Paper vs Real: Exit From Normal, Ecological Economics, and Probabilistic Regimes in One Chart

A 20 year chart of the US 30 Year Treasury Bond vs. a broad commodity index is the occassion to make several macroeconomic observations. The comparison reveals how the purchasing power of the long-dated US Treasury Bond has fared against a basket of commodities over the period. Tracking the ability of the US Treasury bond, denominated in US Dollars, to maintain its viability as a capital storage unit is not arcane. Rather, it is central. All institutions and individuals eventually use financial assets to purchase energy, natural resources, and labor. | see: 30 Year Treasury Bond by Price vs. The Reuters CRB Index–CCI Continuous.

1.  Prior to the years 2000-2002 the Western economic system is still in expansion, funded by cheap fossil fuels. During such a regime, paper assets are priced to reflect the belief in their future purchasing power against natural resources, energy, and labor. This is no mistake. The balance of global population, resource availability, and technological innovation guides savings towards the stability of paper assets. It’s a benevolent, virtuous cycle.

2. The end of cheap energy after 2002 marks the end of economic growth in real terms. The balance of global population, resource availability, and innovation enters transition. Paper assets lose stability and begin their decline against natural resources as technological innovation runs into the harder limit of energy availability. (Liebig).

3. Having built up a surplus of paper assets (both liabilities and claims) over a 25 year period, the economic system succumbs to its own lack of industrial growth. (Soddy). Paper assets become highly unstable as they are now deprived of cheap energy. In probabilistic terms the economic systems exits Normal. (Gauss). A new era of volatility in prices ensues as competing units of account come into play. The relative predictability of the future, also made possible by cheap energy, declines. A new probabilistic regime unfolds. (Pareto).

It’s highly unlikely that long-dated paper assets will ever regain their purchasing power against natural resources, because—while human innovation and technology will surely continue—the energy limit is only surmountable in small, incremental terms. Indeed, most of the revolutionary technology of the past 250 years has neither operated outside of cheap energy nor created cheap energy. Instead, our technological era leveraged cheap energy. The proper stance for resource depletionists therefore is not to dismiss the human capacity for innovation. It is undeniable that technological advances will continue apace. However, the advances made possible once humans started extracting fossil fuels, while likely to be repeated in humanistic terms, will not be repeated in industrial terms. Fossil fuels are not creatable. Their unique density make possible a whole range of laborious, constructive activities at a speed and scale that is not replicable.

The recognition that paper assets derive(d) their worth from future industrial growth will unfold very slowly. Human society, intellectually, continues to operate in the Normal probabilistic regime. Accordingly, the economic system is trying to move forward on the belief that cheap energy, in real terms without losses from externalities, will return. Indeed, modern economic theory, the operation of governments, and risk models are all predicated on the restoration of available cheap energy.

My suggestion: increase your optimism that human ingenuity will help to reorganize society around a new, scarce energy era. But, decrease your optimism significantly that a return to Normal, in energy terms or probabilistic terms, is in the offing.



  1. Mark Bozzone writes:

    How do you explain record corporate profits? That would seem to argue against your theory that commodities will crimp growth.

  2. writes:

    They are record corporate profits in nominal terms. Not real terms. Corporate profits also are declining in purchasing power.

  3. jaykimball writes:

    Hi Gregor – Thanks for the insightful connecting of the dots.

    Lets assume that the major energy users can transition to renewable, and that that renewable energy will be cheap and abundant – solar, wind, etc. Prices are trending down on renewables, and a number of innovations are coming on-line, with more to follow.

    Does that lead to a bottoming of your chart, and a repeat of the “abundant oil” expanding economic system – but this time with renewable energy sources? How do you seeing this playing out? How long do you see the “scarce energy era” going?

    Since much of this is population driven, during the gap between onset of energy scarcity, and established renewable energy abundance, how do you see world population trending?

  4. writes:

    Renewables can’t be cheap because by definition they capture diffuse, not dense, energy. Once that immoveable fact is clear then any use of the word cheap in conjunction with renewables will seem awkward.

    In terms of utility, life quality, however renewables are and will be excellent. We will adopt them. However, their construction depends on oil and will do so until critical level of installation is reached. So the actual project of renewable adoption is hard.

    So I am making a hard distinction here- renewables are good, necessary, healthy, and inevitable. These facts however do not change the enormous chasm that separates diffuse– from dense— energy sources.

