[JuanP]

Great comments above, good thread. While I don't know what will happen in the future, here's part of my best guess at the time.
I profoundly dislike economic systems as they are today, I think they hardly could be worse. So, basically, I welcome all future change.
I believe the economy is likely to contract in size for decades, if not centuries, and is highly unlikely to ever again be as big as it is today in the future. I think this is good, and necessary to preserve and restore the biosphere. Today's population and consumption levels are unsustainable and a global economic contraction should be welcomed.
The economic collapse won't be even. The economy tends to run in cycles and I think this could remain so in the future, too. The cycles will be between contraction and stagnation, leading to an economy that systematically contracts in the long run. In the past the cycles where from growth to recession and back to growth, and the long term trend was growth since we got started.
The events we are facing are a once in human existence thing. We have never been this powerful before, and after fossil fuels are gone, we will most likely never be this powerful again.
So, the economy might get "better" after a while, depending on your perspective, if we survive, but it will never grow back to this again, IMO.

[ralfy]

Because the effects of peak oil may take place even before production peaks, then one should not have to wait for production to peak.

Because many economies are coupled to each other, and because there are many other factors to consider (such as increasing risks due to financial speculation, the effects of global warming and environmental damage, a growing number of people who want middle class amenities, a current middle class that can only maintain its lifestyle through a growing market of consumers, etc.), then collapse may accelerate, become widespread, and worsen.

[MonteQuest]

With a debt-based monetary system based upon infinite growth in a finite world, without a growth in energy production and GDP, there is no economy. Growth is necessary to service the debt. No growth, no debt, no money. I think we are seeing the death throes of capitalism.

[DesuMaiden]

The answer is no. The economy will only get worse as we pass peak oil...watch this youtube video to find out.

https://www.youtube.com/watch?v=8j4Tyy5nsQ8

[dolanbaker]

With a debt-based monetary system based upon infinite growth in a finite world, without a growth in energy production and GDP, there is no economy. Growth is necessary to service the debt. No growth, no debt, no money. I think we are seeing the death throes of capitalism.

But debt can grow to infinity & beyond because the system of money creation allows it to do so, all that debt is the reason for near zero interest rates in the financial sector. At some point in the future someone may create a "superdebt" that will be impossible to ever repay and defer it indefinitely, thus making the debt "vanish" off the balance sheets. The rulebook was rewritten in 2008 to save the financial system , no reason not to expect the same thing to happen again.

[MonteQuest]

But debt can grow to infinity & beyond because the system of money creation allows it to do so, all that debt is the reason for near zero interest rates in the financial sector. At some point in the future someone may create a "superdebt" that will be impossible to ever repay and defer it indefinitely, thus making the debt "vanish" off the balance sheets. The rulebook was rewritten in 2008 to save the financial system , no reason not to expect the same thing to happen again.

The reason for zero interest rates was an effort to create inflation. Fractional reserve banking allows money creation to infinity, but loans require a promise of future growth to be made. At some point, you reach debt saturation, where most of the new borrowed money goes to service the debt, rather than fund those promises of future growth. Our debt is unrepayable now and monetized.

[dolanbaker]

But debt can grow to infinity & beyond because the system of money creation allows it to do so, all that debt is the reason for near zero interest rates in the financial sector. At some point in the future someone may create a "superdebt" that will be impossible to ever repay and defer it indefinitely, thus making the debt "vanish" off the balance sheets. The rulebook was rewritten in 2008 to save the financial system , no reason not to expect the same thing to happen again.

The reason for zero interest rates was an effort to create inflation. Fractional reserve banking allows money creation to infinity, but loans require a promise of future growth to be made. At some point, you reach debt saturation, where most of the new borrowed money goes to service the debt, rather than fund those promises of future growth. Our debt is unrepayable now and monetized.

That's why I suspect that the bank of (powers that be) will at sometine in the future create the superdebt @ 0% with an indefinite repayment to avoid the "default" situation.

[ralfy]

If credit is ultimately dependent on increased production and consumption of goods using more energy and material resources, then increasing credit will matter less given lower energy returns.

