Monday, August 12, 2013

When the shark bites

"increases are of sluggish growth,
the way to ruin is rapid."


"Send lawyers guns and money
the shit has hit the fan"

Warren Zevon


        Tainter suggest that civilizations tend to collapse when increased investment  provides less and less marginal returns.

     Here is a thought provoking graph - which may illustrate this process.  First look at the the debt to GDP ratio.  You can see that  between 1950 and 1980, it was quite stable.  Then starting in 1980 (around the time of the "oil shocks") it start to rise - more and more debt was required to achieved the same amount of GDP.    

    Why would this happen?  Perhaps the second line explains it.  It shows the per capita available energy.     When energy was easily available and cheap, it was easy to increase GDP - but as the situation changed and energy because  less easily available,  the marginal return on investment  slowed.  

    Why would debt increase?   Arguably more debt was needed to make up for the diminishing profits. -(for an good explanation of how higher oil prices lead to lower profits - and lower employment - via automation and off shoring see here)

    Which reminds me of a theme of Kunstler - "capital formation".   He says:

And what’s been going on is that we’ve been trying to compensate for the lack of capital formation with this imaginary money. And by capital formation, I mean the ability to accumulate real wealth from real wealth-producing activities. And creating credit card money on a national level is not real wealth-producing activity.   Kunsler interview

  It takes a lot of capital to fund an energy project.,  Regardless of whether the project is a coal mine, a oil well, or a solar panel.    As we move from cheap energy to low EROI energy - there is less and less  energy returned  to fund the next round of development - less capital.  One indicator of this lack of capital, is the use of increasing amounts of debt.  If you can't fund the project with profits - you borrow from the future, and buy it with debt.


Fig. 1: Graph shows evolution of primary energy consumption per capita in Btu (blue line) and the ratio of total debt to nominal GDP (red line in %) from 1950 to 2011. Vertical dashed lines show approximate thresholds of different growth/decline phases of USA. (Source: EIA, St. Louis Fed)

  How much longer can debt levels continue to rise?  Who knows?  Or what happens when the debt levels fall?   Without more debt, where will the money come from, to support future energy flows?    Future GDP?   What will the future look like?  One possibility is the Seneca Cliff   proposed by Ugo Bardi.  He has created a model that incorporates negative feedbacks, which make the road down much steeper than the road up.


see also - Podcast with Ugo Bardi, where he discusses his Seneca  model, which has a "shark fin" curve which rises slowly, but falls quickly.   Thus if the growth phase of the industrial era was around 200 hundred years while Bardi suggest that retreat could only take 50 years.. 


Sunday, July 21, 2013

The decline of an empire

Guest post by Alexander Ac

Given that City of Detroit has now officially filed for bankruptcy, it is worth to look at the bigger picture. Is the fate of once mighty city just a short pause on the way to further prosperity? Or is it rather a symptom of something bigger and more widespread regarding the future of a post-industrial society?

Without exaggeration, Detroit was once a symbol of “American Dream”, characterized by the highest per capita income in the entire country, growing population, industrialization, mass production, growing wealth, etc. The population reached almost 2 million people.

Now, Detroit is more the symbol of “American Nightmare”, with a declining population* increasing poverty and criminality, declining property value, declining public services, etc. Now the population is bellow 700 thousands people.

The period after the WW2 was characterized by an explosive growth of population and energy consumption, tremendous increases in productivity brought by cheap energy, globalization of trade, technological innovation, especially in fields of computers and communication, increasing quality of healthcare, and hopefully collective growth of population happiness.

The same period can by also characterized by several fundamental trends, which probably explain a lot. Let’s look at the following graph:

Fig. 1: Graph shows evolution of primary energy consumption per capita in Btu (blue line) and the ratio of total debt to nominal GDP (red line in %) from 1950 to 2011. Vertical dashed lines show approximate thresholds of different growth/decline phases of USA. (Source: EIA, St. Louis Fed).

Expansion phase (1950-1979)

This period can be broadly characterized by a rapid population growth, rapid total energy consumption per capita growth (2% p.a.), infrastructure construction, and relatively stable debt/GDP ratio (0.3% p.a.). We could talk about the “expansion phase”, from which most of the population benefited in terms of increasing quality of life. Increasing safety, better access to health care, better education and freedom of almost everything were a given facts of life. Even the environmental conditions might have improved in some or even most locations. And global warming was not of a serious concern at that time.

Slow decline phase (1979-2009)

This characterization of 30 years following the peak in per capita energy consumption might be surprising to many, but should not be really. Many of the great achievements of science and technology started to be slowly overrun by resource depletion. This trend was largely undetected, since increased level of debt masked the real price of the energy. We decided to pay less for prosperity (better call it consumption) today, in exchange for more tomorrow, assuming that happy days of cheap energy would return at some moment in the future. Human naivety is endless, as we can easily observe. But during the phase of exponential growth in the debt to GDP (almost 5% p.a.) and slowly declining per capita energy consumption (0.5% p.a.), many of the previously positive trends turned negative. Here is a list of just some of them:

  • Growth in the income inequality between rich and poor
  • Declining fertility growth rates
  • Growth of the financial sector as the share of GDP
  • Outsourcing of the energy intensive industrial jobs to foreign countries
  • Increasingly negative trade balance
  • Declining quality of education
  • Increasing healthcare costs
  • Declining added value of further debt
  • Increasing oil dependency upon Middle East countries
  • Ageing infrastructure (what you build during 10 dollars/barrel era is difficult to maintain or even expand with 100 dollars/barrel era)

Fast decline phase (2009-???)

These and others long-term negative trends ended up with a financial crisis in 2008-9, which turned out to be global. Debt to GDP ratio peaked in the US, and its decline started off what we might call “fast decline” phase. Close to zero Fed Funds Rate or “quantitative easing” policies are not going to change fundamental evolution of the US economy. There is no new “industrial revolution” behind the corner, no matter what “shale oil” or “shale gas” money loosing/climate catastrophe ignoring propaganda wants you to convince.  We have plundered the cheap resources and now we have to face the consequences. If we are collectively wise enough, which is not happening yet, we might have a small change of avoiding WW3 in coming years and decades. Unfortunately, history seems to predict a different outcome.

* Keep in mind that under a global decline scenario people have nowhere to migrate, unlike in the case of local decline, such as for Detroit.

Labels: , , , ,


Post a Comment

Subscribe to Post Comments [Atom]

<< Home