The Depression of the 1930s Was an Energy Crisis

Economists, including Ben Bernanke, give all kinds of reasons for the Great Depression of the 1930s. But what if the real reason for the Great Depression was an energy crisis?

When I put together a chart of per capita energy consumption since 1820 for a post back in 2012, there was a strange “flat spot” in the period between 1920 and 1940. When we look at the underlying data, we see that coal production was starting to decline in some of the major coal producing parts of the world at that time. From the point of view of people living at the time, the situation might have looked very much like peak energy consumption, at least on a per capita basis.

Figure 1. World Energy Consumption by Source, based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent, divided by population estimates by Angus Maddison.

Even back in the 1820 to 1900 period, world per capita energy had gradually risen as an increasing amount of coal was used. We know that going back a very long time, the use of water and wind had never amounted to very much (Figure 2) compared to burned biomass and coal, in terms of energy produced. Humans and draft animals were also relatively low in energy production. Because of its great heat-producing ability, coal quickly became the dominant fuel.

Figure 2. Annual energy consumption per head (megajoules) in England and Wales during the period 1561-70 to 1850-9 and in Italy from 1861-70. Figure by Wrigley

In general, we know that energy products, including coal, are necessary to enable processes that contribute to economic growth. Heat is needed for almost all industrial processes. Transportation needs energy products of one kind or another. Building roads and homes requires energy products. It is not surprising that the Industrial Revolution began in Britain, with its use of coal.

We also know that there is a long-term correlation between world GDP growth and energy consumption.

Figure 3. X-Y graph of world energy consumption (from BP Statistical Review of World Energy, 2017) versus world GDP in 2010 US$ , from World Bank.

The “flat period” in 1920-1940 in Figure 1 was likely problematic. The economy is a self-organized networked system; what was wrong could be expected to appear in many parts of the economy. Economic growth was likely far too low. The chance for conflict among nations was much higher because of stresses in the system–there was not really enough coal to go around. These stresses could extend to the period immediately before 1920 and after 1940, as well.

 

A Peak in Coal Production Hit UK, United States, and Germany at Close to the Same Time

This is a coal supply chart for UK. Its peak coal production (which was an all time peak) was in 1913. The UK was the largest coal producer in Europe at the time.

Figure 3. United Kingdom coal production since 1855, in figure by David Strahan. First published in New Scientist, 17 January 2008.

The United States hit a peak in its production only five years later, in 1918. This peak was only a “local” peak. There were also later peaks, in 1947 and 2008, after coal production was developed in new areas of the country.

Figure 4. US coal production, in Wikipedia exhibit by contributor Plazak.

By type, US coal production is as shown on Figure 5.

Figure 5. US coal production by type, in Wikipedia exhibit by contributor Plazak.

Evidently, the highest quality coal, Anthracite, reached a peak and began to decline about 1918. Bituminous coal hit a peak about the same time, and dropped way back in production during the 1930s. The poorer quality coals were added later, as the better-quality coals became less abundant.

The pattern for Germany’s hard coal shows a pattern somewhat in between the UK and the US pattern.

Figure 6. Source GBR.

Germany too had a peak during World War I, then dropped back for several years. It then had three later peaks, the highest one during World War II.

What Affects Coal Production?

If there is a shortage of coal, fixing it is not as simple as “inadequate coal supply leads to higher price,” quickly followed by “higher price leads to more production.” Clearly the amount of coal resource in the ground affects the amount of coal extraction, but other things do as well.

[1] The amount of built infrastructure for taking the coal out and delivering the coal. Usually, a country only adds a little coal extraction capacity at a time and leaves the rest in the ground. (This is how the US and Germany could have temporary coal peaks, which were later surpassed by higher peaks.) To add more extraction capacity, it is necessary to add (a) investment needed for getting the coal out of the ground as well as (b) infrastructure for delivering coal to potential users. This includes things like trains and tracks, and export terminals for coal transported by boats.

[2] Prices available in the marketplace for coal. These fluctuate widely. We will discuss this more in a later section. Clearly, the higher the price, the greater the quantity of coal that can be extracted and delivered to users.

[3] The cost of extraction, both in existing locations and in new locations. These costs can perhaps be reduced if it is possible to add new technology. At the same time, there is a tendency for costs within a given mine to increase over time, as it becomes necessary to access deeper, thinner seams. Also, mines tend to be built in the most convenient locations first, with best access to transportation. New mines very often will be higher cost, when these factors are considered.

[4] The cost and availability of capital (shares of stock and sale of debt) needed for building new infrastructure, and for building new devices made possible by new technology. These are affected by interest rates and tax levels.

[5] Time lags needed to implement changes. New infrastructure and new technology are likely to take several years to implement.

[6] The extent to which wages can be recycled into demand for energy products. An economy needs to have buyers for the products it makes. If a large share of the workers in an economy is very low-paid, this creates a problem.

If there is an energy shortage, many people think of the shortage as causing high prices. In fact, the shortage is at least equally likely to cause greater wage disparity. This might also be considered a shortage of jobs that pay well. Without jobs that pay well, would-be workers find it hard to purchase the many goods and services created by the economy (such as homes, cars, food, clothing, and advanced education). For example, young adults may live with their parents longer, and elderly people may move in with their children.

The lack of jobs that pay well tends to hold down “demand” for goods made with commodities, and thus tends to bring down commodity prices. This problem happened in the 1930s and is happening again today. The problem is an affordability problem, but it is sometimes referred to as “low demand.” Workers with inadequate wages cannot afford to buy the goods made by the economy. There may be a glut of a commodity (food, or oil, or coal), and commodity prices that fall far below what producers need to make a profit.

Figure 7. U. S. Income Shares of Top 10% and Top 1%, Wikipedia exhibit by Piketty and Saez.

The Fluctuating Nature of Commodity Prices

I have noted in the past that fossil fuel prices tend to move together. This is what we would expect, if affordability is a major issue, and affordability changes over time.

Figure 8. Price per ton of oil equivalent, based on comparative prices for oil, natural gas, and coal given in BP Statistical Review of World Energy. Not inflation adjusted.

We would expect metal prices to follow fossil fuel prices, because fossil fuels are used in the extraction of ores of all kinds. Investment strategist Jeremy Grantham (and his company GMO) noted this correlation among commodity prices, and put together an index of commodity prices back to 1900.

Figure 9. GMO Commodity Index 1900 to 2011, from GMO April 2011 Quarterly Letter. “The Great Paradigm Shift,” shown at the end is not really the correct explanation, something now admitted by Grantham. If the graph were extended beyond 2010, it would show high prices in 2010 to 2013. Prices would fall to a much lower level in 2014 to 2017.

Reason for the Spikes in Prices. As we will see in the next few paragraphs, the spikes in prices generally arise in situations in which everyday goods (food, homes, clothing, transportation) suddenly became more affordable to “non-elite” workers. These are workers who are not highly educated, and are not in supervisory positions. These spikes in prices don’t generally “come about” by themselves; instead, they are engineered by governments, trying to stimulate the economy.

In both the World War I and World War II price spikes, governments greatly raised their debt levels to fund the war efforts. Some of this debt likely went directly into demand for commodities, such as to make more bombs, and to operate tanks, and thus tended to raise commodity prices. In addition, quite a bit of the debt indirectly led to more employment during the period of the war. For example, women who were not in the workforce were hired to take jobs that had been previously handled by men who were now part of the war effort. (These women were new non-elite workers.) Their earnings helped raise demand for goods and services of all kinds, and thus commodity prices.

The 2008 price spike was caused (at least in part) by a US housing-related debt bubble. Interest rates were lowered in the early 2000s to stimulate the economy. Also, banks were encouraged to lend to people who did not seem to meet usual underwriting standards. The additional demand for houses raised prices. Homeowners, wishing to cash in on the new higher prices for their homes, could refinance their loans and withdraw the cash related to the new higher prices. They could use the funds withdrawn to buy goods such as a new car or a remodeled basement. These withdrawn funds indirectly supplemented the earnings of non-elite workers (as did the lower interest rate on new borrowing).

The 2011-2014 spike was caused by the extremely low interest rates made possible by Quantitative Easing. These low interest rates made the buying of homes and cars more affordable to all buyers, including non-elite workers. When the US discontinued its QE program in 2014, the US dollar rose relative to many other currencies, making oil and other fuels relatively more expensive to workers outside the US. These higher costs reduced the demand for fuels, and dropped fuel prices back down again.

Figure 10. Monthly Brent oil prices with dates of US beginning and ending QE.

The run-up in oil prices (and other commodity prices) in the 1970s is widely attributed to US oil production peaking, but I think that the rapid run-up in prices was enabled by the rapid wage run-up of the period (Figure 11 below).

Figure 11. Growth in US wages versus increase in CPI Urban. Wages are total “Wages and Salaries” from US Bureau of Economic Analysis. CPI-Urban is from US Bureau of Labor Statistics.

The Opposing Force: Energy prices need to fall, if the economy is to grow. All of these upward swings in prices can be at most temporary changes to the long-term downward trend in prices. Let’s think about why.

An economy needs to grow. To do so, it needs an increasing supply of commodities, particularly energy commodities. This can only happen if energy prices are trending lower. These lower prices enable the purchase of greater supply. We can see this in the results of some academic papers. For example, Roger Fouquet shows that it is not the cost of energy, per se, that drops over time. Rather, it is the cost of energy services that declines.

Figure 12. Total Cost of Energy and Energy Services, by Roger Fouquet, from Divergences in Long Run Trends in the Prices of Energy and Energy Services.

Energy services include changes in efficiency, besides energy costs themselves. Thus, Fouquet is looking at the cost of heating a home, or the cost of electrical services, or the cost of transportation services, in inflation-adjusted units.

Robert Ayres and Benjamin Warr show a similar result, related to electricity. They also show that usage tends to rise, as prices fall.

Figure 13. Ayres and Warr Electricity Prices and Electricity Demand, from “Accounting for growth: the role of physical work.”

Ultimately, we know that the growth in energy consumption tends to rise at close to the same rate as the growth in GDP. To keep energy consumption rising, it is helpful if the cost of energy services is falling.

Figure 14. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

How the Economic Growth Pump Works

There seems to be a widespread belief, “We pay each other’s wages.” If this is all that there is to economic growth, all that is needed to make the economy grow faster is for each of us to sell more services to each other (cut each other’s hair more often, or give each other back rubs, and charge for them ). I think this story is very incomplete.

The real story is that energy products can be used to leverage human labor. For example, it is inefficient for a human to walk to deliver goods to customers. If a human can drive a truck instead, it leverages his ability to deliver goods. The more leveraging that is available for human labor, the more goods and services that can be produced in total, and the higher inflation-adjusted wages can be. This increased leveraging of human labor allows inflation-adjusted wages to rise. Some might call this result, “a higher return on human labor.”

These higher wages need to go back to the non-elite workers, in order to keep the growth-pump operating. With higher-wages, these workers can afford to buy goods and services made with commodities, such as homes, cars, and food. They can also heat their homes and operate their vehicles. These wages help maintain the demand needed to keep commodity prices high enough to encourage more commodity production.

Raising wages for elite workers (such as managers and those with advanced education), or paying more in dividends to shareholders, doesn’t have the same effect. These individuals likely already have enough money to buy the necessities of life. They may use the extra income to buy shares of stock or bonds to save for retirement, or they may buy services (such as investment advice) that require little use of energy.

The belief, “We pay each other’s wages,” becomes increasingly false, if wages and wealth are concentrated in the hands of relatively few. For example, poor people become unable to afford doctors’ visits, even with insurance, if wage disparity becomes too great. It is only when wages are fairly equal that all can afford a wide range of services provided by others in the economy.

What Went Wrong in 1920 to 1940?

Very clearly, the first thing that went wrong was the peaking of UK coal production in 1913. Even before 1913, there were pressures coming from the higher cost of coal production, as mines became more depleted. In 1912, there was a 37-day national coal strike protesting the low wages of workers. Evidently, as extraction was becoming more difficult, coal prices were not able to rise sufficiently to cover all costs, and miners’ wages were suffering. The debt for World War I seems to have helped raise commodity prices to allow wages to be somewhat higher, even if coal production did not return to its previous level.

Suicide rates seem to behave inversely compared to earning power of non-elite workers. A study of suicide rates in England and Wales shows that these were increasing prior to World War I. This is what we would expect, if coal was becoming increasingly difficult to extract, and because of this, the returns for everyone, from owners to workers, was low.

