Authored by Gail Tverberg via Our Finite World blog,
It will be an interesting year.
We know that the age of peak performance for humans varies, depending upon the activity. Peak performance for an athlete tends to come between ages 20 and 30, while peak performance for a person writing academic papers seems to come between ages 40 and 50 years. By the time people are 80 years old, they have a strong suspicion that health and other aspects of performance will deteriorate in the next 20 years.
Economies, in physics terms, are similar to human beings. Both are dissipative structures. They require energy of the appropriate kinds to keep their systems growing and operating normally. For humans, the main source of this energy is food. For an economy, it is a mixture of energy that the economy is specifically adapted to. Today’s economy requires a certain mixture of energy directly from the sun, plus energy from fossil fuels, burned biomass, and nuclear energy. Electricity is a carrier of energy from different sources. It needs to be available at the right time of day and the right time of year to allow today’s economy to continue.
Most people don’t realize that economies grow and eventually collapse. For example, we know that the Roman Empire started its growth in 625 BCE and reached its peak extent in 211 CE. It declined somewhat between 211 CE and 456 CE, when it finally collapsed after several invasions. The growth and collapse of economies is very much expected because of their nature as dissipative structures.
In 2024, the world economy is acting more and more like an 80-year-old man than like a young vigorous economy. Perhaps the economy can continue for quite a few more years, but it increasingly looks like it is in danger of falling apart, or of succumbing as a result of what might be regarded as minor problems.
Trying to predict precisely what will happen in the year 2024 is difficult, but in this post, I will examine some of the things that are going wrong in this increasingly creaky old economy.
[1] Too many parts of the world economy are changing from growth to shrinkage.
The blue circles can illustrate many different things:
-
The total goods and services produced by the economy;
-
The quantity of energy required to produce the total goods and service produced by the economy;
-
The total population that is supported by these goods and services (which will generally be rising or falling, too);
-
Goods and services per person (which tend to rise during periods of growth and fall in a shrinking economy);
-
And, strangely enough, the ability of the economy to maintain complexity. Without enough energy, structures such as governments tend to fail.
As the economy moves away from growth, toward shrinkage, major changes can be expected.
[2] In a growing economy, repaying debt with interest is very easy. In a shrinking economy, repaying debt with interest becomes close to impossible.
If an economy is growing, there will likely be an increasing number of jobs available over time, and they will pay relatively more. If a person loses his/her job, it is not very difficult to get a position that will pay as much or more. Paying back a loan on a house or an automobile tends to be easy.
A corresponding situation occurs for businesses. If the business can count on an increasing number of customers, overhead becomes easier and easier to cover with a growing consumer base.
The reverse is obviously true in a shrinking economy. Jobs may be available if a person loses his/her current job, but the jobs don’t pay very well. Businesses may face periods with suddenly lower demand, as in 2020. There is a sudden need to reduce overhead, such as payments for office space, if the space is no longer being utilized by employees.
Clearly, if interest rates rise, it becomes increasingly difficult for borrowers of all kinds to repay debt with interest. Raising interest rates is thus a way to intentionally slow the economy. If the economy is growing too quickly (like a 20-year-old sprinter), then such a change makes sense. But if the economy is behaving like an 80-year-old, hobbling along on a walking stick, it becomes likely the economy will figuratively fall and become severely injured. This is the danger of raising interest rates when the world economy is having difficulty growing at an adequate rate.
[3] The physics of the system dictates that as the system shifts in the direction of shrinkage, the wealth of the system is increasingly distributed toward the rich and very powerful, and away from those of modest means.
Physicist Francois Roddier writes about this issue in his book, The Thermodynamics of Evolution. He likens energy (and the goods and services produced using this energy) as being like energy applied to water. When energy levels are low, the less wealthy members of the economy tend to be squeezed out, just as (low energy) frozen water turns to ice. The reduced amount of energy available (and goods and services produced using this energy) increasingly bubbles up to the small number of economic participants at the top of the economic hierarchy. This issue tends to make the already rich even richer.
In some sense, the self-organizing economy seems to preserve as much of the economy as it can, when energy supplies are inadequate. The wealthy seem to be important for keeping the whole system operating, so the physics tends to favor them.
Inflation, in general, is a problem, especially for people with limited income. Higher interest rates also take a big “bite” out of spendable income. This problem is greatest for low income people. The benefit of higher interest rates, and of capital gains, tends to go to high income people.
High food prices especially affect the poor because, even in good times, food tends to be a high share of their income. For example, in a poor country, if food costs amount to 50% of a person’s income when food prices are moderate, a 20% increase in food prices will lead to food prices costing 60% of income. Such a situation quickly becomes intolerable because there is not enough income left for other essential goods.
Figure 2. Chart by the Federal Reserve of St. Louis showing the Share of the Total Net Worth Held by the Top 1% of US Citizens (99th to 100th percentile).
