Are We Seeing the Economic Inflection Point?
I missed the Summer Solstice because I was intensely focusing on my book writing last June. But as a rule I try to reflect on our situation every seasonal inflection point. This is because the seasonal changes remind me constantly of the nature of cycles and the stochastic nature of nature. Cycles repeat. But combined with the nature of a non-ergodic universe (non-stationary processes) within the pattern of repetition there is difference. Remember the idea that no one can step into the same river twice? That is the same with cycles in the real world. Each time around there is change and difference and novelty superposed over the familiar patterns. La Nina was supposed to fade according to prior cyclical history. But this time its different!
But the economic events of the last few days have jogged my attention to the nature of inflection points in logistic curves! And, thus, reminded me of my ritual. Here are my Autumnal Equinox thoughts.
In July I mused, Are You Witness to the Beginning of the End. The beginning of the end is an inflection point. Naturally, given the economic news of the past few days I can't help wondering if I'm prescient.
Of course I am not. For over four years now I have been saying that the economic conditions around the globe are going to get worse. They have. But I don't really see into the future. The other day a colleague approached me. In the not too distant past he thought I was a crackpot because when the ‘economists’ were seeing “green shoots”, and this included some of our esteemed professors at the University of Washington (one of whom chastised me in a public forum!), I kept claiming things would continue to get worse. I had been vociferous that the economy would still go further in decline. He has, he sheepishly admitted, finally acquiesced to my prior predications and asked me what I was using for a crystal ball. I told him I didn't have a crystal ball. I had physics and systems science. Physics deals with the nature of net energy flow through the economy. Systems science deals with how to consider the the physics in the context of economic activity. Aggregating the entire economy as a work engine that converts natural resources into desired human usable goods (and services) the prediction is simple. Reduce the energy input to the economy and the result is downturn in economic activity of all kinds and monetary price inflation. Systemic physics rules all of human economic endeavors!
Energy is in decline thanks to the twin phenomena of peak oil and declining energy return on energy invested (EROI), which has a direct impact on the prices of energy, especially barrels of oil. As stupidly simple as this sounds it is all you really need to know. The global trend in weighted average oil prices along with oil production numbers really tells much of the sordid story. Even if you don't know the actual net energy, say in BTUs, delivered to the economic engine (we don't keep records of that) you can infer from the price of oil what the effect on the economy will be. Every day that the weighted average price of oil is over, say, $85 there is more drag applied to the global economy. Drag on the economy translates into non-growth. And here is the kicker. The global capitalist economy based, as it is, on debt financing and consumer spending simply cannot handle this drag. It absolutely needs growth in spending to sustain it. Unfortunately, the weighted average global price of oil has been over $100 for many months (the West Texas Intermediate, WTI, crude price on the NYMEX is much less, but is also not really representative of global oil prices).
The reason the economy has been so sluggish is that energy has been costing so much that all supply chains have been suffering cost increases. Right now we are seeing those costs start to percolate up the supply chain line and affect all products and services. Food and gasoline prices continue to rise in spite of short-term reductions in oil prices (at least in the WTI crude market). The Fed's responses, essentially printing money that ISN'T backed by real wealth production simply contributes to the inflationary pressures. Prices will continue to rise, at least relative to most peoples' abilties to pay, and wages, already stagnant, will diminish further leading to many more people sinking into the ranks of the poor. It will get much worse. And, I am sorry to say, based on the systems physics, it will not be getting better. Please believe me when I say it gives me no joy to be the bearer of bad news. Do with it what you will.
We have passed the “beginning of the end” inflection point. Remarkable how close it is to the Autumnal Equinox, the halfway inflection point in the solar day. We are on our way to the Winter Solstice. One can't help but wonder what that will bring. Happy Equinox.
George, here are some facts you and your readers might find interesting, albeit depressingly so:
US private payrolls per capita are at the levels of the late 1980s to early 1990s and falling.
Full-time employment per capita is at the levels of the late 1970s to early 1980s . . . and falling.
Male employment per capita is at the levels of the early to mid-1960s . . . and falling.
Employment per capita for those age 16-24 is at the levels of the Great Depression to before WW II.
Industrial production per capita adjusted for CPI is down 70% since US peak crude oil production in 1970.
