In one of Steve's latest blog posts, at debtdeflation.com, we find this interesting slide showing countries with rapid credit growth and accumulation of private sector debt since 2008. According to Keen these are the future debt-zombies, with a debt ratio of over 150% of GDP. Sweden (brown line) is among the worst of all countries and headed for a crisis. With private debt soaring to 237% of GDP and growing 15% of GDP per year it becomes clear that this is unsustainable and will have to end. Changes in the massive property bubble in Sweden will likely be a key indicator to the coming downturn. The new mortgage repayment requirements may function to slow down credit growth, and if so, most likely popping the bubble. We can't  predict when the crash will happen but that it will happen is a sure thing. 

As for the US we can see in the chart below how credit growth picked back up again in 2010 after some deleveraging (2008-2009) but has once again started a downturn. A pattern similar to Japan's zombie-economy with rising and falling credit leading to recessions and ever more financial trickery from central banks.

This will affect the unemployment levels as, Keen shows in the chart below, there is a strong correlation between changes in credit and unemployment rates. More than 45 million Americans, about 20% of the population, are already on food stamps. According to shadowstats, real unemployment in America is at 23% as of May 2016, not 4.7% as the government claims. Not counting people who have stopped actively looking for a job, cherry picking data, is very dubious and has lead many mainstream media pundits to scratch their head as to "why so many americans are on food stamps?". 

Because there is so much misinformation and propaganda regarding the true state of affairs most people will be surprised when the next crisis hits. They will be angry as to why politicians have not informed them of the dangers and will be even less happy when the government asks for more tax money to once again bail out the banks. But certain homogenous societies may still be stable despite such hardships, as is the case with Japan. While others may experience uprisings and mayhem. 

Taking action to protect yourself and your community, getting out of debt, is all one can do at this point. Governments around the world are so blinded by their addiction to credit growth that they will do anything to keep the bubble going. Even if it only increases the income gap between the rich and the poor. Getting out of debt and investing in alternative energy sources and food production is the safer bet. And something we should all do to protect our families and future generations.

The global economy needs oil for many purposes, for example to power transportation and produce food. If the oil price is too low, its not profitable to extract it. With low oil prices production may drop off rapidly. This can lead to a bunch of secondary effects. With low oil prices, it becomes increasingly difficult for expensive unconventional drilling operations (e.g. fracking, shale oil, tar sands) that are highly leveraged to pay back the loans they have taken out. Energy debt currently accounts for 16% of the US junk bond market, and the value of Venezuelan bonds recently fell substantially because of the high risk of default. Similarly, the Russian rouble has been in freefall which has driven up inflation, decreasing the Russian bank’s ability to pay off foreign debt.

After the massive bank bailouts in 2008 there has been lots of discussions on how to change the system so new state bailouts won’t be needed. One proposal that has been discussed recently by the IMF and other institutions is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports, this approach has been approved by the G20 at their meeting in Brisbane (November 16, 2014). If this is correct, ordinary peoples bank accounts and pension plans could be at risk already. Sweden is not a part of G20 so we should not be affected by this. 

Falling oil prices tend to lead to a lower price for producing food and other goods. The net result tends to be deflation. Not all countries are affected equally, some experience this to a greater extent than others. Those countries experiencing deflation are likely to eventually get problems with debt defaults because. Investers could flee the country since they can’t make an adequate return and this usually tend to push currencies down, relative to other currencies. In Russia this is the case right now. Since the dollar has been rising rapidly, debt repayment is likely to be of greatest concern to those countries where substantial debt is denominated in US dollars but whose local currency has fallen in value. Countries with low currency prices such as Japan, parts of Europe, Brazil, Argentina and South Africa could find it expensive to import goods of all kinds. The Chinese yuan is closely tied to the dollar which makes Chinese exports more expensive and may be part of the reason why their economy has slowed down recently. However, China also have massive debts and a shadow banking system that could be huge. No one really knows since the Chinese aren't transparent with their accounting.

There are limits to the amount of debt that a government, or business can borrow. At some point, interest payments become so high that its difficult to cover other expenses. The way around this have been to lower interest rates to zero. The problem is that we have a monetary system that is either expanding or collapsing. It has no steady state. Increasing debt has been a big part in pumping up demand for commodities and ensuring some economic growth. But interest rates can only go so low and QE does not work in the long-term, mostly it just creates asset bubbles and risky investments. The oil price fall started almost at the same time as the FED ended QE3 in October this year (the crash in oil prices in 2008 was credit-related and prices only picked up after the US initiated its program of QE in November 2008). 

