The Next Financial Crisis

The Next Financial Crisis

Gail Tverberg

2019, The Globalized Governance of Finance

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The paper discusses the potential for economic collapse due to various interrelated factors, particularly focusing on the implications of energy consumption and oil prices. It references historical analyses, including the collapse of the Soviet Union and current issues faced by oil-exporting and importing countries, emphasizing the risks posed by low wages, high debt, and decreasing energy consumption. The paper argues that a decline in energy consumption per capita can hinder economic productivity and lead to significant political and financial instability.

The Next Financial Crisis Gail Tverberg – Ecologistas en Acción - June 26, 2017 Our economy is a self-organized system that seems to grow by itself It is built up over time, by adding new businesses, governments, customers, and laws } } It adds new goods and services, and eliminates old ones Source: http://www.rinusroelofs.nl/structure/davinci-sticks/gallery/gallery-01.html 2 An economy can collapse, if conditions are not right Many economies have collapsed in the past } Based on analysis of researchers Peter Turchin and Surgey Nefedov in “Secular Cycles.” 3 Example: The Soviet Union collapsed in 1991, leaving its member countries This is the energy consumption of the countries, after collapse } 4 The Soviet Union was an oil exporter that collapsed when oil prices were low 1991 Collapse 5 Venezuela is an oil exporting country with problems today – when prices are again low 6 Oil importing nations can have problems when oil prices are too high 7 Spain is another oil importing country with problems when oil prices are too high 8 Countries with rapidly growing (cheap) coal consumption tend to do well 9 China’s energy consumption was growing rapidly, but now is nearly flat – Problem!!! 10 Shrinking coal consumption is bringing down world growth in energy consumption 11 Historically, world economic growth has followed growth in energy consumption 12 Growing energy consumption enables economic growth } Allows energy products to increasingly leverage human labor } } } One gallon of gasoline equivalent to 500 hours of human labor Thus growing energy consumption allows productivity growth World growth in energy consumption per capita is now slightly negative } } } Leads to lack of productivity growth Leads to inability to repay debt with interest Economies of scale occur less often } 13 Instead, fixed costs become a problem as businesses shrink World growth in energy consumption per capita is now slightly negative 14 Growing wage disparity becomes a problem } It takes energy to produce jobs } } People with low skills compete in world labor market } } Not enough energy leads to few jobs that pay well Wages fall too low to afford a home and family Result is political problems } } } Radical parties No two parties can agree Government finds it difficult to collect enough taxes } 15 Problem is workers with low wages who cannot afford to pay taxes No oil price today is satisfactory for both oil producers and oil consumers 16 We have multiple problems that can lead to collapse } $45 per barrel oil is way too low for oil producers } } $100+ per barrel oil is needed by producers } } Will lead to collapse of exporting countries Way too high for oil importers like Greece and Spain China’s slowing energy consumption will make it difficult to repay debt with interest } } } 17 Spain, Italy, Greece have the same problem Can lead to huge debt defaults Failing banks Timing of collapse is likely to be soon } There are many things that go wrong } } } } } Radical political parties arise; gain power If oil prices stay low, oil exporters collapse If oil prices rise, oil importing countries collapse Higher-level organizations, such as European Union, subject to collapse Debt defaults increase } Energy growth is what permits economic growth } All of these problems come from inadequate growth in energy consumption } Timing could be as soon as next few months 18 Affordability is a big part of our energy problem } Too many people have low paying jobs, or no job at all } Wage disparity problem again } These people cannot afford to buy energy-using goods such as cars and homes } There is plenty of oil, coal, natural gas and other energy products, if consumers could afford the high prices that producers require } } 19 Affordability is the key issue Neither economists nor peak oil people understand the issues! Likely symptoms of collapse } Governments that cannot agree because political parties cannot agree } } Eventually, cannot collect enough taxes Top political layers lose power } } Top layers may disappear, similar to Soviet Union collapse Debt that cannot be repaid with interest } } } Failing banks Failing pension plans Eventually, governments give up on bailing out banks, pension plans, or fail themselves Falling international trade } 20 Contact Information } Gail Tverberg } } Fellow of Casualty Actuarial Society – USA Currently doing research on energy and the economy } OurFiniteWorld.com } GailTverberg@comcast.net 21

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