World-Changing Wednesday

Economy#5: Baby Boomer Retirement and What It Means For the Economy

Photo by: mikol ice

This post is part of my World-Changing Wednesday series. These are a collection of thoughts on issues which I think will have a huge impact on how we live our lives in the years to come.

Populations of Industrialised Nations Are Ageing

There is a troubling trend brewing and it’s going to change many of the things we thought we knew about the economy.

In 1960 there were more than 5 workers per retiree in the USA. By 2007, that ratio had dropped to only 3.3 to 1, and by 2032, that ratio will have plummeted to a thoroughly unworkable value of 2.1 to 1. This same pattern is shown throughout the developed world and every country will be affected in some way. This trend comes about as a feature of the so-called ‘Baby Boom’ which occured post WWII.

The easiest way to visualise this issue is using a demographic pyramid chart. This first chart represents a more ‘normal’ population distribution; in this case Australia in 1971. Humans evolved over countless millennia with a population pyramid that looked something like this. This distribution is capable of supporting an entitlement program based on transferring wealth directly from younger workers to older retirees, such as the age pension in Australia and social security in the USA.

When we cast this chart of Australian population forward to 2008, the baby boomer bulge is quite apparent. While it may not seem like much, the ‘hole’ that exists in the population behind the baby boomers represents an enormous challenge, and will greatly complicate how the economy operates in the decades to come.

Boomer Wealth Based on Massive Credit Bubble

The ‘Boomers’ are the wealthiest generation ever. They hold nearly all of the assets in developed nations.  In my article entitled The Debt Trap (Our Economic System is not Sustainable), I explained how our economic system is based entirely on debt and that current levels of debt are without precedent.  The biggest credit bubble in history has been inflating since the beginning of the post WWII baby boom and that bubble has fueled the massive wealth accumulation of the Boomers. 

We have already seen that exponential growth in debt (which underlies the Boomer wealth) only appears to be sustainable when asset prices rise fast enough to keep the financial system solvent. Without continuous economic growth, the entire monetary system will collapse and we are already seeing the beginning stages of this process.


Percentage of nations’ population aged 65 and over: Chartsbin

What Happens When Boomers Want to Retire?

Unfortunately for the Boomers, they will need to sell off the assets which define their wealth in order to fund their retirements. The question then is: Who exactly are the Boomers planning on selling their assets to? Even if Generation X somehow could afford to buy all these assets, there simply aren’t enough people in this generation to buy them. One has to wonder, given the demographic forces in the Western world, if there is simply going to be more sellers than buyers in the coming years as the Boomers liquidate.

If we are operating an economic system which must continue to grow exponentially to survive, we have to question how this can happen if Boomers are retiring en masse and there are fewer behind them to take their place?

  • Will assets plummet in value as they are repriced to the reality of what Gen X can afford?
  • How will this affect the Boomers’ expectations of a comfortable retirement?
  • Will the younger generations be expected to work harder to pay for those promises made to the Boomer generation?

This sort of demographic profile will be with us for decades and setting policies to encourage population growth are probably not the best way to solve the problem given that we live on a finite planet and cannot support further exponential population growth. This issue is one that we’d do well to recognise and plan for rather than ignore.

Boomer retirement has already begun, and the pace of this will accelerate rapidly over the next 15 years.

The next twenty years are going to be completely unlike the last twenty years. ~ Chris Martenson

Soon, I’ll write another post with more specifics on what this means for my generation (Gen X) and those coming through behind.

Read more from me:

Energy#2: The Economy and Oil (The Long Decline)

Environment #1: The issue of Human Population Growth

Environment#3: Resource Limitations ~ Food

Photo by: Bern@t

For some background reading on related issues, try these articles first:

Environment#1: The Issue of Human Population Growth

Energy#1: What is Peak Oil

Environment#2: Resource Limitations~ Water

It’s time to start thinking about Food Security

When you think about the factors affecting food production (climate, water, arable land, fertiliser, energy) it’s easy to see how current trends in each of these areas should be making us feel a little nervous about our Food Security (or lack thereof).

Even more than other oil-driven sectors of the global economy, food production is showing signs of strain as it struggles to maintain productivity in the face of rising population, flattening oil production and the depletion of essential resources such as soil fertility and fresh water. According to figures compiled by the Earth Policy Institute, world grain consumption is starting to exceed global production. Global grain reserves have fallen to 57 days from a high of 130 days in 1986.

The production of an adequate food supply is directly dependent on ample fertile land, fresh water and energy. As the human population grows, the requirements for these resources also grow.

The Decline of Fertile Cropland

During the past 40 years nearly one-third of the world’s cropland (1.5 billion hectares) has been abandoned because of soil erosion and degradation. ~ Food, Land, Population and the U.S. Economy, Pimentel and Giampietro

At present, fertile cropland is being lost at an alarming rate. More and more of the world’s cropland has been abandoned because agricultural practices, overgrazing and deforestation have caused the land to become unproductive. This is a long term problem because it takes 500 years to form 25 mm of soil under agricultural conditions. Most replacement of eroded agricultural land is now coming from marginal and forest land.

World cropland per capita has been steadily declining and is now less than 0.23 ha per capita; and down to as little as 0.08 ha in China, the world’s most populous country. To enjoy a diverse diet similar to that of the U.S. and Europe, 0.5 ha per capita of cropland is required. With more of the world desirous of a western diet, it’s obvious that more pressure will be applied to the arable land that remains.

In addition to losses from erosion and other environmental impacts, cropland is also being converted to non-farm uses. This doesn’t just apply to developing nations. One only has to look at the housing developments here in Southern California to witness how much productive cropland is being lost to construction. The number of vehicles in the world also continues to grow, claiming even more cropland for roads, highways, and parking lots. China has recently overtaken the U.S. as the largest vehicle market in the world. If the Chinese market were to keep growing to an ownership rate of one car for every two people, the country would then have a fleet of 650 million motor vehicles, compared with only 35 million today. Since at least 0.4 hectares of land has to be paved for every 20 vehicles added to the fleet, this would require paving nearly 13.3 million hectares of land — an area equal to half the rice fields in China.

The shortage of productive cropland combined with decreasing land productivity is, in part, the cause of current food shortages and associated human malnutrition. When combined with other factors such as political unrest, economic insecurity, and unequal food distribution patterns food shortages are likely to become worse in the future.

Water shortages = Food shortages

Of all the environmental trends that are shrinking the world’s food supplies, the most immediate is water shortages. In a world where 70 percent of all water use is for irrigation, this is not a small issue.