Figure 15. Suicide rates in England and Wales 1861-2007 by Kyla Thomas and David Gunnell from International Journal of Epidemiology, 2010.

World War I, with its increased debt (which was in part used for more wages), helped the situation temporarily. But after World War I, the Great Depression set in, and with it, much higher suicide rates.

The Great Depression is the kind of result we would expect if UK no longer had enough coal to make the goods and services it had made previously. The lower production of goods and services would likely be paired with fewer jobs that paid well. In such a situation, it is not surprising that suicide rates rose. Suicide rates decreased greatly with World War II, and with all of the associated borrowing.

Looking more at what happened in the 1920 to 1940 period, Ugo Bardi tells us that prior to World War I, UK exported coal to Italy. With falling coal production, UK could no longer maintain those exports after World War I. This worsened relations with Italy, because Italy needed coal imported from UK to rebuild after the war. Ultimately, Italy aligned with Germany because Germany still had coal available to export. This set up the alliance for World War II.

Looking at the US, we see that World War I caused favorable conditions for exports, because with all of the fighting, Europe needed to import more goods (including food) from the United States. After the war ended in 1918, European demand was suddenly lower, and US commodity prices fell. American farmers found their incomes squeezed. As a result, they cut back on buying goods of many kinds, hurting the US economy.

One analysis of the economy of the 1920s tells us that from 1920 to 1921, farm prices fell at a catastrophic rate. “The price of wheat, the staple crop of the Great Plains, fell by almost half. The price of cotton, still the lifeblood of the South, fell by three-quarters. Farmers, many of whom had taken out loans to increase acreage and buy efficient new agricultural machines like tractors, suddenly couldn’t make their payments.”

In 1943, M. King Hubbert offered the view that all-time employment had peaked in 1920, except to the extent that it was jacked up by unusual means, such as war. In fact, some historical data shows that for four major industries combined (foundries, meat packing, paper, and printing), the employment index rose from 100 in 1914, to 157 in 1920. By September 1921, the employment index had fallen back to 89. The peak coal problem of UK had been exported to the US as low commodity prices and low employment.

It was not until the huge amount of debt related to World War II that the world economy could be stimulated enough so that total energy production per capita could continue to rise. The use of oil especially became much greater starting after World War II. It was the availability of cheap oil that allowed the world economy to grow again.

Figure 16. Per capita energy consumption by fuel, separately for several energy sources, using the same data as in Figure 1.

The stimulus of all the debt-enabled spending for World War II seems to have been what finally encouraged the production of the oil needed to pull the world economy out of the problems it was having. GDP and Disposable Personal Income could again rise (Figure 17.)

Figure 17. Comparison of 3-year average change in disposable personal income with 3-year change average in GDP, based on US BEA Tables 1.1.5 and 2.1.

Furthermore, total per capita energy consumption began to rise, with growing oil consumption (Figure 1). This growth in energy consumption per capita seems to be what allows the world economy to grow.

I might note that there is one other exceptional period: 1980 to 2000. Space does not allow for an explanation of the situation here, but falling per capita energy consumption seems to have led to the collapse of the former Soviet Union in 1991. This was a different situation, caused by lower oil consumption related to efficiency gains. This was a situation of an oil producer being “squeezed out” because additional oil was not needed at that time. This is an example of a different type of economic disruption caused by flat per capita energy consumption.

Figure 18. World per Capita Energy Consumption with two circles relating to flat consumption. World Energy Consumption by Source, based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with BP Statistical Data for 1965 and subsequent, divided by population estimates by Angus Maddison.

Conclusion

There have been many views put forth about what caused the Depression of the 1930s. To my knowledge, no one has put forth the explanation that the Depression was caused by Peak Coal in 1913 in UK, and a lack of other energy supplies that were growing rapidly enough to make up for this loss. As UK “exported” this problem around the world, it led to greater wage disparity. US farmers were especially affected; their incomes often dropped below the level needed for families to buy the necessities of life.

The issue, as I have discussed in previous posts, is a physics issue. Creating GDP requires energy; when not enough energy (often fossil fuels) is available, the economy tends to “freeze out” the most vulnerable. Often, it does this by increased wage disparity. The people at the top of the hierarchy still have plenty. It is the people at the bottom who find themselves purchasing less and less. Because there are so many people at the bottom of the hierarchy, their lower purchasing power tends to pull the system down.

In the past, the way to get around inadequate wages for those at the bottom of the hierarchy has been to issue more debt. Some of this debt helps add more wages for non-elite workers, so helps fix the affordability problem.

Figure 19. Three-year average percent increase in debt compared to three year average percent increase in non-government wages, including proprietors’ income, which I call my wage base.

At this time, we seem to be reaching the point where, even with more debt, we are running out of cheap energy to add to the system. When this happens, the economic system seems more prone to  fracture. Ugo Bardi calls the situation “reaching the inflection point in a Seneca Cliff.”

Figure 20. Seneca Cliff by Ugo Bardi

We were very close to the inflection point in the 1930s. We were very close to that point in 2008. We seem to be getting close to that point again now. The model of the 1930s gives us an indication regarding what to expect: apparent surpluses of commodities of all types; commodity prices that are too low; a lack of jobs, especially ones that pay an adequate wage; collapsing financial institutions. This is close to the opposite of what many people assume that peak oil will look like. But it may be a better representation of what we really should expect.

 

Republished with permission from Our Finite World.




The Last Time These 3 Ominous Signals Appeared Simultaneously Was Just Before The Last Financial Crisis

We have not seen a “leadership reversal”, a “Hindenburg Omen” and a “Titanic Syndrome signal” all appear simultaneously since just before the last financial crisis.  Does this mean that a stock market crash is imminent?  Not necessarily, but as I have been writing about quite a bit recently, the markets are certainly primed for one.  On Wednesday, the Dow fell another 138 points, and that represented the largest single day decline that we have seen since September.  Much more importantly, the downward trend that has been developing over the past week appears to be accelerating.  Just take a look at this chart.  Could we be right on the precipice of a major move to the downside?

John Hussman certainly seems to think so.  He is the one that pointed out that we have not seen this sort of a threefold sell signal since just before the last financial crisis.  The following comes from Business Insider

On Tuesday, the number of New York Stock Exchange companies setting new 52-week lows climbed above the number hitting new highs, representing a “leadership reversal” that Hussman says highlights the deterioration of market internals. Stocks also received confirmation of two bearish market-breadth readings known as the Hindenburg Omen and the Titanic Syndrome.

Hussman says these three readings haven’t occurred simultaneously since 2007, when the financial crisis was getting underway. It happened before that in 1999, right before the dot-com crash. That’s not very welcome company.

In fact, every time we have seen these three signals appear all at once there has been a market crash.

Will things be different this time?

We shall see.

If you are not familiar with a “Hindenburg Omen” or “the Titanic Syndrome”, here are a couple of pretty good concise definitions

  • Hindenburg Omen: A sell signal that occurs when NYSE new highs and new lows each exceed 2.8% of advances plus declines on the same day. On Tuesday, they totaled more than 3%.
  • Titanic Syndrome: A sell signal triggered when NYSE 52-week lows outnumber 52-week highs within seven days of an all-time high in equities. Stocks most recently hit a record on November 8.

You can see the other times in recent decades when these three signals have appeared simultaneously on this chart right here.

Once again, past patterns do not guarantee that the same thing will happen in the future, but if the market does crash it should not surprise anyone.

10 days ago, I published an article entitled “The Federal Reserve Has Just Given Financial Markets The Greatest Sell Signal In Modern American History”.  I pointed out that this stock market bubble was created by unprecedented central bank intervention, and now global central banks are reversing the process that created the bubble in unison.  There is no possible way that stock prices can stay at these absolutely absurd levels without central bank help, and if global central banks stay on the sidelines a market decline would seem to be virtually inevitable.

Meanwhile, we are also witnessing a very alarming flattening of the yield curve

Hogan said the market is nervous about the “flattening” difference between the 2-year yield and the 10-year Treasury yield, which have been moving closer together. The curve dipped to 68 basis points Tuesday, a 10-year low. Hogan said 70 has become a line in the sand, and when it falls below that traders get nervous.

A flattening curve can signal that the curve will invert, which historically means a recession is on the horizon.

If the yield curve does end up inverting, that will be a major red flag.

But the experts assure us that we have nothing to worry about.

For example, just check out what Karyn Cavanaugh of Voya Financial is saying

“Now that the earnings season is wrapped up, markets are more beholden to macro data. Weakness in oil prices and skepticism about the passing of the tax bill are also weighing on sentiment,” said Karyn Cavanaugh, senior market strategist at Voya Financial.

Despite the drop on the day, major indexes remain within 1.5 percentage points of record levels.

Any pullback at this stage should be viewed as an opportunity to buy, however. Earnings outlook for U.S. stocks, especially with the synchronized global growth environment is still good,” Cavanaugh said.

And U.S. consumers continue to pile on more debt as if there is no tomorrow.  This week we learned that U.S. household debt has almost reached the 13 trillion dollar threshold

Americans’ debt level rose during the third quarter, driven by an increase in mortgage loans, according to a Federal Reserve Bank of New York report published on Tuesday.

Total U.S. household debt was $ 12.96 trillion in the three months to September, up $ 116 billion from the prior three months. Debt levels were $ 605 billion higher than during the third quarter of 2016.

The fundamentals do not support this kind of irrational optimism.

What the fundamentals have been telling us is that in the absence of central bank support we should see the markets start to decline, and that it is quite likely that a painful recession is on the horizon.

As the next crisis erupts, the mainstream media is going to respond with shock and horror.  But the only real surprise is that this ridiculous bubble lasted for as long as it did.

The truth is that a market decline is way overdue.  If central banks had not pumped trillions upon trillions of dollars into the global financial system, there is no possible way that stock prices would have ever gotten so high, and now that the central banks are removing the artificial life support we shall see how the markets do on their own.

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

The Economic Collapse




Will China Bring an Energy-Debt Crisis?

It is easy for those of us in the West to overlook how important China has become to the world economy, and also the limits it is reaching. The two big areas in which China seems to be reaching limits are energy production and debt. Reaching either of these limits could eventually cause a collapse.

China is reaching energy production limits in a way few would have imagined. As long as coal and oil prices were rising, it made sense to keep drilling. Once fuel prices started dropping in 2014, it made sense to close unprofitable coal mines and oil wells. The thing that is striking is that the drop in prices corresponds to a slowdown in the wage growth of Chinese urban workers. Perhaps rapidly rising Chinese wages have been playing a significant role in maintaining high world “demand” (and thus prices) for energy products. Low Chinese wage growth thus seems to depress energy prices.

(Shown as Figure 5, below). China’s percentage growth in average urban wages. Values for 1999 based on China Statistical Yearbook data regarding the number of urban workers and their total wages. The percentage increase for 2016 was based on a Bloomberg Survey.

The debt situation has arisen because feedback loops in China are quite different from in the US. The economic system is set up in a way that tends to push the economy toward ever more growth in apartment buildings, energy installations, and factories. Feedbacks do indeed come from the centrally planned government, but they are not as immediate as feedbacks in the Western economic system. Thus, there is a tendency for a bubble of over-investment to grow. This bubble could collapse if interest rates rise, or if China reins in growing debt.

China’s Oversized Influence in the World

China plays an oversized role in the world’s economy. It is the world’s largest energy consumer, and the world’s largest energy producer. Recently, it has become the world’s largest importer of both oil and of coal.

In some sense, China is the world’s largest economy. Usually we see China referred to as the world’s second largest economy, based on GDP converted to US dollars. Economists use an approach called GDP (PPP) (where PPP is Purchasing Power Parity) when computing world GDP growth. When this approach is used, China is the world’s largest economy. The United States is second largest, and India is third.

Figure 1. World’s largest economies, based on energy consumption and GDP based on Purchasing Power Parity. Energy Consumption is from BP Statistical Review of World Energy, 2017; GDP on PPP Basis is from the World Bank.

Besides being (in some sense) the world’s largest economy, China is also a country with a very significant amount of debt. The government of China has traditionally somewhat guaranteed the debt of Chinese debtors. There is even a practice of businesses guaranteeing each other’s debt. Thus, it is hard to compare China’s debt to the debt level elsewhere. Some analyses suggest that its debt level is extraordinarily high.

How China’s Growth Spurt Started

Figure 2. China’s energy consumption, based on data from BP Statistical Review of World Energy, 2017.

