This One Chart Should Drive Investors Into Buying Gold & Silver

The U.S. financial system is in serious trouble and this one chart confirms it.  Investors who understand the negative consequences of this chart would be buying physical gold and silver hand over fist.  Unfortunately, Americans have been put to sleep by the Mainstream media as they continue to report that “business as usual forever and everything will be okay.”

However, the opposite is the case as the U.S. economy and the financial system continue to disintegrate under the forces of massive debt, zero interest rates and a collapsing energy industry.  This is not a situation that will continue for many years or decades.  This will likely collapse much sooner than most Americans realize.

Why?  Because of the evidence shown in the chart below:

US-Annual-GDP-&-National-Debt-1791-2010NEW

This chart taken from the Political Calculations blog, reveals the exponential increase in U.S. debt as well as GDP – Gross Domestic Product.  Most individuals have seen charts of U.S. debt going back decades or even to the 1930’s.  However, this chart goes back all the way until 1791.

You will notice as the debt increased at an exponential fashion, so did U.S GDP.  Which means our GDP growth is really fictitious or based on the leveraging of debt.  The chart above represented data up until 2010.  I manually added the U.S. debt and GDP trend lines to the chart below to show the present situation:

US-Annual-GDP-&-National-Debt-1791-2016NEWEST

According to the official figures from the Federal Reserve (GDP) and Treasurydirect.gov (debt), the U.S. GDP hit $18.4 trillion Q2 2016 while total debt is now $19.5 trillion.  The interesting thing to understand about the chart above is the “Exponential Growth Rate” insert chart.  I originally thought the U.S. debt was heading up in an exponential fashion… but didn’t think it was quite that severe.

However, if we look at the Exponential Growth rate chart, we can clearly see that the rising debt and GDP trend lines are heading up FASTER than the exponential trend.  This is very bad news for Americans rich and poor.

Let me briefly explain what an exponential trend is.  It is the doubling of a figure every time period.  For example, the Rule of 70 states that $100 at an annual interest of 7% will double in ten years to $200.  It will continue to double every 10 years ($400, $800, $1,600, $3,200, $6,400 so on and so forth).

According to most scientists and mathematicians, an Exponential Growth Rate is not sustainable… thus it eventually leads to total collapse.  Again, the explosive U.S. Debt and GDP growth rate make the exponential trend look tame indeed.

U.S. Public Debt Is Skyrocketing Faster Than The Exponential Growth Rate

I decided to take the doubling of U.S. debt (every 10 years) starting in 1971, which was $398 billion, and compare it to the actual figures:

US-Public-Debt-vs-Exponential-Growth-2016

If we take the $398 billion in U.S. debt in 1971 and doubled it every 10 years, this would be the result:

1971 = $398 billion

1981 = $796 billion

1991 = $1,592 billion

2001 = $3,184 billion

2011 = $6,368 billion

2016 = $9,552 billion (half the time period)

2021 = $12,736 billion

Because we have only gone half way through the ten-year time period for 2016, the exponential debt increase was only $9,552 billion ($9.5 trillion).  However, U.S. total debt has ballooned to $19.5 trillion.  The U.S. debt has increased $10 trillion faster than the doubling exponential function.  This is off that charts.

Furthermore, here is the same chart including the estimated U.S. public debt for 2021:

US-Public-Debt-vs-Exponential-Growth-2021

According to figures from statista.com, they estimate total U.S. debt will reach $23,574 billion by 2021.  Now, let’s compare that to the next doubling of debt to reach $12,736 billion in 2021.  Again, the exponential doubling trend is still $10+ trillion lower than the estimated debt for the United States in 2021.

I highly doubt we make it that far before the U.S. economic and financial system implode.  When I hear government spokesmen or analysts from Wall Street talking about increasing debt levels out to 2025-2030, I believe they are completely insane.  Again, there is no way we make it anywhere close to 2025 before the system crashes.

