It looks to me as though 2012 is likely to be a truly awful financial year, with several crises converging:

   

• Either very high oil prices or recession,
• The US governmental debt limit crisis,
• The Euro crisis,
• The Chinese debt problem,
• Debt deleveraging in the US and elsewhere,
• Further MENA (Middle East/North Africa) political problems, and
• Conflict between need for greater resources and pollution issues.

It seems to me that we may be reaching “Limits to Growth”, as foretold in the book by the same name in 1972. The book modeled the consequences of a rapidly growing world population and finite resource supplies. A wide range of scenarios was tested, but the result in nearly all scenarios was overshoot and collapse, with the timing of collapse typically being in the 2010 to 2075 time period.

http://gailtheactuary.files.wordpress.com/2011/10/limits-to-growth-forecast.pngw=448&h=415
Figure 1. Base scenario from 1972 “Limits to Growth”, printed using today’s graphics by Charles Hall and John Day in “Revisiting Limits to Growth After Peak Oil” http://www.esf.edu/efb/hall/2009-05Hall0327.pdf

The authors of Limits to Growth did not model the full interactions of the system. One element omitted was how debt would impact the system. Another item omitted was how prices for oil and other resources would affect the system.

If a person follows through the expected effects of high oil prices and debt, the financial system would appear to be the most vulnerable part of the system. The financial system would also appear to be what telegraphs problems from one part of the system to another. Unless a solution is found, failure of the financial system could ultimately bring down the whole system.

Background
Newspapers print endless articles about the need for economic growth, and the need for return to economic growth. But if economic growth really takes resources of some sort–coal, or oil or copper, or fresh water to produce goods and services–it stands to reason that at some point, the resources needed for economic growth will run short. This is especially true for resources that are used up when they are burned, like coal and oil.

Besides the issue of inadequate resources, growing pollution can also interfere with economic growth. As the world is filled with more people, and resources become shorter in supply, pollution becomes more of an issue. For example, we are now extracting natural gas using “fracking” near populated on the East Coast. If we had other options–extracting natural gas in less populated areas, or without fracking, we would be doing them instead. CO2 pollution is another example.

Logically, at some point we can expect to run into limits that are impossible to get around. One of these limits may be inadequate funds for investment in extraction of resources.

Logically, at some point we can expect to run into limits that are impossible to get around. One of these limits may be inadequate funds for investment in extraction of resources.

In the Limits to Growth model, investment is based on a number of factors, including the efficiency of the system (Figure 2). In some respects the efficiency of the system is growing–better technology. But in others, the “efficiency” is getting worse–declining Energy Return on Energy Invested (EROEI) for fossil fuels, and lower ore grades for mined minerals.

How would we know if investment in extraction of resources is inadequate? It seems to me, it would be through relatively flat production and rising prices (or high prices except when the major countries which are large users of the resource are in recession), and this is precisely what we are seeing for oil.

http://gailtheactuary.files.wordpress.com/2011/10/world-oil-supply-including-biofuels-and-price.pngw=448&h=270
Figure 3. World oil supply (broadly defined, including biofuels and natural gas liquids) and Brent spot oil price per barrel. All data is from the US Energy Information Administration.

Prospects for 2012
We are heading into 2012 with many clouds over our heads. Oil supply is still tight, and prices are still high by historical standards. No country expects huge additional oil supply during 2012. We can pretty well guess that we will either have high oil prices or recession throughout 2012.

Many of the problems arising from high oil prices/recession in the 2008-2009 period still have still not gone away. Instead they have been transferred to the governmental sector. What has happened is that with recession, employment dropped, as did taxes collected by governments. At the same time, government expenditures rose, for bank bailouts, stimulus funds, and payments to the unemployed. This is true both in the United States and in many European countries who are importers of oil.

Now conditions are not much better, and are threatening to get worse, because of continued high oil prices. Governments already have high debt loads, but still need to bail out more banks and pay benefits to more unemployed. The United States is supposed to have a plan to solve its debt limits problem by November 23, and vote on it by December 23. Any cutback in benefits to unemployed or layoff of government workers is likely to make the recession worse; raising taxes is likely to have a similar effect. At the same time, there are still problems which have not really been addressed–for example, large amounts of “underwater” commercial property. Defaults on some of these debts are likely to lead to the need for more bank bailouts.

Problems with the Euro have been in the news a lot recently. The adverse factors (particularly high oil prices) causing the PIIGS to have financial difficulty are still in play, so the financial condition of these countries is not likely to improve; more likely it will get worse. It appears to me that the Euro has a high likelihood of “coming apart” in the next year, either partially or completely, because of debt defaults.  If countries go back to their pre-Euro currencies, it is not clear that other countries would want to trade with the defaulting countries, except on very disadvantageous terms.

China has been growing in recent years, but a lot of its growth is propped up by debt. Now, it is hitting headwinds–high oil prices, rising coal prices, and lower economic growth in countries that might buy its products. With less growth, China is likely to have debt default problems relating to the debt supporting its recent growth. All of these headwinds suggest that China’s growth rate may be scaled back greatly as well.