From Figure 2, it is clear that something very dramatic happened to China’s coal consumption about 2002. China joined the World Trade Organization in December 2001, and immediately afterward, its coal consumption soared.

Countries in the OECD, whether they had signed the 1997 Kyoto Protocol or not, suddenly became interested in reducing their own greenhouse gas emissions. If they could outsource manufacturing to China, they would be able to reduce their reported CO2 emissions.

Besides reducing reported CO2 emissions, outsourcing manufacturing to China had two other benefits:

  • The goods being manufactured in China would be cheaper, allowing Americans, Europeans, and Japanese to buy more goods. If more “stuff” makes people happy, citizens should be happier.
  • Businesses would suddenly have a new market in China. Perhaps the people of China would start buying goods made elsewhere.

Of course, a major downside of moving jobs to China and other Asian nations was the likelihood of fewer jobs elsewhere.

Figure 3. US Labor Force Participation Rate, as prepared by Federal Reserve Bank of St. Louis.

In the early 2000s, when China started competing actively for jobs, the share of people in the US workforce started shrinking. The drop-off in labor force participation did not level out until mid-2014. This is about when world oil prices began to fall, and, as we will see in the next section, when China’s growth in average wages began to fall.

Another downside to moving jobs to China was more CO2 emissions on a worldwide basis, even if emissions remained somewhat lower locally. CO2 emissions on imported goods were not “counted against” a country in its CO2 calculations.

Figure 4. World carbon dioxide emissions, split between China and Rest of the World, based on BP Statistical Review of World Energy, 2017.

At some point, we should not be surprised if countries elsewhere start pushing back against the globalization that allowed China’s rapid growth. In some sense, China has lived in an artificial growth bubble for many years. When this artificial growth bubble ends, it will be much harder for China’s debtors to repay debt with interest.

China’s Rapid Wage Growth Stopped in 2014

Rising wages are important for making China’s growth possible. With rising wages, workers can increasingly afford the apartments that are being built for them. They can also increasingly afford consumer goods of many kinds, and they can easily repay debts taken out earlier. The catch, however, is that wage growth cannot get ahead of productivity growth, or the price of goods will become too expensive on the world market. If this happens, China will have difficulty selling its goods to others.

China’s wage growth seems to have slowed remarkably, starting in 2014.

Figure 5. China’s percent growth in average urban wages. Values for 1999 based on China Statistical Yearbook data regarding the number of urban workers and their total wages. The percentage increase for 2016 was estimated based on a Bloomberg Survey.

This is when China discovered that its high wage increases were making it uncompetitive with the outside world. Wage growth needed to be reined in. Its growth in productivity was no longer sufficient to support such large wage increases.

China’s Growth in Energy Consumption Also Slowed About 2014 

If we look at the annual growth in total energy consumption and electricity consumption, we see that by 2014 to 2016, their growth had slowed remarkably (Figure 6). Their growth pattern was starting to resemble the slow growth pattern of much of the rest of the world. Energy growth allows an economy to increasingly leverage the labor of its workforce with more energy-powered “tools.” With low energy growth, it should not be surprising if productivity growth lags. With low productivity growth, we can expect low wage growth.

Figure 6. China’s growth in consumption of total energy and of electricity based on data from BP Statistical Review of World Energy, 2017.

It is possible that the increased rate of electricity consumption in 2016 is related to China’s program of housing migrant workers in unsalable apartments that took place at that time. The fact that these apartments were otherwise unsalable was no doubt influenced by the slowing growth in wages.

This decrease in energy consumption most likely occurred because the price of China’s energy mix was becoming increasingly expensive. For one thing, the mix included a growing share of oil, and oil was expensive. The proportion of coal in the mix was falling, and the replacements were more expensive than coal. There was also the issue of the general increase in fossil fuel prices.

Lower Wage Growth in China Likely Affected Fossil Fuel Prices

Affordability is the big issue with respect to how high fossil fuel prices can rise. The issue is not just buying the oil or coal or natural gas itself; it is also being able to afford the goods made with these fuels, such as food, clothing, appliances, and apartments. If wages were depressed in the developed countries because of moving production to China, then rising wages in China (and other similar countries, such as India and the Philippines) must somehow offset this problem, if fossil fuel prices are to remain high enough for extraction to continue.

Figures 7 and 8 (below) show that oil, natural gas, and coal prices all started to slide, right about the time China’s urban wages growth began shrinking (shown in Figure 5).

Figure 7. Oil and natural gas prices, based on BP Statistical Review of World Energy data.

Figure 8. Coal prices between 2000 and 2016 from BP Statistical Review of World Energy. Chinese coal is China Qinhuangdao spot price and Japanese coal is Japan Steam import cif price, both per ton.

The lower recent increases made China’s urban wage growth look more like that of the US and Europe. Thus, in 2014 and later, Chinese urban wages present much less of a “push” on the growth of the world economy than they had previously. Without this push of rising wages, it becomes much harder for the world economy to grow very rapidly, and for it to have a very high inflation rate. There is simply not enough buying power to push prices very high.

It might be noted that the average Chinese urban wage increases shown previously in Figure 5 are not inflation adjusted. Thus, in some sense, they include whatever margin is available for inflation in prices as well as the margin that is available for a greater quantity of purchased goods. Because of this, these low wage increases may help explain the recent lack of inflation in much of the world.

Quite likely, there are other issues besides China’s urban wage growth affecting world (and local) energy prices, but this factor is probably more important than most people would expect.

Can low prices bring about “Peak Coal” and “Peak Oil”?

What does a producer do in response to suddenly lower market prices–prices that are too low to encourage more production?

This seems to vary, depending on the situation. In the case of coal production in China, a decision was made to close many of the coal plants that had suddenly become unprofitable, thanks to lower coal prices. No doubt pollution being caused by these plants entered into this decision, as well. So did the availability of other coal elsewhere (but probably at higher prices), if it is ever needed. The result of this voluntary closure of coal plants in response to low prices caused the drop in coal production shown in Figure 8, below.

Figure 8. China’s energy production, based on data from BP Statistical Review of World Energy, 2017.

It is my belief that this is precisely the way we should expect peak coal (or peak oil or peak natural gas) to take place. The issue is not that we “run out” of any of these fuels. It is that the coal mines and oil and gas wells become unprofitable because wages do not rise sufficiently to cover the fossil fuels’ higher cost of extraction.

We should note that China has also cut back on its oil production, in response to low prices. EIA data shows that China’s 2016 oil production dropped about 6.9% compared to 2015. The first seven months of 2017 seems to have dropped by another 4.2%. So China’s oil is also showing what we would consider to be a “peak oil” response. The price is too low to make production profitable, so it has decided that it is more cost-effective to import oil from elsewhere.

In the real world, this is the way energy limits are reached, as far as we can see. Economists have not figured out how the system works. They somehow believe that energy prices can rise ever higher, even if wages do not. The mismatch between prices and wages can be covered for a while by more government spending and by more debt, but eventually, energy prices must fall below the cost of production, at least for some producers. These producers voluntarily give up production; this is what causes “Peak Oil” or “Peak Coal” or “Peak Natural Gas.”

Why China’s Debt System Reaches Limits Differently Than Those in the West

Let me give you my understanding regarding how the Chinese system works. Basically, the system is gradually moving from (1) a system in which the government owns all land and most businesses to (2) a system with considerable individual ownership.

Back in the days when the government owned most businesses and all land, farmers farmed the land to which they were assigned. Businesses often provided housing as part of an individual’s “pay package.” These homes typically had a shared outhouse for a bathroom facility. They may or may not have had electricity. There was relatively little debt to the system, because there was little individual ownership.

In recent years, especially after joining the World Trade Organization in 2001, there has been a shift to more businesses of the types operated in the West, and to more individual home ownership, with mortgages.

The economy acts rather differently than in the West. While the economy is centrally planned in Beijing, quite a bit of the details are left to individual local governments. Local heads of state make decisions that seem to be best based on the issues they are facing. These may or may not match up with what Beijing central planning intended.

Historically, Five-Year Plans have provided GDP growth targets to the various lower-level heads of state. The pay and promotions of these local leaders have depended on their ability to meet (or exceed) their GDP goals. These goals did not have any debt limits attached, so local leaders could choose to use as much debt as they wanted.

A major consideration of these local leaders was that they also had responsibility for jobs for people in their area. This responsibility further pushed them to aim high in the amount of development they sought.

Another related issue is that sales of formerly agricultural land for apartments and other development are a major source of revenue for local governments. Local leaders did not generally have enough tax revenue for programs, without supplementing their tax revenue with funds obtained from selling land for development. This further pushed local leaders to add development, whether it was really needed or not.

The very great power of local heads of state and their administrators made these leaders tempting targets for bribery. Entrepreneur had a chance of getting projects approved for development, with a bribe to the right person. There has been a recent drive to eliminate this practice.

We have often heard the comment, “A rising tide raises all boats.” When the West decided to discourage local industrialization because of CO2 concerns, it gave a huge push to China’s economy. Almost any project could be successful. In such an environment, local rating agencies could be very generous in their ratings of proposed new bond offerings, because practically any project would be likely to succeed.

Furthermore, without many private businesses, there was little history of past defaults. What little experience was available suggested the possibility of few future defaults. Wages had been rising very rapidly, making individual loans easy to repay. What could go wrong?

With the central government perceived to be in control, it seemed to make sense for one governmental organization to guarantee the loans of other governmental organizations. Businesses often guaranteed the loans of other businesses as well.

Why the Chinese System Errs in the Direction of Overdevelopment

In the model of development we are used to in the West, there are feedback loops if too much of anything is built–apartment buildings (sold as condominiums), coal mines, electricity generating capacity, solar panels, steel mills, or whatever else.

In China, these feedback loops don’t work nearly as well. Instead of the financial system automatically “damping out” the overcapacity, the state (or perhaps a corrupt public official) figures out some way around what seems to be a temporary problem. To understand how the situation is different, let’s look at three examples:

Apartments. China has had a well-publicized problem of  building way too many apartments. In about 2016, this problem seems to have been mostly fixed by local governments providing subsidies to migrant workers so that they can afford to buy homes. Of course, where the local governments get this money, and for how long they can afford to pay these stipends, are open questions. It is also not clear that this arrangement is leading to a much-reduced supply of new homes, because cities need both the revenue from land sales and the jobs resulting from building more units.

Figure 9 shows one view of the annual increase in Chinese house prices, despite the oversupply problem. If this graph is correct, prices have increased remarkably in 2017, suggesting some type of stimulus has been involved this year to keep the property bubble growing. The size of an apartment a typical worker can now afford is very small, so this endless price run-up must end somewhere.

Figure 9. Chinese house price graph from GlobalPropertyGuide.com.

Coal-Fired Power Plants. With all of the problems that China has with pollution, a person might expect that China would stop building coal-fired power plants. Instead, the solution of local governments has been to build additional power plants that are more efficient and less polluting. The result is significant overcapacity, in total.

May 2017 article says that because of this overcapacity problem, Beijing is forcing every coal-fired power plant to run at the same utilization rate, which is approximately 47.7 % of total capacity. A Bloomberg New Energy Finance article estimates that at year-end 2016, the “national power oversupply” was 35%, considering all types of generation together. (This is likely an overestimate; the authors did not consider the flexibility of generation.)

Beijing is aware of the overcapacity problem, and is cancelling or delaying a considerable share of coal-fired capacity that is in the pipeline. The plan is to limit total coal-fired capacity to 1,100 gigawatts in 2020. China’s current coal-fired generating capacity seems to be 943 gigawatts, suggesting that as much as a 16% increase could still be added by 2020, even with planned cutbacks.

It is not clear what happens to the loans associated with all of the capacity that has been cancelled or delayed. Do these loans default? If “normal” feedbacks of lower prices had been allowed to play out, it is doubtful that such a large amount of overcapacity would have been added.

If China’s overall growth rate slows to a level more similar to that of other economies, it will have a huge amount of generation that it doesn’t need. This adds a very large debt risk, it would seem.

Wind and Solar. If we believe Darien Ma, author of “The Answer, Comrade, Is Not Blowing in the Wind,” there is less to Beijing’s seeming enthusiasm for renewables than meets the eye.

According to Ma, China’s solar industry was built with the idea of having a product that could be exported. It was only in 2013 when Western countries launched trade suits and levied tariffs that China decided to use a substantial number of these devices itself, saving the country from the embarrassment of having many of these producers go bankrupt. How this came about is not entirely certain, but the administrator in charge of wind and solar additions was later fired for accepting bribes, and responsibility for such decisions moved higher up the chain of authority.

