstler is implying. The time of controlling citizens of the various lands with money being argued over, shifted around from column A to column B, assigned to this or that actuarial table or budget line or account or obligation or vault or "structured vehicle"- that money is just... not... there.
The resources are.

Come on now man, you know better than that,

I never said they didn't have "consequences" as between believing persons.

Why heck, although witches don't/didn't exist, to be accused of being one in Salem Massachusetts not too long ago still had "consequences".

Just because they burn people accused of being witches, and that part is "real", it doesn't make witches a real part of the physical universe. The latter part is still a man-made fiction.

[ i.mage.+]

You can get burnt on account of money problems.
But that doesn't make "money real.