Collapse: Is Now Locked In

[grarpamp]

https://ourfiniteworld.com/2023/01/09/__trashed/
https://ourfiniteworld.com/2022/11/17/todays-energy-crisis-is-very-different-from-the-energy-crisis-of-2005/
https://ourfiniteworld.com/2022/09/20/ramping-up-renewables-cant-provide-enough-heat-energy-in-winter/

Tverberg: In 2023, Expect A Financial Crash Followed By Major
Energy-Related Changes

Authored by Gail Tverberg via Our Finite World blog,

Why is the economy headed for a financial crash? It appears to me that
the world economy hit Limits to Growth about 2018 because of a
combination of diminishing returns in resource extraction together
with rising population. The Covid-19 pandemic and the accompanying
financial manipulations hid these problems for a few years, but now,
as the world economy tries to reopen, the problems are back with a
vengeance.

Figure 1. World primary energy consumption per capita based on BP’s
2022 Statistical Review of World Energy. Same chart shown in post,
Today’s Energy Crisis Is Very Different from the Energy Crisis of
2005.

In the period between 1981 and 2022, the economy was lubricated by a
combination of ever-rising debt, falling interest rates, and the
growing use of Quantitative Easing. These financial manipulations
helped to hide the rising cost of fossil fuel extraction after 1970.
Even more money supply was added in 2020. Now central bankers are
trying to squeeze the excesses out of the system using a combination
of higher interest rates and Quantitative Tightening.

After central bankers brought about recessions in the past, the world
economy was able to recover by adding more energy supply. However,
this time we are dealing with a situation of true depletion; there is
no good way to recover by adding more energy supplies to the system.
Instead, the only way the world economy can recover, at least
partially, is by squeezing some non-essential energy uses out of the
system. Hopefully, this can be done in such a way that a substantial
part of the world economy can continue to operate in a manner close to
that in the past.

One approach to making the economy more efficient in its energy use is
by greater regionalization. If countries can start trading almost
entirely with nearby neighbors, this will reduce the world’s energy
consumption. In parts of the world with plentiful resources and
manufacturing capability, the economy can perhaps continue without
major changes. Another way of squeezing out excesses might be through
the elimination (at least in part) of the trade advantage the US
obtains by using the dollar as the world’s reserve currency. In this
post, I will also mention a few other ways that non-essential energy
consumption might be reduced.

I believe that a financial crash is likely sometime during 2023. After
the crash, the system will start squeezing down on the less necessary
parts of the economy. While these changes will start in 2023, they
will likely take place over a period of years. In this post, I will
try to explain what I see happening.
[1] The world economy, in its currently highly leveraged state, cannot
withstand both higher interest rates and Quantitative Tightening.

With higher interest rates, the value of bonds falls. With bonds
“worth less,” the financial statements of pension plans, insurance
companies, banks and others holding those bonds all look worse. More
contributions are suddenly needed to fund pension funds. Governments
may find themselves needing to bail out many of these organizations.

At the same time, individual borrowers find that debt becomes more
expensive to finance. Thus, it becomes more expensive to buy a home,
vehicle, or farm. Debt to speculate in the stock market becomes more
expensive. With higher debt costs, there is a tendency for asset
prices, such as home prices and stock prices, to fall. With this
combination (lower asset prices and higher interest rates) debt
defaults are likely to become more common.

Quantitative Tightening makes it harder to obtain liquidity to buy
goods internationally. This change is more subtle, but it also works
in the direction of causing disruptions to financial markets.

Other stresses to the financial system can be expected, as well, in
the near term. For example, Biden’s program that allows students to
delay payments on their student loans will be ending in the next few
months, adding more stress to the system. China has had huge problems
with loans to property developers, and these may continue or get
worse. Many of the poor countries around the world are asking the IMF
to provide debt relief because they cannot afford energy supplies and
other materials at today’s prices. Europe is concerned about possible
high energy prices.

This is all happening at a time when total debt levels are even higher
than they were in 2008. In addition to “regular” debt, the economic
system includes trillions of dollars of derivative promises. Based on
these considerations alone, a much worse crash than occurred in 2008
seems possible.
[2] The world as a whole is already headed into a major recession.
This situation seems likely to get worse in 2023.