Figure 10. China current view of solar investment risk in China. Chart by Bloomberg New Energy Finance.

Ma also reports, “Officials say that they want ‘healthy, orderly development,’ which is basically code for reining in the excesses in a renewable sector that has become yet another emblem of irrational exuberance.”

According to Ma, the Chinese National Energy Administration has figured out that wind and solar are still about 1.5 and 2.5 times more expensive, respectively, than coal-fired power. This fact dampens their enthusiasm for the use of these types of generation. China plans to phase out subsidies for them by 2020, in light of this issue. Ma expects that there will still be some wind and solar in China’s energy mix, but that natural gas will be the real winner in the search for cleaner electricity production.

Viewed one way, we are looking at yet another way Chinese officials have avoided closing Chinese businesses because the marketplace did not seek their products. Thus, the usual cycle of bankruptcies, with loan defaults, has not taken place. This issue makes China’s total electricity generating capacity even more excessive, and reduces the profitability of the overall system.

Conclusion

We have shown how low wages and low energy prices seem to be connected. When prices are too low, some producers, including China, make a rational decision to cut back on production. This seems to be the true nature of the “Peak Coal” and “Peak Oil” problem. Because China is reacting in a rational way to lower prices, its production is falling. China is already the largest importer of oil and coal. If there is a shortfall elsewhere, China will be affected.

We have also given several examples of how the current system has been able to avoid defaults on loans. The issue is that these problems don’t really go away; the get hidden, and get bigger and bigger. At some point, all of the manipulations by government officials cannot hide the problem of way too many apartments, or of way too much electricity generating capacity, or of way too many factories of all kinds. The postponed debt collapse is likely to be much bigger than if market forces had been allowed to bring about earlier bankruptcies and facility closures.

Chinese officials are now talking about reining in the growth of debt. There is also discussion by heads of Central Banks about raising interest rates and selling QE securities (something which would also tend to raise interest rates). China will be very vulnerable to rising interest rates, because stresses that have been allowed to build up in the system. For example, many mortgage holders will not be able to afford the new higher monthly payments if rates rise. If interest rates rise, factories will find it even harder to be profitable. Some may reduce staff levels, to try to reach profitability. If this is done, it will tend to push the system toward recession.

We likely now are in the lull before the storm. There are many things that could push China toward an energy or debt crisis. China is so big that the rest of the world is likely to also be affected.

 

 

Republished with permission from Our Finite World




The Approaching US Energy-Economic Crisis

I was recently asked to give a talk called, “The Approaching US Energy-Economic Crisis.” In other words, how might the United States encounter problems that lead to a crisis? As we will see, many of the problems that could lead to a crisis (such as increased wage disparity and difficulty in collecting enough taxes) are issues that we are already beginning to encounter.

In this talk, I first discuss the connection between energy and the economy. Without this connection, it doesn’t make sense to talk about a crisis arising with respect to energy and the economy. I then discuss seven issues that could lead to a US energy-economic crisis.

 

Economic Growth Is Closely Tied to Energy Consumption

If we look at world data, it is clear that there is a close tie between energy consumption and economic growth.

Slide 2

On an individual country basis, there can be the belief that we have reached a new situation where a particular country doesn’t really need growing energy supply for economic growth.

Slide 3

For example, on Slide 3, the recent nearly vertical line for the US suggests that the US economy can grow with almost no increase in annual energy consumption. This rather strange situation arises because the standard calculation misses energy embodied in imported goods. Thus, if the United States wants to outsource a great deal of its manufacturing to China, the energy consumption used in making these goods will appear in China’s data, not in the United States’ data. This makes the country that has outsourced manufacturing look very good, both with respect to energy consumption and CO2 emissions.

Buying imported crude oil from elsewhere (such as Saudi Arabia) is also helpful in keeping down energy consumption, because it takes energy of various types to extract oil. If oil extraction takes place in Saudi Arabia, using steel pipes from China, the energy used in extraction will appear in the data of China and Saudi Arabia. Neither China nor Saudi Arabia obtains as much economic growth, relative to its energy expenditures, as does the US. In order to make sense of what is happening, we need to look at the world total.

Slide 4

We see that the pattern of world energy consumption growth follows a pattern not terribly different from that of China. Its growth is not “straight up.” It does take growing energy supply to create additional goods and services. We are getting a little more efficient in this process over time, but energy is very much needed in many areas of the economy:

  • By businesses, to create goods, such as food, and services, such as vacation travel;
  • By governments, to create roads, schools, and other public services;
  • By individual citizens, to cook food, to heat homes, and for transportation.

The World Economy Is Organized Based on the Laws of Physics

There are many self-organized systems that seem to grow of their own accord in the presence of available energy supplies (that is, in thermodynamically open systems). Plants and animals are examples of growing self-organized systems. Hurricanes, ecosystems, and stars are also such systems. Economies also seem to be such systems. The name given to such a system is a dissipative system.

Slide 5 – Source: http://www.rinusroelofs.nl/structure/davinci-sticks/gallery/gallery-01.html

I visualize the world economy as being somewhat like a child’s building toy. It consists of many different elements, a few of which are listed on Slide 5. An economy is self-organized in that new businesses are formed when some entrepreneur sees an opportunity. Consumers decide which product to buy based on which product best serves their needs and based on price. Governments decide on changes to laws and tax levels, depending upon how the economy is functioning at a given time.

This system gradually grows over time, as more businesses and customers are added. As new products and new businesses are added, products and businesses that are no longer needed are taken away. For example, when the private passenger automobile was invented, there was no longer a need to feed and house a large number of horses to be used for transportation purposes. Thus, the system self-organized to eliminate the services needed to care for the many horses used for transportation.

Even if we wanted to get rid of cars and go back to horses, we really could not do so now. In some sense, the structure shown on Slide 5 is hollow, because prior capabilities that are no longer needed tend to disappear. The hollow nature of the economy makes it almost impossible to go backward if we somehow lose our existing capabilities–not enough oil, or an electricity problem, or an international trade problem, or a financial problem. Instead, we will need to build new systems that will function in the new context: depleted resources, a very high population level, high pollution levels, and degraded soils. The existing self-organized system is likely to collapse back to only the part that can be sustained.

Slide 6

Slide 6 is a preview of where this presentation is headed.

Slide 7

Slide 7 describes the issue most people are concerned about: oil prices will rise too high for consumers. In fact, we clearly have had problems with high prices in the recent past. The high prices in 2007 and early 2008 seem to have punctured the debt bubble that existed at that time, as I discuss in an academic article, Oil Supply Limits and the Continuing Financial Crisis.

Shortly before oil prices started to turn back up again in late 2008, the United States instituted a policy of Quantitative Easing (QE), in an attempt to bring interest rates down and thus encourage more debt. Additional debt at low interest rates can “pump up” the economy in several different ways:

[1] Some of this low interest debt can be used by governments to provide funding for unemployment benefits and projects such as road building.

[2] Some of this low interest debt can be used by businesses to open new factories, and thus hire more workers.

[3] Some of this low interest debt can be used by individual citizens to purchase a home, a car, or a college education.

It is the pumping up of the economy with low interest debt that seems to stimulate the economy in a way that raises oil prices. When the US discontinued its third and last phase of QE in late 2014 (shown as “End US QE3” in Slide 7), the pumping up action began to disappear, and oil prices again fell.

Slide 8

The figure in Slide 8 may seem a little exaggerated, but I wanted to make a point. Our wages can roughly be divided into three pieces:

[1] Essential goods whose prices are very much influenced by the price of oil, such as food and gasoline. Besides food and gasoline, the cost of replacing a road, particularly with asphalt, very much depends on the price of oil. Higher costs for roads will be reflected in taxes that we are required to pay. Almost any kind of product that is shipped is affected by the price of oil, because oil is the usual transport fuel. Oil is typically used in the extraction of metal ores, so the price of metals used in making cars, appliances, and other goods is affected by the price of oil. Thus, an oil price increase indirectly leads to inflation in the cost of a wide range of essential goods and services.

To make matters worse, fluctuations in the price of oil can be very large. Between 2000 and 2008, we saw monthly average oil price fluctuate from under $ 20 per barrel to over $ 130 per barrel. Thus, while the growth in the food and gasoline segment is somewhat exaggerated, the impact of price changes is much larger than a person might expect, looking only at the impact of higher gasoline prices for a consumer’s vehicle.

[2] Repayment of loans, such as mortgage payments and auto payments. Loan repayments of these types tend to make up a large portion of most people’s spending. If people don’t own their own home, they have rent payments to make. These rent payments are in some ways similar to loan payments, because they indirectly cover the cost of someone else’s mortgage. These costs tend to be fixed, even if the price of oil goes up.

[3] Everything else. These are the non-essential items that we cut back on when budgets are too tight. Examples include charitable contributions, visits to restaurants, and vacation trips.

Looking at Slide 8, it becomes clear that if a government wants to “counteract” high oil prices, it needs to lower interest rates. This will tend to make car payments, mortgage payments, educational loans, and even rents somewhat more affordable, at least for people whose loans are affected by the new low interest rates. Often, homeowners are allowed to refinance, to take advantage of the new lower interest rates.

The plan this year is to raise, rather than lower, interest rates. Needless to say, this has the opposite effect; it tends to reduce the size of the “everything else” segment of our income. This effect tends to be recessionary.

Slide 9

Monarch Air is a British airline that failed recently. It boasted very low fares. One of the problems leading to its failure was a falling pound relative to the US dollar, raising both the price of oil and the price of new airplanes.

Today, the price that oil producers need, including adequate funds for (a) reinvestment and (b) the high taxes that governments need to continue their programs, is likely $ 100 per barrel or more. Such a price would likely cause recession, because purchases in the “Everything Else” category on Slide 8 would be squeezed.

Slide 10

Most people don’t think about the possibility of oil prices falling too low for producers, but this is a major problem today. When prices are too low, oil companies need to borrow money to continue to operate. They are likely to cut back on developing new extraction sites. With low prices, the tax revenue that the governments of oil-exporting countries are able to collect tends to fall too low, leading to cutbacks in government programs and a need for more debt. Saudi Arabia is running into this difficulty.

The problems that arise from low oil prices can be hidden for quite a while, because investors are likely to see the low prices as a great opportunity. They think, “Surely, oil prices will rise again.” So investors are eager to buy more shares of stock, and banks are willing to issue more debt. At some point, the situation becomes unsustainable, and no more loans are offered.

It has now been about three years since prices fell to a level that is clearly too low for oil producers. It cannot be many more years before something has to “break.” Venezuela is an oil exporter that cannot collect enough revenue from oil exports to afford needed goods, such as food. Other oil exporters may eventually encounter similar problems.

Slide 11

A major reason for falling oil prices is growing wage disparity and the resulting loss in purchasing power for the bottom 90% of workers. In the United States, the bottom 90% obtained about 62% of total income as recently as 1992. In a 2016 Federal Reserve survey, only 49.7% of total income went to the bottom 90%.

The reason why wage disparity is important is because the wealthiest 1% (or even the wealthiest 10%) can’t purchase very much of the goods created using oil. The wealthiest 1% can’t eat very much more food than everyone else. They can only drive one car at a time. In order to have adequate demand for oil, the bottom 90% must have adequate purchasing power for goods such as homes and cars. If young people live with their parents longer, and aren’t able to afford homes, this holds down demand for oil. So does transferring manufacturing to countries where wages are so low that few people can afford cars and other manufactured goods.

Slide 12

Slide 12 shows the Federal Reserve’s graph of the share of families who own (as opposed to rent) their primary residence. There has been a drop in homeownership from 69% in 2004 to less than 64% in 2016. This is a period when wage disparity has been increasing.

Slide 13

Wind and solar are intermittent sources of electricity. They work adequately well in applications where intermittency is no problem, such as charging a cell phone that has a battery, or powering a desalination plant that is not expected to operate around the clock. Most analyses of the benefit of wind and solar are suitable only for these limited situations, because they omit any estimate of the cost of mitigating intermittency.

Intermittency becomes a major problem when wind and solar are added to the electric grid. Wholesale electricity prices may drop to very low levels when both wind and solar electricity are available. At times, prices may become negative. Electricity generation that is designed to be used most of the time (such as coal, nuclear, and even some types of natural gas generation) cannot survive without subsidies to offset the artificially low prices the system produces. The need for subsidies for backup electricity providers is really an indirect cost of adding intermittent types of electricity to the grid, but today’s pricing does not reflect this.

