Why so much debt?

Why so much debt? Wouldn’t it ultimately be the mirror of a physical problem? What role for Bitcoin?

The debt ceiling does not exist…

US debt has risen from 40% to 80% of GDP in 42 years. Then from 80% to 130% of GDP in just 14 years. The debt is increasing faster than the GDP and this phenomenon is observed everywhere.

All states borrow to repay their debts, in a mad rush forward. And unfortunately, not a year goes by without a country sinking into hyperinflation.

For what ? Debt and inflation are above all a reflection of a physical reality. They are the mirror of the productivity which results directly from the capacity to produce energy.

Fossil fuels are the only asset we have. Everything else derives from coal, oil and gas. Without heat, nothing can be made.

The smartphone on which you are reading this article is a derivative of fossil fuels (80% of the global energy mix).

Oil is crucial because it powers 95% of the world’s means of transport. Without it, global productivity would collapse. The more oil we burn, the more raw materials we can extract, transport and process. In a nutshell, the more we can produce.

And it is precisely by increasing productivity that we prevent a drift in the debt/GDP ratio and therefore in inflation. This productivity, we owe it to the machines. And machines need energy. The more this energy is abundant and inexpensive, the higher the productivity.

But any company that continually burns its assets at a rate ten times their replacement rate can be considered bankrupt. But this is exactly our situation.

Oil well is not cornucopia

In 2016, the world discovered only 2.4 billion barrels of oil, but consumed 25 billion. In other words, we have consumed 10 times more oil than we have discovered.

It is true that the average of discoveries over the previous 15 years was 9 billion barrels per year. But the trend is heavy. Since 2016, discoveries of new oil deposits have averaged 5 billion barrels per year:

We all want to be told that our resources and our growth are endless. No one wants to face reality. We prefer to blame inflation on central bankers.

However, it is machines and (limited) fuel that feed us, heat us, light us, transport us and allow us to live in democracy.

Prosperity depends on excess and cheap fossil energy. For two centuries we have been able to use fossil fuels as collateral for our future debts. Our system of rolling the debt depends on an infinite growth of energy supply.

Fossil fuel resources are a unique gift of nature and there are no viable substitutes. Their scarcity directly threatens our economic and monetary system which relies entirely on the availability of surplus energy. Without excess energy there can be no modern society.

Problem, the stock is running out. We even potentially reached the peak of world oil production in 2019. And this after having already crossed the peak of conventional oil (the one that is cheap to get out of the ground) in 2007. Look no further to understand the origin of the subprime crisis (barrel at $140, etc.).

Prosperity is not an infinite right

The rising costs of oil extraction directly weigh on our productivity and, ultimately, our ability to repay debt.

We substitute debt for productivity. The reason being that productivity is weighed down by two things:

-The difficulty in producing ever more oil.

-Rising extraction costs.

We mask the energy reality with debt which (there is no miracle…) turns into inflation. Human technological prowess will certainly surprise us again. But they will not be able to push back the physical limits of the planet ad vitam æternam.

Many bitcoiners reverse cause and effect believing that printing money is causing inflation. No. We are incurring more debt because energy is becoming scarcer and more expensive to extract, not the other way around.

Oil wells are not filled with prayers or ballots. Political promises keep if only there is enough energy to sustain them.

Real wages and pensions are paid from energy surpluses. The more the excess energy dwindles, the more real incomes fall.

The determining factor is what is called energy efficiency (EROEI). This is the ratio of the energy obtained to the energy spent to obtain it.

For the past 150 years, civilization has been built on the basis of coal, which has an energy efficiency of 50:1. Then on oil whose energy efficiency was 100:1. These staggering yields provided cheap excess energy. It is thanks to it that we have been able to create our industrial infrastructures while dreaming of infinite prosperity.

Our current way of life will not survive on fuels with an efficiency of around 18:1, which is the case with the best oil wells today. The good old days of the 100:1 return allowing to drastically increase the standard of living (the thirty glorious years) are over.

The Seneca cliff

A ratio of about 14:1 means that you get 14 times more barrels of oil than you need to extract it, refine it, get it to the pump, and so on. Some experts believe that our society could hold its own at a rudimentary 14:1. But it would be necessary to make a cross on certain things, like a good part of the cars for example. A bit of biking won’t hurt us.

There are many interpretations of the “energy cliff”. The debate is open as to knowing from what energy efficiency our industrial society ceases to function. 15:1, 10:1, 8:1?

The exact figure doesn’t matter, we’re getting into the tough stuff right now. The energy descent will accelerate:

C. Hall and P. Prieto explain why modern society needs a certain EROI to function:

“We looked at how much oil would have to be extracted to run a truck, taking into account the energy needed to extract that energy. So we added the energy needed to obtain, refine, and transport oil to the gas pump. Then we considered the energy required to build and maintain roads, bridges, vehicles, etc. Result, it is necessary to extract 3 liters of oil to use 1 liter in the tank of the truck. That is, a minimum EROI of 3:1 is required. But that didn’t include the energy needed to write off the value of the truck, or even pay for all of our needs like school and hospitals. Very quickly, it became apparent that we needed an EROI of at least 10:1 to meet the minimum needs of society. Even 15:1 for a modern civilization”.

Currently, the global fossil fuel EROI hovers around 20:1. And we’ve probably passed the peak of production…

And renewable energies?

We place our energy hopes in photovoltaic, wind, nuclear, shale oil (and fusion…).

Unfortunately, wind and solar farms cannot provide energy that can replace oil. The energy density of oil is incomparable.

In addition, wind energy painfully boasts an EROI of 4 against 9 for photovoltaics. Clearly, wind power produces barely four times more energy than is needed for its manufacture, installation, maintenance and dismantling.

[En vérité, la capture de l’énergie solaire et éolienne n’est pas réellement renouvelable. La durée de vie des panneaux solaires et des éoliennes est limitée de 20 à 25 ans. En fait, aucune source d’énergie n’est renouvelable, ce qui rend toute la discussion sur les sources d’énergie renouvelables sans objet. La question est plutôt: laquelle émet le moins de CO2.]

Some research shows that storage and redundancy requirements make the EROI of renewables too low. Especially for our current comfort level of having everything working at all times.

But you will have to be content with it. Gradually, the excess energy needed for the entire machine park will decrease along with our standard of living.

This will result in defaults and inflation. So we shouldn’t blame the central bankers, but the fact that we don’t live on an infinite planet.

Don’t be surprised by the more or less gradual hyperinflation. Protect your savings with Bitcoin! If this article resonated with you, you’ll enjoy this one: Why so much inflation?