Global debt crisis honors forum 9 28-11


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  • Presidential Address Eastern Economic Journal (2011) 37, 307–312. doi:10.1057/eej.2011.8 The Profession and the Crisis Paul Krugman
  • In 1998 the total amount of financial borrowing exceeds the total possible.   This is because in that year, the Flow of Funds accounts records that the Federal Government had a surplus of $52.6 Billion.  This number is then deducted from the total, which equals $1005.5 Billion, compared to $1026.8 Billion in financial sector borrowing. 
  • Bank runs are so called because prior to the introduction of federal insurance people would literally run to the banks to withdraw their holdings.
  • In all major economies, the vast majority of money is created by private banks as debt through the fractional reserve system . In the US, all new money is created by private banks, as debt.
  • In all major economies, the vast majority of money is created by private banks as debt through the fractional reserve system . In the US, all new money is created by private banks, as debt.
  • Perversely, the Federal Reserve exercises that power which the US Treasury does not: the power to create money from nothing, but only as debt.
  • For the Federal Reserve (aka Monetary Authority) holdings, go to:
  • For the Federal Reserve (aka Monetary Authority) holdings, go to:
  • For the Federal Reserve (aka Monetary Authority) holdings, go to:
  • For the Federal Reserve (aka Monetary Authority) holdings, go to:
  • For the Federal Reserve (aka Monetary Authority) holdings, go to:
  • Between 1960 and 1970 global petroleum production increased 118.6 percent.  By contrast, between 1971 and 2009, global petroleum production increased only 52.1 percent.   Worldwide discovery of oil peaked in 1964. G lobal petroleum production has remained nearly flat since 2005.   In this year the Energy Information Administration (EIA) estimates that an average of 73.74 million barrels of oil was extracted daily.  This declined slightly until 2008, when it increased to 73.78 million barrels of oil per day, an increase of only .054 percent over four years.  The average annual percent change of production from 1960 to 1970 is 8.139 percent, whereas the average annual percent change of production from 1971 to 2009 is only 1.311 percent.
  • Today, there are about 50 countries that are producing less oil today than in the past.  Ironically, more efficient means of extraction petroleum has only expedited its depletion, acting as giant “super straws” sucking the last easy-to-reach oil out of the ground at faster and faster rates, but without significantly increasing the amount of petroleum that would be produced from any given oil field.  The last great oil discoveries of the 20th century, which effectively postponed the point of peak global production, were fields in Alaska,  Siberia, and the North Sea, discovered in 1967, 1968, and 1969, respectively.
  • This relationship changes abruptly in the mid-1970s due to political events in the Mideast.  Ignoring these political events, and tracing the relationship between quantity supplied and prices for the years 1987 to 2008, yields the time series above. Instead of rising output and falling prices, the rate of production growth declines and prices rise dramatically. In addition, the former linear slope becomes more curvilinear or exponential.
  • Data are taken from the World Bank’s World Development Indicators (WDI) database. Gross Domestic Product is measured at constant 2000 US dollars. Energy use is measured as kg of oil equivalent per capita. The WDI database can be located online at:
  • Global debt crisis honors forum 9 28-11

    1. 1. The Global Debt Crisis: Money, Energy, and Limits to Growth John Bradford, Ph.D.
    2. 2. <ul><li>“ What we really need is a change in the destructive social dynamics that brought us to this point. And I wish I knew how to do that. But my problem is obvious: I’m an economist, and it seems that we need some kind of sociologist to solve our profession's problems .” </li><ul><ul><ul><ul><li>Paul Krugman (2011) </li></ul></ul></ul></ul></ul>
    3. 3. Overview <ul><li>Fundamentals </li><ul><li>Exponential Growth, What is Money? </li></ul><li>Economic Crisis </li><ul><li>Inequality, Debt and Finance, Banking 101 </li></ul><li>Energy Crisis </li><ul><li>Peak Oil, Limits to Growth </li></ul></ul>
    4. 4. Overview Summary: 1. We cannot understand today's global economic crisis without understanding our ecological and energy crises. 2. A monetary and economic system based on the expectation of infinite, exponential growth cannot work in a finite world with limited resources.
    5. 5. I. Fundamental Concepts
    6. 6. Exponential Growth: Population, Money, Oil <ul><li>Exponential Growth occurs when the amount that something increases is proportional to its current size (or 'value').
    7. 7. Example: The more people there are, the more people will be born.
