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The Economy Is Cooked

The growth cycle has peaked
Friday, April 20, 2018, 8:04 PM

Hours ago, European Central Bank chief Mario Dragho conceded: "The growth cycle may have peaked"

Of course, those paying attention to the data already knew this. Our politicians and central planers have been peddling to us the fantasy that the global economy is strengthening, finally ready to fire on all cylinders after nearly ten years of dependence on monetary stimulus.

That just ain't so.

The Federal Reserve of Atlanta's GDPNow measure, which gives a forecast of Q1 2018's expected GDP, is currently coming in at 2.0%, down from the much more vigorous 5.4% growth predicted as recently as early February:

Generating this growth, meager as it is, has required a tremendous amount of new debt. So much more so that the US will soon have a worse debt-to-GDP ratio than perennial fiscal basket-case Italy:

U.S. Debt Load Seen Worse Than Italy's by 2023, IMF Predicts (Bloomberg)

In five years, the U.S. government is forecast to have a bleaker debt profile than Italy, the perennial poor man of the Group of Seven industrial nations.

The U.S. debt-to-GDP ratio is projected widen to 116.9 percent by 2023 while Italy’s is seen narrowing to 116.6 percent, according to the latest data from the International Monetary Fund. The U.S. will also place ahead of both Mozambique and Burundi in terms of the weight of its fiscal burden.

The numbers put renewed focus on the U.S. deteriorating budget after the enactment in December of $1.5 trillion in tax cuts, and the passage more recently of $300 billion in new spending. President Donald Trump’s administration argues that the tax overhaul combined with deregulation will help the economy accelerate, which in turn will generate enough extra revenue to avoid any fiscal fallout.

Officials with the Federal Reserve and Congressional Budget Office are skeptical about those expectations, as they forecast long-term economic growth will fall short of expansion rates needed to fund tax cuts. The central bank’s most recent forecasts show a median estimate of 2.7 percent for this year’s expansion slowing to 2 percent in 2020, while the CBO sees GDP growth slowing from 3.3 percent this year to 1.8 percent in 2020.

Looking back across the past 50 years, we can clearly see that the 2008 Great Financial Crisis was a turning point. That was the moment where our addiction to exponentially increasing our debts began to have real consequences.

The chart below clearly shows that, since then, we've been in an era of diminishing returns in exchanging debt for growth:

What can ride to the rescue at this point? Not much.

Our 'recovery' since 2008 is now one of the longest on record; another recession will occur sooner or later (Fannie Mae head economist Doug Duncan thinks one will likely arrive by next year).

Rising interest rates will only accelerate the advance of a recession. And interest rates are indeed on the rise, with 10-year Treasury yields having nearly doubled since July 2016:

10-YEAR TREASURY YIELD (%)

And with the arrival of recession, what will our leadership do? The only thing it knows how: print, borrow and deficit spend in attempt to boost 'growth'. Except the debt will be even more expensive this time, and it's ability to generate incremental growth per unit of new debt even weaker.

The Bigger Predicament

But sadly, as prodigious as it will be, our growing pile of debt isn't going to be the primary limiter of growth in the coming decades.

Instead, it will be Energy.

Oil prices are on the rise again, as the world is waking up to the fact that annual demand will exceed supply for decades to come and that the US shale 'miracle' will be a short-lived mirage. All while new oil field discoveries are the worst since World War 2.

With increasingly expensive energy -- and increasing global competition for it -- the economy will find itself increasingly constrained. We will be faced with a future of doing less.

This is not fear-mongering; it's science. Specifically, our destiny is in the hands of the Laws of Thermodynamics. Without a surfeit of new, plentiful, BTU-dense and affordable energy sources (which we simply don't see on the horizon), economic growth cannot be sustained.

One of the best explanations I've read on this is the report my fellow Peak Prosperity co-founder, Chris Martenson, wrote upon finishing the book version of The Crash Course. It remains to this day one of his most seminal warnings of the global predicament we a species face on this finite planet.

In Part 2: Energy Is The Non-Negotiable Element Defining Our Future, we re-publish this report in full, which is even more relevant and important to heed today then when Chris wrote it eight years ago -- as our economy specifically, and humanity in general, are totally unprepared for a future of even slightly less energy.

Everything is tuned to grow exponentially. There is no "plan B".

