Author: Rob Mielcarski

By Adam Taggart: Flight to Safety

Sobering data on our bubbles…

http://www.peakprosperity.com/blog/98985/fortunes-will-made-lost-when-capital-flees-safety

Little did I realize when creating the short video below how prescient it would quickly become in the wake of last night’s Brexit vote…

Its message is simple: there’s a preponderance of data that shows the world’s major asset markets are dangerously overvalued. And when these asset bubbles start to burst, the ‘safe haven’ markets that investment capital will try to flee to are ridiculously small. Investors who do not start moving their capital in advance of crisis will be forced to pay much higher prices for safety — or may find they can’t get into these haven assets at any price.

 

On the Wealth of Citizens: An EU Perspective

Those Who Study History

 

The UK voted to leave the EU yesterday.

What’s really going on?

In an industrialized world with abundant resources citizens typically prosper in economies of all sizes.

As populations rise faster than finite resources, the growth rate of per-capita resources slows and eventually must decline. Over time it becomes more difficult to increase the wealth of citizens. In a resource constrained world there are two methods available to grow the wealth of citizens: efficiency and debt.

The first method available to grow the wealth of citizens is to increase the efficiency of producing and using resources. We have done an excellent job of improving efficiency:

  • We optimized the type of energy we use for each application such as using coal and hydro instead of oil to generate electricity, and using oil instead of coal or horses for transportation.
  • We learned how to squeeze oil from sand and rock, how to drill for oil in mile deep oceans, and how to mine coal from the surface with giant machines.
  • We optimized our machines such as switching to lighter fuel-efficient cars, using heat pumps, and abandoning supersonic air travel.
  • We learned how to convert oil and natural gas into cheap and durable materials like plastic.
  • We used electronics and computers to more efficiently control just about everything.
  • We optimized communication with the internet and cell phones.
  • We reduced waste such as insulating our homes.
  • We recycled energy intensive materials such as aluminum cans.
  • We optimized the productivity of our arable land with Haber-Bosch factories that convert natural gas into nitrogen fertilizer, by replacing horses and rain with diesel powered tractors and pumped irrigation, and by growing mono-crops.
  • We optimized the cost of calories by manufacturing high-fructose corn syrup and vegetable oils, and by operating concentrated animal feeding operations.
  • We optimized the harvest of our oceans with powerful ships that net and scrape everything.
  • We optimized the efficiency of global trade with agreements between many countries.
  • We optimized manufacturing by moving it to locations with the lowest labor and energy costs, and the fewest pollution regulations.
  • We optimized shipping with standard containers and ships and trucks to carry them.
  • We optimized distribution to consumers with Walmart and Amazon.

The laws of thermodynamics and the cost of technology and transport mandate a limit to efficiency gains. We are approaching the limits to efficiency improvement.

The second method available to grow the wealth of citizens is to borrow resources from the future. This amazing trick is done with debt. Cash and credit behave the same when spent. Credit however commits us to produce wealth in the future to repay it. This future wealth represents yet to be produced resources. Hence debt’s magic of letting us spend future resources now.

We started using debt in the 80’s to support the wealth of citizens and total debt has grown exponentially since. There are limits to how much debt can be carried by a citizen or government. Money available for living equals income minus interest payments plus any change in debt plus any change in savings.

The combination of stagnating or falling income due to declining per-capita resources and/or rising interest payments eventually imposes a limit on the total debt an individual or government can carry. There are three methods for extending this limit on debt.

The first method for extending debt is to increase the size of economic organizations. Size matters to debt. The larger an economy is the more internal and external resources it can control, the more taxes it can collect, the larger military it can afford, the more confidence and fear it can inspire, and as a consequence, the more credit it can generate. A good example is the USA and the privileges it enjoys from having the world’s reserve currency.

As the wealth of citizens became increasingly dependent on debt there was pressure to increase the size of economic organizations. This in large part explains the formation of the EU. The majority of European countries were keen to join the EU because it promised them access to more debt. Imagine, for example, how much debt and purchasing power an independent Italy with its own currency could have compared to today as a member of the EU.

The second method for extending debt is to reduce the interest rate. We have steadily reduced the interest rate since the early 90’s. We reached the limit of 0% shortly after the 2008 crisis and the interest rate has remained at 0% for an unprecedented 90 months. Some countries are experimenting with negative interest rates however it seems unlikely that this technique will work without dramatic and improbable changes to the rules of money and banking.

The third and final method for extending debt is to print and give money to citizens and/or governments. Most countries have not yet used this method because it reduces confidence in a currency and risks hyperinflation that destroys wealth and can cause war as happened with Germany after WWI. There will be a strong temptation to try this method in the future because it can work well for a period of time. For example, it took 10 years for hyperinflation to take hold after money printing started in Zimbabwe. A politician forced to choose between riots now and hyperinflation 10 years later might well choose to print money.

