Are Gilets Jaunes the new guillotine?

8 12 2018

POPULAR UNREST IN AN AGE OF FALLING PROSPERITY

Between my French origins and the opinions expressed within this little blog, I have taken more than a passing interest in the events happening in France, especially when it’s fuelled by passionate and restless wwoofers who come from there too! As you will or should know, I believe the real economy runs on energy, not money, and surplus energy in particular…… as a result, I have been following Tim Morgan’s Surplus Energy Economics blog for a while, which I would encourage you all to follow too. This is Tim’s latest gem, which proves that when you do the math…….  the truth comes out!

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This weekend, the authorities plan to field 89,000 police officers across France in response to anticipated further mass protests by the ‘gilets jaunes’. In the capital, the Eiffel Tower will be closed and armoured cars deployed, whilst restaurateurs and shopkeepers are being urged to close their businesses at one of the most important times of their trading year.

Though the government has climbed down on the original cause célèbre – the rises in fuel taxes planned for next year – there seems to be no reduction in the worst protests experienced in the country since the 1960s. Reports suggest that as many as 70% of French citizens support the protestors, and that the movement may be spreading to Belgium and the Netherlands.

For the outside observer, the most striking features of the protests in France have been the anger clearly on display, and the rapid broadening of the campaign from fuel prices to a wider range of issues including wages, the cost of living and taxation.

The disturbances in France should be seen in a larger context. In France itself, Emmanuel Macron was elected president only after voters had repudiated all established political parties. Italians have entrusted their government to an insurgent coalition which is on a clear collision-course with the European Union over budgetary matters. The British have voted to leave the EU, and Americans have elected to the White House a man dismissed by ‘experts’ as a “joke candidate” throughout his campaign.

Obviously, something very important is going on – why?

Does economics explain popular anger?

There are, essentially, two different ways in which the events in France and beyond can be interpreted, and how you look at them depends a great deal on how you see the economic situation.

If you subscribe to the conventional and consensus interpretation, economic issues would seem to play only a supporting role in the wave of popular unrest sweeping much of the West. You would concede that the seemingly preferential treatment of a tiny minority of the very rich has angered the majority, and that some economic tendencies – amongst them, diminishing security of employment – have helped fuel popular unrest.

Beyond this, though, you would note that economies are continuing to grow, and this would force you to look for explanations outside the purely economic sphere. From this, you might conclude that ‘agitators’, from the right or left of the political spectrum, might be playing a part analogous to the role of “populist” politicians in fomenting public dissatisfaction with the status quo.

If, on the other hand, you subscribe to the surplus energy interpretation of the economy professed here, your view of the situation would concentrate firmly on economic issues.

Though GDP per capita may be continuing to improve, the same cannot be said of prosperity. According to SEEDS (the Surplus Energy Economics Data System), personal prosperity in France has deteriorated by 7% since 2000, a trend starkly at variance with the growth (of 12%) in reported GDP over the same period.

Not only is the average French person poorer now than he or she was back in 2000, but each person’s share of the aggregate of household, business and government debt has increased by almost 70% since 2000. These findings are summarised in the following table, sourced from SEEDS.

France prosperity snapshot

Two main factors explain the divergence between the conventional and the surplus energy interpretations of the economy. One of these is the pouring of enormous quantities of cheap debt and cheap money into the system, a process which boosts recorded GDP without improving prosperity (for the obvious reason that you can’t become more prosperous just by spending borrowed money). The other is the exponential rise in the energy cost of energy (ECoE), a process which impacts prosperity by reducing the share of output which can be used for all purposes other than the supply of energy itself.

In France, and with all sums expressed in euros at constant 2017 values, GDP grew by 23% between 2000 and 2017. But this growth, whilst adding €433bn to GDP, was accompanied by a €3.07tn increase in aggregate debt. This means that each €1 of reported growth in the French economy has come at a cost of more than €7 in net new debt. Put another way, whilst French GDP is growing at between 1.5% and 2.0%, annual borrowing is running at about 9.5% of GDP.

Cutting to the chase here, SEEDS concludes that very little (about €100bn) of the reported €433bn rise in GDP since 2000 has been sustainable and organic, with the rest being a simple function of the spending of borrowed money. Shorn of this credit effect, underlying or clean GDP per capita is lower now (at €29,550) than it was in 2000 (€30,777).

Meanwhile, trend ECoE in France is put at 7.8%. Though by no means the worst amongst comparable economies, this nevertheless represents a relentless increase, rising from 4.6% back in 2000. At the individual or household level, rising ECoE is experienced primarily in higher costs of household essentials. In the aggregate, ECoE acts as an economic rentdeduction from clean GDP.

Between 2000 and 2017, clean GDP itself increased by only 5.7%, and the rise in ECoE left French aggregate prosperity only marginally (2.2%) higher in 2017 than it was back in 2000. Over that same period, population numbers increased by 10%, meaning that prosperity per person is 7.1% lowernow than it was at the millennium.

In France, as elsewhere, the use of credit and monetary adventurism in an effort to deliver “growth” has added markedly to the aggregate debt burden, which is €3.1tn (86%) higher now than it was in 2000. The per capita equivalent has climbed by 69%, making the average person €41,800 (69%) more indebted than he or she was back in 2000.

The prosperity powder-keg

Gilets Jaunes Acte 3 – Samedi 1er Décembre – Perpignan

To summarise, then, we can state the economic circumstances of the average French citizen as follows.

First, and despite a rise in official GDP per capita, his or her personal prosperity is 7.1% (€2,095) lower now than it was as long ago as 2000.

Second, he or she has per capita debt of €102,200, up from €60,400 back in 2000.

Third, the deterioration in prosperity has been experienced most obviously in costs of household essentials, which have outpaced both wages and headline CPI inflation over an extended period.

This is the context in which we need to place changes in the workplace, and a perceived widening in inequality.

On this latter point, part of the explanation for the anger manifested in France can be grasped from this chart, published by the Institut des Politiques Publiques.