A different workaround for intermittency is to add a large amount of battery backup or other type of storage. In theory, batteries could be used to store electricity generated in the summer for use in the winter, when heating needs are greatest.

Another approach to intermittency is to greatly overbuild intermittent renewables, with the idea of using only that portion of electricity generation that is really needed at any point in time. Yet another approach is adding extra (lightly used) long distance transmission, to try to smooth out fluctuations.

Any of these approaches tends to be expensive. Academic papers estimating the benefit of wind and solar nearly always overlook the cost of mitigating intermittency. Thus, they suggest wind and solar can be solutions, when, in fact, their high cost is likely to lead to the same damaging economic effects as high oil prices. (See Slide 8.)

Slide 14

The dotted line on Slide 14 shows the downward trend in German wholesale electricity prices, as more and more intermittent electricity has been added to the grid. At the same time, total residential electricity prices have risen to higher and higher levels. The countries with the greatest use of wind and solar tend to have the highest retail rates, as shown in Figure 1 below (not in presentation).

Figure 1. Figure by Euan Mearns showing relationship between installed wind + solar capacity and European electricity rates. Source Energy Matters. (Image not part of presentation.)

Slide 15

As we discussed earlier, the “standard” workaround for high oil prices is low interest rates, because of the relationship shown in Slide 8. At some point, however, interest rates fall about as low as they can go.

Slide 16

The interest rates shown on Slide 16 are those for 10-year treasuries. These typically underlie mortgage rates. These rates have been falling since 1981, helping to prop up prices for homes, land, farmland, and other assets purchased with long-term debt. Low interest rates make monthly payments more affordable than high interest rates, so more people can afford to buy such assets. With greater demand, asset prices tend to rise.

Also, with all of the talk about the US continuing to raise interest rates, those owning bonds realize that rising interest rates will cause the selling price of bonds they hold in their portfolio to fall. Thus, pension funds and other organizations that are making a choice between buying bonds (which are certain to fall in selling price, as interest rates rise) and buying stocks, will choose to “overweight” stocks in new purchases for their portfolios. This will tend to push the price of stocks higher, regardless of the earnings potential of the underlying companies.

One thing I didn’t mention in the presentation, but is probably worthwhile pointing out here: Short-term interest rates have been rising since late 2014, even as 10-year treasuries have been holding fairly steady (Figure 2, below). These shorter-term interest rates affect payments on other types of transactions–adjustable rate mortgages and auto loans, for example.

Figure 2. Chart showing 3-month, 1-year, and 2-year interest rates. Chart created by St. Louis Federal Reserve.

These short-term interest rates have been creeping upward, indirectly making certain types of goods less affordable. The increase in short-term interest rates will, by itself, push the economy in the direction of recession.

Eventually, the bubble in asset prices can be expected to collapse, as it did in 2008. Perhaps this will happen when corporate profits fall too low; perhaps this will happen when the economy hits recession. The prices of many types of assets, including shares of stock, prices of homes, and prices of businesses can be expected to fall. There are likely to be many debt defaults in the governmental, business, and personal sectors of the economy. In such a situation, banks may fail.

Slide 17

The goods and services that are delivered each year require the use of physical resources such as oil, coal, natural gas, metals from ores, and wood. In the past, the quantity of these physical resources has grown, year after year, as illustrated in Scenario 1.

In a finite world, we cannot expect the amount of physical resources to grow, indefinitely. At some point something will go wrong, and the amount of resources extracted each year will become start becoming smaller, as in Scenario 2. In a sense, the people of the world can expect to become poorer, because the quantity of goods and services that can be made with these resources grows smaller, instead of larger, and each person’s share of the world output becomes smaller.

Standard economic theory says that resource prices will rise, as the quantity of resources falls, but this view does not take into account the way a networked economy really works.

A more likely scenario is that as the quantity of resources falls, wage disparity will increase. As a result, the incomes of many of the lower-wage workers can be expected to fall. The problem is that jobs that pay well require the use of resources; if there is a decrease in resources available, some jobs are likely to be eliminated. Today, such job elimination may come through added technology, eliminating what were previously low-paid jobs. Studies of past collapses support the view that falling wages for the working class played a major role in these collapses. (See Secular Cycles by Peter Turchin and Surgey Nefedov.)

With greater wage disparity, a smaller share of people will be able to afford to buy homes and cars. Scenario 2 in Slide 17 will occur, not because we “run out,” but because too few people can afford to buy goods made with oil, gas, coal, metals and wood. Market prices will fall below the cost of extracting the necessary resources, and companies in these businesses will fail. Governments of oil exporters may collapse, because they cannot collect sufficient tax revenue at the low price available on world markets.

Slide 18

If there are physically less goods and services available, who will get the benefit of these goods and services? I see the situation as almost like musical chairs. Will it be pensioners who lose out, as bonds held by commercial pension programs default, and also as governmental plans are cut back? Or will it be the wages of the less skilled workers that are cut, as more processes are automated, and only managers and highly skilled workers are needed? If this happens, won’t commodity prices fall even further? We really need to have adequate wage levels for a wide range of workers, if we expect to have enough buyers for the goods produced.

Historically, when collapses have occurred, governments have lost out in the game of musical chairs because they could not collect enough tax revenue. The problem was that the bottom 90% of workers became poorer and poorer, and so less able to pay taxes. This brings us to our next potential US problem area.

Slide 19

In January 2017, the US Congressional Budget Office made a projection of how federal debt held by the public would grow, based upon the information available at that time. Their forecast was that the debt would grow to amount to nearly 150% of GDP. This would be a much higher level than during World War II, World War I, or the Civil War (Slide 19).

Slide 20

Since January 2017, more information has become available. We now know about three hurricanes, plus fires in California. Citizens affected by these events need financial support.

We also know about proposed legislation to reduce taxes, especially for businesses and high-income individuals. These proposals are likely to increase after-tax wage disparity, and increase the amount of the deficit. If corporations choose to return any of the benefit of the tax cut, it will likely be through dividends to those who are already wealthy. With respect to corporate tax rates, we are only trying to catch up with tax havens, so it is difficult to believe that the tax change will result in much more US investment.

Slide 21

We don’t think about the internet as being important, but it has become an essential part of our interconnected world economy. The internet helps facilitate all of the just-in-time deliveries needed to operate today’s economy. All of the fancy workarounds for the use of intermittent electricity on the electric grid assume that the internet will be available to transmit information back and forth quickly. Banks make use of the internet to get information to approve loans and to clear checks with other banks.

In the United States, we seem to hear one story after another about the internet being hacked. The most recent story involves a major hack of the data collected by Equifax for the purpose of determining the credit-worthiness of individuals in the US. If this data gets into the wrong hands, it can be used for “Identity Theft.” An impostor can apply for a new loan in the name of someone else, or can steal an income tax refund intended for someone else.

A different hacking situation in the Atlanta area recently led to the theft of a large number of checks intended for direct deposit in teachers’ bank accounts being stolen. They were instead direct deposited to an impostor’s account.

If the internet is truly not secure, no matter what we do, this by itself could cause major problems for the system we now have in place. We don’t have a “Plan B” available, either. Trying to start over with “snail mail,” for example, would be a problem. This is another illustration of the difficulty involved in going back to an earlier technology.
——–

Clearly this list of potential problems is not complete. Hopefully, this list gives an idea of the wide range of issues we are facing.

Republished with permission by Our Finite World.




The #1 Trigger for Rising Rates, Volatility and a Deflationary Crisis

If you’ve read any of my work, you know I think the iceberg that will ultimately sink the global Titanic is China. It has the greatest overbuilding and debt bubble in history, not to mention the obvious real estate and stock market bubbles.

But the Chinese government has too much control over its economy to just let it slide. No. China won’t be the first domino to fall. Rather, the dubious honor may go to lovely and charming Italy.

Italians are fun, laid-back people. I love visiting the country.

But would I bet on it?

No way!

Italians think they’ve died and gone to heaven, but it looks more like hell’s sneaking up on them!

Outside of Greece, Italy has the highest government debt: 130% of GDP and rising. Greece’s government debt is at 180%, but at least Greece keeps getting bailouts, which it can get because it’s small enough to have little impact on the euro.

But what if Italy starts defaulting?

Scratch that. What happens when Italy starts defaulting?

Default it will!

The country has the great majority of the bad loans in the eurozone. Look at this chart.

Of the worst countries in the eurozone, Italy dominates bad loans in the banking and private sector. It has 29% of the total, or $ 324 billion in bad loans – and that number continues to rise.

Major bank stocks there have already plummeted the most in recent years and are on government life support.

What makes Italy so dangerous is that French banks have the most outside exposure to these bad loans, with Germany taking second spot.

But ultimately Germany has the greatest exposure to a fall in Italy. It is the strongest exporter in Europe, especially to the highly indebted southern European nations.

The euro made that imbalance both possible and attractive. Strong exporters in northern Europe had more favorable exchange rates under the common euro, and the weaker importing nations could borrow more cheaply than under separate currencies.

Since Germany’s exports are 46% of GDP, it has a strong incentive to keep floating these southern importers while criticizing them and forcing austerity at the higher political levels. It’s called Target 2 loans. The German central bank (and others) simply defers payments from companies in Italy to some flexible future date.

It’s like a company that gives more credit to their customers just to keep them buying… even though eventually those patrons will be able to repay a penny.

Look at this next chart.

Of the $ 839 billion in Target 2 loans from Germany’s central bank, half, or $ 418 billion, are to Italy alone.

Given the potential to default on these loans and on foreign bank loans, Italy is strongly incentivized to leave the euro and default, just like Iceland did when it faced an equally dire situation.

A default, a much weaker local currency and higher inflation (from rising import costs) would mean that Italy’s sovereign bonds would see a massive spike in rates. During the euro crisis, they went from 3% to 7%. This time it would be much worse!

But here’s the most important point. Sovereign bonds around the world are overvalued with often negative yields long term (when adjusted for inflation).

Yet continued strong ECB bond buying and QE has put the Italian 10-year bonds yield at 1.85% versus U.S. Treasuries at 2.2%!

That’s insane!

Italy is bankrupt, and we are the best house in this bad global neighborhood. Yet Italy’s bonds are stronger than ours and yielding less.

How much badly could risk be miscalculated?!

When Italy gets in trouble again and bond yields spike, that will cause bondholders to question all sovereign bonds, even the trusted U.S. ones.

The bond bubble will seem to have topped and burst… but NOT.

Talk about volatility!

Bond yields could spike up across the world creating a global crisis and stock crash, and then, after a while, deflation will set in from the collapse of bubbles and debt deleveraging. Deflation will then cause the best sovereign (and corporate) bonds to fall in yields to even lower levels than today’s unprecedented lows.

The bond bubble will continue next time for fundamental reasons, not artificial.

We’re on a financial assets roller coaster ride and the exciting (treacherous?) section is just ahead. And it’s going to be even hairier in traditionally safer and more stable bets like U.S. Treasury bonds.

Wall Street has a new consensus view that such yields can’t go much lower and will rise modestly for years ahead, with mild rising inflation… a typical soft-landing view.

They will be wrong as usual, just like they’ll be wrong on China.

Fortunately, we have solutions and we’ll share the details with you on Wednesday.

Click here to read more “What If…” hypotheses and to add our special event to your calendar.

Harry
Follow me on Twitter @harrydentjr

The post The #1 Trigger for Rising Rates, Volatility and a Deflationary Crisis appeared first on Economy and Markets.

Harry Dent – Economy and Markets ()




The UK’s political crisis

On the evening of Friday, September 22nd, the credit ratings agency Moody’s downgraded the UK’s credit rating. Admittedly, it was only by one notch. But coming as it did hard on the heels of Theresa May’s grand speechin Florence, it was a shattering blow. 

Credit ratings agencies lost much of their lustre in the financial crisis of 2008, when they were revealed to have been complicit in the mispricing of complex financial derivatives – the “toxic waste” that brought down some of the world’s largest financial institutions. So it is tempting to dismiss Moody’s action as pointless and its analysis as economically illiterate. I confess that I have done so myself, in the past. But this time, Moody’s is on the money. It tells a story of a tragically weakened government struggling with a legacy of policy errors from previous governments as well as the growing likelihood of a chaotic and potentially disastrous Brexit.