As an aside, I leave the reader with a question to ponder about the dark side of debt. What will happen if the depletion of finite resources and climate change prevents us from producing the future resources our debts commit us to? The answer to this question explains why I frequently call for reduced public debt.

In summary, a resource constrained world has two methods for supporting the wealth of citizens, efficiency and debt, and as explained above, we are already at fundamental limits for both efficiency and debt.

What must happen next, and what is already starting to happen, is that the wealth of citizens will decrease. This will create social unrest, and given our genetic denial and the difficulty of understanding our complex world, citizens will seek someone to blame.

Yesterday UK citizens blamed the EU. Because most UK citizens do not understand the underlying forces that are causing their hardship they probably have made things worse for themselves, at least in the short-term. Longer term, when there is insufficient affordable oil to support long distance trade, all communities will have to re-localize to survive.

Other independence movements within Europe are building momentum for similar reasons. A primary message of Donald Trump is that “others” are to blame for the hardship of US citizens.

A recurring theme on this blog is that some form of civilization collapse is inevitable and not too many years away. If the majority of citizens do not understand and/or deny what is going on the collapse will be much worse than it needs to be.

We still have sufficient resources to prepare a softer landing zone.

The first step is an adult conversation about what’s really going on.

By USFS: Forest Service survey finds record 66 million dead trees in southern Sierra Nevada

http://www.desdemonadespair.net/2016/06/video-forest-service-survey-finds.html

VALLEJO, California, 22 June 2016 (USFS) – The U.S. Forest Service today announced that it has identified an additional 26 million trees dead in California since October 2015. These trees are located in six counties across 760,000 acres in the southern Sierra Nevada region of the state, and are in addition to the 40 million trees that died statewide from 2010 to October 2015, bringing the total to at least 66 million dead trees. Four consecutive years of severe drought in California, a dramatic rise in bark beetle infestation and warmer temperatures are leading to historic levels of tree die-off.

“Tree dies-offs of this magnitude are unprecedented and increase the risk of catastrophic wildfires that puts property and lives at risk,” said Agriculture Secretary Tom Vilsack. “While the fire risk is currently the most extreme in California because of the tree mortality, forests across the country are at risk of wildfire and urgently need restoration requiring a massive effort to remove this tinder and improve their health.

Between 2010 and late 2015, Forest Service aerial detection surveys found that 40 million trees died across California – with nearly three quarters of that total succumbing to drought and insect mortality from September 2014 to October 2015 alone. The survey identified approximately 26 million additional dead trees since the last inventory in October, 2015.

Forest Service scientists expect to see continued elevated levels of tree mortality during 2016 in dense forest stands, stands impacted by root diseases or other stress agents and in areas with higher levels of bark beetle activity. Additional surveys across the state will be conducted throughout the summer and fall.

With the increasing size and costs of suppressing wildfires due to climate change and other factors, the very efforts that would protect watersheds and restore forests to make them more resilient to fire in the future are being squeezed out of the budget. Last year fire management alone consumed 56 percent of the Forest Service’s budget.

By Gail Tverberg: China: Is peak coal part of its problem?

Gail widens her lens in this essay to consider coal.

https://ourfiniteworld.com/2016/06/20/china-is-peak-coal-part-of-its-problem/

As a bonus Gail provides a nice historical summary of energy prices and debt…

In “normal” times, a small increase in demand will increase production of fossil fuels by several percentage points–generally enough to handle the rising demand. Prices can then fall back again and there is no long-term rise in prices. This situation occurred for quite a long time prior to about 1970.

After about 1970, we found that it became more difficult to raise production levels of energy products, without permanently raising prices. US oil production began to decline in 1970. This started an energy crisis that has been simmering beneath the surface for 45 years. Various workarounds for our energy shortage problem were tried, such as adding nuclear, drilling for oil in new areas such as the North Sea, and building more energy efficient cars. Another approach used was reducing interest rates, to make high-priced homes, cars and factories more affordable.

By the late 1990s, even these workarounds were no longer providing the benefit needed. Another idea was tried: encourage more international trade. This would allow the world access to untapped energy sources, including coal, in the less developed parts of the world, such as China and India.

This, too, worked for a while, but resource depletion tended to continue to raise the cost of energy extraction. Also, the competition with low-cost labor in India, China, and other countries tended to hold down the wages of the less-educated workers in the developed countries. Higher prices at the same time that wages for some of the workers were depressed is, of course, a bad mismatch.

