Collapse is underway……

5 06 2017

(By the Doomstead Diner)

Due to my High & Mighty position as a Global Collapse Pundit, I am often asked the question of when precisely will Collapse arrive?  The people who ask me this question all come from 1st World countries.  They are also all reasonably well off with a computer, an internet connection, running water and enough food to eat.  While a few of us are relatively poor retirees, even none of us wants for the basics as of yet.  The Diner doesn’t get many readers from the underclass even here in Amerika, much less from the Global Underclass in places like Nigeria, Somalia, Sudan and Yemen.

The fact is, that for more than half the world population, Collapse is in full swing and well underway.  Two key bellweathers of where collapse is now are the areas of Electricity and Food.

This chart was around 16 years ago when I first became a peaknik….

In his seminal 1996 Paper The Olduvai Theory: Sliding Towards a Post-Industrial Stone Age, Richard Duncan mapped out the trajectory of where we would be as the years passed and fossil fuels became more difficult and expensive to mine up.  Besides powering all our cars and trucks for Happy Motoring and Just-in-Time delivery, the main thing our 1st World lifestyle requires is Electricity, and lots of it on demand, 24/7.  Although electricity can be produced in some “renewable” ways that don’t depend on a lot of fossil fuel energy at least directly, most of the global supply of electric power comes from Coal and Natural Gas.  Of the two, NG (NatGas) is slightly cleaner, but either way when you burn them, CO2 goes up in the atmosphere.  This of course is a problem climatically, but you have an even bigger problem socially and politically if you aren’t burning them.  Everything in the society as it has been constructed since Edison invented the Light Bulb in 1879 has depended on electricity to function.

Now, if all the toys like lights, refrigerators big screen TVs etc had been kept to just a few small countries and the rest of the world lived a simple subsistence farming lifestyle, the lucky few with the toys probably could have kept the juice flowing a lot longer.  Unfortunately however, once exposed to all the great toys, EVERYBODY wanted them.  The industrialists also salivated over all the profit to be made selling the toys to everyone.  So, everybody everywhere needed a grid, which the industrialists and their associated banksters extended Credit for “backward” Nation-States all over the globe to build their own power plants and string their own wires.  Now everybody in the country could have a lightbulb to see by and a fridge to keep the food cold.  More than that, the electricity also went to power water pumping stations and sewage treatment plants, so you could pack the Big Shities with even more people who use still more electricity.

This went on all over the globe, today there isn’t a major city or even a medium size town anywhere on the globe that isn’t wired for electricity, although many places that are now no longer have enough money to keep the juice flowing.

Where is the electricity going off first?  Obviously, in the poorest and most war torn countries across the Middle East and Africa.  These days, from Egypt to Tunisia, if they get 2 hours of electricity a day they are doing good.

The Lights Are Going Out in the Middle East

Public fury over rampant outages has sparked protests. In January, in one of the largest demonstrations since Hamas took control in Gaza a decade ago, ten thousand Palestinians, angered by the lack of power during a frigid winter, hurled stones and set tires ablaze outside the electricity company. Iraq has the world’s fifth-largest oil reserves, but, during the past two years, repeated anti-government demonstrations have erupted over blackouts that are rarely announced in advance and are of indefinite duration. It’s one issue that unites fractious Sunnis in the west, Shiites in the arid south, and Kurds in the mountainous north. In the midst of Yemen’s complex war, hundreds dared to take to the streets of Aden in February to protest prolonged outages. In Syria, supporters of President Bashar al-Assad in Latakia, the dynasty’s main stronghold, who had remained loyal for six years of civil war, drew the line over electricity. They staged a protest in January over a cutback to only one hour of power a day.

Over the past eight months, I’ve been struck by people talking less about the prospects of peace, the dangers of ISIS, or President Trump’s intentions in the Middle East than their own exhaustion from the trials of daily life. Families recounted groggily getting up in the middle of the night when power abruptly comes on in order to do laundry, carry out business transactions on computers, charge phones, or just bathe and flush toilets, until electricity, just as unpredictably, goes off again. Some families have stopped taking elevators; their terrified children have been stuck too often between floors. Students complained of freezing classrooms in winter, trying to study or write papers without computers, and reading at night by candlelight. The challenges will soon increase with the demands for power—and air-conditioning—surge, as summer temperatures reach a hundred and twenty-five degrees.

The reasons for these outages vary. With the exception of the Gulf states, infrastructure is old or inadequate in many of the twenty-three Arab countries. The region’s disparate wars, past and present, have damaged or destroyed electrical grids. Some governments, even in Iraq, can’t afford the cost of fueling plants around the clock. Epic corruption has compounded physical challenges. Politicians have delayed or prevented solutions if their cronies don’t get contracts to fuel, maintain, or build power plants.

Now you’ll note that at the end of the third paragraph there, the journalist implies that a big part of the problem is “political corruption”, but it’s really not.  It’s simply a lack of money.  These countries at one time were all Oil Exporters, although not on the scale of Saudi Arabia or Kuwait.  As their own supplies of oil have depleted they have become oil importers, except they neither have a sufficient mercantilist model running to bring in enough FOREX to buy oil, and they can’t get credit from the international banking cartel to keep buying.  Third World countries are being cut off from the Credit Lifeline, unlike the core countries at the center of credit creation like Britain, Germany and the FSoA.  All these 1st World countries are in just as bad fiscal deficit as the MENA countries, the only difference is they still can get credit and run the deficits even higher.  This works until it doesn’t anymore.

Beyond the credit issue is the War problem.  As the countries run out of money, more people become unemployed, businesses go bankrupt, tax collection drops off the map and government employees are laid off too.  It’s the classic deflationary spiral which printing more money doesn’t solve, since the notes become increasingly worthless.  For them to be worth anything in FOREX, somebody has to buy their Government Bonds, and that is precisely what is not happening.  So as society becomes increasingly impoverished, it descends into internecine warfare between factions trying to hold on to or increase their share of the ever shrinking pie.

The warfare ongoing in these nations has knock on effects for the 1st World Nations still trying to extract energy from some of these places.  To keep the oil flowing outward, they have to run very expensive military operations to at least maintain enough order that oil pipelines aren’t sabotaged on a daily basis.  The cost of the operations keeps going up, but the amount of money they can charge the customers for the oil inside their own countries does not keep going up.  Right now they have hit a ceiling around $50/bbl for what they can charge for the oil, and for the most part this is not a profit making price.  So all the corporations involved in Extraction & Production these days are surviving on further extensions of credit from the TBTF banks.  This also is a paradigm that can’t last. The other major problem now surfacing is the Food Distribution problem, and again this is hitting the African countries first and hardest.  It’s a combination problem of climate change, population overshoot and the warfare which results from those issues.

Currently, the UN lists 4 countries in extreme danger of famine in the coming year, Nigeria, Sudan, Somalia and Yemen.  They estimate currently there are 20M people at extreme risk, and I would bet the numbers are a good deal higher than that.

World faces four famines as Trump administration [and Australia] plans to slash foreign aid budget

‘Biggest humanitarian crisis since World War II’ about to engulf 20 million people, UN says, as governments only donate 10 per cent of funds needed for essential aid.

The world is facing a humanitarian crisis bigger than any in living memory, the UN has said, as four countries teeter on the brink of famine.

Twenty million people are at risk of starvation and facing water shortages in Somalia, Nigeria and Yemen, while parts of South Sudan are already officially suffering from famine.

While the UN said in February that at least $4.4 billion (£3.5 bn) was needed by the end of March to avert a hunger catastrophe across the four nations, the end of the month is fast approaching, and only 10 per cent of the necessary funds have been received from donor governments so far.

It doesn’t look too promising that the UN will be able to raise the $4B they say is necessary to feed all those hungry mouths, and none of the 1st World countries is too predisposed to handing out food aid when they all currently have problems with their own social welfare programs for food distribution.  Here in the FSoA, there are currently around 45M people on SNAP Cards at a current cost around $71B.  The Repugnants will no doubt try to cut this number in order to better fund the Pentagon, but they are not likely to send more money to Somalia.

Far as compassion for all the starving people globally goes in the general population, this also appears to be decreasing, although I don’t have statistics to back that up. It is just a general sense I get as I read the collapse blogosphere, in the commentariats generally.  The general attitude is, “It’s their own fault for being so stupid and not using Birth Control.  If they were never born, they wouldn’t have to die of starvation.”  Since they are mostly Black Africans currently starving, this is another reason a large swath of the white population here doesn’t care much about the problem.

There are all sorts of social and economic reasons why this problem spiraled out of control, having mainly to do with the production of cheap food through Industrial Agriculture and Endless Greed centered on the idea of Endless Growth, which is not possible on a Finite Planet.

More places on Earth were wired up with each passing year, and more people were bred up with each passing year.  The dependency on fossil fuels to keep this supposedly endless cycle of growth going became ever greater each year, all while this resource was being depleted more each year.  Eventually, an inflection point had to be hit, and we have hit it.

The thing is, for the relatively comfortable readers of the Doomstead Diner in the 1st World BAU seems to be continuing onward, even if you are a bit poorer than you were last year. 24/7 electricity is still available from the grid with only occasional interruptions.  Gas is still available at the pump, and if you are employed you probably can afford to buy it, although you need to be more careful about how much you drive around unless you are a 1%er.  The Rich are still lining up to buy EVs from Elon Musk, even though having a grid to support all electric transportation is out of the question.  The current grid can’t be maintained, and upgrading to handle that much throughput would take much thicker cables all across the network.  People carry on though as though this will all go on forever and Scientists & Engineers will solve all the problems with some magical new device.  IOW, they believe in Skittle Shitting Unicorns.

That’s not going to happen, however, so you’re back to the question of how long will it take your neighborhood in the UK or Germany or the FSoA to look like say Egypt today?  Well, if you go back in time a decade to Egypt in 2007, things were still looking pretty Peachy over there, especially in Tourist Traps like Cairo.  Terrorism wasn’t too huge a problem and the government of Hosni Mubarak appeared stable.  A decade later today, Egypt is basically a failed state only doing marginally better than places like Somalia and Sudan.  The only reason they’re doing as well as they are is because they are in an important strategic location on the Suez Canal and as such get support from the FSoA military.

So a good WAG here for how long it will take for the Collapse Level in 1st World countries to reach the level Egypt is at today is about a decade.  It could be a little shorter, it could be longer.  By then of course, Egypt will be in even WORSE shape, and who might still be left alive in Somalia is an open question.  Highly unlikely to be very many people though.  Over the next decade, the famines will spread and people will die, in numbers far exceeding the 20M to occur over the next year.  After a while, it’s unlikely we will get much news about this, and people here won’t care much about what they do hear.  They will have their own problems.

The original article can be found at the Doomstead Diner here: Dimming Bulb 3: Collapse Has ARRIVED!