In the current budget, policy changes hurt the disposable incomes of the poorest 10% or so (on the left of the scale), but ought to be welcomed by most of the rest – and perhaps might be, were it not for the huge handouts seemingly being given to the very wealthiest. Moreover, these benefits aren’t being conferred on a large swathe of “the rich”, but accrue only to the wealthiest percentile.

French budget 2

This is part of a pattern visible throughout much of the West. Unfortunately, perceptions of hand-outs to a tiny minority of the super-rich have arisen in tandem with a deteriorating sense of security. Security is a multi-faceted concept, which extends beyond security of employment to embrace prosperity, wages, living costs and public services.

Even in the euphoric period immediately following his election, it seemed surprising that French voters would back as president a man committed to ‘reform’ of French labour laws, a process likely to reduce workers’ security of employment. Add in further deterioration in prosperity, and an apparent favouring of the super-rich, and the ingredients for disaffection become pretty obvious.

Where next?

The interpretation set out here strongly indicates that protests are unlikely to die down just because the government has made some concessions over fuel taxes – the ‘gilet jaunes’ movement might have found its catalyst in diesel prices, but now embraces much wider sources of discontent.

Given the context of deteriorating prosperity, it’s hard to see how the government can respond effectively. Even the imposition of swingeing new taxes on the super-rich – a wildly unlikely initiative in any case – might not suffice to assuage popular anger. It seems likelier that the authorities will ramp up law enforcement efforts in a bid to portray the demonstrators as extremists. The scale of apparent support for the movement – if not for some of its wilder excesses – suggests that such an approach is unlikely to succeed.

Of course, it cannot be stressed too strongly that the French predicament is by no means unique. Deteriorating prosperity, a sense of reduced security and resentment about the perceived favouring of the super-rich are pan-European trends.

In the longer term, trends both in prosperity and in politics suggest that the West’s incumbent elites are fighting a rear-guard action. The credibility of their market economics mantra suffered severe damage in 2008, when market forces were not allowed to run to their logical conclusions, the result being a widespread perception that the authorities responded to the global financial crisis with rescues for “the rich” and “austerity” for everyone else.

This problem is exacerbated by the quirks of the euro system. In times past, a country like Italy would have responded to hardship by devaluation, which would have protected employment at the cost of gradual increases in the cost of living. Denied this option, weaker Euro Area countries – meaning most of them – have been forced into a process of internal devaluation, which in practice means reducing costs (and, principally, wages) in a way popularly labelled “austerity”. The combination of a single monetary policy with a multiplicity of sovereign budget processes was always an exercise in economic illiteracy, and the lack of automatic stabilisers within the euro system is a further grave disadvantage.

Finally, the challenge posed by deteriorating prosperity is made much worse by governments’ lack of understanding of what is really happening to the economy. If you were to believe that rising GDP per capita equates to improving prosperity – and if you further believed that ultra-low rates mean that elevated debt is nothing to worry about – you might really fail to understand what millions of ordinary people are so upset about.

After all, as somebody might once have said, they can always eat brioche.

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The shape of things to come…..?

30 11 2018

Consciousness of Sheep keeps coming up with magnificent articles, like this one…..  

I know I keep saying this too, but the Matrix can’t continue lurching about for too much longer….

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Despite a series of stock market scares, see-sawing oil prices and central banks jacking up interest rates, it seems likely that we are going to get through 2018 without experiencing the economic crash that many expected at the start of the year.  But while we may breathe a sigh of relief to have got to the festive season without a complete meltdown, the odds of another crash are still high.

Understanding what might go wrong is a particular problem according to Helen Thompson at the New Statesman.  Not least because 10 years on, we still cannot agree on what caused the last one:

“In July 2008 the then president of the European Central Bank (ECB), Jean-Claude Trichet, declared while announcing an increase in interest rates that the Eurozone’s fundamentals were sound. In fact, a recession had begun in the first quarter of that year.

“The causes of recessions are also sometimes wrongly diagnosed – even in retrospect. For instance, the impact of exceptionally high oil prices and the response of central banks to those prices are still routinely ignored as causes of the US and European recessions in the aftermath of the 2008 crash.”

Thompson’s article sets out a range of weaknesses across the global economy where a new economic meltdown could begin.  China, the (albeit anaemic) growth engine of the global economy for the last decade, has developed debt problems not dissimilar to those in the west in 2008:

“Economic growth in China has been slowing since the second half of 2017, and even the growth of the first half of that year was an interruption of a downward slope that began in 2013. Predictions of a Chinese financial crisis, owing to the country’s huge accumulation of debt since 2008, are made too readily. But China is now caught between a policy shift towards deleveraging to try to avoid such a debt-induced financial crisis, and another debt-financed push for higher growth amid an economic slowdown and a fierce trade war with the US. The Chinese government is struggling under these conflicting imperatives as the country’s dollar reserves fall.”

The Eurozone is also in trouble:

“Growth in the third quarter was the weakest since the second quarter of 2014. Germany’s economy contracted and Italy’s experienced no growth. If the Eurozone’s troubles were confined to Italy, there would be less cause for concern. But even Germany’s powerhouse economy is weakening: retail sales and exports have fallen for several successive months.”

Canada – like the UK – is a basket case just waiting the central bank to add that last interest rate hike to push it over the edge.  Things are more complicated across the border in the USA:

“The official US unemployment rate stands at 3.7 per cent, the lowest since 1969. But this masks a notably low participation rate (62.9 per cent), as significant numbers of people have withdrawn from the labour market. Ever-fewer jobs sustain middle-class lifestyles, especially in cities where housing costs have risen over the past decade.”

Of course, a “black swan” event beyond the areas that Thompson points to might also prove to be the trigger for the next meltdown.  A collapse in the Australian property market, renewed conflict in one of the successor states of the Soviet Union or an oil shock in the Middle East are not beyond the bounds of possibility in 2019.

What is clear, however, is that we are in uncharted territory when it comes to understanding and having any chance of fixing the next meltdown.  As Thompson points out:

“Central banks cannot fix what they set in motion after 2008. There appears to be no way forward that would let this economic cycle play out without risking much more disruption than the typical recession would bring. What is at stake is compounded by the problem of oil: shale production must be sustained by one or more of the following: high prices, extremely cheap credit or investors’ indifference to profitability.

