Aug 152015
 August 15, 2015  Posted by at 1:54 pm Finance Tagged with: , , , , , , ,

Gustave Doré Dante and the Angel of the Church before the Door of Purgatory 1868

We’re going to try something a little different. Nicole wrote another very long article and I suggested publishing it in chapters; this time she said yes. So in the next five days we will post five different chapters of the article, one on each day, and then on day six the whole thing. That way, you will have some time left over to spend with your families… 😉

Just so there’s no confusion: the article, all five chapters of it, was written by Nicole Foss. Not by Ilargi.


A great deal of intelligence is invested in ignorance when the need for illusion is deep.
Saul Bellow, 1976

More and more people (although not nearly enough) are coming to recognise that humanity cannot continue on its current trajectory, as the limits we face become ever more obvious, and their implications starker. There is a growing realisation that the future must be different, and much thought is therefore being applied to devising supposed solutions for that future. These are generally attempts to reconcile our need to make changes with our desire to continue something very much resembling our current industrial-world lifestyle, with a view to making a seamless transition between the now and a comfortably familiar future. The presumption is that it is possible, but this rests on foundational assumptions which vary between the improbable and the outright impossible. It is a presumption grounded in a comprehensive failure to understand the nature and extent of our predicament.

We are facing limits in many ways simultaneously – not surprising since exponential growth curves for so many parameters have gone critical in recent decades, and of course even more so in recent years. Some of these limits lie in human systems, while others are ecological or geophysical. They will all interact with each other, over different timeframes, in extremely complex ways as our state of overshoot resolves itself (to our dissatisfaction, to put it mildly) over many decades, if not centuries. Some of these limits are completely non-negotiable, while others can be at least partially mutable, and it is vital that we know the difference if we are to be able to mitigate our situation at all. Otherwise we are attempting to bargain with the future without understanding our negotiating position.

The vast majority has no conception of the extent to which our modernity is an artifact of our discovery and pervasive exploitation of fossil fuels as an energy source. No species in history has had easy, long term access to a comparable energy source. This unprecedented circumstance has facilitated the creation of turbo-charged civilization.

Huge energy throughput, in line with the Maximum Power Principle, has led to tremendous complexity, far greater extractive capacity (with huge ‘environmental externalities’ as a result), far greater potential to concentrate enormous power in the hands of the few with destructive political consequences), a far higher population, far greater burden on global carrying capacity, and the ability to borrow from the future to satisfy the insatiable greed of the present. The fact that we are now approaching so many limits has very significant implications for our ability to continue with any of these aspects of modern life. Therefore, any expectation that a future in the era of limits is likely to resemble the present (with a green gloss) are ill-founded and highly implausible.

The majority of the Big Ideas with which we propose to bargain with our future of limits to growth rests on the notion that we can retain our modern comforts and conveniences, but that somehow we will do so with far less resource use, and with a fraction of the energy we currently employ. The most mainstream discussions revolve around ‘green growth’, where it is suggested that eternal economic growth can occur on a finite planet, and that we will magically decouple of that growth from the physical basis upon which it rests. Proponents argue that we have already accomplished this to an extent, as the apparent energy intensity of developed state economies has fallen.

In actuality, all that has happened is that the energy deployed to provide developed world comforts has been used in the emerging markets where goods destined for our markets are manufactured, so that the consumption falls within someone else’s energy budget. In reality there has been no decoupling at all. Economic growth requires energy, and there is an exceptionally high correlation between the two. Even the phantom growth of the bubble era, based on the expansion of virtual wealth, requires energy in order to maintain the complexity of the system that generates it.

It is crucial that we understand the boundaries of solution-space, in order to be able to focus our finite resources (in every sense of the word) on that which is inherently workable, at least in theory. ‘Workable In theory’ implies that, while there is no guarantee of success given a large number of unpredictable factors, there is also no obvious prima facie barrier to success. If, however, we throw our resources at ideas that are subject to such barriers, and therefore lie beyond solution space, we guarantee that those initiatives will fail and that the resources so committed will have been wasted. It is important to note that ‘success’ does not mean being able to maintain anything remotely resembling business as usual. It refers to being able to achieve the best possible outcome under the circumstances.