A very interesting article by the folks at Doomstead Diner.  While their forecast of collapse could be off a few years, it seems as if they are looking at the same time-frame the Hills Group and Louis Arnoux are projecting for the Thermodynamic oil collapse.

Lastly, people need to realize COLLAPSE does not take place in a day, week, month or year.  It takes place over a period of time.  The folks at Doomstead Diner are making the case that it has ARRIVED.  It is just taking time to reach the more affluent countries will good printing presses.

So… it is going to be interesting to see how things unfold over the next 5-10 years.





Blindspots and Superheroes

14 05 2017

I haven’t heard much from Nate Hagens in recent times, but when he does come out of the woodwork, his communications skills certainly come through….. We who follow the collapse of the world as we know it probably know most of what’s in this admirable presentation, but it is absolutely captivating, and you will learn something new, or see it in a different perspective. It’s an hour and twenty minutes long (I actually drove down town to use the library’s free wi-fi to download it, my mobile phone data allowance won’t stretch to a quarter Gig for one video!), so make yourself a cup of your favourite poison, and enjoy the show……

Nathan John Hagens is a former Wall Street analyst, turned college professor and systems-science advocate. Nate has an MBA with Honors from the University of Chicago and a PhD in Natural Resources/Energy from the University of Vermont. He is on the Boards of Post Carbon Institute, Institute for Integrated Economic Research, and Institute for the Study of Energy and our Future. He teaches a class at the University of Minnesota called “Reality 101 – A Survey of the Human Predicament”.

Nate, partnering with environmental strategist DJ White, has created the “Bottleneck Foundation”, a nonprofit initiative designed to help steer towards better human and ecological futures than would otherwise be attained. The “Bottlenecks” are the cultural, biological, and technological challenges which will arise as energy and terrestrial biomass begin their long fall back toward sustainable-flow baselines this century. The “Foundation” part of the name is a tip of the hat to Asimov’s “Foundation” series of novels, about an organization designed to mitigate the negative effects of societal simplification. BF is dedicated to making “synthesis science” accessible to a new generation of engaged people, through educational materials and projects which demonstrate that reality is a lot different from our culture currently thinks it is.





The End of the Oilocene

19 02 2017

The Oilocene, if that term ever catches on, will have only lasted 150 years. Which must be the quickest blink in terms of geological eras…… This article was lifted from feasta.org but unfortunately I can’t give writing credits as I could not find the author’s name anywhere. The data showing we’ll be quickly out of viable oil is stacking up at an increasing rate.

Steven Kopits from Douglas-Westwood (whose work I published here three years ago almost to the day) said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programs. Nearly half of the industry needs more than $120,” he said”.

And if you don’t finish reading this admittedly long article, do not exit this blog without first taking THIS on board…….:

What people do not realise is that it takes oil to extract, refine, produce and deliver oil to the end user. The Hills Group calculates that in 2012, the average energy required by the oil production chain had risen so much that it was then equal to the energy contained in the oil delivered to the economy. In other words “In 2012 the oil industry production chain in total used 50% of all the energy contained in the oil delivered to the consumer”. This is trending rapidly to reach 100% early in the next decade.

So there you go…… as I posted earlier this year, do we have five years left…….?

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End of the “Oilocene”: The Demise of the Global Oil Industry and of the Global Economic System as we know it.

(A pdf version of this paper is here. Please refer to my presentation for supporting images and comments. )

In 1981 I was sitting on an eroded barren hillside in India, where less than 100 years previously there had been dense forest with tigers. It was now effectively a desert and I was watching villagers scavenging for twigs for fuelwood and pondering their future, thinking about rapidly increasing human population and equally rapid degradation of the global environment. I had recently devoured a copy of The Limits to Growth (LTG) published in 1972, and here it was playing out in front of me. Their Business as Usual (BAU) scenario showed that global economic growth would be over between 2010 -2020; and today 45 years later, that prediction is inexorably becoming true. Since 2008 any semblance of growth has been fuelled by astronomically greater quantities of debt; and all other indicators of overshoot are flashing red.

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One of the main factors limiting growth was regarded by the authors of LTG as energy; specifically oil. By mid 1970’s surprisingly, enough was known about accessible oil reserves that not a huge amount has since been added to what is known as reserves of conventional oil. Conventional oil is (or was) the high quality, high net energy, low water content, easy to get stuff. Its multi-decade increasing rate in production came to an end around 2005 (as predicted many years earlier by Campbell and Laherre in 1998). The rate of production peaked in 2011 and has since been in decline (IEA 2016).

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The International Energy Agency (IEA) is the pre-eminent global forecaster of oil production and demand. Recently it admitted that its oil production forecasts were based on economic projections rather than geology or cost; ie on the assumption that supply will always meet projected demand.
In its latest annual forecast however (New Policies Scenario 2016) the IEA has also admitted for the first time a future in which total global “all liquids” oil production could start to fall within the next few years.

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As Kjell Aklett of Upsala University Global Energy Research Group comments (06-12-16), “In figure 3.16 the IEA shows for the first time what will happen if its unrealistic wishful thinking does not become reality during the next 10 years. Peak Oil will occur even if oil from fracked tight sources, oil sands, and other (unconventional) sources are included”.

In fact – this IEA image clearly shows that the total global rate of production of “all hydrocarbon liquids” could start falling anytime from now on; and this should in itself raise a huge red flag for the Irish Government.

Furthermore, it raises a number of vital questions which are the core subject of this post.
Reserves of conventional “easy” oil have mostly been used up. How likely is it that remaining reserves will be produced at the rate projected? Rapidly diminishing reserves of conventional oil are now increasingly being supplemented by the difficult stuff that Kjell Aklett mentions; including conventional from deep water, polar and other inaccessible regions, very heavy bituminous and high sulphur oil; natural gas liquids and other xtl’s, plus other “unconventional oil” including tar sands and shale oil.

How much will it cost to produce all these various types? How much energy will be required, and crucially how much energy will be left over for use by the economy?

The global industrial economy runs on oil.

Oil is the vital and crucial link in virtually every production chain in the global industrial world economy partly because it supplies over 96% of global transport energy – with no significant non-oil dependent alternative in sight.

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Our industrial food production system uses over 10 calories of oil energy to plough, plant, fertilise, harvest, transport, refine, package, store/refrigerate, and deliver 1 calorie of food to the consumer; and imagine trying to build infrastructure; roads, schools, hospitals, industrial facilities, cities, railways, airports without oil, let alone maintain them.

Surprisingly perhaps, oil is also crucial to production of all other forms of energy including renewables. We cannot mine and distribute coal or even drill for gas and install pipelines and gas distribution networks without lots of oil; and you certainly cannot make a nuclear power station or build a hydroelectric dam without oil. But even solar panels, wind and biomass energy are also totally dependent on oil to extract and produce the raw materials; oil is directly or indirectly used in their manufacture (steel, glass, copper, fibreglass/GRP, concrete) and finally to distribute the product to the end user, and install and maintain it.

So it’s not surprising that excluding hydro and nuclear (which mostly require phenomenal amounts of oil to implement), renewables still only constitute about 3% of world energy (BP Energy Outlook 2016). This figure speaks entirely for itself. I am a renewable energy consultant and promoter, but I am also a realist; in practice the world runs on oil.

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The economy, Global GDP and oil are therefore mutually dependent and have enjoyed a tightly linked dance over the decades as shown in the following images. Note the connection between oil, total energy, oil price and GDP (clues for later).

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Click on image to enlarge

Rising cost of oil production

Since 2005 when the rate of production of conventional oil slowed and peaked, production costs have been rising more rapidly. By 2013, oil industry costs were approaching the level of the global oil price which was more than $100/barrel at that time; and industry insiders were saying that the oil industry was finding it difficult to break even.

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Click on image to enlarge

A good example of the time was the following article which is worth quoting in full in the light of the price of oil at the time (~$100/bbl), and the average 2016 sustained low oil price of ~$50/bbl.

Oil and gas company debt soars to danger levels to cover shortfall in cash By Ambrose Evans-Pritchard. Telegraph. 11 Aug 2014

“The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry. The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106bn in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time. They also sold off a net $73bn of assets.

The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly. Companies have exhausted the low-hanging fruit and are being forced to explore fields in ever more difficult regions.

The EIA said the shortfall between cash earnings from operations and expenditure — mostly CAPEX and dividends — has widened from $18bn in 2010 to $110bn during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011”.

In another article (my highlights) he wrote

“The major companies are struggling to find viable reserves, forcing them to take on ever more leverage to explore in marginal basins, often gambling that much higher prices in the future will come to the rescue. Global output of conventional oil peaked in 2005 despite huge investment. The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years.

Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said”.

The following images give a good idea of the trend and breakdown in costs of oil production. Getting it out of the ground is just for starters. The images show just how expensive it is becoming to produce – and how far from breakeven the current oil price is.

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Click on image to enlarge

It is important to note that the “breakeven cost” is much less than the oil price required to sustain the industry into the future (business as usual).

The following images show that the many different types of oil have (obviously) vastly different production costs. Note the relatively small proportion of conventional reserves (much of it already used), and the substantially higher production cost of all other types of oil. Note also the apt title and date of the Deutsche Bank analysis – production costs have risen substantially since then.

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The global oil industry is in deep trouble

You do not need to be an economist to see that the average 2016 price of oil ~ $50/bbl was substantially lower than just the breakeven price of all but a small proportion of global oil reserves. Even before the oil price collapse of 2014-5, the global oil industry was in deep trouble. Debts are rising quickly, and balance sheets are increasingly RED. Earlier this year 2016, Deloitte warned that 35% of oil majors were in danger of bankruptcy, with another 30% to follow in 2017.

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Click on image to enlarge

In addition to the oil majors, shrinking oil revenues in oil-producing countries are playing havoc with national economies. Virtually every oil producing country in the world requires a much higher oil price to balance its budget – some of them vastly so (eg Venezuela). Their economies have been designed around oil, which for many of them is their largest source of income. Even Saudi Arabia, the biggest global oil producer with the biggest conventional oil reserves is quickly using up its sovereign wealth fund.

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It appears that not a single significant oil-producing country is balancing its budget. Their debts and deficits grow bigger by the day. Everyone is praying for higher oil prices. Who are they kidding? The average BAU oil price going forward for business as usual for the whole global oil industry probably needs to be well over $100/bbl; and the world economy is on its knees even at the present low oil price. Why is this? The indicators all spell huge trouble ahead. Could there be another fundamental oil/energy/financial mechanism operating here?

The Root Cause

The cause is not surprising. All the various new types of oil and a good deal of the conventional stuff that remains require far more energy to produce.