“When a recession does come, central banks are unlikely to be able to respond without wading even further into uncharted monetary and political waters. And major economies will have significantly higher levels of debt than in 2008, interest rates will already be low and central banks will have enormous balance sheets. As a consequence, a policy response comparable to that of 2008 is likely to be more dangerous and insufficient to restore sustained growth. In times of fear, high debt ensures that, beyond a certain point, consumers simply cannot be incentivised to spend more. Even if they were to be tempted with ‘helicopter money’ from central banks – new money distributed freely to citizens – there is no guarantee at all that the money would do much for aggregate demand.”

Unusually for a mainstream academic Thompson – who is a professor of political economy at Cambridge University – grasps the impact of energy on the economy; particularly the hard choices that face politicians and central bankers as we transition from energy growth to energy decline:

“It has become impossible to confront the economic predicaments in the global economy without contemplating sacrifice, whether that be politicians and central bankers choosing where the heavy costs of the next policy response will fall, or recognising the role that energy sustainability has in maintaining material living standards and a liberal international politics…”

Tighter energy, coupled to the central bank policies that have kept business as usual limping along since the last meltdown, has given rise to a populist revolt that has thus far focused on the democratic pathways in liberal democracies, but has also favoured an emboldened nationalist right that has successfully targeted immigration as the cause of people’s woes.  Worse still, via social media, contrarian economists like Steve Keen, campaign groups like Positive Money and even central bank economists themselves, far more people understand that zero percent interest rates and quantitative easing were designed to favour the already wealthy at the expense of the majority of the population.  It would be lunacy for politicians and central bankers to attempt to do the same thing again this time around:

“The 2007-09 recessions exposed the political discontent that had grown in Western democracies over the previous decade. The next recession will begin with that discontent already bringing about substantial political disruption – from Brexit to Trump’s election to the Lega-Five Star coalition in Italy – which in itself has become a source of economic fear. The economic dangers that lurk are only likely to increase political fragmentation, especially when there is little understanding of the structural economic forces that serve to divide people.”

Unfortunately, the political left are like so many rabbits caught in the headlights in relation to the crisis that is coming.  Rather than the right wing economic and social policies of Trump or the European nationalist parties, the left is most opposed to the populism that these movements harness.  The opposite of populism, of course, is elitism… and that puts the political left on the same platform that Marie Antoinette found herself on in October 1793.

There is no written law that says that the political left or even benign liberals have to win in the end – that storyline only works in Hollywood movies.  In the crisis that we are about to face – whether it be 2019 or 2020 – responding with more policies that favour the wealthy while driving the faces of the poor into the dirt can only end one way, as Thompson reminds us:

“History is full of grisly episodes, usually in eras of revolution, when the politics of sacrifice have come to the fore. Indeed, in many ways, the whole ideal of Western liberal democracies in the postwar world has been about the importance of avoiding such a politics, even as the policies governments pursued unavoidably created winners and losers.

“But the conditions for politics have now become much harder, and the collective and individual question of our times has become how we can confront the inescapable political conflict generated by deep economic dysfunctionality without losing the democratic and liberal foundations of political order as we know it?”

The answer to this question might be the same as the answer to the two other existential crises facing us – How can we prevent runaway climate change without undermining our civilisation? And how can we prevent resource depletion and energy decline undermining it?  The answer is very likely to be that we can’t.





Interesting times ahead…..

29 11 2018

Very few people join all the dots, and as usual, Gail Tverberg does her best to do so here again…. There are so many signals on the web now pointing to a major reset it’s not funny.

Low Oil Prices: An Indication of Major Problems Ahead?

Many people, including most Peak Oilers, expect that oil prices will rise endlessly. They expect rising oil prices because, over time, companies find it necessary to access more difficult-to-extract oil. Accessing such oil tends to be increasingly expensive because it tends to require the use of greater quantities of resources and more advanced technology. This issue is sometimes referred to as diminishing returns. Figure 1 shows how oil prices might be expected to rise, if the higher costs encountered as a result of diminishing returns can be fully recovered from the ultimate customers of this oil.

In my view, this analysis suggesting ever-rising prices is incomplete. After a point, prices can’t really keep up with rising costs because the wages of many workers lag behind the growing cost of extraction.

The economy is a networked system facing many pressures, including a growing level of debt and the rising use of technology. When these pressures are considered, my analysis indicates that oil prices may fall too low for producers, rather than rise too high for consumers. Oil companies may close down if prices remain too low. Because of this, low oil prices should be of just as much concern as high oil prices.

In recent years, we have heard a great deal about the possibility of Peak Oil, including high oil prices. If the issue we are facing is really prices that are too low for producers, then there seems to be the possibility of a different limits issue, called Collapse. Many early economies seem to have collapsed as they reached resource limits. Collapse seems to be characterized by growing wealth disparity, inadequate wages for non-elite workers, failing governments, debt defaults, resource wars, and epidemics. Eventually, population associated with collapsed economies may fall very low or completely disappear. As Collapse approaches, commodity prices seem to be low, rather than high.

The low oil prices we have been seeing recently fit in disturbingly well with the hypothesis that the world economy is reaching affordability limits for a wide range of commodities, nearly all of which are subject to diminishing returns. This is a different problem than most researchers have been concerned about. In this article, I explain this situation further.

One thing that is a little confusing is the relative roles of diminishing returns and efficiency. I see diminishing returns as being more or less the opposite of growing efficiency.

The fact that inflation-adjusted oil prices are now much higher than they were in the 1940s to 1960s is a sign that for oil, the contest between diminishing returns and efficiency has basically been won by diminishing returns for over 40 years.

Oil Prices Cannot Rise Endlessly

It makes no sense for oil prices to rise endlessly, for what is inherently growing inefficiency. Endlessly rising prices for oil would be similar to paying a human laborer more and more for building widgets, during a time that that laborer becomes increasingly disabled. If the number of widgets that the worker can produce in one hour decreases by 50%, logically that worker’s wages should fall by 50%, not rise to make up for his/her growing inefficiency.