We have no models yet for how to manage in a world of de-growth, so we will blindly slam into this crisis head-on. But as painful as they will be, the economic woes at that time will be the least of our worries.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

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27 Comments

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
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Posts: 472
In all the discussion in

In all the discussion in Canada and BC on this Kinder Morgan pipeline to get Alberta oil sand crude out to the Pacific, not one person has even raised the question of how much oil there is left and how long this reserve would feed the world for. Nothing; it is all superficial talk about oil spills and GHG emissions etc. Which are all valid issues of course, but they aren't the main pressing issue right now that could cause TEOTWAWKI. Another failure for the MSM.

cowtown2011's picture
cowtown2011
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Posts: 46
Debt Levels

Is there any reason to believe the US cannot leverage up to the same levels as Japan. They seem to be prime example of how a country who can print it's own currency can leverage up all it wants. There seems to be no consequences for this behaviour. A podcaster I respect, named J. David Stein, Money for the Rest of US, believes that the US can continue to run massive deficits as long as it doesn't destroy the private sector. It's an interesting argument. I think you could point to Venezuela as an example of a country who can print it's own currency yet failed. Did they destroy their private sector? Maybe? Would love to hear your views on this Chris and even hear an interview between you both. It's never a good thing to debate things with people who always agree with you. That applies to all areas, including health. I've tried to get Peak to interview Dr. Michael Greger but no luck. Thanks.

richcabot's picture
richcabot
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Posts: 170
It depends on faith

Money printing depends on people believing that the money has value.  At the moment most people really don't understand how money works.  They think it will be worth something in the future so they accept it.  Certainly the US is the best horse in the glue factory right now but it probably won't stay that way.  Our military's main function is to keep dissent in line and maintain the strength of the dollar.  We want to destroy Russia because they have a fundamentally healthy economic system that poses an alternative to us.  They have almost no debt, lots of natural resources, very intelligent people and a strong enough military to defend it all.  Unlike China, their population is a reasonable size for their resources.  

pat the rat's picture
pat the rat
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Posts: 110
bigger stores

Bigger stores are becoming corporation foods only ,no more store brands do you think this is going to cost food to go down wrong!

LesPhelps's picture
LesPhelps
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Posts: 765
The Economy is Cooked and the Books are Fabricated

Regarding the “Debt to GDP” chart, I wonder if all the other countries on the chart fudge their reported analytics, as does the US?

A real comparison might be even more enlightening.

davefairtex's picture
davefairtex
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Posts: 5326
alberta oil sands

Mark_BC-

So the wiki entry about the oil sands suggests there are 170 years of reserves up there in Athabasca.

https://en.wikipedia.org/wiki/Athabasca_oil_sands

Is the wiki entry wrong?

Certainly, the side effects of production - lots of cancer causing chemicals leak into the environment - seem pretty terrible if you live near by, but the reserves seem as though they'll last for a very, very long time.

Snydeman's picture
Snydeman
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Posts: 498
Anyone know?

Does anyone know the real EROEI of the Alberta field? Tar sand oil is, what, like 4:1?

cmartenson's picture
cmartenson
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EROEI of Alberta tar sands
Snydeman wrote:

Does anyone know the real EROEI of the Alberta field? Tar sand oil is, what, like 4:1?

I sure don't.  

I'm positive that the process of strip mining, trucking, and then using NG to boil the residue off of the sand is an unviable strategy.  It all depends on having lots and lots of 'captive' NG that doesn't have a better use to drive this process.

But I've read more encouraging reports about the SAGD method where steam is injected underground and then the bitumen is collected by pipes after it melts and flows to collection zones.  But not every deposit is amenable to that process as it requires a certain depth of tar sand, and appropriate geology to contain/assist with the collection process.  

But all I have to go on so far are company reports and those are always glowing and making claims that I'd feel better about if verified independently.

So, nope, I don't know except to say that regardless of the method, the EROEI yields on bitumen laden sand is far less than conventional oil, and almost certainly less than shale oil.  So bottom of the barrel kind of stuff.  

DennisC's picture
DennisC
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Posts: 300
Sustainabilty Report

This may be of interest, 2015 version appears to be the latest, check out page 27, Performance Data chart.

http://www.syncrude.ca/assets/pdf/sustainability-reports/SCL-2015-Sustai...

also: http://www.syncrude.ca/environment/sustainability-reports/ for other reports.

 

 

cmartenson's picture
cmartenson
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Good find!
DennisC wrote:

This may be of interest, 2015 version appears to be the latest, check out page 27, Performance Data chart.

http://www.syncrude.ca/assets/pdf/sustainability-reports/SCL-2015-Sustai...

also: http://www.syncrude.ca/environment/sustainability-reports/ for other reports.