In 2015, The Hills Group (US Oil Engineers) published “Depletion – A Determination of the Worlds Petroleum Reserve”. It is meticulously researched and re-worked with trends double checked against published data. It follows on from the Hills Group 2013 work that accurately predicted the approaching oil price collapse after 2014 (which no-one else did) and calculated that the average oil price of 2016 would be ~$50/bbl. They claim theirs is the most accurate oil price indicator ever produced, with >96% accuracy with published past data. The Hills Group work has somewhat clarified my understanding of the core issues and I will try to summarise two crucial points as follows.

Oil can only be useful as an energy source if the energy contained in the product (ie transport fuel) is greater than the energy required to extract, refine and deliver the fuel to the end user.

If you electrolyse water, the hydrogen gas produced (when mixed with air and ignited), will explode with a bang (be careful doing this at home!). The hydrogen contained in the world’s water is an enormous potential energy source and contains infinitely more energy (as hydrogen) than humans could ever need. The problem is that it takes far more energy to produce a given amount of hydrogen from water than is available by combusting it. Oil is rapidly going the same way. Only a small proportion of what remains of conventional oil resources can provide an energy surplus for use as a fuel. All the other types of oil require more energy to produce and deliver as fuel to the end user (taking into account the whole oil production chain), than is contained in the fuel itself.

What people do not realise is that it takes oil to extract, refine, produce and deliver oil to the end user. The Hills Group calculates that in 2012, the average energy required by the oil production chain had risen so much that it was then equal to the energy contained in the oil delivered to the economy. In other words “In 2012 the oil industry production chain in total used 50% of all the energy contained in the oil delivered to the consumer”. This is trending rapidly to reach 100% early in the next decade.

At this point – no matter how much oil is left (a lot) and in whatever form (many), oil will be of no use as an energy source for transport fuels, since it will on average require more energy to extract, refine and deliver to the end-user, than the oil itself contains.

Because oil reserves are of decreasing quality and oil is getting more difficult and expensive to produce and transform into transport fuels; the amount of energy required by the whole oil production chain (the global oil industry) is rapidly increasing; leaving less and less left over for the rest of the economy.

In this context and relative to the IEA graph shown earlier, there is a big difference between annual gross oil production, and the amount of energy left in the product available for work as fuel. Whilst total global oil (all liquids) production currently appears to be still growing slowly, the energy required by the global oil industry is growing faster, and the net energy available for work by the end user is decreasing rapidly. This is illustrated by the following figure (Louis Arnoux 2016).

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The price of oil cannot exceed the value of the economic activity generated from the amount of energy available to end-users per barrel.

The rapid decline in oil-energy available to the economy is one of the key reasons for the equally rapid rise in global debt.

The global industrial world economy depends on oil as its prime energy source. Increasing growth of the world economy during the oil age has been exactly matched by oil production and use, but as Louis’ image shows, over the last forty years the amount of net energy delivered by the oil industry to the economy has been decreasing.

As a result, the economic value of a barrel of oil is falling fast. “In 1975 one dollar could have bought, on average, 42,348 BTU; by 2010 a dollar would only have bought 6,946 BTU” (The Hills Group 2015).

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This has caused a parallel reduction in real economic activity. I say “real” because today the financial world accounts for about 40% of global GDP, and I would like to remind economists and bankers that you cannot eat 0000’s on a computer screen, or use them to put food on the table, heat your house, or make something useful. GDP as an indicator of the global economy is an illusion. If you deduct financial services and account for debt, the real world economy is contracting fast.

To compensate, and continue the fallacy of endless economic growth, we have simply borrowed and borrowed, and borrowed. Huge amounts of additional debt are now required to sustain the “Growth Illusion”.

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In 2012 the decreasing ability of oil to power the economy intersected with the increasing cost of oil production at a point The Hills Group refers to as the maximum affordable consumer price (just over $100/bbl) and they calculated that the price of oil must fall soon afterwards. In 2014 much to everyone’s surprise (IEA, EIA, World Bank, Wall St Oil futures etc) the price of oil fell to where it is now. This is clearly illustrated by The Hills Group’s petroleum price curve of 2013 which correctly calculated that the 2016 average price of oil would be ~$50/bbl (Depletion – The Fate of the Oil Age 2013).

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In their detailed 2015 study The Hills Group writes (Depletion – A determination of the world’s petroleum reserve 2015);

“To determine the affordability range it is first observed that the price of a unit of petroleum cannot exceed the value of the economic activity (generated by the net energy) it supplies to the end consumer. (Since 2012) more of the energy from petroleum was being committed to the production of petroleum than was delivered to the consumer. This precipitated the 2014 price decline that reduced prices by 50%. The energy delivered to the end consumer will continue to decline and the end consumer maximum affordability will decline with it.

Dr Louis Arnoux explains this as follows: “In 1900 the Global Industrial World received 61% of the gross energy in a barrel of oil. In 2016 this is down to 7%. The global industrial world is being forced to contract because it is being starved of net energy from oil” (Louis Arnoux 2016).

This is reflected in the slowing down of global economic growth and the huge increase in total global debt.

Without noticing it, in 2012 the world entered “Emergency Red Alert”

In the following image, Dr Arnoux has reworked Hills Group petroleum price curve showing the impending collapse of thermodynamically driven oil prices – and the end of the oil age as we know it. This analysis is more than amply reinforced by the dire financial straits of the global oil industry, and the parlous state of the global economy and financial system.

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Oil is a finite resource which is subject to the same physical laws as many other commodities. The debate about peak oil has been clouded by the fact that oil consists of many different kinds of hydrocarbons; each of which has its own extraction profile. But conventional oil is the only category of oil that can be extracted with a whole production chain energy surplus. Production of this commodity (conventional oil) has undoubtedly peaked and is now declining. The amount of energy (and cost) required by the global oil industry to produce and deliver much of the remainder of conventional reserves and the many alternative categories of oil to the consumer, is rapidly increasing; and we are equally rapidly heading toward the day when we have used up those reserves of oil which will deliver an energy surplus (taking into account the whole production chain from extraction to delivery of the end product as fuel to the consumer).

The Global Oil Industry is one of the most advanced and efficient in the world and further efficiency gains will be minor compared to the scale of the problem, which is essentially one of oil depletion thermodynamics.

Humans are very good at propping up the unsustainable and this often results in a fast and unexpected collapse (eg Joseph Tainter: The collapse of complex societies). An example of this is the Seneca Curve/Cliff which appears to me to be an often-repeated defining trait of humanity. Our oil/financial system is a perfect illustration.

Debt is being used to extend the unsustainable and it looks as though we are headed for the “Mother of all Seneca Curves” which I have illustrated below:

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Because oil is the primary energy resource upon which all other energy sources depend, it is almost certain that a contraction in oil production would be reflected in a parallel reduction in other energy systems; as illustrated rather dramatically in this image by Gail Tverberg (the timing is slightly premature – but probably not by much).

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Energy and Money

Fundamental to all energy and economic systems is money. Debt is being used to prop up a contracting oil energy system, and the scale of money created as debt over the last few decades to compensate is truly phenomenal; amounting to hundreds of trillions (excluding “extra-terrestrial” amounts of “financials”), rising exponentially faster. This amount of debt, can never ever be repaid. The on-going contraction of the oil/energy system will exacerbate this trend until the financial system collapses. There is nothing anyone can do about it no matter how much money is printed, NIRP, ZIRP you name it – all the indicators are flashing red. The panacea of indefinite money printing will soon hit the thermodynamic energy wall of reality.

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The effects we currently observe such as exponential growth in debt (US Debt alone almost doubled from $10 trillion to nearly $20 trillion during Obama’s tenure), and the financial problems of oil majors and oil producing countries, are clear indicators of the imminent contraction in existing global energy and financial systems.

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The coming failure of the global economic system will be a systemic failure. I say “systemic” because for the last 150 years up till now there has always been cheap and abundant oil to power recovery from previous busts. This era is over. Cheap and abundant oil will not be available for recovery from the next crunch, and the world will need to adopt a completely different economic and financial model.

The Economics “profession”

Economists would have us believe it’s just another turn of the credit cycle. This dismal non-science is in the main the lapdog of the establishment, the global financial and corporate interests. They have engineered the “science” to support the myth of perpetual growth to suit the needs of their pay-masters, the financial institutions, corporations and governments (who pay their salaries, fund the universities and research, etc). They have steadfastly ignored all ecological and resource issues and trends and warnings such as LTG, and portrayed themselves as the pre-eminent arbiters of human enterprise. By vehemently supporting the status quo, they of all groups, I hold primarily responsible for the appalling situation the planet faces; the destruction of the natural world, and many other threats to the global environment and its ability to sustain civilisation as we know it.

I have news for the “Economics Profession”. The perpetual growth fantasy financial system based on unlimited cheap energy is now coming to an end. From the planet’s point of view – it simply couldn’t be soon enough. This will mark the end of what I call the “Oilocene”. Human activities are having such an effect on the planet that the present age has been classified by geologists as a new geological era “The Anthropocene”. But although humans had already made a significant impact on natural systems, the Anthropocene has largely been defined by the relatively recent discovery and use of liquid fossil energy reserves amounting to millions of years of stored solar energy. Unlimited cheap oil has fuelled exponential growth in human systems to the point that many of these are now greater than natural planetary ones.
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This cannot be sustained without huge amounts of cheap net oil energy, so we are inescapably headed for “the great deceleration”. The situation is very like the fate of the Titanic which I have outlined in my presentation. Of the few who had the courage to face the economic wind of perpetual growth, I salute the authors of LTG and the memory of Richard Douthwaite (The Growth Illusion 1992), and all at FEASTA who are working hard to warn a deaf Ireland of what is to come and why – and have very sensibly been preparing for it! We will all need a lot of courage and resilience to face what is coming down the line.

Ireland has a very short time available to prepare for hard times.

There are many things we could do here to soften the impact if the problem was understood for what it is. FEASTA publications such as the Before The Wells Run Dry and Fleeing Vesuvius; and David Korowicz’s works such as The Tipping Point and of course, The Hills Group 2015 publicationDepletion – a determination of the worlds petroleum reserve , and very many other references, provide background material and should be required urgent reading for all policy makers.

The pre-eminent challenge is energy for transport and agriculture. We could switch to use of compressed natural gas (CNG) as the urgent default transport/motive fuel in the short term since petrol and diesel engines can be converted to dual-fuel use with CNG; supplemented rapidly by biogas (since we are lucky enough to have plenty of agricultural land and water compared to many countries).

We could urgently switch to an organic high labour input agriculture concentrating on local self-sufficiency eliminating chemical inputs such as fertilisers pesticides and herbicides (as Cuba did after the fall of the Soviet Union). We could outlaw the use of oil for heating and switch to biomass.

We could penalise high electricity use and aim to massively cut consumption so that electricity can be supplied by completely renewable means – preserving our natural gas for transport fuel and the rapid transition from oil. The Grid could be urgently reconfigured to enable 100% use of renewable electricity within a few years. We could concentrate on local production of food, goods and services to reduce transport needs.