The problem with paying higher prices for what is equivalent to growing inefficiency can be hidden for a while, if the economy is growing rapidly enough. The way that the growing inefficiency is hidden is by adding Debt and Complexity (Figure 4).

Growing complexity is very closely related to “Technology will save us.” Growing complexity involves the use of more advanced machinery and ever-more specialized workers. Businesses become larger and more hierarchical. International trade becomes increasingly important. Financial products such as derivatives become common.

Growing debt goes hand in hand with growing complexity. Businesses need growing debt to support capital expenditures for their new technology. Consumers find growing debt helpful in affording major purchases, such as homes and vehicles. Governments make debt-like promises of pensions to citizen. Thanks to these promised pensions, families can have fewer children and devote fewer years to child care at home.

The problem with adding complexity and adding debt is that they, too, reach diminishing returns. The easiest (and cheapest) fixes tend to be added first. For example, irrigating a field in a dry area may be an easy and cheap way to fix a problem with inadequate food supply. There may be other approaches that could be used as well, such as breeding crops that do well with little rainfall, but the payback on this investment may be smaller and later.

A major drawback of adding complexity is that doing so tends to increase wage and wealth disparity. When an employer pays high wages to supervisory workers and highly skilled workers, this leaves fewer funds with which to pay less skilled workers. Furthermore, the huge amount of capital goods required in this more complex economy tends to disproportionately benefit workers who are already highly paid. This happens because the owners of shares of stock in companies tend to overlap with employees who are already highly paid. Low paid employees can’t afford such purchases.

The net result of greater wage and wealth disparity is that it becomes increasingly difficult to keep prices high enough for oil producers. The many workers with low wages find it difficult to afford homes and families of their own. Their low purchasing power tends to hold down prices of commodities of all kinds. The higher wages of the highly trained and supervisory staff don’t make up for the shortfall in commodity demand because these highly paid workers spend their wages differently. They tend to spend proportionately more on services rather than on commodity-intensive goods. For example, they may send their children to elite colleges and pay for tax avoidance services. These services use relatively little in the way of commodities.

Once the Economy Slows Too Much, the Whole System Tends to Implode

A growing economy can hide a multitude of problems. Paying back debt with interest is easy, if a worker finds his wages growing. In fact, it doesn’t matter if the growth that supports his growing wages comes from inflationary growth or “real” growth, since debt repayment is typically not adjusted for inflation.

Both real growth and inflationary growth help workers have enough funds left at the end of the period for other goods they need, despite repaying debt with interest.

Once the economy stops growing, the whole system tends to implode. Wage disparity becomes a huge problem. It becomes impossible to repay debt with interest. Young people find that their standards of living are lower than those of their parents. Investments do not appear to be worthwhile without government subsidies. Businesses find that economies of scale no longer work to their advantage. Pension promises become overwhelming, compared to the wages of young people.

The Real Situation with Oil Prices

The real situation with oil prices–and in fact with respect to commodity prices in general–is approximately like that shown in Figure 6.

What tends to happen is that oil prices tend to fall farther and farther behind what producers require, if they are truly to make adequate reinvestment in new fields and also pay high taxes to their governments. This should not be too surprising because oil prices represent a compromise between what citizens can afford and what producers require.

In the years before diminishing returns became too much of a problem (back before 2005, for example), it was possible to find prices that were within an acceptable range for both sellers and buyers. As diminishing returns has become an increasing problem, the price that consumers can afford has tended to fall increasingly far below the price that producers require. This is why oil prices at first fall a little too low for producers, and eventually seem likely to fall far below what producers need to stay in business. The problem is that no price works for both producers and consumers.

Affordability Issues Affect All Commodity Prices, Not Just Oil

We are dealing with a situation in which a growing share of workers (and would be workers) find it difficult to afford a home and family, because of wage disparity issues. Some workers have been displaced from their jobs by robots or by globalization. Some spend many years in advanced schooling and are left with large amounts of debt, making it difficult to afford a home, a family, and other things that many in the older generation were able to take for granted. Many of today’s workers are in low-wage countries; they cannot afford very much of the output of the world economy.

At the same time, diminishing returns affect nearly all commodities, just as they affect oil. Mineral ores are affected by diminishing returns because the highest grade ores tend to be extracted first. Food production is also subject to diminishing returns because population keeps rising, but arable land does not. As a result, each year it is necessary to grow more food per arable acre, leading to a need for more complexity (more irrigation or more fertilizer, or better hybrid seed), often at higher cost.

When the problem of growing wage disparity is matched up with the problem of diminishing returns for the many different types of commodity production, the same problem occurs that occurs with oil. Prices of a wide range of commodities tend to fall below the cost of production–first by a little and, if the debt bubble pops, by a whole lot.

We hear people say, “Of course oil prices will rise. Oil is a necessity.” The thing that they don’t realize is that the problem affects a much bigger “package” of commodities than just oil prices. In fact, finished goods and services of all kinds made with these commodities are also affected, including new homes and vehicles. Thus, the pattern we see of low oil prices, relative to what is required for true profitability, is really an extremely widespread problem.

Interest Rate Policies Affect Affordability

Commodity prices bear surprisingly little relationship to the cost of production. Instead, they seem to depend more on interest rate policies of government agencies. If interest rates rise or fall, this tends to have a big impact on household budgets, because monthly auto payments and home payments depend on interest rates. For example, US interest rates spiked in 1981.

This spike in interest rates led to a major cutback in energy consumption and in GDP growth.

Oil prices began to slide, with the higher interest rates.

Figure 11 indicates that the popping of a debt bubble (mostly relating to US sub-prime housing) sent oil prices down in 2008. Once interest rates were lowered through the US adoption of Quantitative Easing (QE), oil prices rose again. They fell again, when the US discontinued QE.

While these charts show oil prices, there is a tendency for a broad range of commodity prices to move more or less together. This happens because the commodity price issue seems to be driven to a significant extent by the affordability of finished goods and services, including homes, automobiles, and restaurant food.