One way of “fixing” the problem was with cheaper debt, and more debt, so that consumers could buy homes and cars with lower incomes.  This fix of more debt stopped working in 2008, as repayment on “subprime” debt faltered, and all fossil fuel prices collapsed.

To “re-inflate” the world economy, world leaders began to try to add even more debt. They did this by fixing interest rates even lower, starting in late 2008, using a program called Quantitative Easing (QE). This program was successful in raising commodity prices again, although its effect seemed to diminish with time. China’s huge growth in debt during this period helped as well.

Energy prices turned downward again in mid-2014, when the United States discontinued its QE program, and China (under new leadership) decided not to continue increasing debt as quickly as before. The result was a second sharp drop in commodity prices, without a corresponding drop in the cost of producing these fossil fuels. This shift was devastating from the point of view of energy supply producers.

Gail concludes by making the case that Seneca will trump Hubbert and provides some insight into why most analysts are in denial.

Future coal production is clearly a function of both the amount of resources available and future prices. If there are no resources available, it is pretty clear that no resources can be extracted.

What most researchers have not understood is that future prices are important as well. We can’t expect that prices will rise indefinitely, because low-paid workers, especially, find themselves in a squeeze. They find homes and cars increasingly unaffordable, unless the government can somehow manipulate interest rates down to never heard of levels. Because of this lack of understanding of the role of prices, most of today’s models don’t consider the possibility that price levels may cut back production, at what seems to be an early date relative to the amount of resources in the ground.

Part of the confusion comes from the view economists have regarding prices, innovation, and substitution. Economists seem to be firmly convinced that prices will always rise to fix the problem of future shortages, but their models do not seem to take into account the major role that energy plays in the economy, and the lack of available substitutes. Certainly, the history of energy prices does not support this claim.

If I am correct in saying that prices cannot rise indefinitely, then all three of the fossil fuels are likely to peak, more or less simultaneously, when prices can no longer stay high enough to enable extraction. The downslope after the peak will be based on financial outcomes, such as the bankruptcies of coal operators, not on the exhaustion of reserves or resources in the ground. This dynamic can be expected to produce a much sharper downturn than modeled by the Hubbert Curve.

If analysts consider the possibility that prices will never again rise very high for very long, they realize such a low-price scenario would be a catastrophe. That is why we hear very little about this possibility.

Conclusion

It appears likely that China’s coal production has “peaked” and has begun to decline. This is especially likely if energy prices stay low, or never rise very high for very long.

If I am correct about energy prices not rising high enough in the future, all fossil fuels may reach peak production more or less simultaneously in the not too distant future. Widespread debt defaults seem likely if this happens.

If we are, in fact, reaching peak coal, even before peak oil, this is disconcerting for those who believe that the Hubbert Model is the only way of viewing the world. Maybe we are expecting too much from the model; maybe we need a model that considers prices, and how prices depend on wages and rising debt. Falling energy prices are especially bad for the system; they seem to lead to debt defaults.

Denial is Layered: What is Your Blind Spot?

Denial seems to come in layers.

It is common to break through one layer of denial to see a portion of reality but to then have another layer of denial block an even more important aspect of reality.

For example:

  • Many environmental activists fly to long distance conferences where they condemn fossil energy companies, promote green growth, and ignore population reduction.
  • Most bankers understand all aspects of wealth except what creates it.
  • Most climate scientists believe we can switch to renewable energy without harming the economy despite abundant physics to the contrary.
  • All climate models that predict a livable planet assume carbon capture despite zero evidence that we can scale or afford this technology.
  • Many vegans want to avoid killing despite the fact that all life depends on the death of other life.
  • Many vegetarians think grains are sustainable.
  • Many people try to be green by recycling and buying a hybrid car.
  • Enlightened governments try to address climate change by spending money on the problem without realizing CO2 emitted is proportional to money spent.
  • Many citizens in collapsing societies have large families and assume corrupt politicians are the cause of their problems.
  • The new enlightened Pope has not yet buried any of the Vatican’s wealth.
  • Many atheists are spiritual.
  • Most religions think other religions are wacky.

Denial of denial is a strong force as demonstrated by the very small number of people interested in Varki’s denial theory, and by the strong emotional response discussing it evokes.

Since I claim to understand what is actually going on an obvious question to ask myself is what am I in denial about?

A friend thinks I am in denial about what motivates me. I think I am seeking truth. She thinks I am seeking status. I hope she is not right.

My best guess is that I may be in denial on two points.

First, I may be wrong to believe that we have any ability to influence the outcome.

Life is governed by the laws of physics and evolution. We seem to be doing what the universe and our genes “want” which is to replicate and degrade the energy gradient as quickly as possible.