These measures would create a lot of jobs and improve the balance of payments. They have already been proposed in one form or another by FEASTA over the last 15 years.

Ireland has made a start, but it is insignificant compared to the scale and timescale of the challenge ahead as illustrated by the next image (SEAI: Energy in Ireland – Key Statistics 2015). We urgently need to shrink the oil portion to a small fraction of current use.

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Current fossil energy use is very wasteful. By reducing waste and increasing efficiency we can use less. For instance, a large amount of the energy used as transport fuels and for electricity generation is lost to atmosphere as waste heat. New technological solutions include a global initiative to mount an affordable emergency response called nGeni that is solely based on well-known and proven technology components, integrated in a novel way, with a business and financial model enabling it to tap into over €5 trillion/year of funds currently wasted globally as waste heat. This has potential for Ireland, and will be outlined in a subsequent post.

To finance all the changes we need to implement, quickly (and hopefully before the full impact of the oil/financial catastrophe really kicks in), we could for instance create something like a massive multibillion “National Sustainability and Renewable Energy Bond”. Virtually all renewables provide a better (often substantially better) return on investment compared to bank savings, government bonds, etc; especially in the age of zero and negative interest rate policies ZIRP, NIRP etc.

We may need to think about managing this during a contraction in the economy and financial system which could occur at any time. We certainly could do with a new clever breed of “Ecological Economists” to plan for the end of the old system and its replacement by a sustainable new one. There is no shortage of ideas. The disappearance of trillions of fake money and the shrinking of national and local tax income which currently funds the existing system and its social programmes will be a huge challenge to social stability in Ireland and all over the world.

It’s now “Emergency Red Alert”. If we delay, we won’t have the energy or the money to implement even a portion of what is required. We need to drag our politicians and policy makers kicking and screaming to the table, to make them understand the dire nature of the predicament and challenge them to open their eyes to the increasingly obvious, and to take action. We can thank The Hills Group for elucidating so clearly the root causes of the problem, but the indicators of systemic collapse have for many years been frantically jumping up and down, waving at us and shouting LOOK AT ME! Meanwhile the majority of blinkered clueless economists that advise business and government and who plan our future, look the other way.

In 1972 “The Limits to Growth” warned of the consequences of growing reliance on the finite resource called “oil” and of the suicidal economics mantra of endless growth. The challenge Ireland will soon face is managing a fast economic and energy contraction and implementing sustainability on a massive scale whilst maintaining social cohesion. Whatever the outcome (managed or chaotic contraction), we will soon all have to live with a lot less energy and physical resources. That in itself might not necessarily be such a bad thing provided the burden is shared. “Modern citizens today use more energy and physical resources in a month than our great-grandparents used during their whole lifetime” (John Thackera; “From Oil Age to Soil Age”, Doors to Perception; Dec 2016). Were they less happy than us?

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Featured image: used motor oil. Source: http://www.freeimages.com/photo/stain-1507366





2017: The Year When the World Economy Starts Coming Apart

20 01 2017

Conclusion

The situation is indeed very concerning. Many things could set off a crisis:

  • Rising energy prices of any kind (hurting energy importers), or energy prices that don’t rise (leading to financial problems or collapse of exporters)
  • Rising interest rates.
  • Defaulting debt, indirectly the result of slow/negative economic growth and rising interest rates.
  • International organizations with less and less influence, or that fall apart completely.
  • Fast changes in relativities of currencies, leading to defaults on derivatives.
  • Collapsing banks, as debt defaults rise.
  • Falling asset prices (homes, farms, commercial buildings, stocks and bonds) as interest rates rise, leading to many debt defaults.

FOLLOWING ON from my last post exposing HSBC’s forecast of a peak oil caused economic collapse, along comes this piece from Gail Tverberg predicting it may all start this year…….

Most of this article is a rehash of things she’s said before all consolidated in one lengthy essay, and some of them were published here before. It’s becoming increasingly difficult to not recognise all our ducks are lining up on the wall…….

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Some people would argue that 2016 was the year that the world economy started to come apart, with the passage of Brexit and the election of Donald Trump. Whether or not the “coming apart” process started in 2016, in my opinion we are going to see many more steps in this direction in 2017. Let me explain a few of the things I see.

[1] Many economies have collapsed in the past. The world economy is very close to the turning point where collapse starts in earnest.  

Figure 1

The history of previous civilizations rising and eventually collapsing is well documented.(See, for example, Secular Cycles.)

To start a new cycle, a group of people would find a new way of doing things that allowed more food and energy production (for instance, they might add irrigation, or cut down trees for more land for agriculture). For a while, the economy would expand, but eventually a mismatch would arise between resources and population. Either resources would fall too low (perhaps because of erosion or salt deposits in the soil), or population would rise too high relative to resources, or both.

Even as resources per capita began falling, economies would continue to have overhead expenses, such as the need to pay high-level officials and to fund armies. These overhead costs could not easily be reduced, and might, in fact, grow as the government attempted to work around problems. Collapse occurred because, as resources per capita fell (for example, farms shrank in size), theearnings of workers tended to fall. At the same time, the need for taxes to cover what I am calling overhead expenses tended to grow. Tax rates became too high for workers to earn an adequate living, net of taxes. In some cases, workers succumbed to epidemics because of poor diets. Or governments would collapse, from lack of adequate tax revenue to support them.

Our current economy seems to be following a similar pattern. We first used fossil fuels to allow the population to expand, starting about 1800. Things went fairly well until the 1970s, when oil prices started to spike. Several workarounds (globalization, lower interest rates, and more use of debt) allowed the economy to continue to grow. The period since 1970 might be considered a period of “stagflation.” Now the world economy is growing especially slowly. At the same time, we find ourselves with “overhead” that continues to grow (for example, payments to retirees, and repayment of debt with interest). The pattern of past civilizations suggests that our civilization could also collapse.

Historically, economies have taken many years to collapse; I show a range of 20 to 50 years in Figure 1. We really don’t know if collapse would take that long now. Today, we are dependent on an international financial system, an international trade system, electricity, and the availability of oil to make our vehicles operate. It would seem as if this time collapse could come much more quickly.

With the world economy this close to collapse, some individual countries are even closer to collapse. This is why we can expect to see sharp downturns in the fortunes of some countries. If contagion is not too much of a problem, other countries may continue to do fairly well, even as individual small countries fail.

[2] Figures to be released in 2017 and future years are likely to show that the peak in world coal consumption occurred in 2014. This is important, because it means that countries that depend heavily on coal, such as China and India, can expect to see much slower economic growth, and more financial difficulties.

While reports of international coal production for 2016 are not yet available, news articles and individual country data strongly suggest that world coal production is past its peak. The IEA also reports a substantial drop in coal production for 2016.

Figure 2. World coal consumption. Information through 2015 based on BP 2016 Statistical Review of World Energy data. Estimates for China, US, and India are based on partial year data and news reports. 2016 amount for "other" estimated based on recent trends.

The reason why coal production is dropping is because of low prices, low profitability for producers, and gluts indicating oversupply. Also, comparisons of coal prices with natural gas prices are inducing switching from coal to natural gas. The problem, as we will see later, is that natural gas prices are also artificially low, compared to the cost of production, So the switch is being made to a different type of fossil fuel, also with an unsustainably low price.

Prices for coal in China have recently risen again, thanks to the closing of a large number of unprofitable coal mines, and a mandatory reduction in hours for other coal mines. Even though prices have risen, production may not rise to match the new prices. One article reports:

. . . coal companies are reportedly reluctant to increase output as a majority of the country’s mines are still losing money and it will take time to recoup losses incurred in recent years.

Also, a person can imagine that it might be difficult to obtain financing, if coal prices have only “sort of” recovered.

I wrote last year about the possibility that coal production was peaking. This is one chart I showed, with data through 2015. Coal is the second most utilized fuel in the world. If its production begins declining, it will be difficult to offset the loss of its use with increased use of other types of fuels.

Figure 3. World per capita energy consumption by fuel, based on BP 2016 SRWE.

[3] If we assume that coal supplies will continue to shrink, and other production will grow moderately, we can expect total energy consumption to be approximately flat in 2017. 

Figure 5. World energy consumption forecast, based on BP Statistical Review of World Energy data through 2015, and author's estimates for 2016 and 2017.

In a way, this is an optimistic assessment, because we know that efforts are underway to reduce oil production, in order to prop up prices. We are, in effect, assuming either that (a) oil prices won’t really rise, so that oil consumption will grow at a rate similar to that in the recent past or (b) while oil prices will rise significantly to help producers, consumers won’t cut back on their consumption in response to the higher prices.

[4] Because world population is rising, the forecast in Figure 4 suggests that per capita energy consumption is likely to shrink. Shrinking energy consumption per capita puts the world (or individual countries in the world) at the risk of recession.

Figure 5 shows indicated per capita energy consumption, based on Figure 4. It is clear that energy consumption per capita has already started shrinking, and is expected to shrink further. The last time that happened was in the Great Recession of 2007-2009.

Figure 5. World energy consumption per capita based on energy consumption estimates in Figure 4 and UN 2015 Medium Population Growth Forecast.

There tends to be a strong correlation between world economic growth and world energy consumption, because energy is required to transform materials into new forms, and to transport goods from one place to another.

In the recent past, the growth in GDP has tended to be a little higher than the growth in the use of energy products. One reason why GDP growth has been a percentage point or two higher than energy consumption growth is because, as economies become richer, citizens can afford to add more services to the mix of goods and services that they purchase (fancier hair cuts and more piano lessons, for example). Production of services tends to use proportionately less energy than creating goods does; as a result, a shift toward a heavier mix of services tends to lead to GDP growth rates that are somewhat higher than the growth in energy consumption.

A second reason why GDP growth has tended to be a little higher than growth in energy consumption is because devices (such as cars, trucks, air conditioners, furnaces, factory machinery) are becoming more efficient. Growth in efficiency occurs if consumers replace old inefficient devices with new more efficient devices. If consumers become less wealthy, they are likely to replace devices less frequently, leading to slower growth in efficiency. Also, as we will discuss later in this  post, recently there has been a tendency for fossil fuel prices to remain artificially low. With low prices, there is little financial incentive to replace an old inefficient device with a new, more efficient device. As a result, new purchases may be bigger, offsetting the benefit of efficiency gains (purchasing an SUV to replace a car, for example).

Thus, we cannot expect that the past pattern of GDP growing a little faster than energy consumption will continue. In fact, it is even possible that the leveraging effect will start working the “wrong” way, as low fossil fuel prices induce more fuel use, not less. Perhaps the safest assumption we can make is that GDP growth and energy consumption growth will be equal. In other words, if world energy consumption growth is 0% (as in Figure 4), world GDP growth will also be 0%. This is not something that world leaders would like at all.