If the collapse of a major debt bubble occurs again, the world seems likely to experience impacts somewhat similar to those in 2008, depending, of course, on the location(s) and size(s) of the debt bubble(s). A wide variety of commodity prices are likely to fall very low; asset prices may also be affected. This time, however, government organizations seem to have fewer tools for pulling the world economy out of a prolonged slump because interest rates are already very low. Thus, the issues are likely to look more like a widespread economic problem (including far too low commodity prices) than an oil problem.

Lack of Growth in Energy Consumption Per Capita Seems to Lead to Collapse Scenarios

When we look back, the good times from an economic viewpoint occurred when energy consumption per capita (top red parts on Figure 12) were rising rapidly.

The bad times for the economy were the valleys in Figure 12. Separate labels for these valleys have been added in Figure 13. If energy consumption is not growing relative to the rising world population, collapse in at least a part of the world economy tends to occur.

The laws of physics tell us that energy consumption is required for movement and for heat. These are the basic processes involved in GDP generation, and in electricity transmission. Thus, it is logical to believe that energy consumption is required for GDP growth. We can see in Figure 9 that growth in energy consumption tends to come before GDP growth, strongly suggesting that it is the cause of GDP growth. This further confirms what the laws of physics tell us.

The fact that partial collapses tend to occur when the growth in energy consumption per capita falls too low is further confirmation of the way the economics system really operates. The Panic of 1857occurred when the asset price bubble enabled by the California Gold Rush collapsed. Home, farm, and commodity prices fell very low. The problems ultimately were finally resolved in the US Civil War (1861 to 1865).

Similarly, the Depression of the 1930s was preceded by a stock market crash in 1929. During the Great Depression, wage disparity was a major problem. Commodity prices fell very low, as did farm prices. The issues of the Depression were not fully resolved until World War II.

At this point, world growth in energy consumption per capita seems to be falling again. We are also starting to see evidence of some of the same problems associated with earlier collapses: growing wage disparity, growing debt bubbles, and increasingly war-like behavior by world leaders. We should be aware that today’s low oil prices, together with these other symptoms of economic distress, may be pointing to yet another collapse scenario on the horizon.

Oil’s Role in the Economy Is Different From What Many Have Assumed

We have heard for a long time that the world is running out of oil, and we need to find substitutes. The story should have been, “Affordability of all commodities is falling too low, because of diminishing returns and growing wage disparity. We need to find rapidly rising quantities of very, very cheap energy products. We need a cheap substitute for oil. We cannot afford to substitute high-cost energy products for low-cost energy products. High-cost energy products affect the economy too adversely.”

In fact, the whole “Peak Oil” story is not really right. Neither is the “Renewables will save us” story, especially if the renewables require subsidies and are not very scalable. Energy prices can never be expected to rise high enough for renewables to become economic.

The issues we should truly be concerned about are Collapse, as encountered by many economies previously. If Collapse occurs, it seems likely to cut off production of many commodities, including oil and much of the food supply, indirectly because of low prices.

Low oil prices and low prices of other commodities are signs that we truly should be concerned about. Too many people have missed this point. They have been taken in by the false models of economists and by the confusion of Peak Oilers. At this point, we should start considering the very real possibility that our next world problem is likely to be Collapse of at least a portion of the world economy.

Interesting times seem to be ahead.





Italy and energy: a case study

22 10 2018

Since discovering Jean Marc Jancovici a couple of months ago, I have been following his work, which is mostly in French; but now and again he publishes something in English, so you guys can benefit from reading this while I prepare to drive my wife’s Suzuki Alto with a full load to Tasmania……  yes I am going to get my life back and get to enjoy sharing the fruits of my labour after a three year wait…..

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Italy is in trouble. Or more precisely, the country has been “abandonned by growth”. It is one of the few OECD countries that is unable to recover from the “2008 crisis”: its GDP is still lagging below 2007 levels. Would it be the simple result of the unability of the successive governments to make the “appropriate reforms”? It might well be that the explanation lies in something much more different, but much more unpleasant: physics.

First, statistics are unequivocal on the fact that growth has vanished, so far.

Year on year change of the GDP in Italy (or “annual growth rate”) since 1961 (blue curve), average per decade (red curve), and trend on the growth rate (green dotted line). It is easy to see that each decade has been less “successful” than the previous one since the beginning of this series, and that the decade that started in 2010 has an average growth rate which is… negative. Italy has therefore been in recession, “on average”, for the last 7 years.

Primary data from World Bank.

As the two are generally linked in Western countries, the debt on GDP ratio has risen to heights, botbh for public and private debt.

Debt on GDP ratio in Italy since 1995. Primary data from Eurostat.

Households debt on GDP ratio since 1960. Data from Bank for International Settlements.

Credit to the non financial sector on GDP ratio (corporates and households) for Italy. Data from Bank for International Settlements.

All this would not be so annoying – well, from an economic point of view – if growth were to resume, because then the money to repay all this extra debt would be available. But why doesn’t growth come back? Some say that this is due to the lack of reforms. This is due to the lack of reforms, but not the same (reforms), say others.

But what if the true reason is… the lack of energy? In Italy, as elsewhere, the machines that surround us everywhere (rolling mills, chemical plants, trains, fridges, elevators, trucks, cars, planes, stamping presses, drawers, extruders, tractors, pumps, cranes…) have 500 to 1000 times the power of the muscles of the population.

It’s these machines that produce, not men. Today, homes, cars, shirts, vacuum cleaners, fridges, chairs, glasses, cups, scissors, shampoo, books, frozen dishes, and all the other tens of thousands of products that you benefit from are produced by machines. If these machines lack energy, they operate less, production decreases, and so does the monetary counterpart of this production, that is the GDP. And it is probably what happened in our southern neighbor.

First of all, energy is definitely less abundant in Italy today than it was 10 years ago.

Primary energy used in Italy (sometimes called “primary energy consumption”; “primary” refers to the fact that it is the energy extracted from the environment in its raw form – raw coal, crude oil, crude gas, etc, not processed fuels or electricity that come out of the energy industries: refined fuels, electricity, processed gas, etc) since 1965. There was a maximum in 2005, i.e. 3 years before the fall of Lehman Brothers. It is impossible to attribute the decline in consumption to a crisis caused by the bankers’ negligence!