The figure above shows that between 1990 and 2022, the share of total wealth held by the top 1% of US citizens rose from 23% to 32%. This means that other citizens were increasingly squeezed out of the benefits of the growing economy.
[4] With their newfound power (arising from the growing concentration of wealth), the wealthy are tempted to exert increasing control over the economic system.
The fact that the world economy was likely to reach annual limits of fossil fuel extraction about now has been known for a very long time. I have referred to a 1957 speech by US Navy Admiral Hyman Rickover pointing out this bottleneck many times. Wealthy individuals have known about this bottleneck for a very long time. They have been asking themselves, “How can we increasingly benefit from this change?”
Clearly, reducing the population growth rate has been one of the goals of some of these wealthy individuals. With fewer people to share the resources available, everyone will benefit.
But the wealthy can also see that hiding the energy bottleneck would be of huge benefit in keeping the current system operating as usual. These individuals, through the World Economic Forum and other organizations, have pushed for zero global warming emissions. They have tried to reframe the problem of inadequate inexpensive-to-produce fossil fuels as a problem of too large a quantity of fossil fuels for the system to handle. In their view, we can decide to transition away from fossil fuels without significantly adverse impacts.
By hiding the energy bottleneck, companies selling vehicles can claim they will be useful for many years. Educational systems can claim that we are well on our way to finding substitutes for fossil fuels, and that there will be good jobs available in the new systems. With the bottleneck problem hidden, politicians do not have to present citizens with a very concerning and intractable issue. Since a happily-ever-after narrative is desired by all, it is easy for the wealthy (and politicians who want to be reelected) to influence the major news outlets to present only this view to readers.
[5] Major cracks in the economy are likely to start showing soon. The energy bottleneck is already pulling the economy down, even if major news media are reluctant to discuss the problem.
The problem displays itself in several different ways:
(a) The economy has moved toward two widely differing views regarding today’s energy situation.
The narrative presented in the press is that we have an excessive amount of fossil fuels. In this view, any shortage of fossil fuels (or any other resource) would be quickly accompanied by rising prices. These rising prices would allow an increasing quantity of these materials to be extracted, quickly solving the problem. But the real story, for anyone who examines the details, is quite different. Affordability becomes very important, holding prices down. History shows that nearly every civilization has collapsed. Populations tend to grow but the resources supporting the economies don’t grow quickly enough. Rising prices don’t fix the problem!
People who work with fossil fuels know how essential they are for our current civilization. The story about intermittent wind and solar substituting for fossil fuels sounds very far-fetched if a person thinks about the need for heat in the winter and the difficulties associated with long-term storage of electricity. The two widely differing narratives surrounding our energy future sound like they could have come from the dystopian novel Nineteen Eighty-Four by George Orwell.
(b) Repaying debt with interest gets to be an increasing problem.
Strange as it may seem, added debt can temporarily act as a placeholder for additional energy. Debt is a promise for goods and services that will be made with future energy. This placeholder can allow capital goods, such as factories, to be made which allow more goods and services to be made in the future. This placeholder can also be used as the basis for money to pay workers, so that they can afford to purchase more goods.
At some point, the debt becomes too much for the system to sustain. We are seeing some of this in China, where there have been debt defaults in the real estate market. In the US, the commercial real estate market is experiencing high vacancy rates. There is increasing concern that, in many places, commercial real estate can only be sold at a huge loss. In this situation, the holders of debt are likely to sustain massive losses.
(c) Political parties start differing widely on whether to increase government debt.
The more conservative parties do not want to keep adding more debt, but the more liberal parties insist that there is no other way out: If there isn’t enough energy of the right kind, the added debt can perhaps be used to fund projects in the renewable energy sector that will create the illusion of progress toward an adequate supply of energy of the right kind at the right price. The added debt can also be used to continue the many social programs promised to citizens and to provide support for activities such as the war in Ukraine.
So far, adding debt has worked for the US because the US dollar is the world’s reserve currency and because the US has tended to keep its target interest rates high, encouraging other countries to invest in US securities. If other countries try to add substantially more debt, their currencies will tend to fall, leading to inflation.
The US may soon also run into an inflation problem because of added debt. This happens because it is possible to “print money,” but it is not possible to print goods and services made with inexpensive energy products. For example, the temptation is to bail out failing banks and pension plans with added debt. To the extent that this debt gets back into the money supply, but there aren’t added goods to match, the result is likely to be inflation in the prices of the goods and services that are available.
(d) Broken supply lines are another sign of an economy reaching limits.
When there aren’t quite enough goods and services to go around, some would-be buyers of goods have to be left out.
In the last three years, all of us have experienced at least some problems with empty shelves in stores and the unavailability of needed parts for repairs. Many kinds of drugs are in short supply around the world. Heavy industry has been encountering problems, as well. In 2022, Upstream Online wrote, “Drill pipe shortages causing headaches for US producers [of oil and natural gas].”