The drilling of millions of irrigation wells has pushed water withdrawal in many countries beyond recharge rates from rainfall, leading to groundwater mining. As a result, water tables are now falling in countries that contain half the world’s people, including the big three grain producers — China, India, and the United States. ~Spiegal Online International

Fossil aquifers which are being use more and more for agricultural irrigation, are not replenishable. When they reach depletion in more arid regions, such as southwestern United States or the Middle East, it can mean the end of agriculture altogether.

In China, the water table under the North China Plain, an area that produces over half of the country’s wheat and a third of its corn, is falling fast. Overpumping has led to the drilling of the region’s non-replenishable deep aquifer, which is dropping at a rate of nearly three meters per year. A World Bank report predicted “catastrophic consequences for future generations” unless water use and supply can quickly be brought back into balance. As water tables fall and irrigation wells go dry, China may soon be importing massive quantities of grain in addition to the soybean imports which now account for nearly 70% of the country’s consumption.

The progressive worldwide depletion of aquifers is making further expansion of food production more difficult. After nearly doubling from 139 million hectares in 1961 to 276 million hectares in 2002, the world’s irrigated area abruptly stopped growing. It seems peak water has arrived.


Industrialized Agriculture relies on Nitrogen-based Fertilisers

Nitrogen-based fertilisers enabled the ‘Green Revolution’ that boosted global food production in the last century, but that benefit came at a cost which we are now going to pay for.

Fossil fuels are needed for the continued production of fertilisers. As those fossil fuels become more expensive or harder-to-obtain, the ready availability of fertilisers is likely to be affected.

Natural gas is a key feedstock (up to 90 percent of the total costs) in the manufacturing of nitrogen fertilizer for which there is no practical substitute… Nitrogen fertilizer prices tend to increase when gas prices increase. ~US GAO report: “Natural Gas: Domestic Nitrogen Fertilizer Production Depends on Natural Gas Availability and Prices”

Between 1950 and 1990, the world’s farmers raised grain yield per hectare by more than two percent a year, exceeding the growth of population. Since then, yield growth has slowed such that the demand from a growing population is rapidly converging with the available food supply.


Expensive Energy = Expensive Food

Here we are, supposedly recovering from the worst economic downturn since the Great Depression, and oil is still trading at more than $80 a barrel. If and when a true recovery gets under way, that price is likely to rise even more, as I discussed in last week’s post on The Economy and Oil. This issue is critical, because our industrialised agricultural system is so reliant on cheap oil for harvesting, processing and transporting food vast distances to the store shelves.

10 kcalories of exosomatic energy are spent in the U.S. food system per calorie of food eaten by the consumer. Put another way, the (US) food system consumes ten times more energy than it provides to society in food energy. ~The Tightening Conflict: Population, Energy Use, and the Ecology of Agriculture”

Oil is a finite, natural resource and we are fast approaching the end of cheap oil. When oil is more expensive, food is more expensive too.


Climate Change

Whether you believe in human-caused climate change or not, it’s clear to most people that something is up with the weather. Many agricultural regions around the world are experiencing stronger heat waves, more drought or more extreme rainfall. It’s starting to affect the harvests we are relying on to keep us all fed. Droughts aren’t good for crops, but neither are record wet spells. Extremely wet conditions in the U.S. Midwest last fall delayed harvests to the point that some 30 per cent of North Dakota’s corn remained in the fields by the time a Christmas blizzard put an end to harvest time completely.

Agriculture as it exists today was shaped by a climate system that has remained remarkably stable over farming’s 11,000-year history. Since crops were developed to maximize yields in this long-standing climate regime, climate change means agriculture will be increasingly out of sync with its natural environment.

Population Growth and Food Scarcity

And finally there’s still population growth to consider.

World food production must increase by 70 percent by 2050, to nourish a human population then likely to be 9.1 billion ~UN Food and Agriculture Organisation

It appears that crop yields are moving closer to the inherent limits of the Earth. This limit establishes the upper bounds of the earth’s human carrying capacity. The question is not whether the world grain harvest will continue to expand, but will it expand fast enough to keep pace with rapidly growing demand? If we continue down the current path it is not likely to do so, which means that food supplies will tighten further. There is a real risk that we could soon face civilization-threatening food shortages.

Geo-Political issues

It’s easy to dismiss this issue as something that will only affect poor nations, but we now live in a truly global world. There are many ways that food scarcity can become very political and start impacting our lives in ways we never imagined. Since that’s a huge topic in its own right, I might leave that topic to another week.

This post is part of my World-Changing Wednesday series. Tune in each Wednesday to read my thoughts on an issue which I think will have a huge impact on how we live our lives in the years to come.

Energy#2: The Economy and Oil (The Long Decline)

After taking a break for the last couple of months, I think it’s high-time I get back into my World-Changing Wednesday series. Each Wednesday I plan to share my thoughts on an issue which I think will have a huge impact on how we live our lives in the years to come.

For some background reading start here:

Last year I discussed Peak Oil, which is simply the term used to indicate the point in time when World Oil Production reaches its peak and starts its ineviteble decline. It’s not the end of oil, simply a point in time when oil supplies are unlikely to keep up with demand, hence the end of the era of cheap oil.

In my post on The Issue of Human Population Growth I demonstrated that the Earth’s carrying capacity has increased through the use of fossil fuels (including oil) and that without continued injections of cheap energy, the current human population is not sustainable.

And in my post called The Debt Trap (Our Economic System is not Sustainable) I illustrated how and why debt levels have grown exponentially for the last half century and how the perpetual growth of our monetary system is not possible in a world of finite resources.

Once you understand those concepts, let’s go a bit further.

We are living in a time of exponential growth in population, in debt and in oil consumption. We can also make a very strong case that both population and our monetary system are utterly dependent on the continued expansion of oil energy. In a finite world, this becomes problematic.


What will happen when oil production begins to decline. What will happen to our exponential, debt-based money system during this period? Is it even possible for it to work in a world without constant growth?

There are plenty of smart people out there who think that the financial instability we are now experiencing is due at least in part to the early stages of this process.

Oil and the Economy

Oil is essential to the economy because it’s required for food production, transportation and the manufacturing of almost every commonly used item in our industrialised society. Because of our absolute reliance on the availability of cheap energy, it’s easy to see how a lack of oil might have an adverse impact on the economy.

Dave Murphy of The Oil Drum shows that when the price of oil goes much above $80 or $85 per barrel in inflation adjusted terms, the economy tends to go into recession. As oil prices once again approach this critical range it will be interesting to see whether it’s enough to tip the economy into what some pundits are calling a ‘double-dip recession’.