I like to think we have free will but we may be just along for the ride.

Second, my chance of surviving the upcoming bottleneck might be improved if I was in a state of denial and accumulating wealth as quickly as possible despite the negative effect of this on the planet.

It makes me happier and more functional to think we can influence the outcome and that I am helping.

My feelings are illustrative of why denial evolved in the first place.

Denial increases our reproductive fitness by enabling an optimistic high intelligence that can out-compete other life for finite resources, while ignoring unpleasant things it is capable of understanding that might otherwise cause depression and reduced reproductive fitness.

Perhaps I am in denial about other things. Or perhaps because I can speculate on my own denial I am in fact not in denial at all and am a rare mutant without the denial gene. Many events in my life suggest there may be some truth to this speculation.

Readers are encouraged to speculate and to comment on their own experiences.

book review: On The Origin of Species by Charles Darwin

Charles Darwin wrote this most famous book in 1859 so I had modest expectations given how much we have since learned about evolution and genetics.

I was pleasantly surprised to find that the book has stood the test of time very well.

Darwin had an excellent mind and writing skills. Highly recommended.

After completing this book I recommend you read Varki’s book where he builds on Darwin’s theory to explain the singular emergence of an intelligent species with an extended theory of mind, and some of our constructive and destructive behaviors.

book review: Our Renewable Future by Richard Heinberg and David Fridley

A new book titled Our Renewable Future by Richard Heinberg and David Fridley is available to read online for free here.

The book is an excellent primer on energy and does a nice job of summarizing the challenges we face as fossil energy depletes.

Heinberg’s style is to present an intelligent fact-based view of the challenges while simultaneously offering positive things we could choose to do to make the future less bad. He avoids predicting pain or collapse although having followed him for years I think this is likely a politically correct veneer. He also tends to ignore the effect of de-growth on our debt-based economy and the resulting small amount of wealth we will have available for investment.

I like the fact that the book uses a wide lens and discusses things often ignored like high temperature industrial processes that cannot run on renewable energy (concrete, metal, and silicon chip production, for example) and discusses the use of fossil energy as feedstocks (fertilizer needed to feed 7 billion, for example). I also like that it discusses honestly the need to reduce our population.

If you’d like a calm intelligent summary of our predicament with lots of space to draw your own conclusions this book a great place to start.

As an aside, I remember David Fridley from an excellent talk he gave in 2007 on the Myths of Biofuels. It’s still relevant and worth watching here.

David J.C. MacKay: Thank You and Goodbye

I was very sad to learn that David J.C. MacKay passed away on April 14, 2016.

When I first learned of peak oil 8 years ago I went deep into renewable energy technologies looking for a solution. One of the people that influenced me the most was David J.C. MacKay with his book “Sustainable Energy – without the hot air”. David was a breath of fresh air with his unbiased scientific analysis of data rather than the fact-free blather that is commonly used to support some favored position.

His book is available to download for free here.

David convinced me that it is impossible to maintain our current lifestyles with renewable energy. We must dramatically reduce our total consumption and we would be wise to do it proactively before nature forces us.

Here are a couple excellent talks by David….

Here is the last interview with David a few days before he died. I find it interesting that on his death bed the thing that fascinated him most was our denial of reality. It’s sad he did not read Varki before he died.

And lastly a nice obituary by Mark Lynas.

Thank you David. You had a great mind and worked hard to make the future better.

Brexit Breeze?

I have a hunch that on June 23 the UK will vote to exit the EU and that this might generate enough of a breeze to destabilize our very shaky house of cards.

Citizens usually vote for whatever choice they think will give them the most stuff.

Since the UK has more seed corn to eat than the poorer nations of Europe it might decide to go it alone.

I suspect that UK citizens do not understand how unstable our house of cards is and so might inadvertently trigger a chain reaction.

We’ll see. I’ve been wrong many times in the past.

A Deadly Recipe: One Part Ignorance, One Part Denial

I’ve been paying a little more attention these days to what the main stream media thinks is going on.

They report on government data that says the economy has recovered from the 2008 crisis. They also report on the rise of Trump that indicates many citizens are struggling and angry.

They know that incomes have stagnated while life’s expenses continue to rise but they have no clue what is causing this.

They don’t even have an intelligent theory.

On other important matters obvious to anyone that cares to look such as the climate spiraling out of control, the 6th great extinction of species, and human overshoot starting to bite in some of the weaker countries, they say nothing.

It’s quite amazing.

It seems likely we will collapse with most people having no idea what is causing their pain.

One part ignorance and one part genetic denial is a deadly recipe for war and civil unrest.