The situation we are encountering today seems to be very similar to the falling resources per capita problem that seemed to push early economies toward collapse in [1]. Figure 5 above suggests that, on average, the paychecks of workers in 2017 will tend to purchase fewer goods and services than they did in 2016 and 2015. If governments need higher taxes to fund rising retiree costs and rising subsidies for “renewables,” the loss in the after-tax purchasing power of workers will be even greater than Figure 5 suggests.

[5] Because many countries are in this precarious position of falling resources per capita, we should expect to see a rise in protectionism, and the addition of new tariffs.

Clearly, governments do not want the problem of falling wages (or rather, falling goods that wages can buy) impacting their countries. So the new game becomes, “Push the problem elsewhere.”

In economic language, the world economy is becoming a “Zero-sum” game. Any gain in the production of goods and services by one country is a loss to another country. Thus, it is in each country’s interest to look out for itself. This is a major change from the shift toward globalization we have experienced in recent years. China, as a major exporter of goods, can expect to be especially affected by this changing view.

[6] China can no longer be expected to pull the world economy forward.

China’s economic growth rate is likely to be lower, for many reasons. One reason is the financial problems of coal mines, and the tendency of coal production to continue to shrink, once it starts shrinking. This happens for many reasons, one of them being the difficulty in obtaining loans for expansion, when prices still seem to be somewhat low, and the outlook for the further increases does not appear to be very good.

Another reason why China’s economic growth rate can be expected to fall is the current overbuilt situation with respect to apartment buildings, shopping malls, factories, and coal mines. As a result, there seems to be little need for new buildings and operations of these types. Another reason for slower economic growth is the growing protectionist stance of trade partners. A fourth reason is the fact that many potential buyers of the goods that China is producing are not doing very well economically (with the US being a major exception). These buyers cannot afford to increase their purchases of imports from China.

With these growing headwinds, it is quite possible that China’s total energy consumption in 2017 will shrink. If this happens, there will be downward pressure on world fossil fuel prices. Oil prices may fall, despite production cuts by OPEC and other countries.

China’s slowing economic growth is likely to make its debt problem harder to solve. We should not be too surprised if debt defaults become a more significant problem, or if the yuan falls relative to other currencies.

India, with its recent recall of high denomination currency, as well as its problems with low coal demand, is not likely to be a great deal of help aiding the world economy to grow, either. India is also a much smaller economy than China.

[7] While Item [2] talked about peak coal, there is a very significant chance that we will be hitting peak oil and peak natural gas in 2017 or 2018, as well.  

If we look at historical prices, we see that the prices of oil, coal and natural gas tend to rise and fall together.

Figure 6. Prices of oil, call and natural gas tend to rise and fall together. Prices based on 2016 Statistical Review of World Energy data.

The reason that fossil fuel prices tend to rise and fall together is because these prices are tied to “demand” for goods and services in general, such as for new homes, cars, and factories. If wages are rising rapidly, and debt is rising rapidly, it becomes easier for consumers to buy goods such as homes and cars. When this happens, there is more “demand” for the commodities used to make and operate homes and cars. Prices for commodities of many types, including fossil fuels, tend to rise, to enable more production of these items.

Of course, the reverse happens as well. If workers become poorer, or debt levels shrink, it becomes harder to buy homes and cars. In this case, commodity prices, including fossil fuel prices, tend to fall.  Thus, the problem we saw above in [2] for coal would be likely to happen for oil and natural gas, as well, because the prices of all of the fossil fuels tend to move together. In fact, we know that current oil prices are too low for oil producers. This is the reason why OPEC and other oil producers have cut back on production. Thus, the problem with overproduction for oil seems to be similar to the overproduction problem for coal, just a bit delayed in timing.

In fact, we also know that US natural gas prices have been very low for several years, suggesting another similar problem. The United States is the single largest producer of natural gas in the world. Its natural gas production hit a peak in mid 2015, and production has since begun to decline. The decline comes as a response to chronically low prices, which make it unprofitable to extract natural gas. This response sounds similar to China’s attempted solution to low coal prices.

Figure 7. US Natural Gas production based on EIA data.

The problem is fundamentally the fact that consumers cannot afford goods made using fossil fuels of any type, if prices actually rise to the level producers need, which tends to be at least five times the 1999 price level. (Note peak price levels compared to 1999 level on Figure 6.) Wages have not risen by a factor of five since 1999, so paying the prices that fossil fuel producers need for profitability and growing production is out of the question. No amount of added debt can hide this problem. (While this reference is to 1999 prices, the issue really goes back much farther, to prices before the price spikes of the 1970s.)

US natural gas producers also have plans to export natural gas to Europe and elsewhere, as liquefied natural gas (LNG). The hope, of course, is that a large amount of exports will raise US natural gas prices. Also, the hope is that Europeans will be able to afford the high-priced natural gas shipped to them. Unless someone can raise the wages of both Europeans and Americans, I would not count on LNG prices actually rising to the level needed for profitability, and staying at such a high level. Instead, they are likely to bounce up, and quickly drop back again.

[8] Unless oil prices rise very substantially, oil exporters will find themselves exhausting their financial reserves in a very short time (perhaps a year or two). Unfortunately, oil importerscannot withstand higher prices, without going into recession. 

We have a no win situation, no matter what happens. This is true with all fossil fuels, but especially with oil, because of its high cost and thus necessarily high price. If oil prices stay at the same level or go down, oil exporters cannot get enough tax revenue, and oil companies in general cannot obtain enough funds to finance the development of new wells and payment of dividends to shareholders. If oil prices do rise by a very large amount for very long, we are likely headed into another major recession, with many debt defaults.

[9] US interest rates are likely to rise in the next year or two, whether or not this result is intended by the Federal reserve.

This issue here is somewhat obscure. The issue has to do with whether the United States can find foreign buyers for its debt, often called US Treasuries, and the interest rates that the US needs to pay on this debt. If buyers are very plentiful, the interest rates paid by he US government can be quite low; if few buyers are available, interest rates must be higher.

Back when Saudi Arabia and other oil exporters were doing well financially, they often bought US Treasuries, as a way to retain the benefit of their new-found wealth, which they did not want to spend immediately. Similarly, when China was doing well as an exporter, it often bought US Treasuries, as a way retaining the wealth it gained from exports, but didn’t yet need for purchases.

When these countries bought US Treasuries, there were several beneficial results:

  • Interest rates on US Treasuries tended to stay artificially low, because there was a ready market for its debt.
  • The US could afford to import high-priced oil, because the additional debt needed to buy the oil could easily be sold (to Saudi Arabia and other oil producing nations, no less).
  • The US dollar tended to stay lower relative to other currencies, making oil more affordable to other countries than it otherwise might be.
  • Investment in countries outside the US was encouraged, because debt issued by these other countries tended to bear higher interest rates than US debt. Also, relatively low oil prices in these countries (because of the low level of the dollar) tended to make investment profitable in these countries.

The effect of these changes was somewhat similar to the US having its own special Quantitative Easing (QE) program, paid for by some of the counties with trade surpluses, instead of by its central bank. This QE substitute tended to encourage world economic growth, for the reasons mentioned above.

Once the fortunes of the countries that used to buy US Treasuries changes, the pattern of buying of US Treasuries tends to change to selling of US Treasuries. Even not purchasing the same quantity of US Treasuries as in the past becomes an adverse change, if the US has a need to keep issuing US Treasuries as in the past, or if it wants to keep rates low.

Unfortunately, losing this QE substitute tends to reverse the favorable effects noted above. One effect is that the dollar tends to ride higher relative to other currencies, making the US look richer, and other countries poorer. The “catch” is that as the other countries become poorer, it becomes harder for them to repay the debt that they took out earlier, which was denominated in US dollars.

Another problem, as this strange type of QE disappears, is that the interest rates that the US government needs to pay in order to issue new debt start rising. These higher rates tend to affect other rates as well, such as mortgage rates. These higher interest rates act as a drag on the economy, tending to push it toward recession.

Higher interest rates also tend to decrease the value of assets, such as homes, farms, outstanding bonds, and shares of stock. This occurs because fewer buyers can afford to buy these goods, with the new higher interest rates. As a result, stock prices can be expected to fall. Prices of homes and of commercial buildings can also be expected to fall. The value of bonds held by insurance companies and banks becomes lower, if they choose to sell these securities before maturity.

Of course, as interest rates fell after 1981, we received the benefit of falling interest rates, in the form of rising asset prices. No one ever stopped to think about how much of the gains in share prices and property values came from falling interest rates.

Figure 8. Ten year treasury interest rates, based on St. Louis Fed data.

Now, as interest rates rise, we can expect asset prices of many types to start falling, because of lower affordability when monthly payments are based on higher interest rates. This situation presents another “drag” on the economy.

In Conclusion

The situation is indeed very concerning. Many things could set off a crisis:

  • Rising energy prices of any kind (hurting energy importers), or energy prices that don’t rise (leading to financial problems or collapse of exporters)
  • Rising interest rates.
  • Defaulting debt, indirectly the result of slow/negative economic growth and rising interest rates.
  • International organizations with less and less influence, or that fall apart completely.
  • Fast changes in relativities of currencies, leading to defaults on derivatives.
  • Collapsing banks, as debt defaults rise.
  • Falling asset prices (homes, farms, commercial buildings, stocks and bonds) as interest rates rise, leading to many debt defaults.

Things don’t look too bad right now, but the underlying problems are sufficiently severe that we seem to be headed for a crisis far worse than 2008. The timing is not clear. Things could start falling apart badly in 2017, or alternatively, major problems may be delayed until 2018 or 2019. I hope political leaders can find ways to keep problems away as long as possible, perhaps with more rounds of QE. Our fundamental problem is the fact that neither high nor low energy prices are now able to keep the world economy operating as we would like it to operate. Increased debt can’t seem to fix the problem either.

The laws of physics seem to be behind economic growth. From a physics point of view, our economy is a dissipative structure. Such structures form in “open systems.” In such systems, flows of energy allow structures to temporarily self-organize and grow. Other examples of dissipative structures include ecosystems, all plants and animals, stars, and hurricanes. All of these structures constantly “dissipate” energy. They have finite life spans, before they eventually collapse. Often, new dissipative systems form, to replace previous ones that have collapsed.





Steve Keen exposes next global economic shockwaves

18 01 2017

Most of DTM’s readers will know this, but as it’s rather well done and amusing to boot, here it is anyway….. some lighthearted relief.





The Party’s Over…..

17 10 2016

I almost republished Raul Ilargi Meijer’s excellent article titled “Why There is Trump”, but I was too busy, or ran out of data or some other poor excuse.  Anyhow, this new article quotes Raul’s writing so much, I no longer feel the need to. This item was lifted straight from the Automatic Earth, and because it’s written by someone with an important past, and the subject matter is critical, it needs to be shared around.