Moody’s gives two main reasons for the downgrade:

  1. The outlook for the UK’s public finances has weakened significantly since the negative outlook on the Aa1 rating was assigned, with the government’s fiscal consolidation plans increasingly in question and the debt burden expected to continue to rise;
  2. Fiscal pressures will be exacerbated by the erosion of the UK’s medium-term economic strength that is likely to result from the manner of its departure from the European Union (EU), and by the increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics.

Unsurprisingly, most commentary has focused on the second of these, and tended to ignore or downplay the first. But in fact the two are inextricably linked.

According to the ONS, the UK’s fiscal deficit currently stands at 2.3% of GDP and its public debt (excluding publicly-owned banks) at 88% of GDP.  George Osborne had planned to eliminate the deficit completely by 2020 and run an absolute surplus thereafter to reduce public debt over time. Of course, ratios to GDP depend as much on the path of the denominator as the numerator: even if the absolute amount borrowed reduces, debt and deficits can still rise in relation to GDP if GDP falls. But until recently, GDP forecasts were buoyant: notwithstanding the Brexit vote, the UK economy was still expected to turn in GDP growth of 2% or more.

Those forecasts have now degenerated substantially. This is from the second section of Moody’s analysis:

Growth has slowed in recent months, with average quarterly growth of just 0.26% in the first two quarters, versus an average of 0.6% over the 2014-2016 period. Private consumption has slowed sharply and business investment has been weak since 2016, most likely linked to the Brexit-related uncertainty. While future years may see some recovery, Moody’s expects growth of just 1% in 2018 following 1.5% this year and 2.25% on average in recent years.

Ouch. And no, this is not merely a minor setback which Britain will quickly transcend on its path to the “sunny uplands”:

More importantly for the UK’s credit profile, Moody’s does not expect growth to recover to its historic trend rate over the coming years.

Brexit will make Britain poorer. Permanently.

Clearly, if GDP is not going to rise as much as previously expected, then debt and deficits will not fall as fast in relation to GDP as previously expected, even if government spending and revenues remain broadly the same. Ceteris paribus, therefore, Brexit thus threatens the UK’s fiscal position

The disastrous 2017 election further weakens the UK’s fiscal position:

…..the government has yielded to pressure and raised spending in several areas, including for health and adult social care. It also agreed to above-budget pay increases for some public sector workers. While these additional expenditures will be funded out of current budgets, the pressure to continue to increase spending in the coming years is likely to remain high, in particular on health care and the public sector wage bill.

In addition, in order to secure a working parliamentary majority, the new government agreed a ‘confidence and supply’ arrangement that increases public spending by GBP1 billion for Northern Ireland. It also abandoned a pre-election promise to review the costly so-called “triple lock” on state pensions after 2020. Overall, Moody’s expects spending to be significantly higher than under the government’s current budgetary plans and higher than the rating agency expected when the negative outlook was assigned in June 2016.

The minority Conservative government is breaking spending limits all over the place in order to hold on to power. I criticised George Osborne’s slash and burn approach to government finances, but this is no better. Giving in to spending demands to prevent a backbench revolt is hardly a responsible approach to managing public finances. It smacks rather of desperation. Theresa May, it seems, will do “whatever it takes” to prevent Jeremy Corbyn from becoming Prime Minister.

Government revenue, too, is compromised by the Tories’ desperation to keep Labour out:

At the same time, revenues are unlikely to compensate for higher spending. Earlier this year, the government abandoned a planned increase in national insurance contributions for the self-employed. Instead, the government has become reliant on highly uncertain revenue gains from tackling tax avoidance to fund tax cuts….

No government in history has ever managed to repair the fiscal finances by clamping down on tax avoidance. This is not a reason not to do it, of course. But it is a reason not to rely on it.

Adding in the effect of a weak government being forced to increase spending and failing to raise the anticipated revenues, Moody’s anticipates that the deficit will remain at or above 3% in the coming years. Debt/GDP will continue to rise, peaking at 93% in 2019.

All in all, this adds up to a poor economic outlook and worsening fiscal finances. This is the reason for the downgrade. To be sure, the current fiscal forecasts are at least realistic, unlike Osborne’s. But as Moody’s says, repeated revisions to government targets don’t exactly inspire confidence.

So far, so meh. Then Moody’s drops this bombshell:

Moody’s is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit.

Wait, haven’t we always known this?

Apparently not. Moody’s seems to have had its head in the sand. Belatedly, it recognises that the obstacles the UK government set up from the start – such as refusing to accept the jurisdiction of the ECJ – have rendered a new free trade agreement all but impossible. The window of opportunity is closing rapidly, there is as yet no substantive agreement on any of the EU’s showstoppers, and therefore little prospect of significant progress on trade before the UK leaves the EU in March 2019.

But even if trade were up for discussion, there is no way any new agreement could come close to matching what the UK currently has as a full EU member. According to Moody’s, Brexit “would likely impose additional costs, raise the regulatory and administrative burden on UK businesses and put at risk the close-knit supply chains that link the UK and the EU.” The UK’s vital services sector is particularly at risk: Moody’s warns that “differences of outlook between the UK and the EU suggest that the most likely outcome is now a rather more limited free trade agreement which may exclude services.”

Putting it all together, Moody’s concludes:

Aside from the direct impact on the UK’s credit profile, weakening growth prospects are likely to exacerbate the government’s evident fiscal challenges. And this is likely to be happening during a period in which policymakers will be increasingly distracted by the twin challenges of sustaining a domestic political consensus on how to operationalise Brexit and reaching agreement with EU counterparts.

UK policymakers will spend all their time working out how to implement a policy that will make Britain considerably poorer and substantially weaken its fiscal finances. Lovely.

Of course, the UK government hit back. A spokesman from the Treasury, quoted in the Financial Times, said this:

The assessments made about Brexit in this report are outdated. The prime minister has just set out an ambitious vision for the UK’s future relationship with the EU, making clear that both sides will benefit from a new and unique partnership.

So Theresa May’s grand aria will make all the difference. Unfortunately the head of sovereign ratings at Moody’s doesn’t think so. “I’ve read the speech and it doesn’t change our view at all”, he said on the BBC’s Today programme, downgrading Mrs. May’s credibility to junk.

I criticise Mrs. May’s government, but I am equally critical of a Labour party whose tax and spending plans are every bit as unrealistic as those of the desperate Tories. Brexit will make Britain poorer. Neither party as yet shows any willingness to admit that the prosperity they have promised the British people is completely incompatible with any sort of Brexit. The British people are being systematically deceived by blue and red politicians alike.

Ever since the referendum, the UK has been engulfed in a deep political crisis. Indeed, it started long before the referendum. It is a crisis of lies and dishonesty which is rapidly destroying all trust in the political establishment.

Moody’s says (I paraphrase), “Thank goodness for the UK’s institutions, because its politicians can’t be trusted.” The downgrade itself does not matter, and I would be the first to dismiss calls for further austerity measures to bring the deficit and debt down in relation to GDP. We know now, all too well, how disastrous fiscal consolidation can be in a weakening economy. But the picture that Moody’s paints, of a weak and untrustworthy political establishment and an economy entirely dependent on the soundness of institutions that are increasingly under political pressure, is shocking. This, even more than Brexit, threatens the future of the UK.

Where have the honest and courageous politicians gone? Whatever happened to doing the right thing, not merely the most popular thing? Who will speak up to avert the coming disaster?

The Lord said, “If I find fifty righteous people in the city of Sodom, I will spare the whole place for their sake.”27Then Abraham spoke up again: “Now that I have been so bold as to speak to the Lord, though I am nothing but dust and ashes, 28what if the number of the righteous is five less than fifty? Will you destroy the whole city for lack of five people?”“If I find forty-five there,” he said, “I will not destroy it.”29Once again he spoke to him, “What if only forty are found there?”He said, “For the sake of forty, I will not do it.”30Then he said, “May the Lord not be angry, but let me speak. What if only thirty can be found there?”He answered, “I will not do it if I find thirty there.”31Abraham said, “Now that I have been so bold as to speak to the Lord, what if only twenty can be found there?”He said, “For the sake of twenty, I will not destroy it.”32Then he said, “May the Lord not be angry, but let me speak just once more. What if only ten can be found there?”He answered, “For the sake of ten, I will not destroy it.”

– Genesis 18: 26-32

Coppola Comment




This Is The Closest That The U.S. Has Been To Nuclear War Since The Cuban Missile Crisis

Are we on the verge of a nuclear war with North Korea?  It has now been confirmed that North Korea has successfully created a miniaturized nuclear warhead, and last month they tested a missile that can reach at least half of the continental United States.  Since 1994 the U.S. has been trying to stop North Korea’s nuclear program, and every effort to do so has completely failed.  Last September, the North Koreans detonated a nuclear device that was estimated to be in the 20 to 30 kiloton range, and back in January President Trump pledged to stop the North Koreans before they would ever have the capability to deliver such a weapon to U.S. cities.  But now the North Koreans have already achieved that goal, and they plan to ultimately create an entire fleet of ICBMs capable of hitting every city in America.

Right now, North Korea and the Trump administration are locked in a game of nuclear chicken.  Kim Jong Un’s regime is never, ever, ever going to give up their nuclear weapons program, and so that means that either Donald Trump is going to have to back down, find another way to deal with North Korea, or use military force to eliminate their nuclear threat.

And time is quickly running out for Trump to make a decision, because now that North Korea has the ability to produce miniaturized nuclear warheads, the game has completely changed.  The following comes from the Washington Post

North Korea has successfully produced a miniaturized nuclear warhead that can fit inside its missiles, crossing a key threshold on the path to becoming a full-fledged nuclear power, U.S. intelligence officials have concluded in a confidential assessment.

The new analysis completed last month by the Defense Intelligence Agency comes on the heels of another intelligence assessment that sharply raises the official estimate for the total number of bombs in the communist country’s atomic arsenal. The U.S. calculated last month that up to 60 nuclear weapons are now controlled by North Korean leader Kim Jong Un. Some independent experts believe the number of bombs is much smaller.

The truth is that nobody actually knows how many nukes North Korea has at this point, and they are pumping out more all the time.

Yes, the Trump administration could order an absolutely devastating military strike on North Korea.  But if the North Koreans even get off one nuke in response, it will be the greatest disaster for humanity since at least World War II.

But at this point Trump doesn’t sound like someone that intends to back down.  In fact, on Tuesday he threatened North Korea with “fire and fury” if they keep threatening us…

“North Korea best not make any more threats to the United States,” Trump said from the clubhouse at his golf course in Bedminster, N.J. “He has been very threatening beyond a normal state, and as I said they will be met with the fire and fury and frankly power, the likes of which this world has never seen before.”

In response to Trump’s comments, the North Koreans threatened to hit Guam with a pre-emptive strike…

If Trump thought that his bluff would be sufficient to finally shut up North Korea, and put an end to Kim’s provocative behavior, well… bluff called because North Korea’s state-run KCNA news agency reported moments ago that not only did N.Korea escalate the tensions up another notch, but explicitly warned that it could carry out a “pre-emptive operation once the US shows signs of provocation”, and that it is “seriously considering a strategy to strike Guam with mid-to-long range missiles.”

Most Americans appear to be completely oblivious to the seriousness of this crisis.  Once we hit North Korea, they will respond.  A single nuke could potentially kill millions in Tokyo, Japan or Seoul, South Korea.  And the North Koreans also have some of the largest chemical and biological weapons stockpiles on the entire planet.  If things take a bad turn, we could see death and destruction on a scale that is absolutely unprecedented.

And if the North Koreans launch an invasion of South Korea, we will instantly be committed to a new Korean War and thousands upon thousands of our young men and women will be sent over there to fight and die.

There is no possible way that a military conflict with North Korea is going to end well.  If things go badly, millions could die, and if things go really badly tens of millions of people could end up dead.

But members of the Trump administration continue to insist that “a military option” is on the table…

In an interview broadcast Saturday on MSNBC’s Hugh Hewitt Show, national security adviser H.R. McMaster said the prospect of a North Korea armed with nuclear-tipped ICBMs would be “intolerable, from the president’s perspective.”

“We have to provide all options . . . and that includes a military option,” he said.

Of course letting North Korea construct an entire fleet of ICBMs that could endanger the entire planet is not exactly a palatable option either.  The Clinton, Bush and Obama administrations all kicked the can down the road year after year, and now we facing a nightmare problem that does not appear to have a good solution.