The Falling EROI Is To Blame For The Skyrocketing Debt

As I mentioned in my article below, the falling EROI – Energy Returned On Investment is the ROOT CAUSE of the massive increase in U.S. public debt (click on image to read article):

Coming-Breakdown-Of-US-&-Global-Markets-Explained-IMAGE

In that article, I posted this graph:

U.S.-Public-Debt-vs-U.S.-OIl-Gas-EROI

You will notice that the U.S. public debt didn’t really start to increase until after 1970’s… the time period when U.S. oil and gas EROI fell below 30/1.  Which means prior to 1971, the U.S. oil and gas industry was providing 30+ barrels of oil to the market for each barrel of oil (energy equivalent) that it burned in the process.

As the U.S. energy EROI continued to fall to the 5/1 of shale oil today, the debt exploded.  For those folks who still believe that PEAK OIL is a grand conspiracy by the wealthy and large oil companies, you need to go back to grade school math and learn why a 5/1 EROI of shale today versus 100/1 EROI of conventional oil production in 1930 PROVES that peak oil is a CERTAINTY.

However, if you would rather continue to believe in lousy conspiracy gossip, just wait around for five more years and I would imagine all doubts of PEAK OIL will be erased.

The Value Of Gold & Silver Will Explode As U.S. Public Debt Implodes

The reason investors need to be holding onto LOTS of physical gold and silver is due to the coming implosion of U.S. public debt.  While many analysts and individuals think it would be prudent for the system to have a Debt Jubilee or to allow the U.S. Banking Industry to go under, this would be a fatal blow to the U.S. Empire.

There is this naive assumption by supposedly intelligent people who think a Debt Jubilee (forgiving or writing off all debts) would allow us to start with a clean slate.  Thus, they believe it provide us the economic freedom to rebuild our economy and make the United States great again.  Unfortunately, this will NEVER happen.

Why?  Because we don’t have the HIGH EROI oil to allow us to do so.  The massive debt we added to the system over the past 45+ years allowed expensive LOW EROI oil supplies to be brought into the market helping to maintain BAU – Business as usual.  However, this is no longer sustainable as our massive amount debt is becoming unmanageable.

I believe the market is finally understanding the ramifications of this as the precious metals prices rally against the tide of high commercial short positions:

Kitco-Spot-Prices-090616

The market is beginning to realize that the massive increase in U.S. debt (faster than the exponential function) is no longer sustainable.  Even though the commercial short positions have fallen from their record highs, to see the silver price rally back above $20 puts serious pressure on commercials (bullion banks such as JP Morgan):

Silver-COT-Report

The red bars heading down in the chart above represent the commercials net silver short positions.  As we can see, they have only decreased by a small amount since the record peak a month ago.  It is surprising to see the silver price move up my higher against the commercial shorts who normally control the market.

Regardless, investors need to own a good percentage of their wealth in physical gold and silver to protect themselves when the market finally crashes.  When the market finally craters, it will take down the value of most paper assets and real estate with it.  Because there is very little in the way of physical gold and silver to go around, their values will skyrocket as investors seek to PROTECT WEALTH.

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105 Comments on "This One Chart Should Drive Investors Into Buying Gold & Silver"

  1. “US public debt didn’t really start to increase until after 1970″….

    In 1971 the gold standard was exchanged for exponential rising debt and borrowed luxury.

    • It did not happen this way : it was because debt HAD to explode that gold HAD to be removed…

    • Tricky Dick was just the icing on the cake, the real culprit was the Baning Act of 1933 which included the Federal Reserve Act (Section 8) which created the FOMC and then the 1999 Gramm-Leach-Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms which was the final straw.

      Now we are neck deep in debt, credit swaps and derivatives.

      There is only one way out – default, but there isn’t anyway back because of rapidly decreasing EROI (energy returned on energy invested). This crash may be virtually permanent.

      • “There is only one way out – default, but there isn’t anyway back because of rapidly decreasing EROI (energy returned on energy invested). This crash may be virtually permanent.”

        Unless billions of people are culled from the herd: I guess that might be one part of a solution.

      • EROI on oil is that low and heading lower,but transferring energy between states(solar to electric,geothermal,wind etc)will quickly become more competitive even against entrenched interests and allow progress but the debt will have to be accounted for.

    • The fancy word is financialization.