The farcical US presidential election as far as I am concerned is proof positive that America is in an utter state of collapse. Let’s face it, what intelligent person would want to be in charge right now, when nobody will be willing to implement any of the solutions I at least believe are necessary?

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Alastair Crooke: ‘End of Growth’ Sparks Wide Discontent

Raul Ilargi Meijer, the long-standing economics commentator, has written both succinctly – and provocatively: “It’s over! The entire model our societies have been based on for at least as long as we ourselves have lived, is over! That’s why there’s Trump.

“There is no growth. There hasn’t been any real growth for years. All there is left are empty hollow sunshiny S&P stock market numbers propped up with ultra-cheap debt and buybacks, and employment figures that hide untold millions hiding from the labor force. And most of all there’s debt, public as well as private, that has served to keep an illusion of growth alive and now increasingly no longer can.

“These false growth numbers have one purpose only: for the public to keep the incumbent powers that be in their plush seats. But they could always ever only pull the curtain of Oz [Wizard of Oz] over people’s eyes for so long, and it’s no longer so long.

“That’s what the ascent of Trump means, and Brexit, Le Pen, and all the others. It’s over. What has driven us for all our lives has lost both its direction and its energy.”

Meijer continues: “We are smack in the middle of the most important global development in decades, in some respects arguably even in centuries, a veritable revolution, which will continue to be the most important factor to shape the world for years to come, and I don’t see anybody talking about it. That has me puzzled.

“The development in question is the end of global economic growth, which will lead inexorably to the end of centralization (including globalization). It will also mean the end of the existence of most, and especially the most powerful, international institutions.

“In the same way it will be the end of -almost- all traditional political parties, which have ruled their countries for decades and are already today at or near record low support levels (if you’re not clear on what’s going on, look there, look at Europe!)

“This is not a matter of what anyone, or any group of people, might want or prefer, it’s a matter of ‘forces’ that are beyond our control, that are bigger and more far-reaching than our mere opinions, even though they may be man-made.

“Tons of smart and less smart folks are breaking their heads over where Trump and Brexit and Le Pen and all these ‘new’ and scary things and people and parties originate, and they come up with little but shaky theories about how it’s all about older people, and poorer and racist and bigoted people, stupid people, people who never voted, you name it.

“But nobody seems to really know or understand. Which is odd, because it’s not that hard. That is, this all happens because growth is over. And if growth is over, so are expansion and centralization in all the myriad of shapes and forms they come in.”

Further, Meijer writes: “Global is gone as a main driving force, pan-European is gone, and whether the United States will stay united is far from a done deal. We are moving towards a mass movement of dozens of separate countries and states and societies looking inward. All of which are in some form of -impending- trouble or another.

“What makes the entire situation so hard to grasp for everyone is that nobody wants to acknowledge any of this. Even though tales of often bitter poverty emanate from all the exact same places that Trump and Brexit and Le Pen come from too.

“That the politico-econo-media machine churns out positive growth messages 24/7 goes some way towards explaining the lack of acknowledgement and self-reflection, but only some way. The rest is due to who we ourselves are. We think we deserve eternal growth.”

The End of ‘Growth’

Well, is global “growth over”? Of course Raul Ilargi is talking “aggregate” (and there will be instances of growth within any contraction). But what is clear is that debt-driven investment and low-interest-rate policies are having less and less effect – or no effect at all – in producing growth – either in terms of domestic or trade growth, as Tyler Durden at ZeroHedge writes:

 

“After almost two years of the quantitative easing program in the Euro Area, economic figures have remained very weak. As GEFIRA details, inflation is still fluctuating near zero, while GDP growth in the region has started to slow down instead of accelerating. According to the ECB data, to generate €1.0 of GDP growth, €18.5 had to be printed in the QE, … This year, the ECB printed nearly €600 billion within the frame of asset purchase programme (QE).”

Central Banks can and do create money, but that is not the same as creating wealth or purchasing power. By channelling their credit creation through the intermediary of banks granting loans to their favored clients, Central Banks grant to one set of entities purchasing power – a purchasing power that must necessarily have been transferred from another set of entities within Europe (i.e. transferred from ordinary Europeans in the case of the ECB), who, of course will have less purchasing power, less discretionary spending income.

The devaluation of purchasing power is not so obvious (no runaway inflation), because all major currencies are devaluing more or less pari passu – and because the authorities periodically steam hammer down the price of gold, so that there is no evident standard by which people can “see” for themselves the extent of their currencies’ joint downward float.

And world trade is grinding down too, as Lambert Strether of Corrente rather elegantly explains: “Back to shipping: I started following shipping … partly because it’s fun, but more because shipping is about stuff, and tracking stuff seemed like a far more attractive way of getting a handle on ‘the economy’ than economics statistics, let alone whatever books the Wall Streeters were talking on any given day. And don’t get me started on Larry Summers.

“So what I noticed was decline, and not downward blips followed by rebounds, but decline, for months and then a year. Decline in rail, even when you back out coal and grain, and decline in demand for freight cars. Decline in trucking, and decline in the demand for trucks. Air freight wobbly. No Christmas bounce at the Pacific ports. And now we have the Hanjin debacle — all that capital tied up in stranded ships, though granted only $12 billion or so — and the universal admission that somehow “we” invested w-a-a-a-a-a-y too much money in big ships and boats, implying (I suppose) that we need to ship a lot less stuff than we thought, at least across the oceans.

“Meanwhile, and in seeming contradiction not only to a slow collapse of global trade, but to the opposition to ‘trade deals,’ warehousing is one of the few real estate bright spots, and supply chain management is an exciting field. It’s disproportionately full of sociopaths, and therefore growing and dynamic!

“And the economics statistics seem to say nothing is wrong. Consumers are the engine of the economy and they are confident. But at the end of the day, people need stuff; life is lived in the material world, even if you think you live it on your device. It’s an enigma! So what I’m seeing is a contradiction: Less stuff is moving, but the numbers say ‘this is fine.’ Am I right, here? So in what follows, I’m going to assume that numbers don’t matter, but stuff does.”

Fake Elixir

Or, to be more faux-empirical: as Bloomberg notes in A Weaker Currency is no longer the Elixir, It Once Was:“global central banks have cut policy rates 667 times since 2008, according to Bank of America. During that period, the dollar’s 10 main peers have fallen 14%, yet Group-of-Eight economies have grown an average of just 1%. Since the late 1990s, a 10% inflation-adjusted depreciation in currencies of 23 advanced economies boosted net exports by just 0.6% of GDP, according to Goldman Sachs. That compares with 1.3% of GDP in the two decades prior. U.S. trade with all nations slipped to $3.7 trillion in 2015, from $3.9 trillion in 2014.”

 

With “growth over,” so too is globalization: Even the Financial Times agrees, as its commentator Martin Wolf writes in his comment, The Tide of Globalisation is Turning: “Globalisation has at best stalled. Could it even go into reverse? Yes. It requires peace among the great powers … Does globalisation’s stalling matter? Yes.”

Globalization is stalling – not because of political tensions (a useful “scapegoat”), but because growth is flaccid as a result of a veritable concatenation of factors causing its arrest – and because we have entered into debt deflation that is squeezing what’s left of discretionary, consumption-available, income. But Wolf is right. Ratcheting tensions with Russia and China will not somehow solve America’s weakening command over the global financial system – even if capital flight to the dollar might give the U.S. financial system a transient “high.”

So what might the “turning tide” of globalization actually mean? Does it mean the end of the neo-liberalist, financialized world? That is hard to say. But expect no rapid “u-turn” – and no apologies. The Great Financial Crisis of 2008 – at the time – was thought by many to mark the end to neo-liberalism. But it never happened – instead, a period of fiscal retrenchment and austerity was imposed that contributed to a deepening distrust of the status quo, and a crisis rooted in a widespread, popular sense that “their societies” were headed in the wrong direction.

Neo-liberalism is deeply entrenched – not least in Europe’s Troika and in the Eurogroup that oversees creditor interests, and which, under European Union rules, has come to dominate E.U. financial and tax policy.

It is too early to say from whence the economic challenge to prevailing orthodoxy will come, but in Russia there is a group of prominent economists gathered together as the Stolypin Club, who are evincing a renewed interest in that old adversary of Adam Smith, Friedrich List (d. 1846), who evolved a “national system of political economy.” List upheld the (differing interests) of the nation to that of the individual. He gave prominence to the national idea, and insisted on the special requirements of each nation according to its circumstances, and especially to the degree of its development. He famously doubted the sincerity of calls to free trade from developed nations, in particular those by Britain. He was, as it were, the arch anti-globalist.

A Post-Globalism

One can see that this might well fit the current post-globalist mood. List’s acceptance of the need for a national industrial strategy and the reassertion of the role of the state as the final guarantor of social cohesion is not some whimsy pursued by a few Russian economists. It is entering the mainstream. The May government in the U.K. precisely is breaking with the neoliberal model that has ruled British politics since the 1980s – and is breaking towards a List-ian approach.

 

Be that as it may (whether this approach swims more widely back into fashion), the very contemporary British professor and political philosopher, John Gray has suggested the key point is: “The resurgence of the state is one of the ways in which the present time differs from the ‘new times’ diagnosed by Martin Jacques and other commentators in the 1980s. Then, it seemed national boundaries were melting away and a global free market was coming into being. It’s a prospect I never found credible.

“A globalised economy existed before 1914, but it rested on a lack of democracy. Unchecked mobility of capital and labour may raise productivity and create wealth on an unprecedented scale, but it is also highly disruptive in its impact on the lives of working people – particularly when capitalism hits one of its periodic crises. When the global market gets into grave trouble, neoliberalism is junked in order to meet a popular demand for security. That is what is happening today.

“If the tension between global capitalism and the nation state was one of the contradictions of Thatcherism, the conflict between globalization and democracy has undone the left. From Bill Clinton and Tony Blair onwards, the center-left embraced the project of a global free market with an enthusiasm as ardent as any on the right. If globalisation was at odds with social cohesion, society had to be re-engineered to become an adjunct of the market. The result was that large sections of the population were left to moulder in stagnation or poverty, some without any prospect of finding a productive place in society.”

If Gray is correct that when globalized economics strikes trouble, people will demand that the state must pay attention to their own parochial, national economic situation (and not to the utopian concerns of the centralizing élite), it suggests that just as globalization is over – so too is centralization (in all its many manifestations).

The E.U., of course, as an icon of introverted centralization, should sit up, and pay attention. Jason Cowley, the editor of the (Leftist) New Statesman says: “In any event … however you define it, [the onset of ‘New Times’] will not lead to a social-democratic revival: it looks as if, in many Western countries, we are entering an age in which centre-left parties cannot form ruling majorities, having leaked support to nationalists, populists and more radical alternatives.”

