The Real Reason the Economy Is Broken (and Will Stay That Way)

Tyler Durden's picture

Submitted by Chris Martenson of Peak Prosperity,

We are far enough and deep enough into the most heroic monetary and fiscal efforts ever undertaken to finally ask, why aren't these measures working?

Or at least we should be.  Oddly, many in DC, on Wall Street, and the Federal Reserve continue to steadfastly refuse to include anything in their approaches and frameworks other than "more of the same."

So we are treated to an endless parade of news items that seek to convince us that a bottom is in and that we've 'turned the corner' often on the flimsy basis that in the past things have always gotten better by now.

The framework we operate from around here is simply encapsulated in the observation that there has never been global economic recovery with oil prices above $100 over barrel.  That is shorthand for the idea that oil is the primary lubricant of economic growth and that it is not just the amount of oil one has to burn but also the quality, or net energy, of the oil that matters. 

If we want to understand why all of the tried-and-true monetary and fiscal efforts have failed, we have to appreciate the headwinds that are offered by both a condition of too-much-debt and expensive energy.  Neither alone can account for the economic malaise that stalks the world.

Getting a Little for a Lot

Trillions have been printed and injected into the world's economies, and yet things seem to be barely limping along, requiring constant attention and interventions from both fiscal and monetary authorities. 

The broadest measure of money in the U.S. is Money of Zero Maturity, or MZM.  Note that it has increased by an astonishing 44% since the start of the crisis:

We could similarly look at the Federal Reserve balance sheet, or excess reserves, or a dozen other indicators that all say the same thing: The money supply has been expanded enormously.

And what do we have to show for it?

Not much.

Since 2005 real that is, inflation-adjusted GDP has only expanded by 0.9% on an annualized basis.  On a nominal basis (not inflation-adjusted), the number is only 2.9%, far below the 5%-6% required to sustain a banking system dependent on exponential growth in that range.

In a very nice piece of work entitled Our Investment Sinkhole Problem, Gail Tverberg put up this handy and extremely important chart:

Oil and GDP are highly correlated and always have been.  The general observation is that growth in GDP is usually higher than growth in oil consumption - as growth in oil consumption powers economic growth.  Without growth in oil consumption, GDP growth doesn't advance.

Back in 2009, in a piece entitled Oil - The Coming Supply Crunch (Part I), I calculated that every 1% increase in global GDP was associated with a 0.25% increase in oil consumption in other words, a roughly 4:1 ratio.

Since 2007, something quite remarkable has happened in the world of oil, and that has been a decline in the consumption of oil in the U.S. and Europe -- with China and India pretty much making up the difference for everything that the West didn't consume.

That, plus a dramatic increase in the price of oil were the only ways to balance out the fact that since 2005 oil production has been essentially dead flat:

If the view that oil consumption and economic growth are linked is correct, then we might easily imagine that simply making money cheaper and more widely available would do little to boost the real economy.

Sure all that funny money will boost asset prices, but in this story, the tail does not and cannot wag the dog.  Stock prices may rise, but unemployment will not budge.  Bonds will become more expensive, but GDP will stall.

Hollowed Out

Now the Fed is finally showing signs of saying hey, what gives? as its policies do little to improve the things it publicly admits to wanting to improve.

In this recent speech by Janet Yellen, Vice Chair of the Fed, you can see her nibbling all around the edges of the mystery:

In the three years after the Great Recession ended, growth in real gross domestic product (GDP) averaged only 2.2 percent per year. In the same span of time following the previous 10 U.S. recessions, real GDP grew, on average, more than twice as fast--at a 4.6 percent annual rate.  So, why has the economy's recovery from the Great Recession been so weak?




[T]he unprecedented level and persistence of long-term unemployment in this recovery have prompted some to ask whether a significant share of unemployment since the recession is due to structural problems in labor markets and not simply a cyclical shortfall in aggregate demand. This question is important for anyone committed to the goal of maximum employment, because it implicitly asks whether the best we can hope for, even in a healthy economy, is an unemployment rate significantly higher than what has been achieved in the past.


For the Federal Reserve, the answer to this question has important implications for monetary policy. If the current, elevated rate of unemployment is largely cyclical, then the straightforward solution is to take action to raise aggregate demand.