There is no guarantee that we are through the governmental problems in the MENA region. Getting rid of one leader does not guarantee that the new government will be a significant improvement over the previous one, so one revolution may be followed by another, or by civil war. The US is pulling out of Iraq, perhaps leading to greater instability there.

http://gailtheactuary.files.wordpress.com/2011/10/food-and-oil-prices-tend-to-rise-together.pngw=448&h=270
Figure 6. Comparison of FAO Food Price Index and Brent Oil Price Index, since 2002.

MENA countries generally import a significant share of their food, and high oil prices usually lead to high food prices, because oil is used in the growing and transport of food. Because of these issues, we may see more riots in MENA countries, especially if oil/food prices rise further.

We are reaching limits in areas other than oil, and these may be problems as well. Fresh water is an issue that will become increasingly important. Pollution is another area where limits are being reached. Examples include hydraulic fracturing of wells in populated areas and conflict over EPA regulations relating to coal-fired power plants.

Impact of Omission of Debt and Prices in the Limits to Growth Model

Figure 1 clearly shows a tendency toward overshoot and collapse, based on the Limits to Growth model as it was originally created. The original model doesn’t consider the impact of debt or of resource prices. The omission of debt means that the model doesn’t consider the possibility of moving from an “increasing debt” situation to a “decreasing debt” situation. If such a change takes place about the time resource limits hit, a person would expect sharper peaks and faster declines to the modeled variables.

The omission of resource prices means that the model doesn’t pick up the interconnections between high prices for one resource, and a cut back on demand for other resources. If financial interconnections cause a shortage of one resource to lead to reduced demand for other resources, this may mean that substitution will not will work as well as some hope.

Nothing happens overnight with the world economy, so changes are likely to take place over a period of years. We can’t know exactly what the future will bring, but the handwriting on the wall is worrisome.

Link -
http://peakoil.com/generalideas/2012-reaching-%E2%80%9Climits-to-growth%E2%80%9D...
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Whilst the author has a good handle on many of the Macro issues, currently impacting Global events, I believe the impact of, on & by Population Growth & levels, may have been under-played.

It is THE over-arching Global Economic Driver and it is now likely to reach an earlier Peak, than was suggested in figure 1, with far reaching, historic ramifications!  

As the world's population reaches 7 billion this month, there is renewed soul-searching about overpopulation. But in much of the rich world, we have slammed on the demographic brakes so hard that it may be helping drive our current economic tailspin.

Exhibit A is Japan.
Economists say the developed world is entering now what Japan first experienced back in the 1990s, when it suffered a "lost decade" of economic stagnation from which it has never recovered.

Japan has the world's oldest people – average female life expectancy is 86 years – and it has among the world's lowest fertility rates. At just 1.2 children per woman, it has not much more than half what it needs to maintain population numbers. Meanwhile, the average age is well over 40, and one in four people are over 65.

This is an extraordinary turn-round. Japan used to be young. When it was the poster child of Asia's economies, it profited from a huge population of young adults, and not many old dependents. Result: the land of the rising sun has become the land of the setting sun.

And where Japan went, so goes the rest of the world. Europe's emerging economic basketcase is Silvio Berlusconi's Italy. Population changes have undoubtedly played a role in this. Thanks to a generation of ultra-low fertility, the last western European country with a prime minister born before the second world war now has the world's second oldest population.

The economic whirlwind of growth in other Asian tiger economies is blowing out as fertility falls and populations age. China is today young and vibrant, but the one-child policy is shutting down population growth. Within a decade, its numbers may be falling and China will have the largest ageing population the world has ever seen. Boom may soon turn to bust.

The Middle East is at an earlier stage on this demographic road. But with falling birth rates, many countries there have a bulge of young adults in their population pyramid. Governments have failed to harness this demographic potential for economic growth, but arguably those young adults drove Muslim radicalism, and now the Arab spring.

The people on the streets in Egypt, Tunisia and Syria demanding democratic reform – and manning the ragtag army in Libya – would a generation ago have been at home minding the children. Whether driving economic growth or demanding democracy, young adults are dynamic forces for change in any society. But as societies age, that dynamism dies.

And ageing is the new way of the world. You wouldn't guess it from the public debate so far about the seven billion landmark, but the average woman in the world today has half as many children as her mother or grandmother did 40 years ago: 2.5 children, compared to five. And the number keeps on going down. Dozens of countries are already below two, including Iran, Burma, Vietnam, China of course – and much of southern India, too.

In the long run, that's not enough to keep up numbers. Many expect world peak population by mid-century, and decline thereafter. Whether it happens then or later, mass global ageing is now a certainty.

I suspect that the global economic binge of the 20th century was a product of a booming, youthful population. It will die as we age. Japan's lost decade, and its likely repetition now across the western world, is perhaps the first sign. About time too. We all know that we cannot go on as we have. The planet cannot stand it. The party is over.

Link -
http://www.guardian.co.uk/environment/2011/oct/26/population-crash-economy-good-...
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Population Growth, it has been THE Economic driving force of history, but in particular, the last 200 years.