In the meantime, debt-money in terms of total credit owed has grown to $5.5 to $1 of private GDP (having reached $6 in 2007-08). China is at $7 of debt to $1 of GDP. IOW, to get 2% private GDP growth, an additional $1 trillion of credit is required. Insanity.
The historical self-similar debt-deflationary secular bear market pattern (1830s-40s, 1890s, 1930s-40s, and Japan in the 1990s-2000s) implies the S&P 500 falling back to the Mar. '09 lows to as low as the 400s (levels before the tech bubble) by 2013, with the 800s-900s being a possible target area this fall.
Were the S&P 500 to fall to the 400s, and unreal estate prices fall another 10-20%, total lost net wealth from stocks and unreal estate will reach more than $20 trillion; that's right, with a "t".
Another 15-20% loss of unreal estate value would put the typical US household at no net unreal estate equity vs. mortgages and outstanding consumer credit (auto loans, credit cards, etc.). That the bottom 90% of US households have the bulk of their net wealth in their primary residence (really the lender's asset, increasingly the US gov't today), this implies that the vast majority of Americans face having effectively no or negative net financial wealth in the years ahead.
And note that $22 trillion (133% of today's GDP) is the amount of total US credit market debt owed added since 2000-01 (!!!).
But it's worse than that. Were total credit owed to decline to allow wage and salary disbursements to catch up at the long-term rate of wage growth and since the credit bubble peaked in '08, it will take 19-20 years and a 50% decline in total credit (deflation), or a loss of over $25 trillion ($83,000 per capita or nearly twice the median household income).
But this does not include the potential loss of business equity, corporate junk bonds going bust, non-residential unreal estate, etc.; therefore, the debt deflation is quite likely to be larger than $25 trillion, implying a loss approaching 200% of GDP.
I'm not sure what your definition of collapse is, or that of your readers, but the scenario described above certainly fits with what I would perceive as a collapse.
And consider what happens if the Fed and US gov't attempt to bail out $25+ trillion in digital fiat debt-money losses by printing still more reserves and borrowing and spending at deficits approaching 100% of federal receipts.
While we might see the risk of imminent collapse of the US economy, the fact is that the US economy has been undergoing a slow-motion decline and hollowing out via deindustrialization, financialization, and militarization for 30-40 years. We monetized and borrowed a couple of generations' worth of income in the meantime, and now we risk quite literally a 50% decline of real GDP per capita back to the period preceding the US crude oil production peak; and for the bottom 50-80% of households, the decline will be worse.
Few Americans, Brits, Canadians, Aussies, Kiwis, and Europeans are prepared for what we face as the post-Oil Age epoch emerges and evolves, and our debts to Nature must be paid.
Posted by: Bruce | September 23, 2011 at 11:22 AM
Bruce,
Your next-to-last paragraph is something I have been arguing for several years now based on the correlation with the decline of EROI, primarily wrt: oil extraction and refining/distribution, and the peaking of oil production.
The rest just make me cringe even more than I had been!
But, of course, the president should be able to fix all this, right?
George
Posted by: George Mobus | September 23, 2011 at 02:19 PM
George, You say "Physics deals with the nature of net energy flow through the economy." as it certainly does, but contains a flaw. Physics represents causation as our predictions, for lack of a way to represent the instrumental processes that bring predictable events about.
I think that's where we differ. I study the instrumental causations that produce the great variety of cases where nature *fails to* produce expected results. The wealth of useful findings isn't evident till you look. That study is what exposes the individuality of responsive systems, that physics has failed to study but are crucial to our modern day survival, it really seems.
Posted by: Phil Henshaw | September 23, 2011 at 03:46 PM
George and Bruce both make valid points.
3 years ago I wrote a 550 page economic log of the US economy from 2002 to 2008. I discovered many things in the process, including that total system wide (on the books) debt had been increasing at a faster rate than GDP since the 1970s. I thought it was a big deal when we reached less than a buck of new gdp per dollar of marginal debt. Now I realize that the way our fractional reserve monetary systems operate it allows for debt increase as long as it pays the interest cost of the new debt (not payback of principle).