Zero interest rates and QE allows more borrowing from the future than would be possible if market interest rates really had to be paid. This allows financiers to temporarily disguise a growing problem of unaffordability of oil and other commodities. The problem is that we live in a finite world and we have reached a point where it has become more expensive to produce essential commodities. Wages don’t rise correspondingly, in most countries, because more and more labor is needed to provide less and less actual benefit. Workers find themselves becoming poorer in terms of what they can afford to buy. So even if prices for basic goods drop, fewer  jobs and lower wages keep consumers from spending. Once commodity prices fall to levels that are affordable based on the income of consumers, they fall to levels that cut out a large share of production. 

The timing of defaults and debt-related problems can take time. Low oil prices take a while to work their way through society. It is also possible that central bankers decide to take up another round of QE early in 2015, or that oil prices hit a low and start going back up. Limits to cheap energy could play out through lower oil prices as limits to growth in debt are reached and demand is destroyed. A collapse in oil production as a consequence of low oil prices could be much more severe for the global economy.

As the graph above shows, solar photovoltaics and biogas from corn require so much energy that there is very little net energy provided to society, you put in 1 and get 3.9 or 3.5 back (even worse if you include the buffering). That’s not enough to run a complex society on. Wind onshore and hydropower, however, perform much better and give a return of 19 and 49 respectively. Natural gas and coal fired power plants give 28 and 30 in net energy. And nuclear has a value of 75, calculated with a 60 year lifetime. Solar thermal in the Sahara would also give enough net energy to be useful.

Now that we know which electricity producing technologies offer most in terms of net energy we can turn to monetary cost. But first note that not all energy is created equal. Electrical energy is very useful, because it can immediately do work. Heat and chemical energy are less useful because it's harder to get work out of them. By calculating the exergy, the available energy to do work, equivalent we can get energy money return on investment (EMROI). This is done by weighting both the energy inputs and energy output by a factor of 3 when the energy type is electrical. As shown in the graph below.

This is just one out of many studies that have looked at EROIs for various energy carriers. Because there is no universally accepted methodology one should be careful about taking any numbers for granted until reading the literature. These numbers are however in line with other studies, except in the case of nuclear. Previous studies have shown extremely varied numbers for nuclear. This could be because, since the 1980s when EROI measurements began, EROI for nuclear has been rising rapidly as the industry has switched from gas-diffusion enrichment of uranium to centrifuge (which is 35 times more energy efficient). The World Nuclear Association projects that there will be no more diffusion enrichment anywhere in the world by 2017. Moreover, there are other processes and a next generation of nuclear power plants, called Gen-IV designs, that don’t use enrichment at all which would give them much higher EROI. And Gen-IV models can't have a melt-down. The Chinese have 300 engineers working on a liquid-cooled thorium reactor right now. So if you wondered why climate scientists like James Hansen are pro-nuclear, this is one reason.

Data from Davour et al. 2014

We have known for a long time that there are physical limits to population and economic growth in terms of what the Biosphere can provide. The Limits to Growth (1972) “business-as-usual” (BAU) scenario produced about forty years ago now aligns well with historical data that has been updated (Figure 1, Turner, 2014). Showing that we are headed in the wrong direction, away from achieving sustainable development. The BAU scenario results in collapse of the global economy and environment, subsequently forcing population down. A collapse in this context simply refers to the fact that standard of living will fall at rates faster than they have historically risen, due to disruption of economic functions. According to the model, a fall in population only occurs after about 2030 but the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline (Turner, 2014). Given the imminent timing, we ought to raise the question whether the current economic difficulties are related to dwindling resources and an end to growth.

Most people assume that the major global difficulties will occur after the end to growth. According to Dennis Meadows, one of the original authors of the book limits to growth, this is not correct. Instead, the global population will experience the most stress prior to the peak, as pressures mount high enough to neutralize the enormous political, demographic, and economic forces that now sustains growth. Pressures building up can take many forms, for example, rising energy and resource costs (A), growing debt (B), climate change (C) and growing population dependency ratio (D).

The history of commodity prices has generally been one of steadily decline for most of the last century. However, the average price fall of some 1.2% a year (inflation adjusted) met it’s low point in 2002. Since 2002 we have seen a remarkable price rise in most commodities (Figure 2). Rising energy and food prices, for example, seems to be the new normal. Unless there is a global economic contraction, prices will likely continue to rise.