This observation becomes particularly relevant when we consider that much of the oil that remains is what we call “difficult oil”, meaning that it is expensive to extract. If producing oil at more than $80-85 per barrel has been enough to throw the economy into recessions in the past, then surely a future of much high energy prices will result in a massive predicament if we wanted to continue to run the economy as we now know it.

Another way to look at the link between oil and the economy is in the following figure from Dave Cohen of ASPO-USA.  This figure shows that growth in global GDP seems to be highly correlated with growth in global oil consumption. This means that if oil production actually starts declining permanently, the world economy as we know it is likely to begin declining permanently as well.


Operating the current monetary system in a world of declining energy

Operating in a world of declining energy is an utterly new prospect for every single political and financial institution. Our current monetary system relies on the very basic assumption that ‘the future will be exponentially bigger than the present’. What if this assumption is incorrect? What are we to expect in the future from a monetary system so reliant on continued growth when this growth becomes impossible?

What we know

  • Surplus energy has been responsible for all the growth and complexity in our industrialised society.
  • Availability of surplus energy is shrinking.
  • The age of cheap oil is all but over.
  • Oil costs will begin to consume an ever-greater proportion of our total budget.

Here are the Risks

  • There is the risk that our exponential money system will cease to operate in a world of declining energy surplus. It might simply not be suited to the task.
  • There is the risk that our society will be forced to become less complex.
  • There is the risk that even as oil winds down, the momentum of the money system will create conditions ripe for much economic hardship.

Some Predictions

  • The status quo economy will be preserved at all costs. Politicians will hide the truth, economic statistics will become even fuzzier, and central banks will continue to throw more and more money at a system that, at its core, is out of tune with reality.
  • Economic pain (hyperinflation, dollar-devaluation or collapse) will result. With western governments stimulating economies all over the world we can reasonably conclude that the future will be filled with ever more dollars. At the same time, declining surplus energy will assure that there are fewer goods floating around. Together, these spell inflation.
  • A logical conclusion from the previous two predictions is that standards of living will decline. (note: even as ones standard of living declines, one’s quality of life can go up!)

While I’m not suggesting these scenarios are going to happen this year or next, I do think these issues are likely to play out over the next couple of decades. On a larger scale, we need to come up with an economic system which is more in tune with the limitations of Earth’s resources and which does away with the need for constant growth. However on a personal level, we now have the time and opportunity  to adapt to a future of less. If done in a deliberate, voluntary manner we can embrace a lifestyle of less ‘stuff’ which is filled with a more meaningful, joyful experiences. We must not fall into the trap of squandering precious time and remaining energy in a desperate, certainly foolish, and possibly, an ultimately unpleasant bid to preserve the status quo.

Learn more:

Exponential Money in a Finite World by Chris Martenson

Photo by: bitzcelt

Environment#2: Resource Limitations ~ Water


Photo by: World Bank Photo Collection

 “You don’t know the worth of water, until the well runs dry” ~Ben Franklin

Last week I wrote a post about Human Population Growth and how continued exponential growth is not possible on our finite planet. Of all human needs, number one has to be access to fresh drinking water. We can live without oil and electricity, but water is an absolutely essential human need. Having lived most of my life on the dryest inhabited continent, Australia, the issue of water is near and dear to me.

It’s an issue which garners some media attention but I don’t think the impact of the current situation has fully registered. 1.1 billion people (about one-sixth of the world’s population) lack access to safe drinking water. Aquifers under Beijing, Delhi, Bangkok, and dozens of other rapidly growing urban areas are drying up. The rivers Ganges, Jordan, Nile, and Yangtze — all dwindle to a trickle for much of the year. In the former Soviet Union, the Aral Sea has shrunk to a quarter of its former size, leaving behind a salt-crusted waste.

Water has been a serious issue in the developing world for a long time, but the scarcity of freshwater is no longer a problem restricted to poor countries. Shortages are reaching crisis proportions in even the most highly developed regions, and they’re quickly becoming commonplace in our own backyard. Crops are collapsing, groundwater is disappearing, rivers are failing to reach the sea. To judge from recent media attention, the finite supply of freshwater on Earth has been nearly tapped dry, leading to a natural resource calamity.

Water is Essential to Life

Water is central to survival—without it, plant and animal life would be impossible. Water is a central component of Earth’s ecosystems, providing important controls on the weather and climate. Water is likewise central to economic well-being. We rely on it for agricultural irrigation, forestry, waste processing and hydroelectricity to name only a few. The potential consequences of future climate change (whether natural or anthropogenic), when coupled with population growth and economic development, means that water resources will be of increasing interest and importance for the foreseeable future.

Water is Finite

The same amount of water exists now as when the Earth was formed.  It evaporates, coalesces in clouds, falls as rain, seeps into the earth, and emerges in springs to feed rivers and lakes. Approximately 97 percent of it is in the oceans, where it’s useless unless the salt can be removed — a process that consumes enormous quantities of energy.



Therefore, only about 3 percent of the world’s water is fit for drinking, irrigation, husbandry, and other human uses. This water can’t always be found where people need it, and it’s heavy and expensive to transport. Like oil, water is not equitably distributed or respectful of political boundaries; about 50 percent of the world’s freshwater lies in a half-dozen lucky countries.



Freshwater is the ultimate renewable resource, but humanity is extracting and polluting it faster than it can be replenished. Rampant economic growth (more homes, more businesses, more water-intensive products and processes, a rising standard of living) has simply outstripped the ready supply, especially in historically dry regions. Compounding the problem, the water cycle is growing less predictable as climate change alters established temperature patterns around the globe.

Water Usage is Increasing

Regional water scarcity is a significant and growing problem. If per capita consumption of water resources continues to rise at its current rate, humans could be using over 90% of all available freshwater by the year 2025, leaving just 10% for all other living organisms. By 2025, 1.8 billion people will be living in regions with absolute water scarcity and two out of three people in the world could be living under conditions of water stress.   



Water Pollution

While water usage continues to increase, water resources continue to be depleted due to increasing pollution. On this basis alone, all water resource estimates may be optimistic. The major sources of intensive pollution of waterways and water bodies are found in the forms of contaminated industrial and municipal wastewater as well as water runoff originating from irrigated areas. This problem can be no more acute than it is in the industrially developed and densely populated regions where relatively little wastewater purification processes take place.

Peak Water?

“It should be obvious from simple arithmetic that population growth is on a direct collision course with increasingly scarce resources.” – Jeremy Grantham

Freshwater shortages could have calamitous consequences for affected regions, worldwide commodity prices, the economic future of nations with water shortages and possible war. The impact of water scarcity can be far-reaching. It can lead to food shortages, famine, and starvation. Many nations, regions and states have mismanaged their water resources, and they will suffer the long-term consequences.