Unfortunately for Trump, time has now run out and a decision has to be made

“Today is the day that we can definitely say North Korea is a nuclear power,” Harry Kazianis, director of defense studies at the Center for the National Interest, told USA TODAY. “There is no more time to stick our heads in the sand and think we have months or years to confront this challenge.”

Let us pray that a way can be found to derail North Korea’s nuclear program that does not involve us going to war.

Because the moment that U.S. forces start striking North Korea, the North Koreans could literally unleash hell if they are inclined to do so.

It appears that we are now closer to nuclear war than we have been at any point since the Cuban missile crisis.  A nuclear holocaust was avoided back then, and hopefully a way will be found to avoid one now.

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

The Economic Collapse




The Next Financial Crisis Is Not Far Away

Recently, a Spanish group called “Ecologist in Action” asked me to give them a presentation on what kind of financial crisis we should expect. They wanted to know when it would be and how it would take place.

The answer I had for the group is that we should expect financial collapse quite soon–perhaps as soon as the next few months. Our problem is energy related, but not in the way that most Peak Oil groups describe the problem. It is much more related to the election of President Trump and to the Brexit vote.

I have talked about this subject in various forms before, but not since 2016 energy production and consumption data became available. Most of the slides in this presentation use new BP data, through 2016. A copy of the presentation can be found at this link: The Next Financial Crisis.1

Slide 1

Most people don’t understand how interconnected the world economy is. All they understand is the simple connections that economists make in their models.

Slide 2

Energy is essential to the economy, because energy is what makes objects move, and what provides heat for cooking food and for industrial processes. Energy comes in many forms, including sunlight, human energy, animal energy, and fossil fuels. In today’s world, energy in the form of electricity or petroleum makes possible the many things we think of as technology.

In Slide 2, I illustrate the economy as hollow because we keep adding new layers of the economy on top of the old layers. As new layers (including new products, laws, and consumers) are added, old ones are removed. This is why we can’t necessarily use a prior energy approach. For example, if cars can no longer be used, it would be difficult to transition back to horses. This happens partly because there are few horses today. Also, we do not have the facilities in cities to “park” the horses and to handle the manure, if everyone were to commute using horses. We would have a stinky mess!

Slide 3

In the past, many local civilizations have grown for a while, and then collapsed. In general, after a group finds a way to produce more food (for example, cuts down trees so that citizens have more area to farm) or finds another way to otherwise increase productivity (such as adding irrigation), growth at first continues for a number of generations–until the population reaches the new carrying capacity of the land. Often resources start to degrade as well–for example, soil erosion may become a problem.

At this point, growth flattens out, and wage disparity and growing debt become greater problems. Eventually, unless the group can find a way of increasing the amount of food and other needed goods produced each year (such as finding a way to get food and other materials from territories in other parts of the world, or conquering another local civilization and taking their land), the civilization is headed for collapse. We recently have tried globalization, with exports from China, India, and other Asian nations fueling world economic growth.

At some point, the efforts to keep growing the economy to match rising population become unsuccessful, and collapse sets in. One of the reasons for collapse is that the government cannot collect enough taxes. This happens because with growing wage disparity, many of the workers cannot afford to pay much in taxes. Another problem is greater susceptibility to epidemics, because after-tax income of many workers is not sufficient to afford an adequate diet.

Slide 4

A recent partial collapse of a local civilization was the collapse of the Soviet Union in 1991. When this happened, the government of the Soviet Union disappeared, but the governments of the individual states within the Soviet Union remained. The reason I call this a partial collapse is because the rest of the world was still functioning, so nearly all of the population remained, and the cutback in fuel consumption was just partial. Eventually, the individual member countries were able to function on their own.

Notice that after the Soviet Union collapsed, the consumption of coal, oil and gas collapsed at the same time, over a period of years. Oil and coal use have not come back to anywhere near their earlier level. While the Soviet Union had been a major manufacturer and a leader in space technology, it lost those roles and never regained them. Many types of relatively high-paying jobs have been lost, leading to lower energy consumption.

Slide 5

As nearly as I can tell, one of the major contributing factors to the collapse of the Soviet Union was low oil prices. The Soviet Union was an oil exporter. As oil prices fell, the government could not collect sufficient taxes. This was a major contributing factor to collapse. The collapse from low oil prices did not happen immediately–it took several years after the drop in oil prices. There was a 10-year gap between the highest oil price (1981) and collapse (1991), and a 5-year gap after oil prices dropped to the low 1986 price level.

Slide 6

Venezuela is often in the news because of its inability to afford to import enough food for its population. Slide 3 shows that on an inflation-adjusted basis, world oil prices hit a high point first in 2008, and again in 2011. Since 2011, oil prices slid slowly for a while, then began to slide more quickly in 2014. It is now nine years since the 2008 peak. It is six years since the 2011 peak, and about three years since the big drop in prices began.

One of the reasons for Venezuela’s problems is that with low oil prices, the country has been unable to collect sufficient tax revenue. Also, the value of the currency has dropped, making it difficult for Venezuela to afford food and other products on international markets.

Note that in both Slides 4 and 6, I am showing the amount of energy consumed in the countries shown. The amount consumed represents the amount of energy products that individual citizens, plus businesses, plus the government, can afford. This is why, in both Slides 4 and 6, the quantity of all types of energy products tends to decline at the same time. Affordability affects many types of energy products at once.

Slide 7

Oil importing countries can have troubles when oil prices rise, similar to the problems that oil exporting countries have when oil prices fall. Greece’s energy consumption peaked in 2007. One of Greece’s major products is tourism, and the cost of tourism depends on the price of oil. When the price of oil was high, it adversely affected tourism. Exported goods also became expensive in the world market. Once oil prices dropped (as they have done, especially since 2014), tourism tended to rebound and the financial situation became less dire. But total energy consumption still has still tended to decline (top “stacked” chart on Slide 7), indicating that the country is not yet doing well.

Slide 8

Spain follows a pattern similar to Greece’s. By the mid-2000s, high oil prices made Spain less competitive in the world market, leading to falling job opportunities and less energy consumption. Since 2014, very low oil prices have allowed tourism to rebound. Oil consumption has also rebounded a bit. But Spain is still far below its peak in energy consumption in 2007 (top chart on Slide 8), indicating that job opportunities and spending by its citizens are still low.

Slide 9

We hear much about rising manufacturing in the Far East. This has been made possible by the availability of both inexpensive coal supplies and inexpensive labor. India is an example of a country where manufacturing has risen in recent years. Slide 9 shows how rapidly energy consumption–especially coal–has risen in India.

Slide 10

China’s energy consumption grew very rapidly after it joined the World Trade Organization in 2001. In 2013, however, China’s coal consumption hit a peak and began to decline. One major contributor was the fact that the cheap-to-consume coal that was available nearby had already been extracted. The severe problems that China has had with pollution from coal may also have played a role.

It might be noted that the charts I am showing (from Mazamascience) do not include renewable energy (including wind and solar, plus burned garbage and other “renewables”) used to produce electricity. (The charts do include ethanol and other biofuels within the “oil” category, however.) The omission of wind and solar does not appear to make a material difference, however. Figure 1 shows a chart I made for China, comparing three totals:

(1) Opt. total (Optimistic total) – Totals on the basis BP computes wind and solar. Intermittent wind and solar electricity is assumed to be equivalent to high quality electricity, available 24/7/365, produced by fossil fuel electricity-generating stations.

(2) Likely totals – Wind and solar are assumed to replace only the fuel that creates high quality electricity. The amount of backup generating capacity required is virtually unchanged. More long distance transmission is needed; other enhancements are also needed to bring the electricity up to grid-quality. The credits given for wind and solar are only 38% as much as those given in the BP methodology.

(3) From chart – Mazamascience totals, omitting renewable sources of electricity, other than hydroelectric.

Figure 1. China energy consumption based on BP Statistical Review of World Energy 2017.

It is clear from Figure 1 that adding electricity from renewables (primarily wind and solar) does not make much difference for China, no matter how wind and solar are counted. If they are counted in a realistic manner, they truly add little to China’s energy use. This is also true for the world in total.

Slide 11

If we look at the major parts of world energy consumption, we see that oil (including biofuels) is the largest. Recently, it seems to be growing slightly more quickly than other energy consumption, perhaps because of the low oil price. World coal consumption has been declining since 2014. If coal is historically the least expensive fuel, this is likely a problem. I have not shown a chart with total world energy consumption. It is still growing, but it is growing less rapidly than world population.

Slide 12 – Note: Energy growth includes all types of energy. This includes wind and solar, using wind and solar counted using the optimistic BP approach.

Economists have given the false idea that amount of energy consumption is unimportant. It is true that individual countries can experience lower consumption of energy products, if they begin outsourcing major manufacturing to other countries as they did after the Kyoto Protocol was signed in 1997. But it doesn’t change the world’s need for growing energy consumption, if the world economy is to grow. The growth in world energy consumption (blue line) tends to be a little lower than the growth in GDP (red line), because of efficiency gains over time.

If we look closely at Slide 12, we can see that drops in energy consumption tend to precede drops in world GDP; rises in energy consumption tend to precede rises in world GDP. This order of events strongly suggests that rising energy consumption is a major cause of world GDP growth.

We don’t have very good evaluations of  GDP amounts for 2015 and 2016. For example, recent world GDP estimates seem to accept without question the very high estimates of economic growth given by China, even though their growth in energy consumption is very much lower in 2014 through 2017. Thus, world economic growth may already be lower than reported amounts.

Slide 13

Most people are not aware of the extreme “power” given by energy products. For example, it is possible for a human to deliver a package, by walking and carrying the package in his hands. Another approach would be to deliver the package using a truck, operated by some form of petroleum. One estimate is that a single gallon of gasoline is equivalent to 500 hours of human labor.

“Energy consumption per capita” is calculated as world energy consumption divided by world population. If this amount is growing, an economy is in some sense becoming more capable of producing goods and services, and thus is becoming wealthier. Workers are likely becoming more productive, because the additional energy per capita allows the use of more and larger machines (including computers) to leverage human labor. The additional productivity allows wages to rise.

With higher incomes, workers can afford to buy an increasing amount of goods and services. Businesses can expand to serve the growing population, and the increasingly wealthy customers. Taxes can rise, so it is possible for governments to provide the services that citizens desire, such as healthcare and pensions. When energy consumption per capita turns negative–even slightly so–these abilities start to disappear. This is the problem we are starting to encounter.

Slide 14 – Note: Energy percentage increases include all energy sources shown by BP. Wind and solar are included using BP’s optimistic approach for counting intermittent renewables, so growth rates for recent years are slightly overstated.

We can look back over the years and see when energy consumption rose and fell. The earliest period shown, 1968 to 1972, had the highest annual growth in energy consumption–over 3% per year–back when oil prices were under $ 20 per barrel, and thus were quite affordable. (See Slide 5 for a history of inflation-adjusted price levels.) Once prices spiked in the 1973-1974 period, much of the world entered recession, and energy consumption per capita barely rose.

A second drop in consumption (and recession) occurred in the late 1970s and early 1980s, when easy-to-adopt changes were made to cut oil usage and increase efficiency. These included

(a) Closing many electricity-generating plants using oil, and replacing them with other generation.

(b) Replacing many home heating systems operating with oil with systems using other fuels, often more efficiently.

(c) Changing many industrial processes to be powered by electricity instead of burning oil.

(d) Making cars smaller and more fuel-efficient.

Another big drop in world per capita energy consumption occurred with the partial collapse of the Soviet Union in 1991. This was a somewhat local drop in energy consumption, allowing the rest of the world to continue to grow in its use of energy.

The Asian Financial Crisis in 1997 was, in some sense, another localized crisis that allowed energy consumption to continue to grow in the rest of the world.

Most people remember the Great Recession in the 2007-2009 period, when world per capita growth in energy consumption briefly became negative. Recent data suggests that we are almost in the same adverse situation now, in terms of growth in world per capita energy consumption, as we were then.

Slide 15

What happens when growth in world per capita energy consumption slows and starts to fall? I have listed some of the problems in Slide 15. We start seeing problems with low wages, particularly for people with low-skilled jobs, and the type of political problems we have been experiencing recently.

Part of the problem is that countries with a high-priced mix of energy products start to find their goods and services uncompetitive in the world marketplace. Thus, demand for goods and services from these countries starts to fall. Greece and Spain are examples of countries using a lot of oil in their energy mix. As a result, they became less competitive in the world market when oil prices rose. China and India were favored because they had a less-expensive energy mix, favoring coal.