    8. 8. The rate or percentage increase may be constant. </li></ul>
    9. 9. Exponential Growth: Population, Money, Oil <ul><li>You cam think of Exponential Growth as SPEEDING UP . </li><ul><li>1. The amount that is added growing larger over each unit of time </li><ul><ul><li>OR </li></ul></ul><li>2. The time shrinking between each additional unit of amount added </li></ul></ul>
    10. 10. Fundamentals: What is Money? <ul><li>Money can be defined as a social relationship or as the object used to symbolize a social relationship.
    11. 11. The things we call money (coins, bills, checks, beads, etc.) are secondary in importance to the relationship they express. </li></ul>
    12. 12. Fundamentals: What is Money? <ul><li>Aristotle: “Money ( nomisma ) by itself is but a mere device. It has value only by law ( nomos ) and not by nature.” </li><ul><li>Money is whatever people believe or treat as money! Money is an abstract social power; it is an unconditional means of payment defined by law. </li></ul><li>What sort of relationship is symbolized by money?
    13. 13. MONEY = A CLAIM ON 'WEALTH' OR HUMAN LABOR. It symbolizes a relation of CREDIT AND OBLIGATION (i.e. DEBT) </li></ul>
    14. 14. Fundamentals: What is Money? Summary: Money is credit . Credit is one end of a credit-debt relationship. Whoever has money is owed by society some quantity of labor or material wealth. Money is a claim on wealth, not wealth. Money represents the absence of wealth, not wealth itself! = IOU
    15. 15. Fundamentals: What is Money? Two Types of Money: 1. Public Money = universally redeemable IOU issued by the state. 2. Private Credit = IOUs which circulate as means of payment.
    16. 16. II. Economic Crisis
    17. 17. INEQUALITY
    18. 18. Wealth Concentration in the United States Top 1 percent Next 19 percent Bottom 80 percent 1983 33.8% 47.5% 18.7% 1989 37.4% 46.2% 16.5% 1992 37.2% 46.6% 16.2% 1995 38.5% 45.4% 16.1% 1998 38.1% 45.3% 16.6% 2001 33.4% 51.0% 15.6% 2004 34.3% 50.3% 15.3% 2007 34.6% 50.5% 15.0% Distribution of net worth and financial wealth Source: Domhoff 2011
    19. 19. Financial Wealth in the United States Top 1 percent Next 19 percent Bottom 80 percent 1983 42.9% 48.4% 8.7% 1989 46.9% 46.5% 6.6% 1992 45.6% 46.7% 7.7% 1995 47.2% 45.9% 7.0% 1998 47.3% 43.6% 9.1% 2001 39.7% 51.5% 8.7% 2004 42.2% 50.3% 7.5% 2007 42.7% 50.3% 7.0% Source: Domhoff 2011
    20. 20. Financial Wealth Distribution 2007 Source: Domhoff 2011
    21. 21. Income earned by the top 1% (1970-2010) Source: Picketty and Saez
    22. 22. Income earned by the top 1% (1913-2006)
    23. 23. CEO and Worker Pay CEOs' pay as a multiple of the average worker's pay, 1960-2007 Source: Domhoff 2011
    24. 24. Income Inequality in Select Countries Gini Coefficient <ul>1. Sweden </ul>23.0 <ul>2. Norway </ul>25.0 8. Austria 26.0 <ul>10. Germany </ul>27.0 <ul>17. Denmark </ul>29.0 <ul>25. Australia </ul>30.5 <ul>34. Italy </ul>32.0 <ul>35. Canada </ul>32.1 <ul>37. France </ul>32.7 <ul>81. China </ul>34.0 <ul>82. Russia </ul>41.5 90. Iran 42.3 *93. United States 44.5
    25. 25. Unemployment
    26. 26. DEBT
    27. 28. Exponential Debt Growth Taken from Monthly Review 2008: Sources: Flow of Funds Accounts of the United States,
    28. 29. Financial Debt and Profits
    29. 30. Financial Debt and Profits
    30. 31. US Total Debt to GDP
    31. 32. Household Debt to GDP
    32. 33. Financial Debt to GDP
    33. 34. Financial Borrowing
    34. 35. France
    35. 36. Germany
    36. 37. Greece
    37. 38. Iceland
    38. 39. Ireland
    39. 40. Portugal
    40. 41. Explaining Debt <ul><li>Remember: borrowing implies a lender. Financial profits rose faster than average, as did financial debts.
    41. 42. Principle: To grow, banks must make more loans. Banks lend more money in order to make more money. To make more money, they ended up borrowing more money to lend, or lending borrowed money .