    • Jud,

      Yes, there is a Rule 69 as well as a Rule 72. However, the Rule of 70 seems to be the one used more often because of its simplicity: http://www.investopedia.com/terms/r/rule-of-70.asp

      steve

      • These are only rules of thumb (approximates). Is it really that important to know if the doubling time is e.g. 10 years or 10,1 years? If you really want to know more about doubling times or the exponential function read prof Bartlett. He wrote some lectures about this phenomenon in I thought 1998. Also about the exponential function on energy, population and resources. Later on Chris Martenson based his work on prof. Bartlett, at least that’s my opinion.

  2. The graph above “US Public Debt vs US Oil & Gas EROI” is very scary. It shows that since about 1980
    there has been a LINEAR decrease in EROI, from about 20 to 5, and an EXPONENTIAL increase in debt,
    from about 500 billion to 19 trillion. If you consider that the linear decrease is driving the exponential increase in debt then it is obvious that as EROI falls just a little more the debt curve will become vertical.
    That is when it all ends.

    • Mark Stevens,

      You are correct. The reason for the exponential increase in debt as the EROI declined in a linear fashion was due to the CRITICAL IMPORTANCE of maintaining a high EROI of energy for a modern society.

      Just to maintain the U.S. transportation industry, cars, trucks and agriculture, we needed at least a 10/1 EROI of oil. If we start to add Healthcare, Education, Entertainment, Service & Retail (stores, restaurants and etc), Retirement and etc… we needed at least 30/1.

      So, because our EROI is falling rapidly, to pay for all this stuff, we add massive amounts of debt.

      This will end badly.

      steve

      • Do you give any credence to nGeni technology?

        • Barry,

          I don’t know enough about nGeni technology. I do realize that Louis Arnoux of nGeni believes there is a very short window, say 10 years, to transition to a more solar based economy. However, I don’t know if it is feasible. Regardless, we will get into more detail about the alternatives in the future.

          steve

  3. Thanks Steve, was missing your article for the last few days…well done. Cheers-

  4. Steve, the GDP/Debt chart proves that Modern Industrial Society NEVER paid for itself. If there are record books in the future, this time period will prove to be the Ponzi Scheme of ALL Ponzi Schemes. Now… it’s payback time in the form of a most grotesque predicament, Energy Deflation. The Black Hole of energy where no matter what the price, it will always be beyond the reach of the marginal consumer. The vast amounts of energy sources within the earth’s crust will soon be unreachable. Forget about technology and forget about the bullshit supply/demand economist voodoo. A debt based currency regime in tandem with so-called capitalism, demands continual growth except we live on a “FINITE” planet. Any honest idiot could figure that out if he put his mind to it.
    Now we sit down to the banquet of consequences. It will look good on us and hopefully save whats left of our precious planet and the myriad of other life forms who in their darkest of intentions could never have caused the kind of damage us humans have.

    • Bill Sodomsky,

      You HIT the NAIL on the HEAD. Yes, our modern U.S. society really wasn’t able to pay for itself since 1970. We could even take it back a decade or more if we include the massive amount of Gold we sold into the market and sent overseas during the LONDON GOLD POOL. That was a stunt just to keep the price of gold skyrocketing… unfortunately it did so the very next decade.

      I am conversing with Louis Arnoux who is very intelligent about our present condition. According to work he has studied in the past (will write about this shortly), he believes we have two choices in the future:

      1) DE-GROWTH
      2) BARBARISM

      De-Growth is a planned system to move to a smaller economy. If we don’t try to focus on this, we then fall into Barbarism.

      steve

      • I can see another one :
        3) The complete annihilation of the political economy.
        It will behave some de-growth concepts.

      • There are different ways to look at this. World pop. should reach 10 bn ca 2050, and then stabilize. The most important factor is the 4th Industrial Revolution, which is underway and accellerating very rapidly. Automation and robotization will mean that most people won’t work, or at least not very much. Human society will change like never before, which will bring challenges that our present status quo-addicted political class is ill equipped to deal with.
        Pop. should then decrease, and the remaining people get everything dirt cheap because super-efficient machines doing the work.

        • “There are different ways to look at this. World pop. should reach 10 bn ca 2050, and then stabilize. The most important factor is the 4th Industrial Revolution, which is underway and accellerating very rapidly. Automation and robotization will mean that most people won’t work,…”

          NO

          You seem to not know how much energy is required to take care of [feed, clothe, house, educate etc.] billions of people and it WON;T be there.