The Problem of Self-Delusion

So, to return to Ilargi’s point, that “we are smack in the middle of the most important global development in decades … and I don’t see anybody talking about it. That has me puzzled” and to which he answers that ultimately, the “silence” is due to ourselves: “We think we deserve eternal growth.”

 

He is surely right that it somehow answers to the Christian meme of linear progress (material here, rather than spiritual); but more pragmatically, doesn’t “growth” underpin the whole Western financialized, global system: “it was about lifting the ‘others’ out of their poverty”?

Recall, Stephen Hadley, the former U.S. National Security Adviser to President George W. Bush,warning plainly that foreign-policy experts rather should pay careful attention to the growing public anger: that “globalization was a mistake” and that “the elites have sleep-walked the [U.S.] into danger.”

“This election isn’t just about Donald Trump,” Hadley argued. “It’s about the discontents of our democracy, and how we are going to address them … whoever is elected, will have to deal with these discontents.”

In short, if globalization is giving way to discontent, the lack of growth can undermine the whole financialized global project. Stiglitz tells us that this has been evident for the past 15 years — last month he noted that he had warned then of: “growing opposition in the developing world to globalizing reforms: It seemed a mystery: people in developing countries had been told that globalization would increase overall wellbeing. So why had so many people become so hostile to it? How can something that our political leaders – and many an economist – said would make everyone better off, be so reviled? One answer occasionally heard from the neoliberal economists who advocated for these policies is that people are better off. They just don’t know it. Their discontent is a matter for psychiatrists, not economists.”

This “new” discontent, Stiglitz now says, is extended into advanced economies. Perhaps this is what Hadley means when he says, “globalization was a mistaalastair-crooke-photoke.” It is now threatening American financial hegemony, and therefore its political hegemony too.

Alastair Crooke is a former British diplomat who was a senior figure in British
intelligence and in European Union diplomacy. He is the founder and director of the Conflicts Forum, which advocates for engagement between political Islam and the West.





Negative Interest Rates and the War on Cash (3)

9 09 2016

Here is Part 3 of Nicole Foss’ wonderful 4 part article on the collapse of money as we know it. Originally published over at the Automatic Earth where you can buy DVDs of Nicole’s talks…

What’s even more amazing is that this concept of traditional banking — holding physical cash in a bank vault — is now considered revolutionary and radical.

Part 1 is here

Part 2 is here

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Promoters, Mechanisms and Risks in the War on Cash

nicolefossBitcoin and other electronic platforms have paved the way psychologically for a shift away from cash, although they have done so by emphasising decentralisation and anonymity rather than the much greater central control which would be inherent in a mainstream electronic currency. The loss of privacy would no doubt be glossed over in any media campaign, as would the risks of cyber-attack and the lack of a fallback for providing liquidity to the economy in the event of a systems crash. Electronic currency is much favoured by techno-optimists, but not so much by those concerned about the risks of absolute structural dependency on technological complexity. The argument regarding greatly reduced socioeconomic resilience is particularly noteworthy, given the vulnerability and potential fragility of electronic systems.

There is an important distinction to be made between official electronic currency – allowing everyone to hold an account with the central bank — and private electronic currency. It would be official currency which would provide the central control sought by governments and central banks, but if individuals saw central bank accounts as less risky than commercial institutions, which seems highly likely, the extent of the potential funds transfer could crash the existing banking system, causing a bank run in a similar manner as large-scale cash withdrawals would. As the power of money creation is of the highest significance, and that power is currently in private hands, any attempt to threaten that power would almost certainly be met with considerable resistance from powerful parties. Private digital currency would be more compatible with the existing framework, but would not confer all of the control that governments would prefer:

People would convert a very large share of their current bank deposits into official digital money, in effect taking them out of the private banking system. Why might this be a problem? If it’s an acute rush for safety in a crisis, the risk is that private banks may not have enough reserves to honour all the withdrawals. But that is exactly the same risk as with physical cash: it’s often forgotten that it’s central bank reserves, not the much larger quantity of deposits, that banks can convert into cash with the central bank. Both with cash and official e-cash, the way to meet a more severe bank run is for the bank to borrow more reserves from the central bank, posting its various assets as security. In effect, this would mean the central bank taking over the funding of the broader economy in a panic — but that’s just what central banks should do.

A more chronic challenge is that people may prefer the safety of central bank accounts even in normal times. That would destroy private banks’ current deposit-funded model. Is that a bad thing? They would still have a role as direct intermediators between savers and borrowers, by offering investment products sufficiently attractive for people to get out of the safety of e-cash. Meanwhile, the broad money supply would be more directly under the control of the central bank, whereas now it’s a product of the vagaries of private lending decisions. The more of the broad money supply that was in the form of official digital cash, the easier it would be, for example, for the central bank to use tools such as negative interest rates or helicopter drops.

As an indication that the interests of the private banking system and public central authorities are not always aligned, consider the actions of the Bavarian Banking Association in attempting to avoid the imposition of negative interest rates on reserves held with the ECB:

German newspaper Der Spiegel reported yesterday that the Bavarian Banking Association has recommended that its member banks start stockpiling PHYSICAL CASH. The Bavarian Banking Association has had enough of this financial dictatorship. Their new recommendation is for all member banks to ditch the ECB and instead start keeping their excess reserves in physical cash, stored in their own bank vaults. This is officially an all-out revolution of the financial system where banks are now actively rebelling against the central bank. (What’s even more amazing is that this concept of traditional banking — holding physical cash in a bank vault — is now considered revolutionary and radical.)

There’s just one teensy tiny problem: there simply is not enough physical cash in the entire financial system to support even a tiny fraction of the demand. Total bank deposits exceed trillions of euros. Physical cash constitutes just a small percentage of that sum. So if German banks do start hoarding physical currency, there won’t be any left in the financial system. This will force the ECB to choose between two options:

  1. Support this rebellion and authorize the issuance of more physical cash; or
  2. Impose capital controls.

Given that just two weeks ago the President of the ECB spoke about the possibility of banning some higher denomination cash notes, it’s not hard to figure out what’s going to happen next.

Advantages of official electronic currency to governments and central banks are clear. All transactions are transparent, and all can be subject to fees and taxes. Central control over the money supply would be greatly increased and tax evasion would be difficult to impossible, at least for ordinary people. Capital controls would be built right into the system, and personal spending information would be conveniently gathered for inspection by central authorities (for cross-correlation with other personal data they possess). The first step would likely be to set up a dual system, with both cash and electronic money in parallel use, but with electronic money as the defined unit of value and cash subject to a marginally disadvantageous exchange rate.

The exchange rate devaluing cash in relation to electronic money could increase over time, in order to incentivize people to switch away from seeing physical cash as a store of value, and to increase their preference for goods over cash. In addition to providing an active incentive, the use of cash would probably be publicly disparaged as well as actively discouraged in many ways. For instance, key functions such as tax payments could be designated as by electronic remittance only. The point would be to forced everyone into the system by depriving them of the choice to opt out. Once all were captured, many forms of central control would be possible, including substantial account haircuts if central authorities deemed them necessary.

 

The main promoters of cash elimination in favour of electronic currency are Willem Buiter, Kenneth Rogoff, and Miles Kimball.

Economist Willem Buiter has been pushing for the relegation of cash, at least the removal of its status as official unit of account, since the financial crisis of 2008. He suggests a number of mechanisms for achieving the transition to electronic money, emphasising the need for the electronic currency to become the definitive unit of account in order to implement substantially negative interest rates:

The first method does away with currency completely. This has the additional benefit of inconveniencing the main users of currency-operators in the grey, black and outright criminal economies. Adequate substitutes for the legitimate uses of currency, on which positive or negative interest could be paid, are available. The second approach, proposed by Gesell, is to tax currency by making it subject to an expiration date. Currency would have to be “stamped” periodically by the Fed to keep it current. When done so, interest (positive or negative) is received or paid.

The third method ends the fixed exchange rate (set at one) between dollar deposits with the Fed (reserves) and dollar bills. There could be a currency reform first. All existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod. Reserves at the Fed would continue to be denominated in dollars. As long as the Federal Funds target rate is positive or zero, the Fed would maintain the fixed exchange rate between the dollar and the rallod.

When the Fed wants to set the Federal Funds target rate at minus five per cent, say, it would set the forward exchange rate between the dollar and the rallod, the number of dollars that have to be paid today to receive one rallod tomorrow, at five per cent below the spot exchange rate — the number of dollars paid today for one rallod delivered today. That way, the rate of return, expressed in a common unit, on dollar reserves is the same as on rallod currency.

For the dollar interest rate to remain the relevant one, the dollar has to remain the unit of account for setting prices and wages. This can be encouraged by the government continuing to denominate all of its contracts in dollars, including the invoicing and payment of taxes and benefits. Imposing the legal restriction that checkable deposits and other private means of payment cannot be denominated in rallod would help.

In justifying his proposals, he emphasises the importance of combatting criminal activity…

The only domestic beneficiaries from the existence of anonymity-providing currency are the criminal fraternity: those engaged in tax evasion and money laundering, and those wishing to store the proceeds from crime and the means to commit further crimes. Large denomination bank notes are an especially scandalous subsidy to criminal activity and to the grey and black economies.

… over the acknowledged risks of government intrusion in legitimately private affairs:

My good friend and colleague Charles Goodhart responded to an earlier proposal of mine that currency (negotiable bearer bonds with legal tender status) be abolished that this proposal was “appallingly illiberal”. I concur with him that anonymity/invisibility of the citizen vis-a-vis the state is often desirable, given the irrepressible tendency of the state to infringe on our fundamental rights and liberties and given the state’s ever-expanding capacity to do so (I am waiting for the US or UK government to contract Google to link all personal health information to all tax information, information on cross-border travel, social security information, census information, police records, credit records, and information on personal phone calls, internet use and internet shopping habits).

In his seminal 2014 paper “Costs and Benefits to Phasing Out Paper Currency.”, Kenneth Rogoff also argues strongly for the primacy of electronic currency and the elimination of physical cash as an escape route:

Paper currency has two very distinct properties that should draw our attention. First, it is precisely the existence of paper currency that makes it difficult for central banks to take policy interest rates much below zero, a limitation that seems to have become increasingly relevant during this century. As Blanchard et al. (2010) point out, today’s environment of low and stable inflation rates has drastically pushed down the general level of interest rates. The low overall level, combined with the zero bound, means that central banks cannot cut interest rates nearly as much as they might like in response to large deflationary shocks.

If all central bank liabilities were electronic, paying a negative interest on reserves (basically charging a fee) would be trivial. But as long as central banks stand ready to convert electronic deposits to zero-interest paper currency in unlimited amounts, it suddenly becomes very hard to push interest rates below levels of, say, -0.25 to -0.50 percent, certainly not on a sustained basis. Hoarding cash may be inconvenient and risky, but if rates become too negative, it becomes worth it.