Sculptors work by carving away excess material in order to reveal the figure within the block they are working with. Similarly, we can carve away from the featureless monolith of conceivable approaches those that we can see in advance are doomed to fail, leaving us with a figuratively coherent group of potentially workable ideas. In order to carve away the waste material and get closer to a much smaller set of viable possibilities, we need to understand some of the non-negotiable factors we will be facing, each of which has implications restrictive of viable solution space. Many of these issues are the fundamental substance of the message we have been propagating at the Automatic Earth since its inception and will therefore constitute a review for our regular readership. For more detail on these topics, check out our primers section.

Global Financial Crisis – Liquidity Crunch and Economic Depression

As we have maintained since the Automatic Earth’s launch in early 2008, we have lived through a gigantic monetary expansion over the last 30 years or so –  the largest financial departure from reality in human history. In doing so we have created a crisis of under-collateralization. This period was highly inflationary, as we saw a vast increase in the supply of money and credit versus available goods and services. Both currency printing and credit hyper-expansion constitute inflation, but the outcome, and therefore prescription, for each is very different. While currency printing cuts the real wealth pie into many more pieces, each of which will be very small, credit expansions such as this one create multiple and mutually exclusive claims to the same pieces of pie, hence we have generated a vast quantity of excess claims to underlying real wealth.

In other words, we have created a bubble of virtual wealth, with no substance to back up the pile of promises to repay that it rests upon. As we have said before, this amounts to playing a giant game of musical chairs where there is perhaps one chair for every hundred people playing the game. When the music stops, those best positioned to understand the rules of the game will grab a chair as quickly as possible. Everyone else will be out of the game. The endgame of credit expansion is always a credit implosion, where the excess claims are rapidly and messily extinguished. This is, of course, deflation by definition – a contraction in the supply of money and credit relative to available goods and services – through the collapse of the credit supply, where credit is of the order of 99% of the effective money supply.

A credit implosion crashes both the money supply and the velocity of money – the rate at which money circulates in the economy. Together these factors determine how much economic activity can be sustained. With both the money supply and the velocity of money very low, a state of liquidity crunch exists, where there is insufficient liquidity in the economy to connect buyers and sellers, or producers and consumers. Nothing moves, so there is little or no economic activity. Note that demand is not what one wants, but what one can pay for, so with little purchasing power available, demand will be very low under such circumstances.

During the expansion, both the money supply and the velocity of money increased dramatically, and the resulting artificial stimulation of demand led to an increase in supply, with the ability to sustain a much larger than normal amount of economic activity. But once the limit is reached, where all the income streams of the productive economy can no longer service the debt created, and there are no more willing borrowers or lenders, the demand stimulation disappears, leaving a great deal of supply without a market. The demand that had been effectively borrowed from the future, must be ‘repaid’ once the bubble bursts, leading to a prolonged period of low demand. The supply that had arisen to service it no longer has a reason to exist and cannot be maintained.

The economy moves into a period of seizure under such cIrcumstances. We have frequently compared attempting to run an economy with too small a money supply in circulation to trying to run an automobile with the oil warning light on, indicating too little lubricant. Engines seize up when run with too little lubricant, a role played by money in the case of the engine of the economy. The situation created can also be compared to a computer operating system crash, where nothing functions until the system has been rebooted. During the Great Depression of the 1930s, people noted that they had plenty of everything except money. Liquidity crunch creates a condition of artificial scarcity, where even being surrounded by resources is of little use for a period of time once the operating system has crashed and has yet to be ‘rebooted’.

We will be looking at a period of acute liquidity crunch followed by a long period of chronic financial instability. The initial contraction will be driven by fear and that fear will persist for a long time. This will result in little credit being made available, and only at high cost. In other words, interest rates, which are a risk premium, will be very high as we move beyond the initial phase of contraction and fear is in the drivers seat. Deflation and economic depression are mutually reinforcing, hence once that downward spiral, or vicious circle, dynamic has taken hold, we will remain in its grip for many years.

Given that the cost of capital will be very high, and there will be little purchasing power, proposed solutions which are capital-intensive will lie outside solution space.

