The War Between Credit and Resources

Dear Readers: I’m currently writing a long-form post twice a month now for Chris Martenson’s excellent website, Peak Accordingly, I’ll be publishing the first (and free) part of these essays here at Enjoy. — Gregor

The Federal Reserve is probably not ready to take the aggressive plunge into Nominal GDP Targeting, but it likely will.

Such a policy, which received wider attention during Ben Bernanke’s Congressional questioning last year and was also highlighted this year in a paper delivered at the Jackson Hole conference (Woodford, opens to PDF), has not caught any visible traction with Washington policy makers possibly because it’s seen as either too radical, or simply too new.

However, after four years of broad reflationary policy (and another year to come) failing to meaningfully spur U.S. employment growth, the Fed may be willing to try such measures by late next year, 2013.

Indeed, given the Fed’s recent announcement of open-ended quantitative easing (QE), one can already anticipate the incremental move towards Nominal Gross Domestic Product (NGDP) Targeting, which has as its central belief that an aggressive and open-ended promise to pursue growth at the expense of inflation is the booster required to push a structurally broken economy back to normal trend. Moreover, in contrast to Bernanke’s swift rejection last year of NGDP on a conceptual basis, Bernanke discussed the idea in friendlier terms during his post-Federal Open Market Committee (FOMC) news conference.

What’s ‘exciting’ about the emergence of NGDP Targeting into mainstream economic thinking is that, once implemented, it will provide a real-world test of reflationary policy’s final effort to combat the forces that have led to the end of strong, economic growth. The appearance of the Woodford paper (link above) further highlights the reality that endless amounts of cheap capital will be provided to restart economies, now that we are in energy transition, with the world having lost its cheap oil. The battle between credit and natural resources will be renewed.

What will be the effect on global natural resource extraction in an era of NGDP Targeting?

Simple.  All of the remaining fossil-fuel BTUs will be extracted on an accelerated basis, and governments will race to provide the capital to do so.

The Post-Abundance Era

It makes sense that just as the era of abundance is coming to an end – an era which dominated developed world economies over the past 250 years – an enthusiastic, vestigial embrace of Abundance would pour forth from culture. Books such as Abundance: The Future is Better Than You Think and also The Coming Prosperity have appeared in a flourish, all in the past year.

Is it not telling that this outpouring has occurred just as it has become crystal clear that prices of resources were not – even in the post-2008 era – returning to levels of the prior decade?

It is either lurid or tragic that assertions of abundance would flower after energy prices endured a price revolution, agriculture prices did the same, and purchasing power and incomes in the developed world entered decline. The repricing of the planet is a super-trend that has endured for more than 10 years now, and it has wreaked havoc on just about every asset class from stocks to housing. While observers currently cheer stabilization in such prices, it’s worth noting that the S&P 500 first reached current levels more than 12 years ago. Therefore, each unit of the stock market buys less of everything. So much for abundance.

It is additionally rather galling to be harangued by Abundance Theorists at a time when OECD economies have essentially failed, both in their financial systems and their ability to produce jobs, and are instead now producers of poverty. As purchasing power declines in the West against energy and food, what can Abundance Theorists possibly be thinking? It is not as if the industrial revolution in the Non-OECD is producing higher quality lives either, as countries like China convert themselves into waste dumps of coal-fired and chemical pollution, and India sees pluralities of its population continue to go without electricity or a reliable water supply.

Abundance would mean that globally, energy is so plentiful that it would be too cheap to meter. On the contrary, global energy prices – and in particular, food prices (which are strongly linked to energy prices) – have completely broken out of long-term trend lines to the upside.

There is no better measure of the aggregate loss of purchasing power against resources than the advance that poverty has made in the past 10 years, especially in the United States. While it’s true that various policy choices have exacerbated income inequality in the West for over thirty years, such explanations were more satisfying from 1975-2000, during a long period of efficiency gains in the economy. As it happens, the U.S. Census Bureau has just released fresh data on U.S. poverty, and while not a surprise, it does not make for pleasant reading. U.S. poverty is at its highest levels since 1993, but the current level — 15% — is very near the highs of the last 40 years:

Number in Poverty and Poverty Rate: 1959-2011

(Source – The U.S. Census Bureau)