So according to their report the EROEI for the tar sands strip mining process is ~ 4:1

I'm going to bet that this is just for the process itself.  I don't know that for sure, but it's probable that Syncrude has not factored in the wider externalities of their efforts including (but not limited to):

  • The energy required to make the heavy equipment involved (excavators, dump trucks, etc)
  • The embedded energy in the operating plant
  • The energy used to feed, transport and train their workers
  • The energy costs of reclaiming the land
  • The embedded energy costs of the capital that generates electricity and NG used in their processes 

All told, this process is probably a lot less than 4:1.  Maybe even 3:1

You can't run a modern society on that.  All you can do is pretend you can for a little longer.

dkengelen's picture
dkengelen
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Posts: 1
GDP Minus Debt

The comment of using John Williams data is absolutely correct. And, if you superimpose the M2 velocity graph it becomes more apparent that our economy is now a place where money certainly goes to die.

Mark_BC's picture
Mark_BC
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Posts: 472
davefairtex
davefairtex wrote:

Mark_BC-

So the wiki entry about the oil sands suggests there are 170 years of reserves up there in Athabasca.

https://en.wikipedia.org/wiki/Athabasca_oil_sands

Is the wiki entry wrong?

Certainly, the side effects of production - lots of cancer causing chemicals leak into the environment - seem pretty terrible if you live near by, but the reserves seem as though they'll last for a very, very long time.

That seems about right. 180 billion barrels recoverable is 6 years of global oil consumption. I've seen estimates that twice as much as that is ultimately recoverable given price increases and technological development (and by externalizing environmental and social costs, wink wink). 

I looked into eroei and I found similar numbers to the above comments. Interesting that it is not increasing over the years. 

 

 

Snydeman's picture
Snydeman
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cmartenson wrote: You can't
cmartenson wrote:

You can't run a modern society on that.  All you can do is pretend you can for a little longer.

Hopium​, Stupidium ​and Ignorium. Now those are resources we are not in danger of running out of.

 

Thanks for the breakdown on the EROEI equation. My gut told me that if there was that much oil sitting up there, and we knew about it this long, there had to be a reason we didn't tap it sooner. Turns out it's the bad stuff. I swear, the more I use the analogy of monkeys climbing trees to get fruit as a way to explain peak oil, the more it makes perfect sense. We're only willing to expend energy to get this energy because there is no more fruit on the lower or middle branches.

 

-S

Waterdog14's picture
Waterdog14
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Snydeman's Monkeys?
Snydeman wrote:

...the more I use the analogy of monkeys climbing trees to get fruit as a way to explain peak oil, the more it makes perfect sense. We're only willing to expend energy to get this energy because there is no more fruit on the lower or middle branches.

If you accept Gail Tverberg's view that Peak Oil will be manifest as falling demand, resulting in lower prices rather than higher prices because the world cannot afford high energy costs, then an analogy of monkeys climbing trees for fruit (energy) can be construed as follows:

Monkeys climb trees to gather and eat all the fruit on the lower branches.  Once the low-hanging fruit is gone, the monkeys have to climb higher (and expend more energy) to get the fruit energy.  But it's a lot of work to climb that high, and takes a lot of energy to climb to the upper branches. Monkeys get tired of making the effort, so they stop climbing as often.  Since they are not climbing, they actually need less energy for a while.  Demand for fruit energy decreases, and there appears to be enough fruit to meet demand.  Until they starve.

Clearly this analogy leaves debt out of the equation.   

Snydeman's picture
Snydeman
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Posts: 498
Waterdog14 wrote: If you
Waterdog14 wrote:

If you accept Gail Tverberg's view that Peak Oil will be manifest as falling demand, resulting in lower prices rather than higher prices because the world cannot afford high energy costs, then an analogy of monkeys climbing trees for fruit (energy) can be construed as follows:

Monkeys climb trees to gather and eat all the fruit on the lower branches.  Once the low-hanging fruit is gone, the monkeys have to climb higher (and expend more energy) to get the fruit energy.  But it's a lot of work to climb that high, and takes a lot of energy to climb to the upper branches. Monkeys get tired of making the effort, so they stop climbing as often.  Since they are not climbing, they actually need less energy for a while.  Demand for fruit energy decreases, and there appears to be enough fruit to meet demand.  Until they starve.

Clearly this analogy leaves debt out of the equation.   

I'll admit I'm still figuring out where I stand on Gail Tverberg's view about Peak Oil, so you may be right in your analogy (which is a good one, if Gail's premise is added to it). Either way, it's not good for the monkeys.

davefairtex's picture
davefairtex
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Posts: 5326
marginal barrels

So something we shouldn't forget is the effect of the marginal barrel on price in the oil market.