Tune back in tomorrow for The Psychological Driver of Deflation and the Collapse of the Trust Horizon .

Home Forums The Boundaries and Future of Solution Space – Part 1

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    Gustave Doré Dante and the Angel of the Church before the Door of Purgatory 1868 We’re going to try something a little different. Nicole wrote another
    [See the full post at: The Boundaries and Future of Solution Space – Part 1]


    Largely through the thinking on this site, several years ago I took a walk in the woods. I am/was a pensioner at that time with a small guaranteed income of some $1800 a month. Adequate for survival but with inflation eating away my purchasing power, the writing was on the wall, even considering governments reneging on pensions in the future.

    I had no land, no savings, and my work skills were quite specialized. I managed to enter into a share cropping experience with a landowner and bought 6 weaner pigs. Over the last three years, my herd has grown to about 40 pigs. I have not sold any and butchered only one for personal use. My pension has just been adequate enough to buy fencing materials and food over the winter for my animals. The government has found ways to reduce my pension income by over $300 so I have had to cut my personal living expenses considerably so that I could keep feeding my herd. My original sharecropping agreement was settled with a cash payment and I have had to find two other locations on which I now pay a small rent.

    I am now 75 years old and the benefits of the decision have been gratifying. My health has improved with the daily exercise I have to do in maintaining my herd. My respect and love of nature has improved in watching pigs breed, eat and survive. I have also gained in personal friendships as people in the community have observed my efforts. If I was to liquify my herd at this moment, I would probably realize 12 – 15,000 dollars. But that in a sense would only be a break even point financially after I deducted all my expenses. So from a business point of view, I am not successful.

    However, in terms of health, community, and having an asset to barter with if our system collapses, I am in excellent shape. I also have skills that would help others to survive and a surplus of female pigs that would allow them to start herds of their own while killing and eating the boars for personal survival and bartering.

    Personally, I am rather surprised that the economic situation has held together as long as it has but I still have faith that it will crash very soon. To echo some advise I received from grandfather who lived through the depression through farming and raised 8 children, it was this: “In the depression you could buy a loaf of bread for a nickel, but no one had a nickel.”

    He had a working farm and a large family so he not only was able to take care of his own, but had surplus to help others. I was amazed at the number of people who came to me at my grandfather and later my grandmother’s funeral who told me how much help they had given to others in those terrible times.


    Liquidity crunch? Enter cashless e-money as the TPTB solution of choice. There are way more electrons in the world than there are physical trees with which to make Federal Reserve Notes. And electrons are much faster to put to work than mechanical printing presses.

    I would be willing to guess that new electronic entries can be generated at a faster rate than any rate of withdrawals, required to meet everyday living expenses. Was it Greenspan that said he could guarantee all the money necessary to meet future debt obligations, he just couldn’t guarantee it’s purchasing power? And this before the technology that exists today, to create bit-money?

    This new means of creating unlimited liquidity should certainly assure that demand will exceed supply to the point of causing ever increasing price rises,,,until, of course, the supply chain breaks down, sometime in the future, and on someone else’s watch. And, after all, isn’t that what politicians do, take credit for temporary solutions, while pushing problems onto the next watch?

    In light of the fact that there is nothing backing today’s money, and considering the above points, I must continue to keep the horse placed before the cart,,,that deflation to a central banker is like garlic to a vampire, and won’t be tolerated, until the currency is destroyed, along with it’s producer. As in “Whatever it Takes.”

    That is when you will get real deflation and revaluation of medium of exchange.


    Add, this isn’t 1929. Money then contained, and was backed by, precious metals, and was hoarded for that reason. How does one cram electrons into a mattress? Why, when there are plenty to go ’round?


    While I think ‘Swineherder’ is doing what he can under the circumstances if things go ‘south’ to the extent his pigs become essential to his survival then things are going all the way ‘south’ and there is no guarantee he will be around to sell or even eat them.