        • yngso,

          I don’t know where you are getting your ideas of ROBOTICS taking over and the population stabilizing by 2050. There is no way we make it to 2025 before a global collapse.

          Robotics are not a solution because it takes A HELL OF A LOT OF ENERGY to make them. Furthermore, we would need less humans on the earth if Robots took over because who would be able to afford goods and services, if their JOBS were taken by the Robots???? No one thinks about these things. People working decent paying jobs allows them to buy things. If you make a robot to do that, then we must remove a human. It’s that simple.

          Lastly, the new energy information makes our situation VERY GRIM in a short period of time. I gather you don’t understand the details as you would not have made this sort of comment.

          Please keep reading upcoming energy articles… as I believe your mind will change if you are open to it.

          steve

          • Congratulations, you nailed it, that’s the reason why, capitalism is doomed on the very long run !
            However I think the system still have several bullets in its pocket regarding these issues :
            1) They will nationalize the energy production like they did in banks/money with the central bank and their QE, NIRP etc.
            2) They will create universal income in order to make people would still be able to buy some things.

            However the above are only temporary solutions and that one more time as primordiale communism, slavery and feudalism, capitalism will die from its own contradictions.

          • RD,

            It will make no sense to nationalize the oil industry. This is the problem. There isn’t the available NET ENERGY remaining in the oil industry to make it worth the effort by Govt’s to nationalize them. For example, shale oil reserves are not worth the effort to nationalize them.

            This will become more apparent in the next few years.

            steve

          • @ RD – We don’t have capitalism now. Where in today’s news do you see an effort to support capital formation? I ask this earnestly It’s important to distinguish between the proper definition of capitalism and the authorized media narrative about “nasty profiteering corporations” or some such.

            Don’t bash capitalism. If only we had some! Instead, elite sociopaths are ramming an agenda for monopolistic central planning down our throats.

          • The collapse will more likely start next year. After the US Prez election anything can happen, according to people who are much smarter than myself. The same smart people talk about a really difficult half a decade ahead in the short term.
            The automation that started already two centuries ago is accellerating with all the new tech that makes energy use ever more efficient.
            I don’t disagree with you about understanding the importance of energy. I was thining about several decades and even further ahead, where we will enjoy much that only sci-fi describes and scientists dream about.

          • do robots pay taxes?

          • @Steve
            When I said nationalize, I say that there will be QE focused on energy : for example shale oil will be lent 0% money for 20 years by central banks as private sector will/may refuse to put money into these ventures.

            @Lore
            You have it backwards imo, it is the world who creates ideas and elites not the opposite. Capitalism has not failed at all indeed it has been an absolute success. It has produced a huge rise of productivity probbaly much quicker than with other production mode (which are more stable) but with a human and environmental “costs” absolutely huge, which is also logic.
            How can a system based on profitability and competition could exist at a level productivity of 1, 10, 100, 1000 or 10000 for about the same amount of humans who can though improve some of their skills of course in average but still into bounded limits ?
            Do you really think that it is a “good idea” to put everybody in competition and expect peace and friendship worldwide just by the beauty of trade ? But I know it is all western elites’ fault… War is just an extension of commerce.
            I guess the same thing in europe could have been said in the past from people of that time regarding salvery and feudalism : if only the elites of that time had put the levers in a different position, there would have been a true and beautiful roman and greek empire or french feudalism/monarchy !
            If Rome debased its silver coin, it is not for the love of lust by the patricians and the emperor, it was because it is the best solution they found.
            It was because empire was already crumbling from its own weight they had to do it and not because they did the empire began to crumble.

            What is currently happening to 21st century capitalism is way out of one blog post but I would just conclude by a little game : suppose world (far from here hopefully) where there is no state and no money (things used for life are produced in common), what would be the operations which would dissapear from for example of our current world :
            Banks (it would be some food, clothes stocks), insurance companies, most of the police (nothing to steal anymore), lawyers, advertising people, commercial people/sellers, real estate agents, cashiers, most of accountants,…
            How horrible this world would be indeed ? The return of the stone age, isnt it ?

