This overlong post has been churning in my Kitchenaid brain machine for some time and I couldn't find my way clear to post it as a series because I feel the interrelatedness of the concepts demanded a coherent single post. Blogs shouldn't be this long. If it seems to long to bother with, my apologies. Just like the Irish cop I will say:" Comon folks. Move along. It's all over." I I have used this graph before and it remains extremely worrisome:(click to enlarge)
The rise in debt is parabolic and only goes through 2006. The past 5 years have only steepened the curve.This curve is just official debt and doesn't include other unfunded mandates like public sector pensions, Medicare promises, hidden military debt and future losses for example in commercial and residential real estate. Nor does it include all the casino gambling debt of the major banks with their derivative exposure and toxic mispriced assets hidden on falsified fraudulent bank balance sheets. Also keep in mind that this debt/gdp graph has similar morphology across a variety of European countries, most notably the PIGS countries. And yet astoundingly, those governments as well as ours continue to add to the debt as they extend and pretend with their deliberate lying statistics of a turn in unemployment and job statistics, manufacturing, housing and the economy returning to normal . This deliberate structured propaganda originates from government economic channels reporting to formerly trustworthy mainstream media as well as the thousands of economists working at the major banks and investment houses and hedge funds who themselves are victims of crowd psychology and flawed econometric models. Dick Cheney mouthed their cherished beliefs when he said "Debt doesn't matter." My contention is that debt matters a great deal and the assumption of more debt is riding the tail end of Joseph Tainters curve of diminishing marginal returns. I think I will venture a prediction: this will all end very badly. Our industrial society is driven and formed by debt and this debt bubble will eventually collapse as do all phenomena characterized and described by a parabolic or exponential curve. This curve of debt is indistinguishable from other financial bubbles and manias as far back as the South Sea bubble and the Tulip Bubble. The only way to put this debt laden economy on a secure footing is to extinguish this debt by either paying down the debt through a prolonged period of austerity or defaulting on the debt by outright default or by inflating it away. Again: this will all end very badly.It cannot help but end badly. What form this bubble collapse will take is subject to debate and educated and uneducated guessing but it will likely include deflationary price collapse early on if debt is defaulted on. Credit will become extinguished as well . Imagine an economy where as debt and credit disappears, so does in effect, money. Money in our society is primarily a function of debt and credit. Money is debt and credit in my opinion.Money is brought into being as part of a fractional reserve model in which a unit of money loaned out again and again from one financial institution to another which has the effect of multiplying the original issued amount by a factor or 10-40 times . If the loaned out money can't be paid back with interest, it wont be loaned out, debt will not be assumed and as a consequence, credit collapses, and in more than just a theoretical sense, money disappears.
The next important trend is the role of energy in supporting and maintaining this debt and credit based economy. This next graph displays the world's consumption of energy from the dawn of the industrial age to the present in a convenient unit of derived work called exjaoule which is 10 to the 18th joules. A joule as you may recall from high school physics is one watt over a period of one sec. joules can be described in electrical terms as well but I digress.… The dashed line represents real GDP in 1990 dollars. The world used 474 exjoules in 2008. Wikipedia mentions that the world in the last 20 years has used up over half of the energy consumed in the last 200 years. In this graph there is an obvious relation between world GDP and energy production. In the last graph we saw a debt parabola. I posit that there is a direct relation of energy use and economic output. It takes work and energy to produce stuff . And you can produce a lot more stuff if you can use machines running on energy provided by the amazing concentrated power contained in fossil energy. Under the right economic conditions you can make one heck of a lot of stuff using a credit and debt based system leveraging this energy availability to make your stuff. More debt using More energy=more jobs=more stuff=more GDP. A powerful and parabolic positive feedback loop.The converse applies as well. If energy availability diminishes or its cost goes up, one could suppose that the dashed GDP line would turn down. A Panglossian neo classical economist would dispute my conclusion. He would say energy is external and substitutable to the production process. If fossil energy became scarce,then the market would substitute another form of energy and that dashed line could resume its parabolic ascent. This is where I part company with the Panglossians and the cornucopians who loudly assert that there is plenty of oil and gas and coal, algae, cow farts, hummingbird wings and unharnessed dark energy. With the right technology, the dream can go on, the future is unbounded. I acknowledge that there is a possibility that some new cheap form of energy could be found which could keep that graph of GDP parabolic or exponential. But parabolic curves make me very nervous. Parabolic curves describe bubbles, unstable finite systems, immanent collapse. If I were sharing a cabin on the Titanic with a Panglossian after the iceberg incident, my conclusion just like George Bush would be to shout “This sucker is going down,” and head for the lifeboat deck.. Msr Pangloss would hopefully assert that “there ought to be some way, some technology to get the water out of this tub.” Peut-etre monsieur but once that curve goes parabolic it is time to get worried. So let’s pull all this together. It looks like we have parabolic debt, parabolic energy use, parabolic world GDP rise, parabolic population increases. I mean, what could go wrong? The key driver is cheap energy and cheap credit. Pull out cheap energy and I hazard that the parabola will collapse as all parabolas describing biologic or economic systems eventually do.