    Bob Dylan wrote a song long ago called “Talking World War Three Blues” in which he noted that everyone dreams they are the sole survivor but everyone’s dream is a bit different in that they ‘didn’t see you around’ and therein lies the problem. There is no ‘plan’ one can have that works if the ‘system’ collapses. Gold, crops, protein and any other ‘asset’ can be seized by the state or any other actor with the means to do so even if it is just an 18 year old kid with a gun and if the ‘system’ breaks down everyone becomes an independent actor.

    Our world is incredibly complex. My ability to exchange a promissory note backed by the ‘full faith and credit’ of the United States government for a ham depends on a few billion people working together and believing in that promise for it to happen. Should that faith and trust dissolve then we are left with an unpleasant alternative.


    Huge energy throughput….has led to tremendous complexity [and] …far greater potential to concentrate enormous power in the hands of the few with destructive political consequences…

    Ivan Illich talked about this back in the early 1970s in his little book (actually a compilation of several lectures) Energy and Equity. Even fewer people realize this important aspect of large quanta of energy through a system than realize we are at the limit of our limits.

    In other words, the continued concentration of wealth/power in the hands of fewer and fewer (the infamous 1 percent, and now talk of the 1 percent of the 1 percent) is a guaranteed result of gorging on fossil fuels. We can try to put governors on this phenomena–for instance, the New Deal–but eventually even those mild attempts at restraint are overwhelmed.

    It should be clear from this that there is no secret cabal of TPTB, meeting on a yacht somewhere once a year and staying in touch with weekly teleconference calls to plan their world domination. Sure, super wealthy people fight together to make rules that allow them to get richer, but, as Nicole puts it, when the music stops, they will be cutting each others’ throats to get their ass in the empty chair.

    It should also be clear from this that the natural outcome of vast amounts of energy poured into a civilization will have all the same complex problems and dilemmas whether the particular segment of the civilization is socialist, communist, democratic, republican or whatever.

    This is not an insignificant point, because the failure to understand that will create scapegoating and many other problems that will further absorb energy, both physical and psychic, that would obviously be better applied elsewhere. It’s not that bad behavior should not garner an appropriate response, but over-attention to this aspect of who is to blame will not be fruitful.

    Industrial civilization is a complex organism in its own right, and a few must play the role of those in power regardless. Once those massive amounts of energy go away, much of the power reliant on that will also disappear. It is important to envision what types of hopefully relatively benevolent power structures might work in this kind of future. If we even have a choice. A number of writers in this arena of collapse have suggested dictators, tyrants, and various criminal gangs will fill this void. Certainly if we don’t make any positive effort in this direction that is a highly conceivable outcome.


    What is the underlying wealth made of?
    Land? Metals?
    And, how does one measure it, other than in terms of currency?
    Which currency? Dollar? Sterling? Ruble?

    Rogue Economist

    So how many words does the whole article come in at with all 5 parts? 😀



    9662 words. 200 paragraphs. 60896 characters.

    Dr. Diablo

    The super-wealthy certainly will try the digital currency and to further concentrate power, but the problem is that their power also rests on a fabulously complex chain of specialization. Whether that breaks because it’s fragile, or whether because the drop of energy overwhelms their resistance (just as Mixte notes the New Deal was overwhelmed by the energy rise) doesn’t really matter. Sure you can IMAGINE a world where a few have a digital full-surveillance state (Hunger Games, eg) but the details of the REALITY of that aren’t really so practical. In a world of intermittent power for the masses, where being more wealthy will be seen as part of the cause and the enemy, where all the rare earth supplies, magnets, chips, tens of thousands of specific plastics, bearings, metals, parts, all become harder to source with ever-fewer companies still open, then the computer of the surveilled will be broken or won’t be on. You can no longer just go down to the mall and get a night vision drone. Or gasoline. Or even from Lockheed for that matter, as their creations also depend on the nut-and-screw manufacturers still being open much more than you’d imagine. Short answer, seems like a good idea– to them, as we see from their own white papers–but practically will fall apart. Like the Iraq war funding itself.