    42. 43. LEVERAGE = DEBT: Leverage measures the degree to which assets are funded by borrowed money.  </li></ul>
    43. 44. Leverage and Bank Growth Banks can make more money in three ways: <ul><ul><li>Borrow at  lower interest rates;
    44. 45. Charge higher interest rates; </li></ul></ul><ul><ul><li>Banks have little control over the first two. Competition between banks for funding enforces some uniformity of interest rates. </li></ul></ul>3. Make more Loans! (aka increase its “Leverage”)
    45. 46. Banking 101
    46. 47. Two Debates about Central Banks <ul><li>Whether or not there should be a central, national bank.
    47. 48. Whether or not the central bank should be private or public. </li></ul><ul><li>These issues tend to get confused, but are in fact distinct. You should keep them separate in your mind. </li></ul>
    48. 49. Fractional Reserve Banking <ul><li>Suppose you lend Bob $100, but require Bob has to give you back this money (or part of it) whenever you ask for it. Realizing you probably aren’t going to ask for more than $10 back, Bob keeps $10 and loans out the rest of the “deposit” to Jane.
    49. 50. Note: normally a 'loan' implies that the lender gives up the right to use the item being loaned! This is not the case here. </li></ul>“ Bob” the Bank Depositor Borrower You “lend” the bank $100. Bob keeps $10, but lends out the rest of the $90.
    50. 51. Bank Runs <ul><li>Because the bank only has 10 percent of its total deposits on reserve, it necessarily cannot redeem all deposits at the same time. A mass withdrawal by depositors is called a bank run . When a bank run happens, the demands for cash exceed the bank's ability to pay , and if the bank cannot raise enough money, the bank becomes insolvent.
    51. 52. THE BANK'S POTENTIAL LEGAL OBLIGATIONS TO PAY ALWAYS EXCEED ITS ACTUAL ABILITY TO PAY AT ANY MOMENT. Bank Runs are an inherent risk of fractional reserve banking . </li></ul>“ Bob” the Bank Depositor Borrower Bank owes you $100, whenever you want it. Borrower owes bank $90 + 10% interest, in 1 year.
    52. 53. Shadow Banking (aka Securitized Banking) <ul><li>IOUs from other people become a store of value and are traded as money.
    53. 54. Banks sell (trade) these IOUs; lend these IOUs; and borrow against IOUs, (i.e. use IOUs as collateral). </li></ul>IOU Currency =
    54. 55. Securitized Banking (selling and lending loans) <ul><li>Think of “securities” as IOUs that are in turn traded and passed along, as in a game of ‘hot potato. ’ </li></ul>
    55. 56. Securitized Banking (selling and lending loans) <ul><li>Debt is sold to larger banks.
    56. 57. These Banks then can either sell these loans again, or they can borrow against them in ‘repurchase agreements’ </li></ul>
    57. 58. Loan sales increased, but most were retained
    58. 59. The 'Bank Run' of 2007-8 <ul><li>The financial panic of 2007-8 was essentially a ‘bank run’ in these ‘repo markets’
    59. 60. IOUs circulated around as money. Banks that purchased these IOUs (e.g. MBSs) borrowed against them in short-term contracts, using them as collateral to borrow cash.
    60. 61. Like a mortgage, this is ‘securitized’ lending, because putting up collateral makes it less risky or more secure (contra the ‘Commercial Paper’ market). </li></ul>
    61. 62. The 'Bank Run' of 2007-8 <ul><li>When the value of these securities dropped, because people stopped making their mortgage payments, this ( loan to value ratio ) was not met.
    62. 63. Lenders demanded that they be paid back, or else be given more collateral, i.e. more securities.
    63. 64. This is basically a mass withdrawal on the debtors who had to find more securities or sell them to raise more money. The sale in turn caused the prices of these securities to decline even further! </li></ul>
    64. 65. How money is created <ul><li>&quot;The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.” </li><ul><ul><ul><ul><li>John Kenneth Galbraith </li></ul></ul></ul></ul></ul>(1908 – 2006)
    65. 66. Where does our Money come from? <ul><li>In the US, the Federal Reserve prints “Federal Reserve notes” which function as legal tender or fiat money. </li></ul><ul><ul><li>This money essentially represents debt to the Fed , to be explained below…
    66. 67. US coins, however, are produced by the US Treasury, and do not represent debt to private banks. </li></ul></ul>
    67. 68. Where does money come from? Two Steps: <ul><li>The Fed creates all new money as debt , from “thin air.”