It is interesting to note that maximum of the energy consumption in Italy corresponds to the maximum gas production of Algeria (2005), Italy’s second largest gas supplier after Russia.

Oil and gas production in Algeria since 1965 (oil) and 1970 (gas). Oil production peaked in 2008, and gas production in 2003 so far (monthly data from the Energy Information Agency suggest that the gas production in Algeria is anew on the decline). Primary data from BP Statistical Review.

Italy is a major consumer of gas, because its electricity production relies on it for half of the domestic generation. This maximum (of energy consumption in Italy) also corresponds to the beginning of the stabilization of world oil production that took place between 2005 and 2010, which also led to a decrease in Italy’s import capacity in this precious liquid.

Monthly production of liquids (crude oil and condensates) worldwide. Data from the Energy Information Agency. We can clearly see the “plateau” that runs from 2005 to 2010, before the rise of the American shale oil, which has rekindled global growth and allowed the subsequent economic “rebound”.

Combined together, oil and gas accounted for 85% of Italian energy in 2005 (and accounted for 65% of its electricity production): less oil available on the world market (because a constant production must be shared with a growing importation from the emerging countries), and less gas available in Europe and Algeria led to a decline in supply beforethe beginning of the financial crisis.

In fact, when looking at trends over long periods, we can see that, in Italy as in all industrialized countries, i. e. with machines that produce instead of men, GDP is driven by available energy.

Rate of change (3 year running average) of the energy consumption in Italy (green curve) and rate of change (also 3 year running average) of the Italian GDP. It is noteworthy that the trend is the same for both. Where’s the hen, where’s the egg? For what follows, we just need one valid rule: less energy means less running machines and thus less GDP. And we see that when the energy growth slower, so does the GDP, one to two years later, which supports the idea that when it is energy that is constrained, GDP is forced to be constrained as well.

Data from BP Statistical Review for energy and World Bank for GDP

This “precedence” of energy over GDP will show up in another presentation of the same data.

Energy used in Italy (horizontal axis) vs. Italian GDP (in constant billions dollars) for the period 1965 to 2017. The curve start in 1965, at the bottom left, and then follows the chronological order upwards to the right

We note that the curve makes a series of “turns to the left” in 1974, 1979, and especially from 2005 onwards. The “turn on the left” means that it is first the energy that decreases, and then the GDP, excluding in fact a sequence that would explain the decrease in the energy consumed by the crisis alone (then the curve should “turn right”).

One can also notice that after the decline in GDP from 2006 to 2014, the line goes back to “normal”, that is going from “bottom left” to “top right”, which reflects a GDP that grows again because of an energy supply that does the same.

Author’s calculation based on BP Statistical Review & World Bank data

And then?

Well, for the moment energy supply is going downwards, but will it continue to do so in the future? For the first 3 components of the energy supply in Italy, things look pretty settled. For coal, all is imported. This fuel is a nightmare regarding logistics: a 1 GW power plant requires between 4000 and 10000 tonnes of coal per day, and this explains why when a country is not a coal producer its coal imports are never massive. Add on top that coal is clearly the first “climate ennemy” to shoot: calling massively on imported coal to compensate for the decline of the rest seems very unprobable.

Consumption (dotted lines) and production (solid line, actually zero all the time!) of coal in Italy. Data from BP Statistical Review.

Then comes oil. Italy imports almost all it uses, and when world production stopped growing in 2005, Italian consumption fell in a forced way – as in all OECD countries – because the emerging countries took an increasing share.

Consumption (dotted lines) and production (solid line) of oil in Italy. Data from BP Statistical Review.

Eventually comes gas. Here too, Italy had to reduce its consumption in a compulsory way after 2005, when Algerian production – which provides about a third of Italian consumption – peaked.

Consumption (dotted lines) and production (solid line) of gas in Italy. Data from BP Statistical Review.

Italy gave up nuclear power after Chernobyl, and so no “relief” can come from this technology. Hydroelectricity has been at its peak for decades, with all or most of the equippable sites having been equipped. In addition, the drying up of the Mediterranean basin due to climate change should also reduce rather than increase this production.

Hydroelectric production in Italy since 1965, in TWh (billion kWh) electricity. Data from BP Statistical Review.

Then remain the “new renewable”, mostly solar, biomass and wind energy, that now represent about the equivalent of hydropower. But solar and wind require a lot of capital to be deployed, and thus the irony is that if the economy “suffers” because of a decline in the supply of fossil fuels, there is fewer money to invest in this supply! Biomass requires a lot of land to become significant because of the biomass that has to be grown.

Non-fossil electricity production in Italy since 1965. We see that the “new renewable” (biomass, wind, solar) do a little more than hydroelectricity, i.e. 20% of the total production (of electricity only, of course). Data from BP Statistical Review.

As these means cannot quickly supply large extra quantities of electricity, and will quickly be limited by storage issues, the energy used in Italy remains massively fossil, and will do so in the short term.

Share of each energy in Italian consumption. Data from BP Statistical Review.

It is therefore likely that Italy will remain massively dependent on fossils fuels in the next 10 to 20 years, and since the supply of these fuels is likely to continue to decrease on average, which means that Italy will have to manage its destiny without a return to growth, or even with a structural recession.

It is to this conclusion that a “physical” reading of the economy leads. And what is happening to our neighbours to the south is, most probably, the “normal” way in which an industrialized country reacts to the beginning of an unexpected energy contraction (and then populists follow, because of promises that coldn’t be fulfiled). As other European countries do not anticipate any better their upcoming energy contraction (that will happen anyway because oil, gas and coal are not renewable), let us look carefully at what is happening in this country. Something similar is likely to happen in France (and in Europe, and in the OECD) too if we do not seriously address the issue of fossil fuels, or more precisely if we do not seriously begin to organise society with less and less fossil fuels, including if it means less and less GDP.