If we are reaching the limit of inexpensive fossil fuel available for extraction, an increasing number of these problems can be expected. These supply line problems tend to raise costs in a different way than “regular” inflation. Often, a more expensive product must be substituted, or a higher cost workaround is needed. For example, a person may need to use a rental vehicle while his current vehicle is being repaired because of unavailable replacement parts.
(e) Conflicts arise when there are not enough goods and services to go around.
Part of the conflict comes from wage and wealth disparity. For example, an increasing number of people are finding reasonably-priced housing impossible to find. The combination of high interest rates and high housing prices tends to make home-buying a luxury, available only to the rich. An increasing share of young people are also finding automobiles too expensive to afford. One way “not-enough-goods-and-services-to-go-around” manifests itself is by many people not being able to afford the products in question.
There is often a belief that a more equitable distribution of income would solve the problem. But, if the economy cannot build more cars or homes because of energy shortages, this doesn’t fix the problem. Providing more money to the poor would instead cause inflation in the price of the goods that are available.
Another way this conflict manifests itself is in conflicts among countries. Countries selling fossil fuels, such as Russia, would like higher fossil fuel prices, so that the standards of living of their own people can be higher. However, if fossil-fuel-importing countries, such as those in Europe, are forced to pay higher prices for the fossil fuel they use, it becomes difficult for companies in these countries to manufacture goods profitably. Also, the higher fossil fuel prices make the cost of growing food higher. Customers often cannot afford higher food prices.
In the case of the fight between Israel and Gaza, at least part of the conflict relates to the natural gas field that Israel is developing, but which arguably belongs to Gaza. If Israel can develop this resource, it may be able to keep its own economy expanding for a while longer. The people of Gaza will remain very poor.
(f) Manufacturing around the world seems to be reducing in quantity. It definitely is not rising to keep up with population growth.
The big shortfall today is in goods, rather than in services. This is what a person would expect if an energy problem is giving rise to the problems we are currently experiencing.
The organization S&P Global Market Intelligence puts out an index called the Purchasing Managers Index, for 15 countries, including a global average. The manufacturing portion of this index is in contraction on a worldwide basis, as of the latest data available. The extent of this manufacturing contraction is especially significant for the US, the European countries included, for Japan, and for Australia. The countries that are not in contraction are India, Russia, and China.
If manufacturing is in contraction, we would expect more broken supply lines in the months and years ahead.
[6] How will all this turn out, in 2024 and long term?
I don’t think we know. Things are likely to get worse economically, but we don’t know how much worse. We know that an elderly person can easily succumb to some illness. In the same way, we know that if the economy has enough weak points, a major collapse might occur, even without a huge decline in energy availability.
At the same time, the economy seems to have a lot of resilience. Leaders of the US, and perhaps of other countries, as well, seem likely to take the route of adding increasing amounts of debt, to bail themselves out of whatever problems arise. If banks get into trouble, some new funding facility will be developed. If Social Security or private pensions need more funding, it will likely be provided by more government debt. This leads me to suspect that in the US, at least, there is likely to be a higher risk of hyperinflation (lots of money but very little to buy) rather than deflation (very little money, but also very little to buy).
The Universe came into being, apparently out of nothing. The Universe has grown and continues to grow. Eric Chaisson, in his 2001 book, Cosmic Evolution: The Rise of Complexity in Nature, shows that the trend in the Universe has been toward ever greater complexity.
Figure 3. Image similar to ones shown in Eric Chaisson’s 2001 book, Cosmic Evolution: The Rise of Complexity in Nature.
Together, it appears that the Universe, itself, acts like a dissipative structure. Self-organization leads the Universe to grow and become more complex, as long as it has adequate energy. The question becomes, “Where is the expanding energy supply for the Universe as a whole coming from? Can the expanding energy supply continue indefinitely, or until whatever force started it, chooses to stop it?”
It seems to me that there is something from outside pushing the whole Universe along. Economists talk about “an invisible hand.” People from a religious background might say that there is a God who created the Universe, and is continuing to create it every day, through involvement in the things that take place on Earth, including the strange happenings in 2020.
If I am correct that there is an outside force influencing the economy today, perhaps Earth’s problems are temporary. One possibility is that eventually a new type of energy solution will be found. There is also the possibility that, at some point, whatever force started the Universe may cause the operation of the Universe to cease. A replacement (which we can think of as heaven) might be provided instead.
The popular narrative tends to see ourselves as having a great deal of power to manage problems with our current economy, but I don’t think that we have very much power to influence the system we find ourselves embedded in. The economic system behaves on its own, based on market forces, just a child grows up, matures, and eventually dies. The system within which we live is very much guided by what we call self-organization, which is outside our power to control.