Some observers have commented that the U.S. poverty rate is actually “not as bad as it seems” because of food stamps, various state and federal assistance programs, unemployment insurance, and other financial aid that the government now provides to the poor. These are collectively known as “transfer payments.” However, the income bracket requirements to be placed in the poverty category have such a low ceiling that it seems likely that U.S. poverty remains undercounted. From recent news coverage of the poverty figures at the San Jose Mercury News:

Although the poverty rate didn’t rise, the median household income for all Americans declined 1.5 percent to $50,100 in 2011. That was an 8.1 percent decline from 2007, before the recession began, and 8.9 percent lower than the 1999 peak. To be classified as poor in 2011, a family of two adults and two children would have had to make less than $22,811. Some economists had predicted Wednesday’s annual report would show the poverty rate hitting its highest level since 1965, when President Lyndon Johnson announced his war on poverty. The fact that the numbers instead leveled off after three consecutive years of increase was a relief to some. Still, the persistent poverty is troubling: the 15 percent poverty rate ties with 2010 as the highest since 1993 and one of the highest since the government began measuring poverty.


There is a certain unreality to a measurement that deems a family of four with an income above $22,811 to not be in poverty. How, exactly, could one live as a family of four in these United States with an income of $24,000 or even $26,000 and not be in poverty? For such a household, energy and food prices alone would dictate either a very poor diet, or the need for government assistance in utility and transport costs, or both. Indeed, a new unreality in our accounting now marks many areas of economic life in the U.S. in the post-Abundance era.

Unreality in Energy Costs: The Ethanol Example

Analysts have pointed out for years that a significant portion of the military budget is devoted to the safety of global oil supply, and thus each barrel of oil has “external” costs that the user does not pay at the pump, but instead pays as a taxpayer. This is undoubtedly true.

So what policy has the U.S. pursued in an era when military costs and the price of oil are even more onerous? The policy of mandated ethanol.

Mandated ethanol in the U.S. has done nothing to lower gasoline prices (which are, of course, driven entirely by oil prices) regardless of ethanol content. Moreover, the energy content of all organic material, in this case corn, is so low that by the time the process of converting corn to a liquid is complete, so many other energy inputs have been required that the net energy pick-up is incredibly small. In order to escape the reality of structurally higher oil prices, the U.S. has diverted enormous capital and other resources to a program that is largely symbolic. But billions in tax credits have been devoted to grow and support an industry that could simply not make it without such support, primarily for two reasons: one, because the low energy content of corn does not provide enough profit to pay all entities in the production chain; and two, because ethanol makers are essentially refiners and do not ultimately control the cost of their feedstock (corn).

Ethanol policy has been underway since 2006, when the price of oil had started its price revolution. And aggressive reflationary policy in the US has actually been underway for 12 years, not just the past four years, when the near-zero interest rate policy was first employed (1.00% interest rates). These two policies are an example of how institutions and economies will grapple with both the loss of cheap energy and the tremors such a loss sends out through an economy. Trying to battle, hold back, and generally thwart secular changes in prices and carrying capacity with patchwork solutions not only is destined to fail, but brings with it myriad other consequences.

For example, because the economy was already experiencing energy limits in the early part of last decade, instead of spurring organic growth, reflationary policy simply distributed into the fixed assets of housing. That was confirmation that other barriers to growth were already becoming embedded.

Reflationary policy produced a greater quantity of resources, nor cheaper resources.

Similarly, in ethanol policy, instead of reconfiguring transportation systems or investing in rail, the U.S. foolishly wasted billions trying to produce more liquids when the real problem was the quickly escalating cost of oil supply. As we now understand, agricultural production is not free, but instead tied very much to fossil fuel costs. So the dream of escaping from high oil prices by running large-scale food-to-fuel programs is destined to fail.

No Carbon or Green Solutions at Sufficient Scale Coming

But if you think these measures are desperate, we have only just begun to push energy and financial systems beyond their capability.

The launch of QE3 (and similar measures by the European central bank (ECB) in Europe) is like the crack! of a starting-gun to human psychology that carries the following, urgent message: Hey, humans go get those resources quickly, before someone else does! Indeed, the most powerful lever for monetary policy remains our capacity for social competition. The open-ended promise to pursue a faster rate of growth at the expense of inflation, mal-investment, bubbles, and the environment places a new and fast pressure on human economies to perform.