Conjuring Up the Next Depression

11 09 2018

chrishedges

Chris Hedges

During the financial crisis of 2008, the world’s central banks, including the Federal Reserve, injected trillions of dollars of fabricated money into the global financial system. This fabricated money has created a worldwide debt of $325 trillion, more than three times global GDP. The fabricated money was hoarded by banks and corporations, loaned by banks at predatory interest rates, used to service interest on unpayable debt or spent buying back stock, providing millions in compensation for elites. The fabricated money was not invested in the real economy. Products were not manufactured and sold. Workers were not reinstated into the middle class with sustainable incomes, benefits and pensions. Infrastructure projects were not undertaken. The fabricated money reinflated massive financial bubbles built on debt and papered over a fatally diseased financial system destined for collapse.

What will trigger the next crash? The $13.2 trillion in unsustainable U.S. household debt? The $1.5 trillion in unsustainable student debt? The billions Wall Street has invested in a fracking industry that has spent $280 billion more than it generated from its operations? Who knows. What is certain is that a global financial crash, one that will dwarf the meltdown of 2008, is inevitable. And this time, with interest rates near zero, the elites have no escape plan. The financial structure will disintegrate. The global economy will go into a death spiral. The rage of a betrayed and impoverished population will, I fear, further empower right-wing demagogues who promise vengeance on the global elites, moral renewal, a nativist revival heralding a return to a mythical golden age when immigrants, women and people of color knew their place, and a Christianized fascism.

The 2008 financial crisis, as the economist Nomi Prins points out, “converted central banks into a new class of power brokers.” They looted national treasuries and amassed trillions in wealth to become politically and economically omnipotent. In her book “Collusion: How Central Bankers Rigged the World,” she writes that central bankers and the world’s largest financial institutions fraudulently manipulate global markets and use fabricated, or as she writes, “fake money,” to inflate asset bubbles for short-term profit as they drive us toward “a dangerous financial precipice.”

“Before the crisis, they were just asleep at the wheel, in particular, the Federal Reserve of the United States, which is supposed to be the main regulator of the major banks in the United States,” Prins said when we met in New York. “It did a horrible job of doing that, which is why we had the financial crisis. It became a deregulator instead of a regulator. In the wake of the financial crisis, the solution to fixing the crisis and saving the economy from a great depression or recession, whatever the terminology that was used at any given time, was to fabricate trillions and trillions of dollars out of an electronic ether.”

The Federal Reserve handed over an estimated $29 trillion of this fabricated money to American banks, according to researchers at the University of MissouriTwenty-nine trillion dollars! We could have provided free college tuition to every student or universal health care, repaired our crumbling infrastructure, transitioned to clean energy, forgiven student debt, raised wages, bailed out underwater homeowners, formed public banks to invest at low interest rates in our communities, provided a guaranteed minimum income for everyone and organized a massive jobs program for the unemployed and underemployed. Sixteen million children would not go to bed hungry. The mentally ill and the homeless—an estimated 553,742 Americans are homeless every night—would not be left on the streets or locked away in our prisons. The economy would revive. Instead, $29 trillion in fabricated money was handed to financial gangsters who are about to make most of it evaporate and plunge us into a depression that will rival that of the global crash of 1929.

Kevin Zeese and Margaret Flowers write on the website Popular Resistance, “One-sixth of this could provide a $12,000 annual basic income, which would cost $3.8 trillion annually, doubling Social Security payments to $22,000 annually, which would cost $662 billion, a $10,000 bonus for all U.S. public school teachers, which would cost $11 billion, free college for all high school graduates, which would cost $318 billion, and universal preschool, which would cost $38 billion. National improved Medicare for all would actually save the nation trillions of dollars over a decade.”

An emergency clause in the Federal Reserve Act of 1913 allows the Fed to provide liquidity to a distressed banking system. But the Federal Reserve did not stop with the creation of a few hundred billion dollars. It flooded the financial markets with absurd levels of fabricated money. This had the effect of making the economy appear as if it had revived. And for the oligarchs, who had access to this fabricated money while we did not, it did.

The Fed cut interest rates to near zero. Some central banks in Europe instituted negative interest rates, meaning they would pay borrowers to take loans. The Fed, in a clever bit of accounting, even permitted distressed banks to use these no-interest loans to buy U.S. Treasury bonds. The banks gave the bonds back to the Fed and received a quarter of a percent of interest from the Fed. In short, the banks were loaned money at virtually no interest by the Fed and then were paid interest by the Fed on the money they borrowed. The Fed also bought up worthless mortgage assets and other toxic assets from the banks. Since Fed authorities could fabricate as much money as they wanted, it did not matter how they spent it.

“It’s like going to someone’s old garage sale and saying, ‘I want that bicycle with no wheels. I’ll pay you 100 grand for it. Why? Because it’s not my money,’ ” Prins said.

“These people have rigged the system,” she said of the bankers. “There is money fabricated at the top. It is used to pump up financial assets, including stock. It has to come from somewhere. Because money is cheap there’s more borrowing at the corporate level. There’s more money borrowed at the government level.”

“Where do you go to repay it?” she asked. “You go into the nation. You go into the economy. You extract money from the foundational economy, from social programs. You impose austerity.”

Given the staggering amount of fabricated money that has to be repaid, the banks need to build greater and greater pools of debt. This is why when you are late in paying your credit card the interest rate jumps to 28 percent. This is why if you declare bankruptcy you are still responsible for paying off your student loan, even as 1 million people a year default on student loans, with 40 percent of all borrowers expected to default on student loans by 2023. This is why wages are stagnant or have declined while costs, from health care and pharmaceutical products to bank fees and basic utilities, are skyrocketing. The enforced debt peonage grows to feed the beast until, as with the subprime mortgage crisis, the predatory system fails because of massive defaults. There will come a day, for example, as with all financial bubbles, when the wildly optimistic projected profits of industries such as fracking will no longer be an effective excuse to keep pumping money into failing businesses burdened by debt they cannot repay.

“The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses,” Bethany McLean writes of the fracking industry in an article titled “The Next Financial Crisis Lurks Underground” that appeared in The New York Times. “In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.”