 “There is more water allocated to each user from the Colorado River than there is water to allocate. As long as some people are willing to sell their water, this isn’t an immediate problem. Chevron’s water rights for its DeBeque, Colo., shale oil project are leased, not sold, to the city of Las Vegas for drinking water. How will Las Vegas replace that in the future when Chevron won’t extend the lease? Many areas are using ground water that will be used up entirely in just a few decades.” ~ Mike Shedlock

Climate Change gets plenty of headlines but unfortunately the future water crisis has stayed well under the radar. As with most looming resource limitations, little if any future thought has been given to the issue of water scarcity. The last few decades have seen debt-financed good times and relatively low prices for all natural resources and commodities. The end of this period of low prices is nigh.

“We must prepare ourselves for waves of higher resource prices and periods of shortages unlike anything we have faced outside of wartime conditions. In fact, I believe we are already several years into this painful transition but are still mostly invested in denying it.”  ~ Jeremy Grantham, investment banker

Water Crises = Food Crises  



A looming future crisis of food shortages and skyrocketing commodity prices is inevitable. Peak water will play a significant role in the crisis. Here what’s happening:

  • Droughts are occurring in key farming belt areas.
  • Less snow pack in the mountains is resulting in less freshwater flows during the growing season.
  • Contamination of freshwater sources by industrial waste in increasing.
  • Soil erosion and depletion of underground aquifers in accelerating.
  • Expansion of bio-fuels as an energy source, means that more land and water is dedicated to the growing of these crops.
  • Worldwide population is growing and developing countries are expanding the diets of their middle class.
  • Water is unable to be transported economically.

War over resources has happened before and it could happen again. The devastating combination of peak oil and peak water will combine to create a commodity crisis that could cause conflict as countries contend for declining resources.


There can be little argument that exponential population growth coupled with an increasing demand for fresh water is resulting in increasing pressures on this valuable resource. In recent times, it has become more clear that human prosperity and prospects for survival vary with the amount and distribution of fresh, unpolluted water. Each year there are millions more humans, but no more water than before. This is going to be one of the biggest issues of our generation.

Watch: Tapped the Movie

More from me:

Environment#1: The issue of Human Population Growth

Energy#1: What is Peak Oil?

Economy#4: The Debt Trap (our Economic System is not Sustainable)

Environment #1: The issue of Human Population Growth


When listing the most troubling global trends of our time, one has to consider the following: accelerating industrialization, widespread malnutrition, depletion of non-renewable resources and a deteriorating environment. At the root of all these converging crises is the issue of human overpopulation. Each person we add to the planet requires more energy, space and resources to survive. If the human population was maintained at sustainable levels, it might be possible to balance environmental issues with renewable resources and regeneration. Unfortunately our population is rapidly rising beyond the Earth’s ability to regenerate and sustain us with a reasonable quality of life.  We are exceeding the carrying capacity of our planet.

One only has to look at the situation we find ourselves in with respect to water, soil and food depletion, biodiversity loss and the degradation of our oceans to know that the human situation is not sustainable. So, one has to ask, what level of human population is sustainable?

What is a Sustainable Population?

A sustainable population is one that can survive over the long-term (tens of thousands of years) without running out of resources or damaging its environment in the process. This means that a population must not generate more waste than natural processes can deal with, that those wastes do not generate harmful outcomes for the ecosystem and that the resources used are either renewable through natural processes or are able to be entirely recycled. A sustainable population must not grow past the point where those natural limits are breached. Clearly, the current human population is not sustainable.

Carrying Capacity

Carrying capacity is defined as “the population size of the species that the environment can sustain indefinitely, given the food, habitat, water and other necessities available in the environment.” Wiki If the numbers of a species are below the carrying capacity of its environment, its birth rate will increase. If the population exceeds the carrying capacity, the death rate will increase until the population numbers are stable.

The relationship of humans to their environment is obviously more complex than the relationship of other species to theirs. The human carrying capacity can be increased by the discovery and exploitation of new resources (such as metals, oil or fertile uninhabited land) and it can be decreased by resource exhaustion and waste buildup, for example declining soil fertility and water pollution.

If we look at a graph of world population from 1 AD to now, it’s perfectly obvious that something has massively increased the world’s carrying capacity in the last 150 years. For tens of thousands of years the human population rose very gradually as humanity spread across the globe. This began to change around 1800 and by 1900 the human population was rising dramatically. The population reached 6.1 billion in 2000.  The United Nation projects that if continue along our current trajectory, world population for the year 2050 could range between 7.9 billion to 10.9 billion!


The Role of Oil in Population Growth

Oil first entered general use around 1900 when the global population was about 1.6 billion. Since then the population has quadrupled. When we look at oil production overlaid on the population growth curve we can see a very suggestive correlation.


Oil allowed humans to send fishing ships far out to sea, to drill deep water wells to irrigate crops and to grow, harvest, refrigerate and distribute vast quantities of food. It enables us to feed 6.8 billion people.

The “Green Revolution”

Another cause of the huge population growth during the 20th century was the enormous world-wide increase in food production created by the growth of industrial agribusiness. Popularly known as the “Green Revolution”, it’s clear that it has caused a massive increase in both yields and the absolute quantities of food being grown worldwide. I often think calling this particular revolution ‘green’ is a complete misnomer, given that it was actually based on cheap and easy access to large quantities of oil. First came mechanization, then the invention of pesticides and fertilizers. Both of these new technologies are completely reliant on petroleum products derived from oil. Without large quantities of cheap oil, this revolution could not have occurred.

In 2000, a University of Michigan study stated that for every calorie of food energy consumed in the United States, over seven calories of non-food energy (fossil fuels) were used to produce it. Other studies have placed the ratio at 10:1. The United States uses over 12% of its total oil consumption for the production and distribution of food. As the oil supply begins its inevitable decline, food production will be affected. Over the next decades the ability to maintain our burgeoning population will come under increasing pressure.


Source: Clay Bennett

Population Growth in light of Peak Oil

Over the last couple of centuries, Human carrying capacity has been added to the Earth in direct proportion to the use of oil.


As I outlined in a previous post, oil is a finite, non-renewable resource. As our oil supply declines, the disturbing implication is that the carrying capacity of the world will automatically fall with it. Our population today is many times as much as it was before oil came into our lives, and it is still growing. If this resource were to be exhausted, our population would have no option but to decline to the level supportable by the world’s lowered carrying capacity. Understanding the role of oil in expanding the earth’s carrying capacity brings a new urgency to the topic of Peak Oil. I’ll leave further discussion on that topic until another day.