2. Commodity indices (1900-2010) - Paradigm shift Source: GMO (2011)

B) Growing Debt

3. Public debt in % of GDP in 2013 (left) 4. Private debt in % of GDP in 2012 (right). Source: Eurostat

C) Climate Change

The world is aging at a rapid rate and by 2030 there will be 34 nations where more than 20% of the population is over 65 (figure 6). This has broad implications for economic growth and immigration trends. While Sweden's dependency rate will rise we still have a rise in population both from births and from immigration (SCB, 2014). Given today's immigration policy the potential to meet the growing needs of an aging population is better than other countries such as Japan or Austria.

Most common solutions to increased welfare costs depend on growth. For example through encouraging higher birth rates, raising immigration rates, increasing labor productivity, raising the retirement age and increasing taxation. Effective responses, however, are different. Especially if one is serious about creating a more resilient society. There will probably have to be a restructuring of the economy, a reorienting of capital and labor structure of society, from production toward maintenance, to serve an aging population and lower resource consumption. Priority has to shift from GDP per person toward maximizing human welfare directly i.e. using different metrics for national targets. Expenditures have to be reduced by developing non-market methods of social support (e.g. volunteer work, time-banking). The benefit of an aging population is that construction rates goes down, so does the need for police, prisons and military, while the need for health care increases. Shorter work time can give more jobs while allowing more leisure time. Shifting taxes from labor towards heavy industries and resource extraction is another interesting idea.

Several stresses are converging, creating difficulties for the welfare state. Especially in countries with demographic trends of having to care for a larger number of pensioneers. Dependency ratio will increase at the same time as GNP declines. Resource prices have reverted from their long-term downward trend, to increasing prices, but falling again in times of economic contraction.We have unsustainable levels of debt, especially unproductive debt (consumption and speculation), putting downward pressure on the economy. No government has yet tried to increase taxes a lot on the financial sphere or other efforts to get debt levels down, this is mainly because much of our growth today depends on ever increasing debt. Climate change will have many impacts e.g. increasing yields in the north and lower yields in the south of Europe. Scandinavia is in a better position than southern Europe to handle coming heatwaves and floods since temperatures are lower from the beginning. There is plenty of human capital and much work needed to be done (e.g. elderly care) but misalignment of incentives has led to massive unemployment and a generation of lost youths who can't get a job, even with a university degree. Potential solutions should involve changed goals, redirected investment and initiatives to engage the neglected work force. Sweden is in a better position than most other countries to achieve a more resilient society but radical thinking and a clear vision is needed if we wish to maintain our social welfare.

There seems to be a lot of confusion regarding the recent behavior of the world oil market. After five years of relatively stable oil prices, a barrel of WTI crude has dropped from around 110 to 81 dollar (see chart below). I have been following a discussion in the opinion-pages of Svenska Dagbladet clearly displaying this confusion. The discussion started with an article from Kjell Aleklett, a physics professor in global energy systems at Uppsala University, arguing that falling oil prices may signal the start of a global economic downturn. After which Magnus Grill, a political representative of the Peoples Liberal Party (Fp) and energy businessman, replied by arguing that Aleklett did not understand economic theory and that we instead more likely will see an economic upswing in the close future. So how come these two prominent people get to totally different conclusions? While this is a very complicated subject, fraught with international politics, there are some key points I would like to make from the natural resource dynamics and economics perspective.

First of, Grill makes a fundamental mistake when he writes that the concept of peak oil is about running out of oil resources. Peak oil simply refers to the peak in production of oil, as opposed to demand which is generally assumed to increase. The concept is mainly useful for understanding that there are geological conditions/limits to oil extraction which makes oil increasingly expensive and harder to extract, leading to higher capital expenditures (i.e. diminishing economic returns). Peak conventional oil is according to many system scientists not some fuzzy academic concern but a reality, for the US in 1970 and for the world since about 2005-2008 (e.g. Hall, 2010; Turner 2014). Even the conservative IEA has warned about peak oil. The issue is not really about how much oil there is in the world, since there are surely untapped reservoirs, but rather how much effort we can afford spending trying to get to those oil resources. The harder we have to work for getting more oil (e.g. tar sands, fracking, and deepwater drilling) the less net energy we produce for society. In the 1970s every one barrel of conventional oil in form of energy input yielded about 30 barrels of energy in output (i.e. 30:1). Today that relationship is somewhere around 18:1 (Hall, Lambert and Balogh, 2014). Since oil is still the largest source for global energy use (~33%) this has significant implications for the overall economy. 

