"The Fed Cannot Fix Today’s Energy Inflation Problem"
From Gail Tverberg (she's an actuary, pretty good with numbers, no B.S.) at her Our Finite World blog, April 5:
There is a reason for raising interest rates to try to fight
inflation. This approach tends to squeeze out the most marginal players
in the economy. Such businesses and governments tend to collapse, as
interest rates rise, leaving less “demand” for oil and other energy
products. The institutions that are squeezed out range from small
businesses to financial institutions to governmental organizations. The
lower demand tends to reduce inflationary pressure.
The amount of goods and services that the world’s economy can produce
is largely determined by fossil fuel supplies, plus our ability to use
“complexity” in many forms to produce the items that the world’s growing
population requires. Adding debt helps add complexity of various types,
such as more international trade, more advanced education, and more
specialized tools. For a while, the combination of growing energy
supplies and growing complexity have helped pull economies along.
Unfortunately, the world’s oil supply is no longer growing. Without
an adequate oil supply, it becomes difficult to maintain complexity
because complex solutions, such as international trade, require adequate
oil supplies. Inasmuch as we seem to be reaching energy and complexity
limits, nothing the regulators try to do to change the debt and money
supplies–even reeling them back in–can fix the underlying oil (and total
energy) problem.
I expect that the rich parts of the world, including the US, Europe,
and Japan, are in line to be adversely affected by high interest rates
this time. With their high levels of complexity, they are among the most
vulnerable to disruption when there is not enough oil to go around.
Figure 1. World oil consumption divided into consuming areas, based on data of BP’s 2022 Statistical Review of World Energy. Europe excludes Estonia, Latvia, Lithuania, and Ukraine.
The problem I see is that rich countries expect to maintain service
economies that are fed by huge streams of manufactured goods and raw
materials from poorer countries. This pattern appears unsustainable to
me, in a world with falling exports because of energy problems.
I expect a significant change in the trading of goods and services,
starting as soon as the next few months. Major financial changes may be
ahead, fairly soon, as well. In this post, I will try to explain these
and related ideas.
[1] Growing debt is a temporary substitute for growing energy supply of the right kinds.
Economists seem to believe that the economy grows because of an invisible hand.
I believe that the economy grows because of a growing supply of energy
products of the right kinds, together with a growing supply of other raw
materials, and a growing supply of human labor. The economy grows in
keeping with the laws of physics.
Debt does help provide an extra pull, however, because it enables
growing “complexity.” Even in the days of hunters and gathers, it was
helpful for people to work together and share the benefit of their
labor. A type of short-term debt results from the delayed benefit of
working together, even if the delay is only a few hours.
In modern times, debt can help build a factory. The factory can
provide more/better output than individual people working by themselves
using available resources. There needs to be a way of paying for the
delayed benefit of the human labor involved in the whole chain of events
that leads to the finished output. Growing debt can help pay workers,
long before the benefit of the factory becomes available.
Debt can also make high-priced goods more affordable. A car, or a
home, or a college education is more affordable if it can be paid for in
installments, as income becomes available to pay for it.
[2] Diminishing returns on added complexity is one issue that puts an end to the ability to grow debt....