Population Growth and other Environmental issues

As the world population continues to grow, much pressure is being placed on arable land, water, energy, and biological resources to provide an adequate supply of food while maintaining the integrity of our ecosystem. Each of these issues deserves a dedicated post, so in the coming months I intend to discuss the impact our growing population has on a variety of these environmental issues.

Read more from me:

Economy#1: How Money is Created

Energy#1: What is Peak Oil?

Economy #4: The Debt Trap (Our Economic System is not Sustainable)

3058009462_f59cb3ed1aPhoto by: bitzcelt

“[Money] is an odd measure of value. It is so ubiquitous in our culture, so fundamental to how we all live, yet we rarely sit and contemplate what it really “is.” Where it comes from, what it does, and who (in the final analysis) really controls it. Most of us spend most of our waking hours chasing it, without really understanding what it really is we are doing.” ~ Charles Curtis

debt-moneyHave you ever wondered how governments, corporations, small businesses and families can all be in debt….and for such astronomical amounts? How can there be so much money to lend? If you haven’t already read my article on How Money is Created, I encourage you to read that before delving into this one. It will all make so much more sense.

For those of you who are well versed on the subject of how money is created, let’s continue. We know that banks don’t simply lend the money they already have on deposit, they create it out of thin air as debt. Therefore, because the amount of debt is potentially unlimited, so is the supply of money.

Money = Debt

The strange thing is, if I paid off all of my debt I would find I personally have more money to spend because I have no loan repayments, but the same does not hold true for the entire society. If everyone paid off their debt, there would simply be no money.

“That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.” ~ Marriner S. Eccles, Chairperson and Governor of the Federal Reserve Board.

We are totally reliant on continually renewed bank credit for there to be any money in existence. No loans = no money. When credit dried up during the Great Depression, the money supply decreased drastically. It’s for this reason that Governments around the world are so worried about the current crises of credit.

“This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create enough synthetic money, we are prosperous; if not, we starve. We are, absolutely, without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is.” ~ Robert H. Hemphill, Credit Manager Federal Reserve Bank, Atlanta, Georgia.

Our money system is not what we have been led to believe. In essence, the creation of money has been privatised. Except for coins, all of our money is now created as loans advanced by private banking institutions. While banks create the principal out of thin air, one very important factor is missing.

Perpetual Debt

PIf the entire economy pays back all the money that was loaned into existence, but still owes the interest, where does the money come from to pay the interest?

The answer is simple but profound: more money has to be loaned into existence to pay back the original interest!

In order to just keep the system running, the total debt in the economy has to grow exponentially until the end of time, and can never be repaid fully. That means the economy has to grow continuously in order to generate the income to pay back the continuously growing debt. And that means more interest must be paid, resulting in an ever-increasing and inescapable spiral of mounting indebtedness. Doesn’t that make your head spin?

Historic Level of Debt

When viewed historically, and compared to gross domestic product, the current levels of debt are without precedent.  This chart (based on U.S. data) shows how my generation has spent their entire lives on the slippery slope of the biggest credit bubble in history.  The last time debts got even remotely close to current levels was back in the 1930’s. The credit bubble that burst at the end of the roaring twenties was followed by years of economic contraction and hardship, now known as the Great Depression.


Source: Crash Course Chapter 12

Our economic model requires that the future be much larger than the present

As today’s huge credit bubble gets bigger and bigger, the need to create more and more debt money becomes increasingly urgent. Our entire economic model is based on a rather substantial assumption about the future….that the future will be larger than today.  

There is an explicit assumption here that the future GDP is going to be larger than today’s. A lot larger. More cars sold, more resources consumed, more money earned, more houses built – all of it – must be larger than today just to offer the chance of paying back the loans we’ve ALREADY taken on. But each quarter we see that new debts are being made at a rate five times to six times faster than growth in the underlying economy. Even with a fairly optimistic assessment of future growth, this trajectory is unsustainable. ~ Chris Martenson, author of the Crash Course

Exponential growth in debt only appears to be sustainable when asset prices (most notably, house prices) rise fast enough to keep the financial system solvent (i.e. able to pay back the continuously growing compounding debt). Once asset prices stop rising in the context of adequate economic growth, the game is over. That game-over moment is what we all know as the Global Financial Crisis.

Without continuous economic growth, the entire monetary system will collapse. Governments, in their quest to maintain the status quo consider the only course of action is to pump more money into the system. This is done through increasing the levels of government deficit spending and consequently increasing the total amount of debt. The risk is, that without a properly growing real economy, this process could ignite another asset price bubble. This may seem to work for a while, until the bubble bursts and we plunge back into another financial crises, this time even bigger than the last.

Can debt continue to grow exponentially in a finite world?

Since the physical world has a finite quantity of resources, the quantity of goods and services produced in the economy cannot always grow fast enough to match the continuously growing debt. The perpetual growth required by our current economic system requires perpetually escalating use of real world resources and energy. More and more ‘stuff’ has to be created from our natural resources and turned into garbage. This must continue every day, of every year…forever…Just to keep the system from collapsing. Given what we know about Peak Oil and other resource limitations, how long do we think this system will last?

” [It’s] our monetary system itself that is out of step with reality.  Everything else we see around us economically is merely a symptom, while the cause of our current and future ills is the dependence of our monetary system on perpetual exponential growth.  A profound and important set of conclusions immediately result from the acceptance of this argument. ~ Exponential Money in a Finite World by Chris Martenson

What can we do about this very scary situation? For starters we need a very different concept of money and wealth. In trying to envisage a sustainable future, it’s very clear that our current system of money is not workable.

Read more from me:

Economy#1: How Money is Created

Economy#2: Is a Housing Bubble looming in Australia?

Economy#3: How the Credit Crises Happened

Energy#1: What is Peak Oil?

Energy#2: The Economy and Oil (The Long Decline)

Learn more about Money as Debt:

Energy#1: What is Peak Oil?


Photo by: MissusK

This post is part of my World-Changing Wednesday series. Tune in each Wednesday to read my thoughts on an issue which I think will have a huge impact on how we live our lives in the years to come.

“My main motto never changes, the era of low oil prices is over.” Dr Fatih Birol, Chief Economist, International Energy Agency

Most mornings I try to read the headlines in the Australian news because I like to keep up with what’s happening back home. This morning I was surprised to see the following headline in the Breaking news section: ‘Four Saudi Arabias’ needed for oil. For many of us aware of Peak Oil, this is hardly breaking news, but I’m somewhat pleased that this type of article is finally making its way into the mainstream media. I consider Peak Oil to be the one issue which could impact us most in the decades to come, affecting almost every facet of our lives. I think it’s about time for me address this topic on my blog.