Whether or not you buy in to the fact that non-renewable resources are finite and has a depletion function, or maximum yield curve, there are simple economic factors connected to oil which impacts growth. We also have to think about that oil is subject to supply and demand. So while Saudiarabia may have released some reserves, as they are the price setters, there are other more long-term trends influencing the market. Conventional oil production has been stagnating while the production of unconventional oil, especially shale oil in the US, has compensated for the decline and allowed for a small production increase. However, at the same time, many of the major economies are in recession and reducing their energy demand. For example, Italy has lost 25% of its oil consumption over the last five years (Bardi, 2014). And many other economies are in trouble, now even perhaps Germany. So if there is a increase in supply while demand is falling the market may eventually determine that oil prices should go down. Here, the role of financial operators perceptions play an important role. How low prices will go depends on several factors, but short-term the markets confidence in oil can influence large swings, such as the drastic drop witnessed in 2008-2009. And Saudi oil policy also matters. In the long term, however, oil prices are likely to rise. Secondly, Grill argues that lower oil prices is a good thing that could lead to economic upswing. That depends, if you are an importer or exporter. Sweden is dependent on oil imports, mainly for transportation. So for us it is perhaps beneficial but may also deter our society to shift from oil to other liquid fuels. But, lower oil prices hurts economies dependent on oil exports and non-conventional oil drillers dependent on a high oil price (around 75-90/barrel) to break even (Forbes). If oil prices stay low for any longer period industry will probably produce less oil. Thus, lower oil prices in a resource constrained world does not necessarily imply increases in global growth. 

This is in essence what peak oil means. Peaking does not mean running out of oil but rather that producing more oil becomes much harder/expensive than before. It is therefore possible that oil will cost less in the future, but that we won't have the money to pay for it. So the real question is, up to when are we able to afford further production? And the crucial point is that when a society's economy is based upon non-renewable energy resources there are limits to growth. It is just how nature works, the laws of thermodynamics, and there is no point in trying to argue with nature. There is however a point in arguing with Magnus Grill since he doesn't seem to understand the complex relationships between ecological and social factors influencing resource extraction and energy availability.

Source: Living Planet (2014)

Growth in what?

References and reading tips:
Beinhocker, E. and Hanauer, N. (2014). Redefining capitalism. McKinsey Courterly.
Dean, B (2014). Greens face problem with economic ‘growth’ framing. Open Economy.
Jackson, Tim (2009). Prosperity without growth? - the transition to a sustainable economy. Sustainable Development Commission UK, Report.
WWF (2014). Living Planet Report.

The main obstacle to a binding treaty is of course the division between richer and poorer nations on how to proceed, specifically which countries ought to bear most of the burden? This is fundamentally a international justice issue since most of the cumulative carbon emissions and massive resource use originates from the wealthiest people on the planet (Fig. 1).

Trying to get governments, especially the US, EU and China, to commit to substantial carbon emission reductions will be very difficult as such action definitely will have a direct impact on the their economies i.e. initially costly but beneficial in the long-term. Professor in physics Chris Williams says "a solution to the climate crisis requires a restructuring of the global economy, but when the last opportunity to do so came after the 2008-09 financial crisis, wold leaders saved the banks instead" (The Real News)

Aware of the tension between economic growth and carbon emission reductions many organisations have this time around adapted their material to match the language of economics, making cost-benefit analyses of adopting "green" technologies etc. One example is the new report called "The new climate economy" of which the Swedish minster of Environment, Lena Ek, was an initiator. The key message of the report is basically that we can have economic growth and save the environment too. My guess is that it's a political attempt to get more nations aboard signing a binding treaty. So the intent is good and probably smart but it depends on what kind of growth western nations are asking for - material or knowledge based? Another example is a recent Oxfam report stating that climate-related disasters (e.g. droughts, extreme temperatures, wildfires, storms, floods) have cost the world almost 500 billion dollars since 2010. To put numbers on losses in natural and social capital have thus become a new standard practice. And will perhaps lead to more action from politicians. In any case, it will be interesting to see what 2014-2015 will bring in terms of climate debate, demonstrations, treaty and much more. I'm hoping that talks will go beyond arguments about carbon markets and blame games. Civil society organizations and businesses attending the conference play an important role in reminding government officials that what is good for the planet, is also good for the people and for business.