Slide 16

Slide 16 shows the kinds of comments we have been hearing in recent years, as prices have recently bounced up and down. It is becoming increasingly clear that no price of oil is now satisfactory for all participants in the economy. Prices are either too high for consumers, or too low for the producers. In fact, prices can be unsatisfactory for both consumers and producers at the same time.

On Slide 16, oil prices show considerable volatility. This happens because it is difficult to keep supply and demand exactly balanced; there are many factors determining needed price level, including both the amount consumers can afford and the costs of producers. The bouncing of prices up and down on Slide 16 is to a significant extent in response to interest rate changes, and resulting changes in currency relativities and debt growth.

We are now reaching a point where no interest rate works for all members of the economy. If interest rates are low, pension plans cannot meet their obligations. If interest rates are high, monthly payments for homes and cars become unaffordable for customers. Also, high interest rates tend to raise needed tax levels for governments.

Slide 17

All of these problems are fairly evident already.

Slide 18

The low level of energy consumption growth is of considerable concern. It is this low growth in energy consumption that we would expect to lead to low wage growth worldwide, especially for the non-elite workers.  Our economy needs more rapid growth in energy consumption to provide enough tax revenue for all of our governments and intergovernmental organizations, and to keep the world economy growing quickly enough to prevent large debt defaults.

Slide 19

Economists have confused matters for a long time by their belief that energy prices can and will rise arbitrarily high in inflation-adjusted terms–for example $ 300 per barrel for oil. If such high prices were really possible, we could extract all of the oil that we have the technical capacity to extract. High-cost renewables would become economically feasible as well.

In fact, affordability is the key issue. When the world economy is stimulated by more debt, only a small part of this additional debt makes its way back to the wages of non-elite workers. With greater global competition in wages, the wages of these workers tend to stay low. The limited demand of these workers tends to keep commodity prices, especially oil prices, from rising very high, for very long.

It is affordability that limits our ability to grow endlessly. While it is possible to argue that more debt might help raise the wages of non-elite workers in a particular country, if one country adds more debt, other currencies around the world can be expected to rebalance. As a result, there would be no real benefit, unless all countries together could add more debt. Even this would be of questionable value, because the whole effort relates to getting oil and other commodity prices to rise to an adequate level for producers; we have already seen that there is no price level that is satisfactory for both producers and consumers.

Slide 20

These symptoms seem to be already beginning to happen.

Note:

[1] This presentation is a little different from the original. The presentation I am showing here is entirely in English. The original presentation included some charts in Spanish from Energy Export Data Browser by Mazama Science. With this database, a person can quickly prepare energy charts for any country in a choice of seven languages. I encourage readers to “look up” their own country, in their preferred language.

In this write-up, I include more discussion than in my original talk. I also added Slides 13 and 14, plus Figure 1.

Republished with permission from Our Finite World.




Janet Yellen Says A New Financial Crisis Probably Won’t Happen ‘In Our Lifetimes’ But The BIS Says One Could Soon Hit ‘With A Vengeance’

Federal Reserve Chair Janet Yellen is quite convinced that the United States will not experience another financial crisis for a very long time to come.  In fact, she is publicly saying that she does not believe that another one will happen “in our lifetimes”.  But there are other central bankers that see things very differently.  In fact, a new report that was just released by the Bank for International Settlements is warning that a new financial crisis could soon strike “with a vengeance”.  So who is right?

It would be nice if it turned out that Yellen was right.  Nobody should want to see a repeat of what happened in 2008, and Yellen seems extremely confident that she will never see another crisis of that magnitude

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” Yellen said at an event in London.

Even though the U.S. national debt has roughly doubled since the start of the last financial crisis, and even though corporate debt has roughly doubled since then as well, and even though U.S. consumers are more than 12 trillion dollars in debt, and even though the top 25 U.S. banks have 222 trillion dollars of exposure to derivatives, Yellen believes that our financial system “is much safer and much sounder” than it was in 2008…

“I think the system is much safer and much sounder,” she said. “We are doing a lot more to try to look for financial stability risks that may not be immediately apparent but to look in corners of the financial system that are not subject to regulation, outside those areas in order to try to detect threats to financial stability that may be emerging.”

I have a feeling that these words may come back to haunt her, and the fact that she has more power over the performance of the U.S. economy than anyone else does is more than just a little bit frightening.

The truth is that signs of a major new economic downturn are emerging all around us, and many are warning that the next great financial crisis is just around the corner.  For example, just consider what a new report from the Bank for International Settlements is saying.  The Bank for International Settlements is widely regarded as “the central bank of central banks”, and this new report is warning that we could be heading for “a financial boom gone wrong”

A new financial crisis is brewing in the emerging economies and it could hit “with a vengeance”, an influential group of central bankers has warned.

Emerging markets such as China are showing the same signs that their economies are overheating as the US and the UK demonstrated before the financial crisis of 2007-08, according to the annual report of the Bank for International Settlements (BIS).

Claudio Borio, the head of the BIS monetary and economic department, said a new recession could come “with a vengeance” and “the end may come to resemble more closely a financial boom gone wrong”.

And of course many of the most trusted analysts in the financial world agree with the BIS.  In fact, Dr. Doom Marc Faber is predicting that stocks could soon decline “by 40 percent or more”

If the man often hailed as the original “Dr. Doom” is right, the stock market could see another “lurch” higher — at which point investors may want to cash out quickly and run for cover.

Marc Faber, the editor of “The Gloom, Boom & Doom Report’ and a perennial bear, isn’t backing down from his latest dire prediction that would send stocks plummeting by 40 percent or more.

A drop of that size could take the S&P 500 Index down from Friday’s closing price of 2,438 to 1,463.

In the end, we shall see who is right and who is wrong.

And let us certainly hope that another crisis like the one we saw in 2008 does not happen any time soon, because tens of millions of Americans are completely unprepared for one.

According to a brand new survey that was just released, almost half the country currently spends as much or more money than they make each month…

Nearly half of Americans say their expenses are equal to or greater than their income, according to a new study from the Center for Financial Services Innovation. And for those 18 to 25 the percentage is over half, up to 54%.

“Half of America has no financial cushion,” says Jennifer Tescher, president and CEO of CFSI, which released the study. “They are living really close to the edge.”

And another recent survey discovered that 69 percent of all Americans do not have an adequate emergency fund.

With so many of us living on the edge, our society is extremely vulnerable to a major financial shock.  And when one finally does happen, a lot of people are going to get knocked out of the ranks of the middle class very rapidly.

Even though things seem relatively stable for the moment, poverty is on the rise all over the country.  For example, according to the Daily Mail the number of homeless people in Los Angeles has risen by 23 percent over the last year…

According to a new count released in May, the number of homeless people in the Los Angeles area jumped by 23 percent in the last year to reach nearly 58,000. Of those, some 5,000 are veterans, the highest number of homeless veterans of any city in the country and a near 60 percent increase over the previous year.

And we are seeing similar things in cities all over the nation.

The United States is in the midst of a long-term economic decline that goes back for decades.  Our economic infrastructure has been gutted, our middle class is now a minority of the population, and we have piled up the biggest mountain of debt in the history of the world in a desperate attempt to maintain a standard of living that we have not earned.

Hopefully Janet Yellen is right and hopefully the next major financial crisis will be put off for as long as possible.

But whether the next financial crisis comes quickly or not, the truth is that the U.S. economy is going to continue to decline if we continue to make the same kinds of incredibly poor decisions that we have been making for a very long time.

The Economic Collapse




The Worst Financial Nightmare In Illinois History Erupts As State Comptroller Declares ‘We Are In Massive Crisis Mode’

Margaret Thatcher once said that the big problem with socialist governments is that “they always run out of other people’s money”, and unfortunately we are witnessing this play out in a major way in the state of Illinois right now.  At this point, the Illinois state government has more than 15 billion dollars of unpaid bills.  Yes, you read that correctly.  They are already 15 billion dollars behind on their bills, and they are on pace to take in 6 billion dollars less than they are scheduled to spend in 2017.  It is the worst financial crisis in the history of Illinois, and State Comptroller Susana Mendoza sounds like she is about ready to tear her hair out in frustration

“I don’t know what part of ‘We are in massive crisis mode’ the General Assembly and the governor don’t understand. This is not a false alarm,” said Mendoza, a Chicago Democrat. “The magic tricks run out after a while, and that’s where we’re at.”

It’s a new low, even for a state that’s seen its financial situation grow increasingly desperate amid a standoff between the Democrat-led Legislature and Republican Gov. Bruce Rauner. Illinois already has $ 15 billion in overdue bills and the lowest credit rating of any state, and some ratings agencies have warned they will downgrade the rating to “junk” if there’s no budget before the next fiscal year begins July 1.

Would you continue to do work for the Illinois state government if you knew that they were this far behind on their bills and that it is doubtful that you would be paid any time in the foreseeable future?

Of course the answer to that question is quite obvious.  As contractual relationships break down, social services are starting to suffer, and there is not much hope that things will take a turn for the better any time soon.

At this point things have gotten so bad that the Illinois Department of Transportation is planning to cease all roadwork starting on July 1st, and even the Powerball lottery is threatening to cut all ties with the state

As reported previously, the state Transportation Department said it would stop roadwork by July 1 if Illinois entered its third consecutive fiscal year without a budget – the longest such stretch of any US state – while the Powerball lottery said it may be forced to dump Illinois over its lack of budget. For now, state workers have continued to receive pay because of court orders, but school districts, colleges and medical and social service providers are under increasing strain.

So what has caused this unprecedented crisis?

At the core, the problem is political.  A tense standoff between a Republican governor and a Democratic legislature has resulted in the state going 700 days without a budget

On May 31, Illinois will have gone 700 days without a budget, an unprecedented political failure. Also on May 31, if a budget is not passed, it could mean that the state could go until 2019—an unimaginable idea, except that senators have already imagined it.

How does a state, led by a successful businessman as governor, a brilliant political strategist in the House, and a consummate dealmaker in the Senate, end up in this kind of political disorganization? Bad political errors led to bad political incentives, and as the problem worsened, so did the political risk of solutions—and what politicians had to ask of their constituents.

This is another example of how deeply divided we are as a nation right now.  Democrats hate Republicans and Republicans hate Democrats, and it is getting to the point where the two parties cannot work together on even the most basic things.

In the end, the state of Illinois is either going to have to cut spending dramatically, raise taxes substantially or some combination of both.  And since the Democrats have very large majorities in both chambers of the state legislature, I wouldn’t count on spending being cut that much.

This is the thing with big government – it always has a tendency to get even bigger.  And the bigger government gets, the more of our money and the more of our freedom it takes away.

That is why I am a huge advocate of dramatically shrinking the size of government on the federal, state and local levels.  Like Rand Paul has often said, I want a government so small that I can barely see it.

When you let government get out of control, what you end up with is a ravenous beast that has an endless appetite for more of your money.  In Illinois, the money is all gone and the beast is desperately hungry for more.

Sadly, what is happening in Illinois is just the tip of the iceberg.  If stock prices start declining from these massively inflated levels, state pension funds all over America are going to be in crisis mode very rapidly.  And a new recession would greatly accelerate the financial problems of a whole bunch of states that are already dealing with huge budget shortfalls.

Unfortunately, experts all over the country are warning that the next major downturn is coming very quickly.  For example, just consider what Bernard Arnault just told CNBC

A financial crisis could be just around the corner, according to the chief executive of LVMH, who has described the global economic outlook as “scary”.

“For the economic climate, the present situation is…mid-term scary,” Bernard Arnault told CNBC Thursday.

“I don’t think we will be able to globally avoid a crisis when I see the interest rates so low, when I see the amounts of money flowing into the world, when I see the stock prices which are much too high, I think a bubble is building and this bubble, one day, will explode.”

There is always a price to pay for going into too much debt.

A financial day of reckoning can be delayed for a while, but eventually bad financial decisions are going to catch up with you.  The state of Illinois is learning this lesson in a very harsh manner right now, and the country as a whole is on the exact same path as Illinois.

I am often criticized for endlessly warning about America’s coming day of reckoning, but you can’t pile up the biggest mountain of debt in the history of the world without paying a price.

Just like the state of Illinois, we will pay for decades of exceedingly foolish decisions, and unfortunately this is going to cause severe economic pain throughout our entire society.

The Economic Collapse