There are optimistic voices in the environmental let’s save the world community who offer what is to them the obvious solution. They see that energy and peak oil may be a real threat and suggest a shift to renewables, renewable energy. Of course in an absolute sense they are right. We need to return to a world which can exist on the energy availability of sun, wind and water and with a little luck and hard work, we will. But dig a little deeper and you will hear that they don’t want a return to a pre industrial, pre oil and coal past. They want to keep the existing party going on renewable energy with a little conservation thrown in, of course. They see electric cars powered by Li Ion batteries made from lithium mined in Afghanistan and Chile. But to my mind, it doesn’t compute, it doesn’t scale. Unless the society is willing to subsidize renewable energy on a massive scale the way we subsidize corn ethanol, the whole concept is flawed on many levels but cost alone is a deal breaker, especially in a country that is functionally bankrupt. Let’s use the example of wind as our renewable energy source as it is widely regarded as the cheapest renewable. Our earnest and well meaning lefties point to success stories like Denmark which gets 70% of its power from wind. What they omit to mention is Denmark is a tiny densely populated country, wealthy and with a lot of wind. They also omit to mention that Demark has the world highest electricity rates at 36 cents per kilowatt hour. It is also true that some areas of the United States have undeniable wind potential which given subsidies could compete with 3 cent/kw coal and 5 cent natural gas. My home state of Wyoming is awash with wind almost every dusty day but nobody lives here and our wind resource is a long way from the metro centers who could use it. Wyoming is also the country’s largest producer of that 3 cent/kw coal produced electricity. The coal and gas and oil lobby in Wyoming has formidable political power as do the globalized oil and gas companies . Their lobbyists own Congress. Do you still think you’ll get your subsidy? They have their subsidies and definitely don’t want to share. There are a myriad of other issues. Electric cars have the same range as they did in 1910 and building a nationwide network of battery or CNG stations would take decades and cost $trillions. That Chevy Volt is $40,000. The Toyota Prius hybrid is over half that and gets about 50 mpg with complex electronics and an expensive battery pack and a wimpy gas engine. I have a Toyota Corolla which gets up to 50 mpg which is a brutally simple manual transmission plain jane econobox with a 100 hp engine, and its operating cost per mile is far less than a Prius with much less complexity. Currently most hybrids are charged from Coal or gas power plants which would have to be massively increased to generate enough electricity to fuel a hybrid fleet. Keep in mind also that the wind towers were built using electricity generated not by wind but from coal and gas . They were transported vast distances by oil powered ships and on huge trucks running on asphalt roadbeds capable of heavy loads, hoisted into place with huge diesel powered cranes . The service life of the towers transmissions and blades is short compared to other energy plants
and most of these wind towers were manufactured in China and Europe. There is a place for wind power in some regions but intermittent wind still needs fossil or nuke or hydro backup. Water and wave energy has obvious potential but only in coastal regions. One could imagine San Francisco running entirely on wind and water with its fierce tidal currents and reliable afternoon breezes but all I hear from there is a deafening silence. Energy nerds know that I am talking about and around the crucial concept of EROEI, acronym for energy return on energy invested, or just Net Energy. As the resource diminishes, the cost to discover and process the resource increases. It takes energy to get energy. If it takes as much energy to acquire it as you receive, you are out of business. EROEI is normally expressed as a ratio of energy consumed to energy obtained and realistically depending on the type of equipment in use, distance to transport, wages paid and so forth, once you get to about 3:1 with oil for example using one unit of oil to get 3 units of oil, you are perilously close to shutting down. Germany in WW2 had minimal access to oil and used a coal to oil conversion which used an awful lot of coal to get a little diesel oil and their inability to seize and hold oil fields and refineries is one of the factors that finished them. They were defeated by the US with access to vast reserves of oil with EROEI ratios exceeding 100:1. Had Germany had the same reserves of cheap energy when the war began, we might all be speaking English with a German accent.