    We can have an expanding economic system again, but one that uses measures that will be less physical, less industrial. And one that is much more uncertain about the future. Credit is a claim that the future is predictable on a relative terms. So, imagine an economy that runs not on a long-dated fossil fuels cycle but runs more on a solar cycle– the daily flow of energy rather than future flows.

    Population? It either has to decline in absolute terms, or, life quality has to decline for many. Best outcome would be a decline in the growth rate. And I think that will happen

  5. Gregor, do you agree with any aspect of Mike Ruppert’s predictions in the movie Collapse or do you treat that as too far fetched to comment on?

  6. writes:

    I enjoyed Collapse and a number of the events discussed in the film already occurred. Namely, the financial crisis of 2008.

    I’ve spent a couple of years researching collapse models, reading collapse literature, and looking at scholarly work on collapse. It’s a deeply fascinating topic and really has nothing to do with doomerism per se, but is in fact its own scholarly focus in its own right.

    I favor descent, rather than collapse. I also favor huge up spikes away from collapse during descent, as the system becomes more robust as it spends longer periods of time in deep difficulty.

    The complexity of collapse can be easily modeled in such things as Wolf-Grass-Sheep scenarios, and we can also look at historical examples of collapse. Here’s what’s seriously hard: trying to come up with a road map for future collapses.

    This is why I take the following view: the way out of the analytical problem of collapse is to turn one’s attention to risk and volatility. If volatility protection in all assets, from precious metals, to oil, to real estate, to sovereign bonds is dirt cheap–then that interests me. Just as it interests me that the global Reinsurance industry is already pricing in new risks that mainstream markets continue to ignore.

    I am generally uninterested in Mike Ruppert’s day to day commentary. However, he deserves a tip of the cap and props for his longer cycle work. I think he’s earned that.


  7. Anonymous writes:

    Thanks for that – it demonstrates clearly to me the transition away from Infinite Growth to a period of instability and volatility occasioned by an end to cheap energy.

    I do think however, that when you look at the whole picture, including ecological catastrophe, that Collapse is the correct word. This is just part of the picture.

    At the base of it is the truth that there is no longer enough cheap energy available to sustain 7 billion people on the planet.

  8. Russell Bradshaw writes:

    An excellent and compelling article. Short, succinct and accurate.
    On the topic of Collapse / Decline, I recommend John Michael Greer, Long Descent, and EcoTechnic Future. Both are well written and sensible. Neither wildly optimistic about technology as our salvation, nor doom laden either. A nice balance between the two.
    Also, really appreciate the reference to Frederick Soddy. Wealth, Virtual Wealth and Debt has to be one of the most well rounded and complete analysis of economics and monetary systems ever written. 100 years ahead of its time. Written by a true Nobel scientist!

  9. Anonymous writes:

    Interesting as ever, but you ignore the Elephant in the Room.

    ie the value of land/location.

    Over two thirds of $, £ and so on in existence came about through mortgage loans, created to acquire existing real property. An increasing proportion of this has been the value of exclusive use of (finite) 3D location/land – as opposed to the use value of the energy and knowledge embedded in the location eg as buildings or fertility.

    Most financial claims in the economy are in fact claims over the use value of location/land through intermediaries:

    (a) Credit institutions aka banks;

    (b) States – through property taxes; and

    (c) Landlords rent claims;

    all of which are claims made at the expense of productive wealth creators.

    How the role of land/location relates to the graph, I’m not sure – it’s the first I’ve seen of it, and it’s a very interesting question.

    But in my view all commodities traded on financial markets have become financialised in the medium/long term through purchasing by risk averse ‘inflation hedger’ investors – the complete opposite of the greedy speculators who take the blame but are in fact responsible only for transient ‘spikes’.

    It is supremely ironic that it is the investors who are attempting to avoid inflation, who are actually causing it.

  10. Welcome to the capital scarce, resource scarce, energy scarce future – where monetary inflation meets resource depletion.

    Your wonderful chart succinctly demonstrates this fact.

    We need solar, wind, thorium reactors, methane producing algae, smart grids, home energy production, local food networks…oh, and fewer parasitic bankers, toxic corporations, and petty bureaucrats from hell.