The global financial system is a ticking time bomb. The question is not if it will explode but when it will explode. And once it does, the inability of the global speculators to use fabricated money with zero interest to paper over the debacle will trigger massive unemployment, high prices for imports and basic services, and a devaluation in which the dollar will become nearly worthless as it is abandoned as the world’s reserve currency. This manufactured financial tsunami will transform the United States, already a failed democracy, into an authoritarian police state. Life will become very cheap, especially for the vulnerable—undocumented workers, Muslims, poor people of color, girls and women, anti-capitalist and anti-imperialist critics branded as agents of  foreign powers—who will be demonized and persecuted for the collapse. The elites, in a desperate bid to cling to their unchecked power and obscene wealth, will disembowel what is left of the United States.





Peak Infrastructure

20 08 2018

For years now, I have been saying that the 20th Century was built one brick at a time, as and when it was needed, using ever growing amounts of surplus energy that were both very cheap and easily accessible….. and as Limits to Growth rears its ugly head more and more often, all the signs that we are no longer able to do this is becoming obvious; because we have now reached the stage when all those old bricks (and steel and concrete and…….) start needing to be replaced while at the same time the new infrastructure required by the growth monster has to also be built.Genoa-Bridge-Collapse

Enter the Genoa bridge that collapsed last week….. photos of it crumbling weeks before the tragic event that seems to have killed 43 people were posted on social media. I’m no structural engineer, but it looks pretty bad to me. Dangling cables and the middle buckling under its own weight are not good signs… Falling apart comes to mind. Anyone in their right mind would have closed it down and more than likely condemned it, but no, let’s not get a few lives get in the way of profits. At fifty years old, it wasn’t particularly ancient, but shoddy workmanship and even mafia involvement in supplying dodgy concrete are issues making their way to the Italian media.

With Italy on the cusp of bankruptcy caused by energy decline, how will they afford to replace this ‘important infrastructure’ linking France to Italy? In reality, is it even worth contemplating in the face of dwindling oil supplies?

minneapolis bridgeAnd it’s not just Italy. In the US, where some 58,000 estimated bridges are past their use by date and many are dangerous to boot, a similar collapse occurred in Minneapolis with the I W35 falling into the Mississippi killing 13 and injuring 135……

But wait there’s more……  this bridge was replaced with a new one, and at just seven years old, this new bridge is already showing signs of wear and tear…..  I kid you not!

Furthermore, as the debt bomb ticks away and authorities become less and less able to service exponentially growing debts, repair and maintenance budgets are falling through the floor…. The US, which was first in the world to go nuts with road and highway building is in biggest trouble.

infrastructure shortfall

On my recent return to Tasmania from Queensland, I experienced the tunnel building boom when my son kindly drove me to the airport. I was gobsmacked. After having lived in Brisbane for decades and knowing it like the back of my hand, I had no clue where I was…. and all that concrete? Why do I even feel guilty about the few cubic metres of concrete in my house when that would only build five metres of highway or tunnel, if that….?

Brisbanes_New_Runway

On take off, I observed acres and acres of what looked like white sand which was not there two years ago when I last flew to Brisbane (I arrived in the dark) Some quick research discovered they’re building a new runway! Obviously, nobody in government has ever heard of peak oil…..

While they’re building this monstrosity, I read that schools in inner Brisbane are really stressed due to overcrowding, caused, I guess, by more and more families living in apartment towers.

While Australia, unlike Europe and the USA, is as yet not showing too many signs of crumbling ageing infrastructure, we are paying for the so called ‘gold plating’ of the poles and wires that constitute our grid. It may well be the world’s most reliable, but everyone is sure complaining about the cost of their power….. and it remains to be seen exactly what will happen when we eventually close down our remaining coal fired power stations, as must happen, no matter what our idiot government wants t believe.

 

 





Are NEW Chinese buildings really FALLING DOWN?

16 07 2018

Years ago, I remember hearing Nicole Foss saying that those Chinese ghost towns we have all heard about were never built to last; they were built to be finished so the builders could get paid by the government, and to hell with durability……

Well you would not believe how bad it actually is……  and to think that China consumed more cement over a recent three year period than the US consumed during the entire 20th century, for results like this, is simply appalling…. and it’s fast looking like it was all wasted.

ChineseCementDemand2011-2013

Australia’s economy utterly relies on China’s, and China’s is not looking too good now, especially after you watch the video below……. Nicole wrote this way back in 2011..:

Vulnerable Commodity Exporters

Commodity exporting nations, which were insulated from the effects of the 2008 financial crisis by virtue of their ability to export into a huge commodity boom, are indeed feeling the impact of the trend change in commodity prices. All are uniquely vulnerable now. Not only are their export earnings falling and their currencies weakening substantially, but they and their industries had typically invested heavily in their own productive capacity, often with borrowed money. These leveraged investments now represent a substantial risk during this next phase of financial crisis. Canada, Australia, New Zealand, are all experiencing difficulties:

Known as the Kiwi, Aussie, and Loonie, respectively, all three have tumbled to six-year lows in recent sessions, with year-to-date losses of 10-15%. “Despite the fact that they have already fallen a long way, we expect them to weaken further,” said Capital Economists in a recent note. The three nations are large producers of commodities: energy is Canada’s top export, iron ore for Australia and dairy for New Zealand. Prices for all three commodities have declined significantly over the past year, worsening each country’s terms of trade and causing major currency adjustments.

China – Not Just Another BRIC in the Wall

More than anything, the story of both the phantom recovery and the blow-off phase of the commodity boom, has been a story of China. The Chinese boom has quite simply been an unprecedented blow-out the like of which the world has never seen before:

China has, for years now, become the engine of global growth. Its building sprees have kept afloat thousands of mines, its consumers have poured billions into the pockets of car manufacturers around the world, and its flush state-owned enterprises (SOEs) have become de facto bankers for energy, agricultural and other development in just about every country. China holds more U.S. Treasuries than any other nation outside the U.S. itself. It uses 46% of the world’s steel and 47% of the world’s copper. By 2010, its import- and export-oriented banks had surpassed the World Bank in lending to developed countries. In 2013, Chinese companies made $90-billion (U.S.) in non-financial overseas investments.

If China catches a cold, the rest of the world won’t be sneezing – it will be headed for the emergency room.

There’s more to read about this on the Automatic Earth here….. an old article, but more relevant than ever.