The Global Purchasing Managers Index (PMI) has been signaling problems
for months. A few bullet points from their site include the following:

    Service sector output declined in October, registering the worst
monthly performance since mid-2020.

    Manufacturing output meanwhile fell for a third consecutive month,
also declining at the steepest rate since June 2020.

    PMI subindices showed new business contracting at the quickest
rate since June 2020, with the weak demand environment continuing to
be underpinned by declining worldwide trade.

    The global manufacturing PMI’s new export orders index has now
signaled a reduction in worldwide goods exports for eight straight
months.

    Price inflationary pressures remained solid in October, despite
rates of increase in input costs and output charges easing to 19-month
lows.

The economic situation in the US doesn’t look as bad as it does for
the world as a whole, perhaps because the US dollar has been at a
relatively high level. However, a situation with the US doing well and
other countries doing poorly is unsustainable. If nothing else, the US
needs to be able to buy raw materials and to sell finished goods and
services to these other countries. Thus, recession can be expected to
spread.
[3] The underlying issue that the world is starting to experience is
overshoot and collapse, related to a combination of rising population
and diminishing returns with respect to resource extraction.

In a recent post, I explained that the world seems to be reaching the
limits of fossil fuel extraction. So-called renewables are not doing
much to supplement fossil fuels. As a result, energy consumption per
capita seems to have hit a peak in 2018 (Figure 1) and now cannot keep
up with population growth without prices that rise to the point of
becoming unaffordable for consumers.

The economy, like the human body, is a self-organizing system powered
by energy. In physics terminology, both are dissipative structures. We
humans can get along for a while with less food (our source of
energy), but we will lose weight. Without enough food, we are more
likely to catch illnesses. We might even die, if the lack of food is
severe enough.

The world economy can perhaps get along with less energy for a while,
but it will behave strangely. It needs to cut back, in a way that
might be thought of as being analogous to a human losing weight, on a
permanent basis. On Figure 1 (above), we can see evidence of two
temporary cutbacks. One was in 2009, reflecting the impact of the
Great Financial Crisis of 2008-2009. Another related to the changes
associated with Covid-19 in 2020.

If energy supply is really reaching extraction limits, and this is
causing the recent inflation, there needs to be a permanent way of
cutting back energy consumption, relative to the output of the
economy. I expect that changes in this direction will start happening
about the time of the upcoming financial crash.
[4] A major financial crash in 2023 may adversely affect many people’s
ability to buy goods and services.

A financial discontinuity, including major defaults that spread from
country to country, is certain to adversely affect banks, insurance
companies and pension plans. If problems are widespread, governments
may not be able to bail out all these institutions. This, by itself,
may make the purchasing of goods and services more difficult. Citizens
may find that the funds they thought were in the bank are subject to
daily withdrawal limits, or they may find that the value of shares of
stock they owned is much lower. As a result of such changes, they will
not have the funds to buy the goods they want, even if the goods are
available in shops.

Alternatively, citizens may find that their local governments have
issued so much money (to try to bail out all these institutions) that
there is hyperinflation. In such a case, there may be plenty of money
available, but very few goods to buy. As a result, it still may be
very difficult to buy the goods a family needs.
[5] Many people believe that oil prices will rise in response to
falling production. If the real issue is that the world is reaching
extraction limits, the problem may be inadequate demand and falling
prices instead.

If people have less to spend following the financial crash, based on
the reasoning in Section [4], this could lead to lower demand, and
thus lower prices.

It also might be noted that both the 2009 and 2020 dips in consumption
(on Figure 1) corresponded to times of low oil prices, not high. Oil
companies cut back on production if they find that prices are too low
for them to expect to make a profit on new production.

We also know that a major problem as limits are reached is wage
disparity. The wealthy use more energy products than poor people, but
not in proportion to their higher wealth. The wealthy tend to buy more
services, such as health care and education, which are not as energy
intensive.