  11. Randall Parker writes:

    I am gradually coming to understand the central role of debt in what is to come. The debt becomes unserviceable because the growth needed to pay it back will not happen. Even before Peak Oil the unfunded entitlements and aging population made a financial crisis inevitable. But with Peak Oil the crisis will be hugely larger.

    Washington DC still acts as if fast growth is just around the corner. It is amazing to me that the Congressional Budget Office assumes over 5% annual growth in the US economy over the next 10 years. That’d be hard to do even under Business As Usual. This is not a BAU era.

  12. Most of the renewable technologies cannot scale to meet our current energy demands. Solar requires rare earth metals which are, well, rare. Wind has high resource demands compared to energy output, and as the best sites are taken, returns will diminish from poorer sites. It has been pointed out that if we replace every petrol-driven vehicle with an electric one using lead-acid battery technology it will take decades to find enough lead and the lead pollution would be huge. (fortunately there are energy storage alternatives such as compressed air being developed). Wave and tidal energy requires a lot of resource for maintenance as the harsh environment causes much attrition. Over time, climate change will affect some wind, hydro and tidal sites, meaning we will have to abandon them and start over in the new good place.
    Uranium etc. are akin to fossil fuels, a finite resource – it has been estimated that if we met all current energy demands with uranium-powered fission the resource would be depleted in 75 years, which is nothing in the long now.
    Therefore it will be necessary to severely reduce energy consumption. One of the key areas for this will be food, where the agricultural model has failed (peak phorphorous is as big a problem as peak oil). Fortunately we still have some working models of sustainable (4000 years and counting) peasant farming which have significantly higher yields than agriculture with no artificial inputs of nutrients/energy – e.g. Chinese Dao farmers. This is knowledge-intensive rather than energy-intensive production.

  13. writes:

    Hi. Thanks for the comment. We agree about the monetization of land and property, regardless of that land or property’s productivity. I will make a very broad remark to this point, and simply say that only through the use of fossil fuels can land and property become more “valuable” than it was during the age of wood, when the shorter solar cycle relegated most land to agricultural use.

    Where we might disagree a little is in the role of financialization of commodity markets. I take the view that speculation is merely an amplification of price. For example, speculation will play a large role in today’s price, and last week’s price. But, speculation plays virtually no role over longer periods of time. Hence, the repricing of oil from the 20 dollar era to the 100 dollar era over 7-9 years is a function of geology.

    I address the fact that claims made on global real estate can never be repaid, and have done so often in my work. Indeed, this is hardly my own view now as it gains wider adoption. For example, in today’s post on housing, I once again explain that the regime change in oil’s price–which as we know is from geology, and declining EROEI–will never revert. Oil will not get cheaper. Speculators cannot make oil cheaper, and neither can governments. Thus, with oil more expensive in real terms–global real estate must reset at a lower price level. And we all know what that means for the value of the claims against that real estate, which were issued at much higher price levels.

    Not sure if I touched upon your focus or point, but I hope I did at least a little.

    Best to you,


  14. writes:

     Love Greer and I appreciate his work on two levels: not only are his long essays seriously good explanations, but, his writing is pure pleasure. Indeed, I think Greer’s prose is still improving. Nice for him!


  15. writes:

    Yes. solar costs are indeed dropping fast. We simply need to adjust to the different way in which the built environment will be organized once we become more dependent on diffuse energy sources.


  16. writes:

    That’s right. And let’s also consider that a world composed of myriad energy sources, that are less centralized and more dispersed, will also be a more resilient and robust world.


  17. writes:

    Most Western governments are enabled by a class of professionals who will place their intellectual imprimateur on any policy that the political class wants to pursue. Hence, the return to normal is what governments want to hear, and the economist class is only too happy to supply that vision. Sad, but true.


  18. Russell Bradshaw writes:


    Great to hear you’ve read Greer.

    Have you also read any Soddy? He is surely the pioneer of economics being a function of energy usage (Robert Ayres recent-ish “Accounting for Growth” essentially proves the thesis). He also makes the statement that financial claims often diverge wildly from economic fundamentals due to excess credit creation.


  19. Tim Hill writes:

    Clicking the Like button’s not enough.  Really, really, really like.  This is frankly the *ONLY* solution.  But decentralization has significant ideological opposition as well as powerful elite with vested interest in keeping control.  Centralization has corrupted just about everything. Nevertheless, forces may force a transition…and the transformation may be radical, protracted, and painful.

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