[MonteQuest]

That's why I suspect that the bank of (powers that be) will at sometine in the future create the superdebt @ 0% with an indefinite repayment to avoid the "default" situation.

It's called hyperinflation to fight deflation. And they won't have to "create" it. Google Weimar Germany 1923.

[dolanbaker]

That's why I suspect that the bank of (powers that be) will at sometine in the future create the superdebt @ 0% with an indefinite repayment to avoid the "default" situation.

It's called hyperinflation to fight deflation. And they won't have to "create" it. Google Weimar Germany 1923.

Hyperinflation is the exact opposite of what is currently happening, what happened in Weimar Germany & Zimbabwe was that the printed money went into circulation. The current situation has the money staying within the banking & financial sector.

[Tanada]

That's why I suspect that the bank of (powers that be) will at sometine in the future create the superdebt @ 0% with an indefinite repayment to avoid the "default" situation.

It's called hyperinflation to fight deflation. And they won't have to "create" it. Google Weimar Germany 1923.

Hyperinflation is the exact opposite of what is currently happening, what happened in Weimar Germany & Zimbabwe was that the printed money went into circulation. The current situation has the money staying within the banking & financial sector.

The money is staying in the banking sector, but prices for things everyone needs like food and winter heating have gone up considerably. We don't yet have hyperinflation, but food costs twice what it cost a decade ago and for the lower income folks that is a serious burden.

[dolanbaker]

The increased food costs are directly related to the increases in the cost of fuel used in their production, rather than being directly affected by the financial sector actions.

[Subjectivist]

The increased food costs are directly related to the increases in the cost of fuel used in their production, rather than being directly affected by the financial sector actions.

Maybe so, but the ultimate effect is the same to my account either way.

[ROCKMAN]

pstarr - Perhaps we've already gotten a hint of what PO will bring: all of the above. High/low energy prices, high/low drilling activity, good/poor economic growth, etc. And maybe inflation/deflation also depending on gov't actions. The feedback loops seem rather inevitable: look at the current drop in oil prices following high oil prices that bought on more drilling which brought on more production. More production which, along with the economic damage of high oil prices, leading to lower oil prices. And the future? The timing is, as always, difficult to predict. But not the nature of the POD IMHO.

[MonteQuest]

Hyperinflation is the exact opposite of what is currently happening, what happened in Weimar Germany & Zimbabwe was that the printed money went into circulation. The current situation has the money staying within the banking & financial sector.

And you somehow think that money within the banking and financial sector isn't in circulation? Money is loaned into circulation. What you mean is that QE is making the rich richer.

[MonteQuest]

This is such an interesting debate. It was widely thought here at po.com that hyperinflation (a consequence of tight oil, high prices) would ensue, and gold was the hedge. I don't remember deflation being much of a concern. However it seems the two are tightly coupled: demand/debt collapse followed by government over-stimulation (currency devaluation in Germany. QE in the USA) may play out differently in different countries but the result is the same; deflation. Last time it was call stagflation here in the US.

Think of our money supply as a bucket of water with a hole in the bottom. The bucket represents just the right amount of money to have a stable system. The money leaking out is principal being paid back and defaults. In both cases, the money is destroyed. Money poured into the bucket is new loans. Money created. That rate of new money flow and it's velocity is largely controlled by the Fed through a change in reserve requirements, a change in the discount rate, and open-market operations.

If we correctly define inflation as too much money in circulation relative to the goods and services available, rather than rising prices ( which is the effect of inflation) then one would expect the FEDS QE to create massive inflation. If we interest rates this low in the 1960's we would have hyperinflation. Why don't we?

In my thinking, two reasons: bubble creation and a big hole in the bucket.

So, why are fears of deflation rising? Deflation conversely, is too little money in circulation relative to the goods and services available. What we had during the depression. The money supply shank as loans defaulted and debts were repaid and few new loans were made.

All the tools in the Fed's bag have been used or are worn out. Remember, QE was supposed to cause inflation. It did not. It only inflated assets. i.e., bubbles.