    68. 69. Private banks then take this new money and create 10x this amount through fractional reserve banking. This process is called the money multiplier process . </li></ul>
    69. 70. How new money is created by the Federal Reserve (in US) US Treasury The Fed IOUs (Bonds) Federal Reserve prints money, from nothing, and pays Treasury. Money as Debt
    70. 71. How new money is created by the Federal Reserve (in US) Treasury Federal Reserve and other Private Banks US Treasury ‘sells’ bonds. (T-Bills) In exchange for money now, Treasury gives IOU’s, to pay back this money, plus interest. IOU Cash Whatever bonds the other banks do not purchase, the Federal Reserve purchases. The Federal Reserve can exercise a power that the Treasury cannot: it can simply print the money from nothing ! But it creates this money as debt.
    71. 72. Money Creation... Money Multiplier Process <ul><li>The bank, having received the deposits, now lends the new money it has borrowed. Because the newly circulated money also eventually ends up in a bank, the amount of money created from an initial deposit by the Fed is a multiple of the original amount. This is called the money multiplier process. </li></ul>
    72. 73. Money Creation... Money Multiplier Process <ul><li>The money multiplier is the inverse of the reserve ratio. If the reserve ratio is 10 percent, for instance, then the money multiplier will be 1/.10=10. This factor will be multiplied by the amount of money initially put into circulation to derive the total amount of money that is eventually generated from this amount. For example, a $10,000 loan from the Fed eventually generates $100,000 of new money. </li></ul>
    73. 74. Money as Private Credit <ul><li>Today, new money (i.e. credit) is primarily loaned into existence by private banks. This establishes monetized relationships of credit and obligation: we are the debtors, the banks are the creditors. </li></ul>Principal (original amount owed) New money created =
    74. 75. Money as Private Credit <ul><li>Because of the application of interest, total debt will always exceed the size of the existing money supply.
    75. 76. Interest accumulates exponentially! </li></ul>TOTAL DEBT (Principal + Interest) Money (amount that can be used to pay off debts) <
    76. 77. How money is created in the US: Taxing or Borrowing <ul><li>To raise money, US government must either tax or borrow .
    77. 78. The US Treasury does not exercise the legal authority to spend new, debt-free money directly into circulation, but must instead borrow from the Federal Reserve and other private investors whatever it doesn’t collect in taxes.
    78. 79. It cannot just ‘print money’ into existence! When it does this, it is actually borrowing this money from the Federal Reserve, a private bank. </li></ul>
    79. 80. Implications: Growth or Die 1. The current system functions like a pyramid scheme: growth is a requirement for it to function . 2. The trickle-down effect of the pyramid monetary system has not been sufficient to avoid exacerbating income inequality: interest payments have not recycled back into the general population as earned income.
    80. 81. Linking Inequality and Debt WEALTH Ownership Relative amount of MONEY POWER 1. extend credit 2. pay debts Money is not regarded as the absence of wealth. Instead, money is itself dependent on material wealth. M oney (social credit or power) is created on the basis of the anticipated value of one's material wealth. Those with more material wealth also havemore social credit.
    81. 82. Linking Inequality and Debt Money in Circulation, Spending, or Income Expected Value of Assets Expected repayment Private Credit Amount of money is dependent upon the expected willingness of others to pay .
    82. 83. Ben Bernanke's Explanation of the Crisis: “China did it!”
    83. 84. The “Global Pool of Money” <ul><li>Bernanke (the current Fed chairman) has argued that the housing bubble was a result of excessive Chinese saving! China loaned this money to US banks and financial institutions.
    84. 85. Foreign holdings of” agency” MBSs (those issued by Fannie Mae, Freddie Mac) = $250 billion (10%) by 2000; $1.5 trillion (23%) by 2008 </li></ul><ul><ul><li>2007, net US international debt = $2.5 trillion = combined GDP of Latin America and Africa
    85. 86. ½ of this debt is held by developing countries </li></ul></ul>Source:
    87. 88. Holders of US Treasury Securities TABLE OFS-2.—Estimated Ownership of U.S. Treasury Securities
    88. 89. Holders of US Treasury Securities
    89. 90. Holders of US Treasury Securities
    90. 91. Holders of US Treasury Securities
    91. 92. Holders of US Treasury Securities
    92. 93. Percentage of Federal Securities owned by Federal Reserve
    93. 94. ‘ Narrow Banking’ and Basic Income <ul><li>One solution, proposed originally during FDR’s administration and supported by a majority of economists (including Irving Fisher) is 100% reserves, or ‘narrow banking’: </li></ul><ul><li>Nationalize the Federal Reserve (incorporate into the Treasury). Money creation will be a power delegated solely to the Federal Government.