A decrease in the net delivered energy per capita does slow the real economy. However GDP also includes bads as well as goods so that in theory the GDP can grow (at least for a while) even as the goods side of the ledger shrinks and median wages shrink.
Eventually (absent recapitalization of banks off record by the Fed) credit issuing institutions will issue credit at a rate faster than the economy can pay back the interest and by then savings (deferred consumption) and equity will cease to exist for almost all.
Steve, could you rephrase or explain your 6th to the last paragraph? thanks
Posted by: Larryshultz | September 26, 2011 at 08:21 AM
Steve in the last paragraph should read Bruce, sorry
Posted by: Larryshultz | September 26, 2011 at 08:23 AM
http://www.hussmanfunds.com/wmc/wmc110926.htm
The Economic Cycle Research Institute is "forecasting" a recession (after one has begun, as is their tendency).
Note that historically the unemployment (U) rate (9.1%) and total unemployed to private payrolls (15-16% today) have risen 50-100%+ during recessions, implying that within 18-24+ months the U rate and total unemployed to private payrolls could reach 13-18%+ to 25-30%.
Moreover, the next 7-10 to 12-15 years will coincide with the peak rate of change of increase of Baby Boomers turning age 62-65 leaving the labor force en masse (voluntarily or otherwise) and drawing down on Social Security, Medicare, private and public pensions, and private retirement savings.
Peak Oil, falling net energy and oil exports, population overshoot, and the global Boomer demographic drag effects will combine to make it "different this time" but in ways we don't expect and won't like.
The "Disneyfication" of the US and increasingly the world of the peak-Oil Age epoch is over; but most of us don't know it yet. Now Peter Pan is old but cannot admit it, resulting in his having gained no wisdom in the process.
Posted by: Bruce | September 26, 2011 at 08:37 AM
The production of usable goods and services is necessarily predicated upon available energy to effect such production or service. When available energy (≅ net energy) declines, the production will decline pari passu. The promise (in the form of fiat currency) of future offsets to the decline will ultimately come due, at which time the piper can only be offered wheelbarrows heaping full of inflated cash.
Posted by: Robindatta.blogspot.com | September 26, 2011 at 05:54 PM
Hi, Larry. Thanks for the question.
I assume you are referring to the seemingly implausible statement that industrial production per capita and adjusted for reported consumer price inflation has declined by an order of exponential magnitude since US peak crude production, yes?
Well, that has occurred, and it is not so incredible when one realizes, to which you allude, that debt-money growth and associated growth of compounding interest income to lenders and the top 1-10% of households, along with importing oil and offshoring energy-intensive production, has allowed growth of "services" investment and spending ("education", "health care", a.k.a. "disease care", FIRE sector, marketing, adverstising, merchandizing, "Googlization" (passive ad pushing on Web surfers' eyeballs [when they don't use adblocking]), gov't, IT, porn, war, etc.), which occurred at an unprecedented multiplier to net energy per capita since the 1920s-30s to 1970, and thus crude oil consumption to GDP and per capita.
Moreover, microelectronics, IT, internetworking, telecommunications, wireless, etc., were self-reinforcing "leading-sector" technologies associated with the Schumpeterian S-curve techno-economic trajectory. IOW, IT and associated infrastructure build out coincided with, and enabled, the growth of debt-money and related sectors in a kind of once-in-history, perfect storm-like cumulative growth effects of cheap oil, technological innovation, peak Boomer demographics, cultural "devolution" (our descendents will be counting the costs of the Boomer legacy for decades, if not a lifetime or two), and "globalization", i.e., Anglo-American imperial (neo-colonial) trade regime.
The result is a costly, mind-numbingly complex, obscenely wasteful, woefully unsustainable global oil-based, digital empire requiring 3-5 planets' worth of natural resources at the long-term rate of growth of the western standard of material consumption per capita to sustain.
We simply can no longer afford to produce what we have come to believe is a normal, permanent standard of material consumption per capita in perpetuity.
And there is no Plan B for the sub-species Homo Colossus (at least not one the masses would allow the Power Elite to impose on them, i.e., Soylent Green or voluntary mass die-off).