If unemployment is instead substantially structural, some worry that attempts to raise aggregate demand will have little effect on unemployment and serve only to stoke inflation.


As I said, the Fed is nibbling, but it is not yet even close to the center of the conundrum.  Yes, there are structural issues at play, but they have as much to do with expensive oil as they do with any great shifts in labor market trends. 

The main part to consider here is contained in the last two bolded parts in the above quote.  If the Fed is just chucking more and more money into an economy that has fundamentally shifted into a lower gear, then all they are doing is laying the tinder for future inflation.

Given the amounts involved, the potential for a very punishing period of inflation is quite high, for reasons often discussed here, such as in the recent article QE For Dummies.

Economic Sinkholes

This leads us back to Gail Tverberg's piece on economic sinkholes.  Her main point in that piece was that in times past, higher investment led to higher output.  That is, spending led to economic growth, especially investment spending.

Carefully buried within higher oil prices are higher prices for every single economic activity that uses them.  Along with diminishing ore yields come incrementally higher costs to simply, extract, and refine those ores, let alone fashion them into something useful.

Gail writes:

All types of mineral extraction, but particularly oil, eventually reach the situation where it takes an increasing amount of investment (money, energy products, and often water) to extract a given amount of resource. This situation arises because companies extract the cheapest to extract resources first, and move on to the more expensive to extract resources later.


As consumers, we recognize the situation through rising commodity prices. There is generally a real issue behind the rising prices -- not enough resource available in readily accessible locations -- so we need to dig deeper, or apply more “high tech” solutions. These high tech solutions indirectly require more investment and more energy, as well.


While we don’t stop to think about what is happening, the reality is that increasingly less oil (or other product such as natural gas, coal, gold, or copper) is being produced, for the same investment dollar. As long as the price of the product keeps rising sufficiently to cover the higher cost of extraction, the investor is happy, even if the cost of the resource is becoming unbearably high for consumers.


The summary here is that it takes more and more to achieve less and less.  The old form of economic growth is no longer with us, but the Fed still doesn't get it.  It still has its eyes firmly trained on economic indicators and equations, having not yet raised its gaze into the real world where limits are being reached.

As Gail nicely encapsulates, many of those limits are carefully hidden from view as a slightly but steadily reducing net energy for oil seeps into every nook and cranny of our complex economy.

The sinkholes that we are facing now are extraordinary.  Some of them are quite literal, and numerous, as Harrisburg, Pennsylvania is demonstrating:

Bottom Falls Out of Debt-Ridden City

Jan 31, 2013

HARRISBURG, Pa.—With midnight approaching on New Year's Eve, Sherri Lewis and her two children knelt to pray for a better year ahead.


A few minutes later, she heard a rumbling that sounded like fireworks. The ground outside her apartment had opened up, revealing a municipal disaster that shows how far this city's finances have sunk.


A sinkhole, measuring about 50 feet long and eight feet deep, had swallowed Ms. Lewis's street, damaging water and gas pipes and forcing more than a dozen residents to evacuate one of the city's poorest neighborhoods. "I thought the world was ending,'' says Ms. Lewis, 42 years old.


Harrisburg officials have identified at least 40 other sinkholes around the 50,000-person city. The combination of particularly sandy soil and leaky pipes under Harrisburg's streets make it susceptible to sinkholes, city officials say. But Harrisburg has a bigger problem: The Pennsylvania capital can't afford to replace many of the aging pipes, some of which date back to the 19th century.

The metaphor perfectly offered by Harrisburg is that once you run out economy, your current infrastructure alone may be well beyond your means to maintain.

The embodied energy in just our existing property, plant, and equipment is enormous.  Nearly every high-tech dream of a kinder, gentler future where 9 billion people somehow enjoy higher average standards of living than the current 7 billion requires an extraordinary investment of energy.

Left out of this dream is a crisp articulation of exactly where that energy will come from and when we will begin to transition to prioritizing its use towards building and maintaining all of that new infrastructure.  It's not enough to merely buy electric cars, should they ever be manufactured in sufficient quantities, because we also need new grid components, electrical storage, generation, and a thousand other components to pull it off.