Those who are concerned about the environment and climate change should also read the onset of QE3 and the inevitability of NGDP Targeting as the start of the next big leg of resource extraction. And, accordingly, of CO2 production.

While the dream of a green energy transition persists, however, no such transition from fossil fuels to renewable energy is taking place at sufficient scale or speed to effectively shift human economies to new energy architectures. We already have sufficient and clear data in our possession to know with some degree of certainty how energy transition is currently proceeding. In short, while wind and solar resources are growing at near-exponential rates, they remain such a small portion of the global energy mix that even in the best case scenario just 15% of the global powergrid will be free of fossil fuels roughly 20 years from now.

Displacing that much of the powergrid with renewables will indeed be an achievement, but unfortunately, the recoverable reserves of natural gas and especially coal are sufficient to fund incremental growth for at least another 20 years. Even if we project a mostly flat global economy for the next two decades, the energy-funding requirements to run a flat global economy will still necessitate that we extract enormous volumes of fossil fuels each year. And that is precisely what will happen as long as aggressive reflationary policy is pursued.

Accordingly, any global effort to place carbon taxes on economies or to agree to other climate treaties will largely be token and symbolic. In Part II: What Happens Once We’ve Burned All the Resources?, we take a look at the remaining reserves of natural gas and coal, and roughly model the composition of energy inputs to the global powergrid as economies transition increasingly away from oil. Also, now that it’s clear that this reflationary policy will carry on for years and years to come, we explore at a rough calendar as new programs roll out in Japan, the EU, and the U.S. Those who predicted Infinite QE have now been proven correct.

Click here to read Part II of this report (free executive summary; paid enrollment required for full access).

  • Burkhard Braun

    Hi, Gregor-

    Abundance in a monetary sense means that everyone is employed. It does not have anything to do with high or low resource extraction. If everyone were employed digging holes and breaking rocks, (voluntarily), then the Fed would have done its job.

    As you say, we are degrading our world all the time. Fish stocks die, species go extinct, countries turn into waste dumps. Economists couldn’t give a flying hubcap. They only care that GDP (money turnover) is high and that employment is high. The prospect of economic “growth” is completely different from the concept of ecological systainability, or, indeed, happiness and well-being.

    Obviously, having people employed and inflation low is generally conducive to happiness, but interposed between the monetary policy and our resource trajectory is our political system with its economic policy. If we taxed fossil carbon and otherwise promoted green energy, we would find ourselves fully employed and extracting other kinds of resources. Perhaps living at a different standard than before, (cars without tailfins, or no cars at all), but in the long run perhaps a more sustainable standard.

    But this is a classic commons problem. The rules have to universal, not voluntary. You say that any carbon taxes will be symbolic, but that is a psychological argument.. that we have so little capacity for self-governemnt and consciousness of the damage we are doing to our own prospects, let alone those of the biosphere, that we will pursue BAU till the bitter end. I hope you devote some of your energy to a more optimistic future, rather than a cynical one.

    As for poverty, that is entirely a distribution problem. No matter how aggressively we get off fossil carbon, we are going to have enough food and other necessities to go around (in the US, at least.. the rest of the world is another matter). Poverty now and in any sustainable future is a matter of not letting the 1% hog all the resources, rather finding a way to keep the poor in both the production and into the income system. The rich, of course, are ever busy trying to keep them out of both, or ideally, making them into unpaid slaves who produce but get no income.

    On your monetary comments, all this talk of “reflation” seems pointless and alarmist. Where is our inflation rate right now? Essentially zero. So the monetary management, on its proper terms, is fine. That is not the problem. It is our *real* economy that is the problem, raping the environment, etc. You are just as mistaken to attack peak oil through the Fed as the Fed is to attack low economic growth through QE-X, since interest rates are not the limiting problem in that case- rather, demand is the problem.

    -with appreciation…

  • Continued exponential growth of renewable energy should radically transform their meager inputs into a global solution within the next 40 years. Yet, I doubt that they will offer anything meaningful within the first 25 years. Of course, continued growth acceleration of RE requires mass production via some kind of machine automation, be it robotic factories or advanced 3-d printers. Batteries, necessary for transport and storage, must also be made by machine, 24/7 for pennies on the dollar!