[MonteQuest]

This is such an interesting debate. It was widely thought here at po.com that hyperinflation (a consequence of tight oil, high prices) would ensue, and gold was the hedge. I don't remember deflation being much of a concern.

I wrote about it alot. Deflation and Stagflation: An Ominous Portent

A bit from that thread:

The United States is flirting with a low-grade depression, (deflation) one that may last for years. The meaning of deflation is that assets of almost every kind, from financial investments and real estate to manufactured goods and commodities, will be revalued downward correcting for the falsely optimistic asset valuations achieved during the easy credit years.

Basically, what's under way is a brutal unwinding of the delusional optimism like that which reigned during the dot.com bubble; excesses like the hyperinflation in financial assets and the swollen ambitions that led investors and companies to wildly overvalue their prospects and their stocks for future returns. Now, we have the real estate bubble which will burst when long term interest rates rise or when the unemployment rate is so high that it impairs household marketability.

From all outward appearances, it appears that the Federal Reserve is deliberately inducing price inflation to counter the deflationary forces, while fudging the CPI and inflation numbers. Rising prices will automatically ease the debt burdens of borrowers by diluting money's real value (that's why creditors always adamantly oppose inflation). In a perverse way, peak-oil is a god-send. If you intend to jump-start an $11 trillion economy, you have to print a bunch of debt money. The US government has a technology, called a printing press that allows it to produce as many US dollars as it wishes at essentially no cost. We have not finished paying the consequences of our international monetary system based on fiat money. If things deteriorate further, who knows, the government's deficits may have to grow twice as large to become effective therapy. The gathering evidence also suggests that the mass-consumption economy that has flourished since World War II may at last be running out of gas--literally.

My crystal ball worked pretty well, it seems. I wrote that on Fri Oct 22, 2004 9:22 pm. 10 years ago.

[PieceOfMine]

If we correctly define inflation as too much money in circulation relative to the goods and services available, rather than rising prices ( which is the effect of inflation) then one would expect the FEDS QE to create massive inflation. If we interest rates this low in the 1960's we would have hyperinflation. Why don't we?

The monetary definition of inflation is an increasing money supply. It is that simple really. Prices or amount of money in circulation relative to the goods and services available has nothing to do with monetary inflation.

Deflation is a shrinking money supply. Deflation is a phenomenon that to a large degree is out of control of central bankers, since it mainly consists of defaulting businesses/consumers. etc. They fear it like hell. Banksters tend to be jailed only during deflation. Pitch-fork-time.

Inflation can be controlled by central bankers, and is a favourite tool by banksters and politicians.

Hyper-inflation can not be controlled, and is from a practical point of view quite another animal than inflation.

Higher oil prices should really give us deflation, since businesses/consumers struggle and there is less scope to start new businesses/undertake new debt.

But this is uncharted territory, every trick in the book will be used, and they also think outside of the book. We have seen other scenarios, like stagflation and bouts of inflation and deflation.

[Loki]

Hyperinflation is the exact opposite of what is currently happening, what happened in Weimar Germany & Zimbabwe was that the printed money went into circulation. The current situation has the money staying within the banking & financial sector.

And you somehow think that money within the banking and financial sector isn't in circulation? Money is loaned into circulation. What you mean is that QE is making the rich richer.

That's the "problem," most of the hot-off-the-presses money isn't entering circulation. It's being used to prop up the financial sector's books, to wipe out their debt.

Fed prints money and gives it to the financial sector, financial sector adjusts some decimal points on their balance sheet and newly printed money disappears into black hole never to be seen again. This is where the hyperinflationists get it wrong. They have no understanding of the role of private lending in money creation, everything's always about the all-powerful ebil goobermint for them.

The banks simply aren't loaning like they used to and/or people aren't borrowing/spending like they used to, which means less money being created, reduced velocity of money, and an overall deflationary trend. If the hot-off-the-presses money was entering general circulation, household debt levels would be rising, not declining.

That's my understanding of it, at least. Not a simple system to understand, anyone who claims to know exactly what's going on has a >99.9% chance of being full of shit. Hell, there's an entire academic discipline devoted exclusively to being wrong about what's going on in the economy LOL