Firstly, I want to say right from the start, Peak Oil does not mean we’ve run out of oil, nor will we run out any time soon. What it does mean is that there will be a decline in production of ‘easy oil’ (light, sweet crude oil) and we’ll move to more production of ‘difficult oil’ (heavy, sour crude oil, oil shale and tar sands) . Since I like to use diagrams, let me try to explain this visually.

Peak Oil definition

Peak oil is the simplest label for the peak in global oil production. The rate of oil ‘production’ (meaning extraction and refining) has grown almost every year of the last century. Once we have used up about half of the original reserves, oil production ceases to grow and begins a terminal decline, hence ‘peak’. The peak in oil production does not signify ‘running out of oil’, but it does mean the end of cheap oil, as we switch from a buyers’ to a sellers’ market.

Oil production peak

oil-wellExtraction of oil is not like pumping water from a tank. Oil does not simply flow out at a constant rate until there is no more. When an oil field starts production, the oil is under a lot of pressure and comes up easily. Images like the one to the right show how oil literally gushed from the ground when new fields were tapped. As more and more wells are sunk into a field the amount of oil able to be extracted from a field increases….up until a point.  Eventually water, steam or gas has to be injected to repressurise the wells. Finally, once most of the recoverable oil has been taken out, it becomes impossible to maintain the same production rate. The remaining oil has to be pumped out at a much slower rate. The production peak occurs when that output begins to decline.

Typically, each oil producing country will stagger the development of their oil fields. The biggest and easiest fields will be developed first. Then the harder and smaller ones. As more and more fields reach their production peak, the production of the country (the aggregate production of the individual fields) will also eventually peak and decline (see below).


Source Energy Watch Group, Oil Report 2007.

Every oil field exploited to date has exhibited this same basic extraction profile. Just as individual fields peak, so do collections of fields. Peak Oil, then, is NOT an abstract theory. It is a physical description of an extremely well characterised physical phenomenon. Already, a large number of oil-producing countries are past the peak of their oil production.


Source Energy Watch Group, Oil Report 2007.

Global peak oil

As more and more countries are reaching their own national peak, the question on everyone’s minds is: When is world oil production going to peak? The answer to this question is what is generally refered to as ‘Peak Oil’.


In the 1950s the well known U.S. geologist M. King Hubbert was working for Shell Oil. He noted that oil discoveries graphed over time tended to follow a bell shape curve. He supposed that the rate of oil production would follow a similar curve, now known as the Hubbert Curve. In 1956 Hubbert predicted that production from the US lower 48 states would peak between 1965 and 1970. Most people inside and outside the industry quickly dismissed the predictions but as it happens, the US lower 48 oil production did peak in 1970/1. The peak was only acknowledged with the benefit of several years of hindsight.

No oil producing region fits the bell-shaped curve exactly because production is dependent on various geological, economic and political factors, but the Hubbert Curve remains a powerful predictive tool. Later in life M. King Hubbert predicted a global oil peak between 1995 and 2000. He may have been close to the mark, except that the oil shocks of the 1970s slowed the consumption of oil for close to a decade.

From the graph below, we see that global oil discoveries peaked in the sixties which means that the bulk of oil extracted today is coming from aging fields discovered decades ago.


Source The Oil Drum: Peak Oil Overview – March 2008.

Of the 65 largest oil producing countries in the world, up to 54 have passed their peak of production and are now in decline, including the USA in 1970, Australia in 2000, the UK in 1999, Norway in 2001, and Mexico in 2004. Hubbert’s methods, as well as other methodologies, have been used to make various projections about the global oil peak, with results ranging from ‘already peaked’, to the very optimistic 2035. Many of the official sources of data used to model oil peak such as OPEC figures, oil company reports, and the USGS discovery projections, upon which the international energy agencies base their own reports, can be shown to be frighteningly unreliable.

Source Energy Watch Group, Oil Report 2007.

Personally I find myself in the ‘near peak’ camp meaning I tend to think world oil production has already peaked or will very soon. I’ve tried to keep today’s post pretty simple and based on factual evidence based on what we know about the characteristics of individual oil fields. Over the next few weeks I intend to delve a little more deeply into this issue and also look at some of the ramifications of peaking global oil production. I hope you join me.

Read more from me:

Economy#1: How Money is Created

Economy#2: Is a housing bubble looming in Australia?

Economy#3: How the Credit Crisis Happened

Economy #3: How the Credit Crisis Happened


This is the third post in my World-Changing Wednesday series. Tune is each Wednesday to read my thoughts on an issue which I think will have a huge impact on how we live our lives in the years to come.

Unfortunately I am away for work this week and haven’t had the time to put together a full post. However, I did come across this excellent visual presentation on how the credit crisis happened.

The Crisis of Credit Visualized from Jonathan Jarvis.

This presentation will explain, with easy to understand visuals, the complex relationships between sub-prime mortgages, collateralized debt obligations (CDO), frozen credit markets and credit default swaps. It also provides some historic context into what caused the crisis, starting from the dot-com bubble and subsequent lowering of interest rates by the US Federal Reserve. This is the easiest, most clear explanation of the causes of the financial crisis that I could find. I hope you get as much out of it as I did. I should be back next week to talk about another big issue which consumes much of my thoughts these days.

Read other articles in the World Changing Wednesdays series

Economy #1: How money is created

Economy #2: Is a housing bubble looming in Australia?

Energy#1: What is Peak Oil?

Economy #2: Is a Housing Bubble looming in Australia?

3172219438_a17f572489Photo by: bitzcelt

This is the second post in my World-Changing Wednesday series. Tune is each Wednesday to read my thoughts on an issue which I think will have a huge impact on how we live our lives in the years to come.

Originally I had planned to talk about the U.S. Housing Bubble and how it collapsed in spectacular fashion over the last couple of years. However, having just spent three weeks in Australia I thought I’d focus on what I think could be another looming housing bubble…. this time in the land Down Under.

While I was in Newcastle, I spent some time talking to a couple of people about the property market. One friend who is sole provider for his wife and four children, has been unable to get a loan to build a house on some land he already has mortgaged. He was telling me that property was set to boom and that he wanted to get into the market now at all costs because he didn’t want to miss the boat. Despite being rejected for loans from all the major banks, he had managed to find himself a broker who was willing to be little bit creative to get him a loan. Is any of this sounding familiar? Like what was happening in the U.S. before the housing bubble popped? To say I’m worried for my friend is an understatement.