Posted by: Bruce | September 26, 2011 at 06:11 PM
Paul Kingsnorth's collapse as the "crisis of Bigness": http://www.paulkingsnorth.net/journalism/this-collapse-is-a-crisis-of-bigness/
Walking away from green activism as just another faction of ecocidal mass-consumerism: http://www.theecologist.org/green_green_living/Q_and_A/1062124/q_a_paul_kingsnorth_green_activism_is_simply_a_faction_of_consumer_society.html
Kohr's "Breakdown of Nations": http://www.ditext.com/kohr/kohr.html
Kropotkin's "Mutual Aid: A Factor of Evolution": http://dwardmac.pitzer.edu/Anarchist_Archives/kropotkin/mutaidcontents.html
Posted by: Bruce | September 26, 2011 at 07:46 PM
There is a non-trivial probability that the next big stock market decline is imminent within hours to days, not unlike fall '08.
To those to whom it matters, good luck.
Posted by: Bruce | September 28, 2011 at 10:28 AM
Good post, George. A well worn path (for some of us), but useful to reiterate again and again.
I keep thinking about root causes, and one thing that I keep going back to is perspective. We, as a species, have lost perspective - or, rather, our perspective has tightened, narrowed, over time.
I end up getting to the same place that you discuss quite often - the need for systems thinking. We have narrowed our once broad view of the world and how everything we do has an impact on everything else. We no longer see the Tragedy of the Commons. We no longer plan further than the next election cycle, or the next business cycle, or the next quarterly profits report.
I'd argue that very few are ever rewarded for this kind of thinking. Are you rewarded in your job for thinking about or planning for something that will not happen for several years? Several decades? Several centuries?
And, so, all of us are caught in the Catch-22 of our own making. In order to continue to survive - RIGHT NOW - pay our bills, procure food, shelter, and warmth, we must ignore the future, however much we speak of these things with other like-minded individuals on the intertubes.
We may have more perspective - a broader vision of cause and effect - but the true Tragedy of the Commons is that there is almost nothing that can be done to change our individual predicaments. Knowledge may be power, but it is also a curse. Ignorance, as they say, is bliss.
This is the struggle I find myself in almost daily. The need to provide for myself and my family from a system that is completely at odds with any kind of thinking about the future. I'm contributing to our downfall as much as anyone, because I am part of the closed system called Earth.
I feel that I am in the petri dish with all the other yeast, and see what is coming for all of us. Yet, I cannot escape the petri dish. And, neither can you.
Sorry that this is a bit of a downer comment. I guess this is the cost of admission for awareness and perspective.
Posted by: Mark Twain | September 29, 2011 at 07:32 AM
Apologies to all for my slowness to respond. The last two weeks were devoted to the school year and quarter start up and I have been uncommonly busy with that while still trying to maintain a writing schedule.
These responses may be a bit short!
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Phil,
I'm just no good at figuring out what you might be referring to. Can you clarify?
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Larry,
Have you seen my model graphs? I believe what you are referring to is evident in that dynamic. The difference is that I modeled wealth as emergy (embodied energy) rather than futz around with GDP. Any and all payback of both principal and interest ultimately depends on growth of net energy available.
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Bruce,
(1) Well put.
(2) Wow. You've included things I haven't thought about directly in a categorization that makes a lot of sense. Thanks.
(3) As if I didn't have enough to read already! ;^)
(4) Would love to know the basis of your prediction. Are we in it as of last week?
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Robin,
We're on the same page.
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Mark,
Have 'we' lost perspective or is it the case that the environment in which we live (and did much to create) has changed so much that what an average person's perspective might have been is simply no longer fit?
The great irony for me is that we humans, because of an inadequate form of perspective (i.e. insufficient sapience) barged ahead and created this world of complexity and high power (energy and politics) without the perspective of good judgment. It is as you describe. But now we find that the evolution of the cultures has brought us, as animals embedded in the environment, to a point where we are simply not fit to survive. It is classic evolution - rapid change in environment and a species inability to adapt rapidly enough. There is selection here. And I have a strong hunch that variation in our genome has produced a few individuals who might yet prove fit (the point of my current series of posts on future living).
I hear your lament, as I'm sure others here do as well. No solutions for mankind, only adaptation by individuals.
George
Posted by: George Mobus | October 02, 2011 at 11:17 AM