    94. 95. Ban fractional reserve banking- banks will serve as depository institutions, as people think they do already. The function of credit and money creation will be separated. </li></ul>
    95. 96. II. Energy Crisis
    96. 97. ‘ Peak Oil’ <ul><li>Peak Oil production (aka Hubbert’s peak) : the point at which oil extraction reaches its highest level; it is also the point at which half of oil supply (for a well, a nation, or the world) is depleted. After the peak, oil production declines. </li></ul>
    97. 98. ‘ Peak Oil’ Key Facts <ul><li>Oil contributes to about 40 percent of energy production and supplies 90 percent of all transportation fuel (Korowicz 2010).
    98. 99. A barrel of oil, which could be extracted for a dollar, would in turn generate 25,000 hours of labor. One dollar equals 25,000 hours of labor.
    99. 100. Up until the 1950s, the United States was the “Saudi Arabia of oil” in the sense that it was world’s largest exporter. Its production, however, peaked in 1970 at 10.2 million barrels a day and subsequently declined.
    100. 101. Ten years later, domestic oil production was still in decline, despite the fact that ten times more oil wells had been drilled.
    101. 102. Currently the United States uses 25 percent of the world’s oil but possesses only 2 percent of the world’s known reserves </li></ul>
    102. 103. ‘ Peak Oil’ Key Facts <ul><li>Worldwide discovery of oil peaked in 1964.
    103. 104. Today, there are about 50 countries that are producing less oil today than in the past
    105. 106. Net Energy <ul><ul><li>EROEI = Net Energy = E nergy R eturned O n E nergy I nvested </li></ul></ul><ul><ul><ul><li>EROEI declines, according to the ‘lowest hanging fruit’ principle and the law of entropy.
    106. 107. Once the EROEI for petroleum reaches 1 (i.e. whenever it takes one barrel of oil to produce a barrel of oil), petroleum will not be market viable , regardless of how expensive it becomes and regardless of how much petroleum remains in the ground . </li></ul></ul></ul>
    107. 108. Peak Oil
    108. 109. Global Oil Production (1960-2008)
    109. 110. United States and Saudi Arabia Oil Production (1960-2008)
    110. 111. Declining Oil Prices and Rising Output (1960-1974)
    111. 112. Rising Oil Prices and Falling Rate of Output (1987-2008)
    112. 113. Peak coal? <ul><ul><li>US as the &quot;Saudi Arabia of coal“; US is the 2nd largest producer of coal, after China
    113. 114. Coal production (per weight) has not peaked, it continues to increase annually; however, total amount of energy generated from coal in the US peaked in 1998. </li></ul></ul><ul><ul><li>30% decline in energy content per weight since 1955 . </li></ul><li>How much coal do we have left? </li></ul><ul><ul><li>Coal production will peak in 10 to 15 years (Energy Watch Group)
    114. 115.   Peak by 2020, and then begin a decline by 2050  (Uppsala Hydrocarbon Depletion Study Group) </li></ul></ul>
    115. 116. World oil production per capita. 1960-2003. Source: Energy Energy Information Administration (EIA). Population figures from Ecological Footprint Network.
    116. 117. Oil Production for US and Saudi Arabia, 1960-2008. Source: Energy Information Administration.
    117. 118. Growth in per capita Energy Consumption. US, OECD, China. 1990-2006. Source: World Bank.
    118. 119. Energy spending vs. Income. Source: BEA NIPA tables 2.3.5 line 11 and Table 2.1 line 1.
    119. 120. Energy use vs GDP. United States. 1960-2009. Source: World Bank.
    120. 121. World GDP vs. World Energy Use. 1971-2009. Source: World Bank.
    121. 122. Global petroleum production 1960-2008. (Source: EIA)
    122. 123. Oil price average USD 1960-2008. (Source: EIA )
    123. 124. Oil Price and Quantity (1960-1974).
    124. 125. Oil Price and Quantity (1987-2008)
    125. 126. Oil Price-to-Quatity versus GDP (1960-1974)
    126. 127. Oil Price-to-Quantity versus GDP (1987-2008)
    127. 128. Oil price-to-quantity versus World per capita GDP (1960-1974)
    128. 129. Oil price-to-quantity versus World per capita GDP (1987-2008)
    129. 130. Per capita GDP and Energy Use. United States (1960-2008).
    130. 131. Global per capita GDP and energy use (1971-2008 )