So far Australia has managed to escape recession and is one of  the few countries not dragged completely into the global financial crisis.  While I was visiting I really got a sense that nothing much had changed for most Australians and they were simply spectators to the global recession. There are a couple of reasons Australia avoided most of the pain. The most obvious one is China.

“Australia’s pre-crisis China boom meant both federal government and business balance sheets were in good shape when the shock hit. And, while export prices slumped, Australia has actually increased the volume of exports during the crisis thanks to China’s ramped-up demand for our iron ore and coal.” ~ The Australian

The second reason I think Australia has powered on through the global recession is that a large part of our economy is boosted by the housing sector which from all appearances is still going strong. As I travelled around the country I was consistently amazed at the prices being asked for properties. I thought I would spend a little time today looking into the housing market situation in an attempt to understand where property prices might go.

Australian Housing is Unaffordable

Australia currently has amongst the most expensive and unaffordable housing in the developed world. The following chart from Scott Reeve’s Economics and Share market blog shows how Australian house prices have grown far beyond household incomes, construction costs and rental yields. One has to wonder how this situation could possibly be sustained.


According to a new Housing Affordability Survey by Performance Urban Planning,  Australia has the most unaffordable housing of all the nations surveyed. Not only that, but according to the report, Australia doesn’t even have a single urban area in which housing is merely “moderately unaffordable.” In order to determine what is affordable, the survey uses a ratio of Median House Price to Median Household income. A house is “Affordable” if the ratio is 3.0 or less and it’s “Severely Unaffordable” if the ratio is 5.1 or more.

Australia has a ratio of 6.3 which is “Severely Unaffordable” compared to the U.S. nationwide ratio of just 3.2. If you’re in the market for something just “Seriously Unaffordable” you should try Bendigo (4.8), Wagga Wagga (4.9). or the goldfields in Ballarat (5.0). The other 24 major urban areas surveyed are prohibitively expensive.

“Unlike the other national markets in the Survey,” the survey surmises, “Australia has thus far been able to avoid material house price declines. It seems likely that, sooner or later, the inherent instability and unsustainability that characterizes bubbles will lead to house price declines in Australia. However, were it possible for Australia to retain its highly over-valued house prices, there would still be a significant cost. Future generations would pay far more for housing than in the past, and Australia’s relative standard of living would decline.”

Here’s another chart from Who Crashed the Economy which visually shows the house price index in Australia compared to the U.S. This chart finishes at 2005, just prior to the collapse of the US market, but it really does show how inflated the Australian market was in comparison to the US pre-crash prices.


Australians are in too much debt

Australia has enjoyed prosperous times for a number of decades and as a consequence, individuals, companies and banks have taken on more and more debt. It goes without saying that the U.S. subprime crisis caused massive problems for the global economy. The Australian economy is also reliant on a buoyant housing market and with the huge amount of money the average Australian owes on their mortgage, things could get very messy if/when housing prices come down.

The following chart from Who Crashed the Economy compares Australia’s household debt ratio with that of the United States.  While the U.S. may have had lower quality loans and lower lending standards which contributed to their housing crisis, Aussies have accumulated far more household debt and it’s growing fast.


Australian’s have over leveraged in order to buy into the great Australian dream of owning a home. The situation is precarious and anything which could negatively affect employment rates could bring this house of cards crashing down around us.

The Australian Government has been encouraging first home buyers

Since 2000, the Australian Federal and State Governments have been encouraging more purchasers into the market through handouts and stimulus packages such as the First Home Owner Grant (FHOG). In October 2008, the Premier of Victoria announced that Victorians who entered into a contract for a newly constructed home would get cash grants of up to $29,000 for regional areas. That’s a whole lot of money and you can’t tell me that these huge injections of cash from the government aren’t inflating property prices artificially. What happens later this year when the cash boost tapers off?

“COMMONWEALTH Bank of Australia has cautioned that the Federal Government’s sweetener on the first home buyers grant should not become an open-ended offer because it could encourage some into the housing market who may not be able to afford home ownership.” ~ The Age

Interest rates are set to rise

On 6 October 2009, the Reserve bank of Australia (RBA) increased the official cash rate by 25 basis points to 3.25%, making Australia the first developed nation to increase rates since the start of the global financial crisis.

“The International Monetary Fund is advising central banks to take pre-emptive action to control asset price bubbles by raising interest rates.” ~ ABC News

I enjoyed the interest rate holiday while it lasted but we had to know it was never going to be long term. I remember only 18 months ago that people were beginning to struggle with their mortgages when interest rates exceeded 9%. How many people jumped in and purchased a house when interest rates dropped and will struggle with repayments return to those higher levels?

What about demand?

The one thing I can’t quite determine is where the demand for property in Australia is heading. When it comes to property prices, most Australians think they only go in one direction. We have been lulled into a false sense of security by prices which have consistently grown by 5-10% for the last couple of generations. Apart from the Australian dream of owning their own home, many Australians see property as a sure fire way to get rich. This has certainly been true for the Baby Boomers but I wonder how the younger generations will fare when they are finding it difficult to even get into the market in the first place.

This chart from Wikipedia demonstrates what’s been going on in terms of population growth in Australia. This exponential growth has continued to put pressure on housing availability which has driven up prices to obscene levels. Most reputable sources predict further population growth over the next 40 years. In fact while I was in Australia, the news was announcing record growth this year with a new baby boom (no doubt stimulated by the Government’s Baby Bonus) and record immigration.


However, lets look at the ABS Population Pyramid for Australia in 2008. What’s interesting about this graph is that you can notice a definite ‘bulge’ in the population aged 35-60. This is the Baby Boomer generation moving towards retirement. This generation has amassed massive wealth over the last few decades of their working lives and much of it is in the form of property. As these boomers retire, often they will sell their expensive city properties and make a sea-change or tree-change move to more regional areas. This has the added effect of driving up prices in rural areas and small towns making it extremely difficult for younger people to afford houses.


I have to wonder what is going to happen as more and more retiring boomers try to sell their properties upon retirement. Will the generations coming through behind them be able to afford the prices they are expecting? Somehow I think not. There are simply not enough people in the younger generations to support a large retired population and to turn the boomers property wealth into cash. I think this will be a very interesting aspect to watch over the coming years.


  • Australian housing is unaffordable compared to similar developed nations.
  • Australian households hold records amount of debt.
  • The Australian Government has been artificially inflating housing prices with grants.
  • Interest rates won’t stay low forever.
  • For the property market to continue to rise, buyers must be secure in their employment, banks must continue to lend at current rates and boomers must find property purchasers who are willing to fund their retirement.