    What is wealth made of? Take a look at the underlying premise: wealth to whom? Human beings in this case. Well a forest is a storehouse of wealth in wood, water, but if you were dropped in the middle of one you’d probably starve. So it’s not exactly the wood, the ore, the fields, the sea that is wealth. It’s human imagination and activity that transforms these raw resources into forms that humans use, into wealth for humans. So in a strange way, WE are the wealth, not them, not “it.” That’s what several writers (like yourself, but also Charles Hugh Smith and others) mean by weathering the storm by focusing on skills and connections to make ourselves resilient. If we are the wealth, our skills, our knowing, our trading amongst ourselves, then we can be okay if only people can get their minds around not trading for money owned and dispensed by a third party, but among ourselves for our own benefit. –Far easier said than done, unfortunately.

    And perhaps we should focus more on the solutions, on what type of leaders and governance we would like to see and has been proven to work, rather than re-hashing the problems again.


    Prof, the situation you describe, ie cashless money, is already the case. The vast predominance of all “money” is both in the form of debt and as electronic entries. I don’t know for sure the share of actual printed money, but it is trivial.

    As for being able to generate it faster than it is withdrawn, very possibly, but it could only be withdrawn electronically and one would have to trust its value, which, as you suggest, cannot be guaranteed.

    But the biggest problem with that path is that its hyperinflationary effects would enable those in debt to pay off those debts very quickly and those who own the debts have no interest (literally and figuratively) in doing so. The banking system has created vast amounts of debt by fiat, with no actual collateral to back it up and when all debts become unpayable, they will be the ones rushing to grab whatever they can in the way of collateral which will suddenly be worth something real.

    The situation Nicole describes already exists in the Chinese port of Quindao where owners of piles of iron, steel, copper etc have been borrowing money from the shadow banking sector against that “asset”. Because the shadow banks don’t publish their books, and certainly don’t tell each other what they are doing, unscrupulous types have been able to mortgage the pile many times over. When, about 2 years ago, one of the owners became unable to pay his interest, the banks tried to seize his asset only to find there were 6 other banks already there fighting over ownership.

    That is what has happened on the grand scale. Greece, for example, was loaned billions more than its underlying assets were worth even then, and would be worth even less in a fire sale, the only reason the banks did not end up fighting over those assets was because they had the power to force the EU to buy their debts at 100% using public money.

    And that is also why we have not seen hyperinflation while the world’s central banks have borrowed into existence, literally trillions of $ in the last 7 years; there is no way that those dollars have been allowed into circulation, they have been used exclusively to prop up banks’ balance sheets and then fed into intangible assets such as shares which are endlessly exchanged among the banks or their proxies at ever higher values while the original debt is used by governments to maintain basic services that can no longer be supported by taxes from an economy that is breaking down.


    This is a very timely piece because its good to know that others are in the same boat. I had been working on my plan for a number of years and making what I thought to be reasonable progress until about a month ago when I read James Hansen’s latest paper and realised that my estimation of the climate issues is many orders of magnitude too optimistic.

    Since then I have been pretty depressed and paralysed and I’m only just starting to climb out of the grief and try to figure out what I might reasonably do next. Its good to see that people like Nicole (as I would have expected) are also staring hard down the barrel and into the abyss. I look forward to the next in the series. I would copy to my friends and family but given their response to my personal crisis, I realise also that it will be a waste of time.


    Imagine for a moment that a new energy source that outperforms fossil fuels in abundance and availability, but also has not any of the environmental constraints of fossil fuels, is discovered. I’m talking about an energy source with the density of nuclear fission but no radioactive emissions nor residues, whatsoever. Would it solve the problems of humanity within the current mindset? or just come to worsen them? I postulate that, by far, the current biggest problem humanity faces is the lack of capacity of changing our individual and colective behavior. No technology can fix that. This is something we have to become really aware of, and ponder it, because no magic trick will help us if we can’t truly and wholeheartedly change, from the predator competitive mindset, to the cooperative and solidarity based mindset. We need to do this desperately, to avoid our demise as species. Not even Low Energy Nuclear Reactions can save humanity from itself if we fail to change.

    Rogue Economist

    <i>”9662 words. 200 paragraphs. 60896 characters.”-RIM</i>

    On the long side, but not outrageous. I’ll cross post it in one shot after you finish the series and drop on the whole thing.


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