I note that with every passing year, more and more internal combustion engine (ICE) vehicles are manufactured and sold, not fewer and fewer.  The past 7 years has seen the number of new ICE vehicles sold grow at a compounded rate of 3.7% per annum, and at that rate, 2013 should see more than 80,000,000 sold.  That's up from just over 50,000,000 only ten years ago.

Every one of those represents the investment of energy and capital that will consume our remaining oil at the expense of anything else we might choose to do with that oil, such as maintain our current infrastructure as we build out the next one.


As we dump more and more money into the economy, hoping with all our collective might that it will once again sputter back to life and lift all fortunes and boats, too few are asking what happens if it does not.

If there are other factors at work here besides a simple case of too much debt, then the Fed is not only barking up the wrong tree, but is unaware that a very dangerous animal with a bad attitude is resting up there.

These are truly extraordinary times.  I am in awe of the number of otherwise professional investors who believe that the Fed has things safely in hand.  The amount of market insanity and complete disconnect from reality has me thankful that I already lived through a similar time and can keep things in perspective now.

That time was 2005 to 2007, when I was trading quite actively and thought the world had gone mad.  Nothing made sense, because I was trying make sense of things that could not be made sense of.   In times of extraordinarily abundant liquidity and loose monetary policies, all that has to be understood is that financial assets tend to run up in price during such moments.

The fact that this all ended quite badly then does little to make me think this time is going to end any better.  Thin-air money, attempting to print one's way to prosperity, and spending more than you have are proven losers in the history books.

Yet here we are, doubling down we're all in and I guess there's no turning back now.  The Fed is going to keep with the program until forced to change by circumstances.

As I see it, the economy is broken and it will stay that way.  Our only hope for an alternative would be to immediately cut our losses in those enterprises that do not make sense in a world of increasingly expensive liquid fuels, and invest heavily in those things that will help us transition to a future without fossil fuels.

I am quite aware that many decades’ worth of fossil fuels remain, but equally aware that all energy transitions require four to six decades under ideal conditions where one is transitioning to a higher quality fuel source and capital is expanding. 

And under less-than-ideal conditions, where we are transitioning to a lower density energy source (as all alternative energy sources are) and capital is shrinking?  There we might imagine it could take longer than usual; a 100-year transition period is not out of the question.

In the meantime, the best I can tell you is that the markets are reflecting liquidity, not reality, and that until and unless the world suddenly starts to produce a lot more crude oil and the U.S. and Europe increase their consumption of it, I will remain quite skeptical of all pronouncements of recovery in the West.

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LawsofPhysics's picture

financialization has been setting "policy" for far too long (stealing form those that actually produce to give to fucking paper-pushers).  Time for the laws of physics to re-assert themselves.  Fucking bring it.

camaro68ss's picture

I think ZH should do a article on food prices in the supermarkets. its getting nuts.

tickhound's picture




Dorner left final request in note to family.

"Dear Mom, this is Chris Dorner, please bury my body at sea at 2 am with no witnesses. XXXXXXXXXXXXXX and I XXXXXXXXXXXXX XX XXX racism and the guns XXX XXXXXXX XXXX."


DaveyJones's picture

Weird. The CIA claims Bin Laden's read exactly the same

macholatte's picture




Let's see...... maybe this will help sort it out:

We get the same people going to the same schools being taught by the same professors getting coached by the same political hacks getting bribed by the same people who went to the same schools and belonged to the same fraternities and ......


Naturally there will be fresh new people with fresh new ideas...... NOT!


Insanity: doing the same thing over and over again and expecting different results.
Albert Einstein

TwoShortPlanks's picture

The Western World is seeing money velocity at levels lower than the days of rationing during WWII. The money that is being spent is mostly Credit (Consumer, Commercial, Government etc.). Consumer savings are all but gone and most people are simply living off credit, servicing their loans with wages, and buying assets with left-over cash or leveraging up more while stuff is cheap (eg. cars at min % rates). Cash savings must be non-existent by now.

The monetary system isn't broken, it's being circumvented through ZIRP and Monetization. This Dynamic Duo is fuelling-up Banks but not fuelling up commercial ventures which could drive the economy. Lowered money velocity and consumer spending is not attracting capital into Commercial Ventures when there are crumbs to be found in Markets and Bonds. This is the deflation we are seeing right now. There is no growth in this economic desert.