If the poor get too poor, they find that they must cut back on things
like meat consumption, housing expenses, and transportation expenses.
All these things are energy intensive. If very many poor people cut
back on products that indirectly require energy consumption, the
prices for oil and other energy products are likely to fall, perhaps
below the level required by producers for profitability.
[6] If I am right about low energy prices, especially after a
financial discontinuity, we can expect oil, coal, and natural gas
production to fall in 2023.

Producers tend to produce less oil, coal and natural gas if prices are too low.

Also, government leaders know that high energy prices (especially oil
prices) lead to high food prices and high inflation. If they want to
be re-elected, they will do everything in their power to keep energy
prices down.
[7] Without enough energy to go around, more conflict can be expected.

Additional conflict can be expected to come in many forms. It can look
like local demonstrations by citizens who are unhappy about their
wages or other conditions. If wage disparity is a problem, it will be
the low-wage workers who will be demonstrating. I understand that
demonstrations in Europe have recently been a problem.

Conflict can also take the form of wide differences among political
parties, and even within political parties. The difficulty that the US
recently encountered electing a Speaker of the House of
Representatives is an example of such conflict. Political parties may
splinter, making it difficult to form a government and get any
business accomplished.

Conflict may also take the form of conflict among countries, such as
the conflict between Russia and Ukraine. I expect most wars today will
be undeclared wars. With less energy to go around, the emphasis will
be on approaches that require less energy. Deception will become
important. Destruction of another country’s energy infrastructure,
such as pipelines or electricity transmission, may be part of the
plan. Another form of deception may involve the use of bioweapons and
supposed cures for these bioweapons.
[8] After the discontinuity, the world economy is likely to become
more disconnected and more regionally aligned. Russia and China will
tend to be aligned. The US seems likely to be another center of
influence.

A major use of oil is transporting goods and people around the globe.
If there is not enough oil to go around, one way of saving oil is to
transport goods over shorter distances. People can talk by telephone
or video conferences to save on oil used in long distance
transportation. Thus, increased regionalization seems likely to take
place.

In fact, the pattern is already beginning. Russia and China have
recently been forging long-term alliances centered on providing
natural gas supplies to China and on strengthening military ties.
Being geographically adjacent is clearly helpful. Furthermore, major
US oil companies are now focusing more on developments in the
Americas, rather than on big international projects, according to the
Wall Street Journal.

Countries that are geographically close to Russia-China may choose to
align with them, especially if they have resources or finished
products (such as televisions or cars) to sell. Likewise, countries
near the US with suitable products to sell may align with the United
States.

Countries that are too distant, or that don’t have resources or
finished products to sell (goods, rather than services), may largely
be left out. For example, European countries that specialize in
financial services and tourism may have difficulty finding trading
partners. Their economies may shrink more rapidly than those of other
countries.
[9] In a regionally aligned world, the US dollar is likely to lose its
status as the world’s reserve currency.

With increased regionalization, I would expect that the US dollar’s
role as the world’s reserve currency would tend to disappear, perhaps
starting as soon as 2023. For example, transactions between Russia and
China may begin to take place directly in yuan, without reference to a
price in US dollars, and without the need for US funds to allow such
transactions to take place.

Transactions within the Americas seem likely to continue taking place
using US dollars, especially when they involve the buying and selling
of energy-related products.

With the US dollar as the reserve currency, the US has been able to
import far more than it exports, year after year. Based on World Bank
data, in 2021 the US imported $2.85 trillion of goods (including
fossil fuels, but excluding services) and exported $1.76 trillion of
goods, leading to a goods-only excess of imports over exports of $1.09
trillion. When exports of services are included, the excess of imports
over exports shrinks to “only” $845 billion. It is hard to see how
this large a gap can continue. Such a significant difference between
imports and exports would tend to shrink if the US were to lose its
reserve currency status.
[10] In a disconnected world, manufacturing of all kinds will fall,
especially outside of Southeast Asia (including China and India),
where a major share of today’s manufacturing is performed.

A huge share of today’s manufacturing capability is now in China and
India. If these countries have access to oil from the Middle East and
Russia, I expect they will continue to produce goods and services. If
there are not enough of these goods to go around, I would expect that
they would primarily be exported to other countries within their own
geographic region.