Now I will give you yet another crucially important graph illustrating what I have just explained, entitled the Net Energy Cliff and it is all about EROEI ratios:
You will note that the author used the ratio of 8:1 as the minimum ratio needed to just maintain our extravagant lifestyle. There are many ways to calculate EROEI ratios and the reader will note differences depending upon who is crunching the numbers but the general concept is the important thing. For example, absent a $.50/ gallon subsidy for corn ethanol combined with tariffs on Brazilian sugar cane bagasse ethanol from our percipient congress, there wouldn’t be any corn ethanol which is said to have a EROEI just above or below 1:1. Corn ethanol exists as a gift to the Industrial corn producers who wrote the legislation. Canadian tar sands are said to be in a 3:1 EROEI range which would using my methodology, be uneconomical to produce but tar bitumen production is still economical because it is an energy arbitrage using very cheap(at the moment) Canadian natural gas as the primary energy source to heat and remove the thick bitumen from the sand. If and when the energy or BTU content of oil and gas reach parity, you can say bye bye to the tar sands in Canada which just so happens to be our largest source of imported oil. You will also note the general shape of the net energy cliff curve resembles an exponential or parabolic curve. The conclusion I draw from the curve is that once energy starts to be withdrawn from society, things happen in a big hurry. It is not an arithmetic decay curve where the resource diminishes gradually. When it begins to bite, it will bite you hard and fast, with precious little time to react.
And that brings me to my summary phase. Systems characterized or described by parabolic or exponential growth phases are inherently unstable. I am characterizing our national debt as a bubble, as is 200 years increasing use of fossil energy, growth of GDP, and population growth. These are all systems characterized by some factor increasing at an increasing rate and if uncontrolled or ungoverned, collapse eventually ensues which is by definition the pop of a bubble, an uncontrolled collapse. Up to a certain point if the growth curve can be moderated , modulated or reduced to growth at a sustainable rate, the bubble can be deflated and a descent to sustainability can be slow and controlled. There is a period or window within which it is still possible to avert a collapse or uncontrolled chaotic descent to the abyss. But because we are talking about complex adaptive or maladaptive systems on a globalized scale, knowing where the point of no return is, is probably an unknowable situation. For example we almost certainly have a debt bubble in the United States but the bubble is not just conventional debt but bets on the debt and bets on bets using derivatives which leverage the debt into the stratosphere. Since the possibility or probability of a bubble or multiple simultaneous bubble collapses may not be knowable or predictable, the only strategy for the individual whether contemplating financial or personal survival is to prepare and think of actions to mitigate personal, familial and social pain. Clearly an obvious strategy is to put some distance between yourself and the bubble. If your existence is tied to the bubble, you will pop along with the bubble. My conclusion is that lack or scarcity or simply high cost of energy will be the impetus to a financial collapse. A financial collapse doesn’t necessarily imply a societal or cultural or political collapse. Russia experienced a political and financial as well as a regime collapse twenty years ago and they recovered amazingly well for many reasons not the least of which includes their vast energy resources and relative lack of globalized interconnectedness in their financial system. WE in the United States do not have those advantages. We have other advantages but there is no way of knowing whether we could quickly recover as Russia did. Ancient Rome made several recoveries in the waning centuries of its existence and it was able to maintain its power and wealth by expanding and stealing the wealth and energy of its neighbors. Once that wealth extraction hit a point of diminishing returns, Rome was finished, and really finished. 1200 years after Rome's collapse, only livestock were grazing on the Palatine Hill above the Roman Forum and the Circus Maximus.