Before making any decision to buy property, I would encourage everyone to consider these facts, but also do your own research. I have quickly put together some thoughts based on a three week visit back to Australia, but I’m sure there are plenty of experts out there who have undertaken more analysis on this issue. Just be careful not to believe Government, real estate or media spin. They have their own agenda which is growth at all costs.

Check out my previous article on the Creation of Money to understand why Governments and Banks must continue to grow debt.

Disclaimer: I do own property in Australia, however I am currently liquidating some assets. I don’t know what the market is going to do, but I do not see sufficient likelihood of further massive growth for me to consider holding out for more capital gains. For reasons I’ll probably discuss in another blog post, I am getting out of debt as fast as I possibly can.

Read more from me:

Economy#1: How Money is Created

Economy#3: How the Credit Crisis Happened

Energy#1: What is Peak Oil?

Economy #1: How Money is Created


Photo by: cayusa

This is the first post in my World-Changing Wednesday series. Tune is each Wednesday to read my thoughts on an issue which I think will have a huge impact on how we live our lives in the years to come.

This week, I’m going to talk about how money is created. If you are anything like me, you’ve probably never even given this topic a second thought. In hindsight, this attitude might have been a little crazy given that most of us live our lives in pursuit of money. In our culture we’ve been taught that money buys us happiness. Without consciously choosing to do so, we’ll seek riches as a means of fulfillment and in the process we’ll put the earning of money above all other pursuits.  However once you understand the nature of money, you may think twice about its relative value.

The process by which banks create money is so simple that the mind is repelled ~ John Kenneth Galbraith, Economist

Where does money come from?


Most people imagine that the government makes money. Indeed the coins and paper we usually consider to be money are produced by a government agency known as the mint, but the vast majority is created by private corporations known as banks.

Most of us probably think that banks lend out money that they have on deposit from peoples’ savings, but this is not the case. The banks simply create money out of thin air, based on the borrower’s promise to pay. The borrower agrees to pay back the money loaned to them, plus interest and if they don’t they will forfeit their collateral (i.e. car or home).

So, for that big commitment made by the borrower, you’d think there would have to be some sort of large commitment on the banks behalf, wouldn’t you? In fact, all the bank needs to do in this exchange is to conjure out of thin air, the amount of the loan and write it into the borrowers account. So you’re now thinking, ‘Surely this can’t be true?’ But it is.

Money is loaned into existence.

Let me try to explain. If it takes you a couple of reads to get this, don’t worry. I’ve been there. It’s actually a pretty simple process, but it is difficult to accept. The following explanation applies to the process in the USA, but the system is similar in all industrialised nations.

Firstly, let’s imagine that a brand new bank has just opened up in town and it has no depositors yet. To get things started, the bank’s investors have made a reserve deposit of $1111.12 of existing cash money at the Central Bank.


Screen capture from Money as Debt

Step 1. The bank welcomes their first loan customer who needs $10,000 to buy a car. At the 9:1 reserve ratio required in the USA, the bank’s reserve legally allows it to conjur into existence nine times that amount (9 x $1111.12 = $10,000). This $10,000 is not taken from anywhere. It’s brand new money simply typed into the borrowers account as bank credit. The borrower then writes a cheque (check) against that credit to buy a used car.

Step 2. The seller of the used car then deposits this newly created $10,000 at her bank. Money deposited into commercial banks can then be loaned out on a 9:1 ratio.  So for the $10,000 deposited, $9,000 could be loaned out and the bank would keep $1,000 in reserve.

Step 3. If that $9,000 is then deposited in a bank, that deposit can again be used for a third issue of bank credit, this time for the amount of $8,100. Each new deposit contains the potential for a slightly smaller loan. In all likelihood, this process will repeat over and over until nearly $100,000 of brand new money has been created within the banking system.

All of this new money has been created entirely from debt and the whole process has been legally authorised by the initial reserve deposit of just $1111.12 which is sitting at the Central Bank. So ultimately, the banks initial Central Bank reserve deposit of $1111.12 allows it to collect interest on up to $100,000 that the bank never had.

Banks loan money they DO NOT HAVE!

What’s even more interesting is that the required reserve ratio in Australia, Canada and the UK is 0%. There is no statutory limitation to the amount of artificial money that can be created by the banks.

Now while there are some complex rules I won’t go into, the reality is quite simple. Banks can create as much money as we can borrow.


Photo by: Martin Kingsley

Despite, the fact that we usually think of money as the physical cash and coins we have in our wallets, Government created money typically accounts for less than 5% of the money in circulation. More than 95% of all money in the world today was loaned into existence. Is this all real money? Sure it is….. especially if it’s in your bank account.

Ok….How’s your brain doing?

I’m afraid that the ordinary citizen will not like to be told that banks can and do create money …. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hands the destiny of the people. ~ Reginald McKenna, past Chairman of the Board, Midlands Bank of England.

Now that you know all this, give some thought to what might happen if everyone who had money in the bank walked in and tried to take all their money out at once. Remember, depending on your country, the banks have been holding somewhere between 0-10% of your deposit in reserve. How many people will receive their deposits back before the bank has to close it’s doors because it’s run out of money?

Also give some thought to what happens when people default on their loans. This system works great while people are able to keep making their payments, but what happens to the money when loans don’t get repaid?

You may also have noticed that we haven’t really touched on an important aspect of this whole system……. Interest. Where does the money come from to pay the interest on all the loans? If all the loans are paid back without interest, we can undo the entire string of transactions, but when we factor in interest, there suddenly isn’t enough money to pay back all the loans.

This issue is addressed in a follow-up article: The Debt Trap (Our Economic System is Not Sustainable)

Ok, I think I’ve written enough for today, so I’m going to leave the next part of this discussion to another day. It’s a lot to digest all at once, so as long as you come away from today understanding that all money is loaned into existence you’ll have a good basis for understanding why this might create problems within our society.

Please note that I am not an economics expert. I’m simply an ordinary gal trying to make sense of a complex world. I urge you to do your own reading on this subject. Here’s some good places to get started:

The Story of Money – Comic book from the Federal Reserve

Money Creation – Crash Course Chapter 7 – Explanation of Money

Read more from me:

Economy#2: Is a housing bubble looming in Australia?

Economy#3: How the Credit Crisis Happened

Economy#4: The Debt Trap (Our Economic System is Not Sustainable)

Energy#1: What is Peak Oil?

Energy#2: The Economy and Oil (The Long Decline)