Monetization is simply feeding the Credit Markets through the banking system but because velocity is so low, a back-log of capital should be building up in the Banking system. Yes, they are indeed flush with cash.

The Fed kicking Bank Reserves out onto the open market will merely fuel the Credit Markets and speculative investments; it will not find its way into the economy real while it is contracting. The real economy is not the S&P, you do not BTFD, it just keeps shrinking and nobody buys-in expecting a bottom because there isn't one.

Inflation pressures will build only within the Credit Markets (status quo assumed), so Inflation may not be seen until there is a break in confidence in currency. Ugly.

Raising Interest Rates will do little other than jack-up debt service obligations and since the Fed will more than likely drop rates on Bank Reserves at the same time, I'd say that liquidity will just flow into Commodities and the Markets (Gold run?). Remembering that it's the Banks which have the cash, not the public, so don't expect to see consumer driven Inflation anytime soon...maybe for a decade!

The Western World is now living in a state of permanent 'Sales' in retail and ultra-low interest rates for Real Estate, Cars etc. But this cannot last forever. Eventually we will see an indebted and broke public facing increasing Interest rates...with no savings to take advantage of.

If all this is true, then countries which produce the stuff we buy can never leap-frog into higher standards of living....unless something they already own becomes exceptionally expensive and wanted globally.

Margaret Thatcher once said, "The problem with socialism is that you eventually run out of other people's money". I say, "democracy only gets us a bit further down the road".

I believe China and Russia saw this coming a while back and made moves early, forming the BRICS and establishing a way forward. They cannot hurdle the West, they must swap places via wealth transfer or war, or else it's back to the Sweat Shops in a crippled global economy.

Like I've always said; Western Gen-Y are the most ill-equipped generation to tackle one of the most difficult times in human history. Eastern Gen-Y are savvy, hungry and educated.

China and Russia have Government sponsored student spy hacking pools, do we?...You don't really think that someone walked out of a building with the entire US Nuclear Weapons technology in a briefcase, do you?!

We are most definitely entering a new Cold War.

r3phl0x's picture

Well said and I agree, except for the "Cold" part. As oil declines, the global elite will need a hot war that substantially reduces the population. As always - young males get to die first.

sgt_doom's picture

"bottom line is oil."

Yes and no!  Bottom line is too much financial manipulation and speculation which has gone on for far too long!


BLOTTO's picture

IMO, Bottom line -   is our will...our souls.


Earthly stuff is peanuts for 'them.' They want our essence and spirit...dont give it to them...ever.



centerline's picture

A petro-eternal soul hybrid engine has been invented?  Does it require a Ghostbusters-like containment grid for refueling?

Raymond Reason's picture

Yes, the net, net, net bottom line.

DaveyJones's picture

cart and a horse issue. Is the financial manipulation getting worse because the real economy, real resources, and the credit economy based on the false premise of infinite growth is getting worse or is the fianancial manipulation somehow affecting the access to real stuff.

TahoeBilly2012's picture

No the price the same, the size just got cut in half.

BeerBrewer09's picture


I think there should be a website that tracks individual items and their prices, along with decreasers in volume, etc. IMHO, it would get enormous amounts of site trafiic.

DaveyJones's picture

and as your avatar states, brewing is your first line of defense

so is growing and making as much as you can from scratch

the best assault on a 100 year old criminal bank system is 100 year old skills 

BeerBrewer09's picture

Trying to start a small brewery in this eco-political climate. Wish me luck.

centerline's picture

MIT Billion Prices project was supposed to track inflation and such.

Good luck on the micro (or nano) brewery.  Beer has been around longer than scumbag bankers and will endure beyond them as well.  Not to mention the world about to become much more local in the near future.  Not a bad idea to think local in terms of ingredients - grow your own - etc.

Raymond Reason's picture

It's the best defense and best offense.  It's the way we beat these leaches, patiently, steadfastly becoming more and more independent, one person at a time.  Let the parasites turn on each other. 