Around the year 1800, the Global Population hit 1 Billion,  it hit 2 Billion around 1930 and now, only some 80 years later, it is about to tip over at 7 Billion.

This massive & unprecedented Growth in Global Population has been enabled, largely by 3 major factors -
1) Cheap Energy - that being Fossil Fuels, predominantly Oil.
2) Innovation/Tecechnology - Humanity has undergone massive change, to keep up with our Population Growth.
3) Climate - A largely benign Global climate, over the last 200 years, has aided new Technology/Innovation & Cheap Energy, in ensuring that Food Production & the availability of fresh water, has kept up with the Global Population Growth.   

However Japan has led the way, showing what happens as Population Growth starts to decline, although they were partially supported by Global Growth, which was still continuing.

That Global Growth is now also slowing & is most likely to Peak around 2030, which is earlier than generally expected.

That said, it really can't happen quick enough, because the total Population Demand on all Products is now starting to reach tipping points, where Supply of various Products are starting plateau, before going into permanent decline.

Oil & other Fossil Fuels, are prime examples of this Peaking process and we have already witnessed huge Price swings & impacts on the Global Economy, arising from Peak Oil. 

It is a law of nature that everything has limits and we are now very close to finding out what some of those limits are and what that will mean to the Global & OZ Economy!

French President Nicolas Sarkozy plans to call Chinese leader Hu Jintao tomorrow to discuss China contributing to a fund European leaders may set up to bolster its debt-crisis fight, said a person familiar with the matter.

The investment vehicle was one of the options being considered by European leaders at a summit tonight to expand the reach of its 440 billion-euro ($612 billion) European Financial Stability Facility.

Sarkozy’s plea to his Chinese counterpart would come the day before a planned visit to Beijing by Klaus Regling, chief executive officer of the EFSF, to court investors.

The EFSF, established last year to sell bonds to finance loans for distressed euro nations, has since also gained the authority to buy sovereign bonds on the secondary and primary markets, offer credit lines to governments and recapitalize banks as the Greece-triggered debt troubles have spread. The EFSF said Regling’s visit to China this week is linked to the fund’s original debt-issuance role.

Link -
http://www.bloomberg.com/news/2011-10-26/euro-rescue-fund-chief-goes-to-china-as...
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So, after months of backroom haggling and years of inaction, is this Plan B, Europe  goes begging to the Chinese?

Is this the Plan that's seen the DOW rise by a thousand points?

More Importantly, why the hell would the Chinese want to throw "good money", after bad money?

Do the Europeans think the Chinese are stupid and they won't want guarantees, outside of "fiatfake money"?

There seems to be a fair bit of chit chat on the financial forums about the mysterious 'glitch' at the Australian Stock Exchange this morning. All the more suspicious because the European members were locked into a deep discussion regarding Greece's debt.

Maybe a hacker and they don't want to say, who knows????? but of all the days in the year for it to happen, it had be at opening time on the very day that the stock market had a chance of crashing.

Others are saying it could have something to do with the rival Chi-x entering in a few days.

Anyway, I wonder if the ASX have any responsibility to the companies that would have lost big dollars due to ceased trading? maybe just their reputation.

Hard to believe it was a 'glitch'.

Ex Dame Pansi wrote on Oct 27^th, 2011 at 4:27pm:


There are plenty that would have lost their shorts today, but not really ASX's issue.

Clearly they have some disaster management issues at play, however at the end of the day the market is closed for at least 110 days a year excluding public holidays, one more won't hurt.

I should imagine the market will be quite active tomorrow, there is a significant chunk of cash awaiting deployment based on a strategy being developed and announced, whilst it remains to be seen whether it's affective, it will boost confidence which is about all that's missing; in the absence of further bad news from Europe we could be in for a significant rally over the coming weeks especially in light of significant corporate strength. 

Dow futures are pointing above 12000 on tomorrows market.  Tomorrow will probably be fairly quite on the ASX but will point up. 

The next couple of months will herald significant merger and acquisition opportunities for cash rich corporate organisations keen to get it off the balance sheet.

Volatility will remain until confidence is restored and that will take time but you'd be braver than me shorting much at the moment. 

qikvtec wrote on Oct 27^th, 2011 at 9:17pm:



Dunno - but synthetic fuels will still require commodity inputs...

qikvtec wrote on Oct 27^th, 2011 at 9:17pm:


It won't!

In fact, it can't!

At least, not on the scale required to replace Oil and at a price sufficiently low, so that it doesn't send the Global Economy crashing!

We already have the capacity to manufacture Synthetic fuels and we produce a reasonable quanity, but no where even close to being able to just fill the gap, as Oil Production shortly goes into Decline, let alone make up for the entire Production of Global Oil!

Sorry, but the EROEI (Energy Return On Energy Invested) just won't cut it!

When Oil first got under way, the EROEI was upward of 100/1, now it's under 10/1 and heading lower.

Once we reach 1/1, then production is no longer viable, as it takes as much energy to  produce the Energy, as it does when it is consumed.

You may care to have a look thru the following and other articles, at the Oil Drum. The author is this article, Gail the Actuary, is particularly good.
[url]http://www.theoildrum.com/node/7786   [/url]