The Americas and Europe will be at a disadvantage because they have
fewer manufactured goods to sell. (The US, of course, has a
significant quantity of food to export.) Starting in the 1980s, the US
and Europe moved a large share of their manufacturing to Southeast
Asia. Now, when these countries talk about ramping up clean energy
production, they find that they are largely without the resources and
the processing needed for such clean energy projects.

Figure 2: New York Times chart based on International Energy Agency
data. February 22, 2022.

In fact, ramping up “regular” manufacturing production of any type in
the US, (for example, local manufacturing of generic pharmaceutical
drugs, or manufacturing of steel pipe used in the drilling of oil
wells) would not be easy. Most of today’s manufacturing capability is
elsewhere. Even if the materials could easily be gathered into one
place in the US, it would take time to get factories up and running
and to train workers. If some necessary items are lacking, such as
particular raw materials or semiconductor chips, transitioning to US
manufacturing capability might prove to be impossible in practice.
[11] After a financial discontinuity, “empty shelves” are likely to
become increasingly prevalent.

We can expect that the total quantity of goods and services produced
worldwide will begin to fall for several reasons. First, regionalized
economies cannot access as diverse a set of raw materials as a world
economy. This, by itself, will limit the types of goods that an
economy can produce. Second, if the total quantity of raw materials
used in making the inputs declines over time, the total amount of
finished goods and services can be expected to fall. Finally, as
mentioned in Section [4], financial problems may cut back on buyers’
ability to purchase goods and services, limiting the number of buyers
available for finished products, and thus holding down sales prices.

A major reason empty shelves become can be expected to become more
prevalent is because more distant countries will tend to get cut out
of the distribution of goods. This is especially the case as the total
quantity of goods and services produced falls. A huge share of the
manufacturing of goods is now done in China, India, and other
countries in Southeast Asia.

If the world economy shifts toward mostly local trade, the US and
Europe are likely to find it harder to find new computers and new cell
phones since these tend to be manufactured in Southeast Asia. Other
goods made in Southeast Asia include furniture and appliances. These,
too, may be harder to find. Even replacement car parts may be
difficult to find, especially if a car was manufactured in Southeast
Asia.
[12] There seem to be many other ways the self-organizing economy
could shrink back to make itself a more efficient dissipative
structure.

We cannot know in advance exactly how the economy will shrink back its
energy consumption, besides regionalization and pushing the US dollar
(at least partially) out of being the reserve currency. Some other
areas where the physics of the economy might force cutbacks include
the following:

    Vacation travel

    Banks, insurance companies, pension programs (much less needed)

    The use of financial leverage of all kinds

    Governmental programs providing payments to those not actively in
the workforce (such as pensions, unemployment insurance, disability
payments)

    Higher education programs (many graduates today cannot get jobs
that pay for the high cost of their educations)

    Extensive healthcare programs, especially for people who have no
hope of ever re-entering the workforce

In fact, the population may start to fall because of epidemics, poor
health, or even too little food. With fewer people, limited energy
supply will go further.

Governments and intergovernmental agencies may start to fail because
they cannot get enough tax revenue. Of course, the underlying issue
for the lack of tax revenue is likely to be that the businesses within
the governed area cannot operate because they cannot obtain enough
inexpensive energy resources for operation.
[13] Conclusion.

If the world economy experiences major financial turbulence in 2023,
we could be in for a rough ride. In my opinion, a major financial
crash seems likely. This is could upset the economy far more seriously
than the 2008 crash.

I am certain that some mitigation measures can be implemented. For
example, there could be a major push toward trying to make everything
that we have today last longer. Materials can be salvaged from
structures that are no longer used. And some types of local production
can be ramped up.

We can keep our fingers crossed that I am wrong but, with fewer oil
and other energy resources available per person, moving goods shorter
distances makes sense. Thus, the initial trends we are seeing toward
regionalization are likely to continue. The move away from the US
dollar as the reserve currency also looks likely to continue.
Moreover, if the changes I am talking about don’t occur in 2023, they
are likely to begin in 2024 or 2025.