DaveyJones's picture

Have thought hard about this in the past  -brewing, cooking, dreaming. Wanted to try something more like a "micro-cosmic brewery. Heard about guys in Colorado and other places getting certified out of their basement. Start very small (Like Celestial Seasons Tea) maybe stay small. Small batches, very small. Like a whole new product. Gourmet and creative, less risk. Of course go around to your local restaurants, give samples. They key would be the constant change of product, and gourmet unique elements like the very basis for a restaurant. Small batches, so less risk. At the other end no reason you can't amke an affordable but healthy and suspended yeast port. Comic names and themes throughout the year maybe even political commentary - like the pub or the early american ale house. Where all the trouble starts through history. You could have a "President's Ale" with an alcohol warning. "Warning this beverage may impair your ability to speak, spell, or operate political machinery."  Strike a chord, have some fun, bring the ale back to its tradition.

Don't know if it would work but would love to try. Let me know.   

Raymond Reason's picture

When the new economy emerges, it would be interesting to see if "laudanum" becomes available again.  This old fashioned opiate tincture was sold over-the-counter at drug stores for decades, centuries probably.  Used for headaches, sore throats, and in general for relaxation, and alternative to alcohol.  A very popular remedy, drug shops and apothecaries frequently cultivated their own.  My family owned the town drug shop in NJ for many generations.   Might be an interesting way to put the "cosmic" into your micros? 

Dingleberry's picture

Oil prices do as much psychological damage to J6P than actual financial damage.  He's correct.  100 buck oil=disaster. Always has. Always will. Note the "Brent vigilante" term coming into vogue. Thanks Ben!

But credit the media for convincing many (incl. most Obamanites) the economy is getting better.

"Hope n' EBT/SNAP cards"......bitchez!

Sellmoney's picture

I know, have you see the prices on organic almond butter, grass fed beef, and even the hormone free milk, its outragous. But i still buy it. I guesss I give credit to the guy that created the yoga pants and the lovely ladys that whear them, for his invention keeps me going back to Whole Foods. Unintended Economic Effect.



Shell Game's picture

"The Real Reason the Economy Is Broken (and Will Stay That Way)"


Because it has been thoroughly LOOTED and continues to be.  It will stay that way because the Untouchables remain Unpunishable..


Stuck on Zero's picture

You got it.  That huge increase in MZM isn't in the pockets of the middle class.  It is in the pockets of the 0.01%.


RockyRacoon's picture

You're discounting the Apple effect.  As the aficionados perch on the edge of their seats waiting for the new piece of iCrap to appear.  How do we know we need it until we see it?!  Just think of all the innovations that are in the pipeline which will suddenly become necessities.  I hear they're working on a wristwatch!  Holy cow!  Why didn't somebody think of that before?  It's just so... so... obvious!  Gotta hand it to those high-tech guys.  Their prescience is amazing.

r3phl0x's picture

Exactly. The 7" iPad and 10" iPad are not enough - we need some more MBA innovation - an 8.5" iPad, followed soon after by 7.75" and 9.25" iPads!

Apple to $1200, Bitchez.

Radical Marijuana's picture

"Financialization" was just a fancy word for the runaway triumph of fraud in the form of privatized fiat "money" made out of nothing, as debts, enforced by the power of a completely corrupted government against the entire population.

However, my personal attitudes are the same as almost everyone else's ... Let's keep on deliberately ignoring the the laws of physics for as long as we can! Let's keep kicking the can of worms of fundamentally fraudulent accounting systems down the road of history for as long as possible.  Since everything our civilization did was built on a foundation of fraud, more "truth" would only cause it to collapse into chaos. It will take the laws of physics, beyond the ability of human beings to continue to deliberately ignore, to correct the runaway social insanities which are due to our entire society being dominated by legalized lies, backed by legalized violence. The final corrections for that are NOT something that I would like to see be brought on in my life time ... although, I believe it will happen ...

Anyway, as this article stated: "... here we are, doubling down – we're all in and I guess there's no turning back now."

blindman's picture

Irredeemable Currencies and the Fate of Europe
By Keith Weiner on February 11, 2013
our brave captain posted this t'other day.
Posted on February 13, 2013 by
Chris Hedges: Failure of Liberals
link o mania continues !

sgt_doom's picture

LawsofPhysics makes the most excellent point!

Martenson says:

"Trillions have been printed and injected into the world's economies, and yet things seem to be barely limping along, requiring constant attention and interventions from both fiscal and monetary authorities."