    In this way, employment opportunities will abound installing hundreds of thousands of square miles of solar collection media around the planet. Note that such an expanse of solar panels would most probably have to be designed to convert excess (unused) light into much LESS infrared than they do today (to be made light in color and still be 15% efficient).
    I find it very hard to believe that this kind of machine made jobs scenario is not possible and infact believe that this kind of massive energy farming, as bad as it may become, will NEVER even come close to current enviro destruction. Whole mountains are leveled for coal alone (which, contrary to batteries, is not recyclable).
    However, if for some inane reason such large scale RE harvesting is not permitted, then there is the much better energy source… Nuclear. But not the kind that we are familiar with today. No!, the light water reactor is simply to dangerous and inefficient, not to mention long lived wastes, to be a meaningful solution. ONLY reactor designs that do NOT require water are (possibly) acceptable! LFTR, IFR, and (Bill Gate’s wish, the) TWR can not melt down, will not melt down if there is a prolonged grid outage, will not explode if cracked open (no high pressures), and will simply cool down during any unforeseen event (a radioactive housing is billions of times less harmful than a radioactive countryside!). They also “eat” LWR wastes and even create elements needed for medical and space exploration to boot!
    The ONLY things stopping these wonderful sources of energy is greed and the inability for populations to foresee and plan on a collective level. Therefore, I am also convinced that we are headed for fossil fueled depletion into an over heated world.Please search the liquid fluoride thorium reactor, the integrated fast reactor and the traveling wave reactor… and while you’re at it, check out what happens when too much excess CO2 is pumped into the air… oceanic anoxic events. I like to call it OxygenInsufficient
    Legacy (or oil).

  • Richard Elder

    Hi Robert,
    I have researched the LFTR technology and its history, at least to the extent that a non-physicist can. I’m left with several observations/explanations as to why this is not the silver bullet that will usher in a new age of growth based upon abundant energy.

    First a few observations on the history of LFTR reactors:
    –One individual produced the basic design for both solid fuel water cooled reactors and LFTRs.
    –An operational prototype ran successfully for four years prior to the commercial deployment of light water reactors.
    –Thorium is both abundant and inexpensive compared to the enriched uranium that is need for solid fuel reactors, and supplies are virtually inexhaustible.
    –LFTRs are capable of using 95% of the energy potential in their fuel source: The energy utilization of light water reactors is closer to 5%. This results in a drastic reduction in the volume of remaining waste that must be safely stored.
    LFTRs are the only reactor design that has an automatic, passive shut down mode. A completely unattended reactor with no back up power, no diesel generators, and no human operators will self decommission even if humans don’t return for a thousand years.

    So, why are there several hundred poorly designed and inherently dangerous light water reactors operating worldwide and no LFTRs? The answer is purely political, but that goes to the very core of human nature. There are two fatal flaws of the LFTR design from the point of view of the decision makers at the time the choice was made. 1- The end products of the fission process in a LFTR are not suitable for building building atomic or hydrogen bombs, and civilian “Peaceful Atom” program was always a smoke screen for doing what humans have done for centuries— build ever more deadly weapons to conquer their neighbors and steal their wealth and women. 2- Thorium in liquid form is too cheap a fuel source. The business model of GE and other reactor builders has always been similar to cell phone providers—- build a machine that you hold a monopoly on— in this case the manufacture of the solid fuel rods, and then exploit a guaranteed profit stream for the life of the machine.

    So, will a technocratic future powered by electrical energy too cheap to meter usher in our golden age? All we need to do is completely replace the entire world’s physical infrastructure built upon the back of cheap, concentrated fossil fuels. Develop the wisdom to manage a steady stream of radioactive waste. Reverse the most rapid species die-off since the last great meteor impact. Learn to adapt to a pace of climate change that far outstrips the ability of plant species to keep up through relocation or evolution. Abandon many of the world’s major cities to rising sea levels. Dial back population levels to a level sustainable in a turbulent world ecosystem. Oh, and change human nature so we as a species don’t use war as the solution to all our tribulations as we have done throughout our history on the planet.

  • Luke Smith

    The planned obsolescence of our two major political parties’ wishful thinking is the moral equivalent of a bankrupt affluent society.