If most of the production is relatively cheap, and the marginal barrel is relatively costly to produce, the market will (roughly) price the marginal barrel at or near the cost of production.  While society can't be run on tar sands, it can be run on mostly conventional production supplemented by tar sands.

Without the tar sands, we'd lose 3 mbpd, and price immediately jumps to $150/bbl.  So that 3 mbpd is really critical to keeping price in control - more critical than it would otherwise seem.

Put numerically, losing 3% of global production would result in a 120% increase in price.

 

Snydeman's picture
Snydeman
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Posts: 498
davefairtex wrote: So
davefairtex wrote:

So something we shouldn't forget is the effect of the marginal barrel on price in the oil market.

If most of the production is relatively cheap, and the marginal barrel is relatively costly to produce, the market will (roughly) price the marginal barrel at or near the cost of production.  While society can't be run on tar sands, it can be run on mostly conventional production supplemented by tar sands.

Without the tar sands, we'd lose 3 mbpd, and price immediately jumps to $150/bbl.  So that 3 mbpd is really critical to keeping price in control - more critical than it would otherwise seem.

Put numerically, losing 3% of global production would result in a 120% increase in price.

 

Wouldn't that mean we'll have to extract increasing amounts of tar and other low-EROEI projects, given that the production of cheaper oil is already in decline? At what point does that cost of production get tipped by a decreasing proportion of high-EROEI to low-EROEI oil sources? Meaning, sooner or later there's too much high-cost oil in the market relative to low-cost oil, right?

 

I don't know, by the way. I'm asking!

Mark_BC's picture
Mark_BC
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Posts: 472
Right but $150 oil will kill

Right but $150 oil will kill demand so it would find some equilibrium probably aroun $100. End result - production goes down but price goes up. Exactly as peak oilers have been predicting for decades but were ignored by the mainstream. 

Wantingtoretire's picture
Wantingtoretire
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Posts: 9
At the moment most people really don't understand how money work

I agree fully with this statement. Unfortunately, this covers most of the worlds' population.

Snydeman's picture
Snydeman
Status: Gold Member (Online)
Joined: Feb 6 2013
Posts: 498
10 years just popped 3%

DaveF,

So, the 3% just got breached. We'll see if that's a flash in the pan and drops back into the 2s, or continues its upward move.

You're the detail guy with a penchant for watching trends and market movements, so if you are willing could you highlight any reactionary moves/trends you see today as a result? 

 

-S

Snydeman's picture
Snydeman
Status: Gold Member (Online)
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Posts: 498
Boink

And there goes both the price of oil and U.S. equity markets.

 

Could be blood on the floor when this day ends!

dcm's picture
dcm
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Posts: 212
analogies

and a barrel of monkeys would be my analogy to those making energy policy

 

Snydeman's picture
Snydeman
Status: Gold Member (Online)
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Posts: 498
dcm wrote: and a barrel of
dcm wrote:

and a barrel of monkeys would be my analogy to those making energy policy

 

I dunno. That may be a tremendous insult to the monkeys.

 

;)

thc0655's picture
thc0655
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Posts: 1580
Wait! What?

There's someone making energy policy?  This isn't unmanaged chaos?

KugsCheese's picture
KugsCheese
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Posts: 1447
Ford Canceling NA Sedans

Subject tells you all you need to know.  Dumb is Dumb is Dumb.

KugsCheese's picture
KugsCheese
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Posts: 1447
cowtown2011 wrote: Is there
cowtown2011 wrote:

Is there any reason to believe the US cannot leverage up to the same levels as Japan. They seem to be prime example of how a country who can print it's own currency can leverage up all it wants. There seems to be no consequences for this behaviour. A podcaster I respect, named J. David Stein, Money for the Rest of US, believes that the US can continue to run massive deficits as long as it doesn't destroy the private sector. It's an interesting argument. I think you could point to Venezuela as an example of a country who can print it's own currency yet failed. Did they destroy their private sector? Maybe? Would love to hear your views on this Chris and even hear an interview between you both. It's never a good thing to debate things with people who always agree with you. That applies to all areas, including health. I've tried to get Peak to interview Dr. Michael Greger but no luck. Thanks.

 

Japan is tied to the $.   Japan got a pass when QE arrived.

pgp's picture
pgp
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Joined: Mar 2 2014
Posts: 201
Agreed. But....

You can reduce the demand for energy by reducing the population.  Energy demand is a function of population size.  In other words while the heart of the problem is clearly in the energy supply chain as applied to an infinite growth economic model the cause is "too many people". 

Overpopulation is not a consequence of economic policy it is a cultural problem, rooted in our instinct for greed, that economic policy simply exploits.

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