Riiiigggghhht, but not into a real economy, trillions have been injected into the Fantasy Finance Sector, sonny.

Offshoring jobs, technology and investment doesn't an economic system make.

Between them, the Fed and the US Treasury pumped out $17 trillion throughout the planet to banks, corporations and private equity firms, etc., during 2007 to 2009, while at the same time, US households lost an estimated $17 trillion in real value --- note the exact same figure in both cases!

Martenson says:

"That time was 2005 to 2007, when I was trading quite actively and thought the world had gone mad."

You sure you mean "trading" and not speculating, sonny?

  Point being, in America from 1914 to 1966, there existed a financial transaction tax, which was ended during LBJ's administration, as much else was completely flipped from the progressive Kennedy administration.

Only real union today in the country, National Nurses United, is logically pushing for a financial transaction tax --- step one of many steps if any semblance of an economic system will exist a few years hence!


silverserfer's picture

money is not injected into the economy to improve it, its injeccted by organized criminal private intrests to import natural resources and labor. Not to help the sheep. Keep power, staus quo, and people putting their life saving into 401ks and other garbage.

Hunter S. Thompson's picture

Exactly, if we had let the deflation take place to keep energy prices low the USA would have been a huge winner. Remember when gas was just over $1 right before the fed started printing like crazy. The Fed destroyed the recovery in the USA.

LawsofPhysics's picture

the "flation" debate is pointless as there will still be 7+ billion people demanding a decent quality of life.  Demand and "prices" on the planet will only go down if your deflation model also includes the deflation of humanity as well.

centerline's picture

Yup.  Laugh all you want folks - but the smartest thing we can do is actually build the damn Death Star.  lol.  Either we figure out how to get off this planet and infect the rest of the universe with our presence, or we will follow the the same pattern here on Earth as bacterial growth.

AnAnonymous's picture

Dont worry at that, 'americans' are working on that, they will pionneer the space frontier as they pionneer the Indian frontier. Given...

LawsofPhysics's picture

Only if there are martians to kill or enslave and they have some new energy technology.

AnAnonymous's picture

'Americans' again hiding among humanity... Prices are shaped by people who do not bid on consumption.

The 7 billion of people is not that weight. The weight is that billion of acknowledged 'americans' who have made the bulk of consumption.

But hiding in humanity is a trick used by 'americans' since 1776, July, 4th.

TheFourthStooge-ing's picture


The 7 billion of people is not that weight. The weight is that billion of acknowledged 'americans' who have made the bulk of consumption.

Ummm, there are about 300 million Americans, not a billion.

Perhaps your rudimentary math skills provide explanation for your poor grasp of thermodynamics when declaring that the Earth plus the Sun form a closed system or a very good approximation of what a closed system is.

One might think that the Chinese citizenism education system is a good approximation of what the American education system is.

RockyRacoon's picture

It's the Chinese peoples' fault.  All those folks located in one spot are making the Earth go all wobbly.

AnAnonymous's picture

'Americans': population of NA plus population of Europe plus population of Japan plus countries like Israel.

They are the ones living the 'american' way...

Sudden Debt's picture



and they lived happilly ever after...

Robot Traders Mom's picture

"....a kinder, gentler future where 9 billion people somehow enjoy higher average standards of living than the current 7 billion  requires an extraordinary investment of energy."


We're much more likey to see a world population of 1 billion, than 9 billion. See: Georgia Guidestones, AMA, Big Pharma, Eugenics, GMO's, etc. I'm not really worried about an energy crisis for 9 billion people. 


As Bill Lumbergh says, "We fixed the glitch" 


Meat Hammer's picture

Actually one of "The Bobs" said that.  I think it was the tall Bob.  +1 for the Office Space reference, though.

whirling tword freedom's picture

Is that thalt in my margurita? I thaid nooooooo thalt, noooo thalt!!  Guess you won't be getting a tip then.  Maybe I'll just burn the place down.

Meat Hammer's picture

You stumped me on that one SheepDog.  Shit, now I have to call in sick and watch the movie.

RockyRacoon's picture

It will be time well spent.  It'll go down as a classic, somewhat in the tradition of Groundhog Day (but not as romantic).