However, he too notes associated risks:

Another argument for maintaining paper currency is that it pays to have a diversity of technologies and not to become overly dependent on an electronic grid that may one day turn out to be very vulnerable. Paper currency diversifies the transactions system and hardens it against cyber attack, EMP blasts, etc. This argument, however, seems increasingly less relevant because economies are so totally exposed to these problems anyway. With paper currency being so marginalized already in the legal economy in many countries, it is hard to see how it could be brought back quickly, particularly if ATM machines were compromised at the same time as other electronic systems.

A different type of argument against eliminating currency relates to civil liberties. In a world where society’s mores and customs evolve, it is important to tolerate experimentation at the fringes. This is potentially a very important argument, though the problem might be mitigated if controls are placed on the government’s use of information (as is done say with tax information), and the problem might also be ameliorated if small bills continue to circulate. Last but not least, if any country attempts to unilaterally reduce the use of its currency, there is a risk that another country’s currency would be used within domestic borders.

Miles Kimball’s proposals are very much in tune with Buiter and Rogoff:

There are two key parts to Miles Kimball’s solution. The first part is to make electronic money or deposits the sole unit of account. Everything else would be priced in terms of electronic dollars, including paper dollars. The second part is that the fixed exchange rate that now exists between deposits and paper dollars would become variable. This crawling peg between deposits and paper currency would be based on the state of the economy. When the economy was in a slump and the central bank needed to set negative interest rates to restore full employment, the peg would adjust so that paper currency would lose value relative to electronic money. This would prevent folks from rushing to paper currency as interest rates turned negative. Once the economy started improving, the crawling peg would start adjusting toward parity.

This approach views the economy in very mechanistic terms, as if it were a machine where pulling a lever would have a predictable linear effect — make holding savings less attractive and automatically consumption will increase. This is actually a highly simplistic view, resting on the notions of stabilising negative feedback and bringing an economy ‘back into equilibrium’. If it were so simple to control an economy centrally, there would never have been deflationary spirals or economic depressions in the past.

Assuming away the more complex aspects of human behaviour — a flight to safety, the compulsion to save for a rainy day when conditions are unstable, or the natural response to a negative ‘wealth effect’ — leads to a model divorced from reality. Taxing savings does not necessarily lead to increased consumption, in fact it is far more likely to have the opposite effect.:

But under Miles Kimball’s proposal, the Fed would lower interest rates to below zero by taxing away balances of e-currency. This is a reduction in monetary base, just like the case of IOR, and by itself would be contractionary, not expansionary. The expansionary effects of Kimball’s policy depend on the assumption that households will increase consumption in response to the taxing of their cash savings, rather than letting their savings depreciate.

That needn’t be the case — it depends on the relative magnitudes of income and substitution effects for real money balances. The substitution effect is what Kimball has in mind — raising the price of real money balances will induce substitution out of money and into consumption. But there’s also an income effect, whereby the loss of wealth induces less consumption and more savings. Thus, negative interest rate policy can be contractionary even though positive interest rate policy is expansionary.

Indeed, what Kimball has proposed amounts to a reverse Bernanke Helicopter — imagine a giant vacuum flying around the country sucking money out of people’s pockets. Why would we assume that this would be inflationary?

 

Given that the effect on the money supply would be contractionary, the supposed stimulus effect on the velocity of money (as, in theory, savings turn into consumption in order to avoid the negative interest rate penalty) would have to be large enough to outweigh a contracting money supply. In some ways, modern proponents of electronic money bearing negative interest rates are attempting to copy Silvio Gesell’s early 20th century work. Gesell proposed the use of stamp scrip — money that had to be regularly stamped, at a small cost, in order to remain current. The effect would be for money to lose value over time, so that hoarding currency it would make little sense. Consumption would, in theory, be favoured, so money would be kept in circulation.

This idea was implemented to great effect in the Austrian town of Wörgl during the Great Depression, where the velocity of money increased sufficiently to allow a hive of economic activity to develop (temporarily) in the previously depressed town. Despite the similarities between current proposals and Gesell’s model applied in Wörgl, there are fundamental differences:

There is a critical difference, however, between the Wörgl currency and the modern-day central bankers’ negative interest scheme. The Wörgl government first issued its new “free money,” getting it into the local economy and increasing purchasing power, before taxing a portion of it back. And the proceeds of the stamp tax went to the city, to be used for the benefit of the taxpayers….Today’s central bankers are proposing to tax existing money, diminishing spending power without first building it up. And the interest will go to private bankers, not to the local government.

The Wörgl experiment was a profoundly local initiative, instigated at the local government level by the mayor. In contrast, modern proposals for negative interest rates would operate at a much larger scale and would be imposed on the population in accordance with the interests of those at the top of the financial foodchain. Instead of being introduced for the direct benefit of those who pay, as stamp scrip was in Wörgl, it would tax the people in the economic periphery for the continued benefit of the financial centre. As such it would amount to just another attempt to perpetuate the current system, and to do so at a scale far beyond the trust horizon.

As the trust horizon contracts in times of economic crisis, effective organizational scale will also contract, leaving large organizations (both public and private) as stranded assets from a trust perspective, and therefore lacking in political legitimacy. Large scale, top down solutions will be very difficult to implement. It is not unusual for the actions of central authorities to have the opposite of the desired effect under such circumstances:

Consumers today already have very little discretionary money. Imposing negative interest without first adding new money into the economy means they will have even less money to spend. This would be more likely to prompt them to save their scarce funds than to go on a shopping spree. People are not keeping their money in the bank today for the interest (which is already nearly non-existent). It is for the convenience of writing checks, issuing bank cards, and storing their money in a “safe” place. They would no doubt be willing to pay a modest negative interest for that convenience; but if the fee got too high, they might pull their money out and save it elsewhere. The fee itself, however, would not drive them to buy things they did not otherwise need.

People would be very likely to respond to negative interest rates by self-organising alternative means of exchange, rather than bowing to the imposition of negative rates. Bitcoin and other crypto-currencies would be one possibility, as would using foreign currency, using trading goods as units of value, or developing local alternative currencies along the lines of the Wörgl model:

The use of sheep, bottled water, and cigarettes as media of exchange in Iraqi rural villages after the US invasion and collapse of the dinar is one recent example. Another example was Argentina after the collapse of the peso, when grain contracts priced in dollars were regularly exchanged for big-ticket items like automobiles, trucks, and farm equipment. In fact, Argentine farmers began hoarding grain in silos to substitute for holding cash balances in the form of depreciating pesos.

 

For the electronic money model grounded in negative interest rates to work, all these alternatives would have to be made illegal, or at least hampered to the point of uselessness, so people would have no other legal choice but to participate in the electronic system. Rogoff seems very keen to see this happen:

Won’t the private sector continually find new ways to make anonymous transfers that sidestep government restrictions? Certainly. But as long as the government keeps playing Whac-A-Mole and prevents these alternative vehicles from being easily used at retail stores or banks, they won’t be able fill the role that cash plays today. Forcing criminals and tax evaders to turn to riskier and more costly alternatives to cash will make their lives harder and their enterprises less profitable.

It is very likely that in times of crisis, people would do what they have to do regardless of legal niceties. While it may be possible to close off some alternative options with legal sanctions, it is unlikely that all could be prevented, or even enough to avoid the electronic system being fatally undermined.

The other major obstacle would be overcoming the preference for cash over goods in times of crisis:

Understanding how negative rates may or may not help economic growth is much more complex than most central bankers and investors probably appreciate. Ultimately the confusion resides around differences in view on the theory of money. In a classical world, money supply multiplied by a constant velocity of circulation equates to nominal growth.

In a Keynesian world, velocity is not necessarily constant — specifically for Keynes, there is a money demand function (liquidity preference) and therefore a theory of interest that allows for a liquidity trap whereby increasing money supply does not lead to higher nominal growth as the increase in money is hoarded. The interest rate (or inverse of the price of bonds) becomes sticky because at low rates, for infinitesimal expectations of any further rise in bond prices and a further fall in interest rates, demand for money tends to infinity.

In Gesell’s world money supply itself becomes inversely correlated with velocity of circulation due to money characteristics being superior to goods (or commodities). There are costs to storage that money does not have and so interest on money capital sets a bar to interest on real capital that produces goods. This is similar to Keynes’ concept of the marginal efficiency of capital schedule being separate from the interest rate. For Gesell the product of money and velocity is effective demand (nominal growth) but because of money capital’s superiority to real capital, if money supply expands it comes at the expense of velocity.

The new money supply is hoarded because as interest rates fall, expected returns on capital also fall through oversupply — for economic agents goods remain unattractive to money. The demand for money thus rises as velocity slows. This is simply a deflation spiral, consumers delaying purchases of goods, hoarding money, expecting further falls in goods prices before they are willing to part with their money….In a Keynesian world of deficient demand, the burden is on fiscal policy to restore demand. Monetary policy simply won’t work if there is a liquidity trap and demand for cash is infinite.

During the era of globalisation (since the financial liberalisation of the early 1980s), extractive capitalism in debt-driven over-drive has created perverse incentives to continually increase supply. Financial bubbles, grounded in the rediscovery of excess leverage, always act to create an artificial demand stimulus, which is met by artificially inflated supply during the boom phase. The value of the debt created collapses as boom turns into bust, crashing the money supply, and with it asset price support. Not only does the artificial stimulus disappear, but a demand undershoot develops, leaving all that supply without a market. Over the full cycle of a bubble and its aftermath, credit is demand neutral, but within the bubble it is anything but neutral. Forward shifting the demand curve provides for an orgy of present consumption and asset price increases, which is inevitably followed by the opposite.

Kimball stresses bringing demand forward as a positive aspect of his model:

In an economic situation like the one we are now in, we would like to encourage a company thinking about building a factory in a couple of years to build that factory now instead. If someone would lend to them at an interest rate of -3.33% per year, the company could borrow $1 million to build the factory now, and pay back something like $900,000 on the loan three years later. (Despite the negative interest rate, compounding makes the amount to be paid back a bit bigger, but not by much.)

That would be a good enough deal that the company might move up its schedule for building the factory. But everything runs aground on the fact that any potential lender, just by putting $1 million worth of green pieces of paper in a vault could get back $1 million three years later, which is a lot better than getting back a little over $900,000 three years later.

This is, however, a short-sighted assessment. Stimulating demand today means a demand undershoot tomorrow. Kimball names long term price stability as a primary goal, but this seems unlikely. Large scale central planning has a poor track record for success, to put it mildly. It requires the central authority in question to have access to all necessary information in realtime, and to have the ability to respond to that information both wisely and rapidly, or even proactively. It also assumes the ability to accurately filter out misinformation and disinformation. This is unlikely even in good times, thanks to the difficulties of ‘organizational stupidity’ at large scale, and even more improbable in the times of crisis.

Part 4 is here