          • robertsinclair | September 8, 2016 at 1:50 am |

            For the world to survive, we have to leave an economy based on the multiplication of debt, and return to capitalism. Capitalism is the DIVISION OF LABOUR or using existing resources (capital) in the most economical way.

          • @ Robertsinclair
            You want pure division of labor but you do not want the appearance of a parasitic class.
            You want always producitivty improvement and growth but want to freeze the evolution of capitalism itself.
            The “most economical way” is not a well defined concept in fact because it is always taking a monetary standard whch is even in the case of gold completely different of human needs (for example outsourcing into cheap labor zone is 100% justified even if gold standard would come back).

      • De-Growth is such a benign word and, in this context, disingenuous. There is only one way to a sustainable world population post cheap oil and that is Barbarism. A world in chaos followed by a world of small agrarian communities.

        Those in the know and with adequate means are preparing now for the future of their families.

        The uninformed and the poor will not survive.

    • You are right capitalism has reached its apogee, since the removal of the gold standard, it is dying for now possibly for the best outcomes !

  5. The one thing that get’s me every time the metals are grouped together for comparison in order to prove a point , in this case bid Gold , $ 1349.00 , Silver , $ 20.03 , Platinum , $ 1098.00 Palladium $ 697.00 Rhodium $ 613.00

    HEH !!!!???? Silver $ 20 flippin dollars !!!!!!!!???

    Before there is any kind of reset for assets overall physical silver HAS to realize it’s true value !
    No if’s , and’s or but’s .

    • I agree completely. What was golds high back in the 80s 800dollars? Now it’s more 50 percent above that. And silver is more than 50 percent below its high!? It’s unreal

    • shhhh… just keep stackin’. (;

      the market will def discover silver’s true value soon enough. meanwhile, ain’t nothin’ better than swappin’ paper Jacksons for troy ounces of pure beautiful, shiny silver.

      can’t get enough… of that funky stuff! lol

      • I hear ya Farah , but when will the time be that the actual true price of the metal see’s the light of day !? For Pete sake’s , there are individuals who have waited a lifetime (or at least a span of their life where they could have enjoyed the fruits of their investment) only to have it dashed because some thief so to speak overshadowed the price by a made up version. Thus realizing the benefits from the ruse ! It burns me up that some less than honest group out there are driving around in top line cars , sending their kids to prestigious colleges , buying summer homes , just living the good life all based on a lie !

  6. Though I do believe in peak oil I also believe it is far down the list of our worries.our huge government and dishonest monetary system are gonna be our main downfall. Also the the decline of morals culture etc. I guess the big gov dishonest money thing will take care of itself by default . But it has sure set us up for a he’ll of a fall.
    I wanted to point out something. The part of the country I am from is you could say”booming”. You can tell just by the heavy auto traffic alone and also if you want a job and you don’t mind sweating and getting your hands dirty then you can definitely find work.i think all the money printing is finally starting to work it’s way into the system. Seeing this is am expecting prices to start rising fairly quickly. Is anybody else from their parts of the country seeing the same things I am seeing? Please reply and let us know.

    • B.,

      The reason you see PEAK OIL down the list is due to the fact that its extremely hard to CONNECT THE DOTS. I gather you must be new to the site. I would recommend you listen to our upcoming interview with Dr. Louis Arnoux and Bedford Hill on the OIL PEARL HARBOR event due to the Thermodynamic collapse of the oil industry.

      This will not take decades, but rather years to happen. It’s much worse than you realize.

      steve

      • If so that means that the BRICS will be unable to postpone the inevitable demise of capitalism !

        • Actually capitalism at the local level will be the new game. If you are not self sustaining or able to offer something of value to trade then you will probably not survive.

    • Sure, just wait till the oil price soon collapses and stays there. Throw us a comment then, will ya?

      • It may collapse…but then there won’t be much to consume if it bankrupts oil producers to bring to market. Production winds down.

    • I think you made a major mistake a very common one I used to do in the past :

      1) There have never been honest goverment, NEVER, whatever the political circus was even if you went back to european middle age, or imperial Rome.
      2) Dishonest monetary system : it is a common belief that the principle and spirit of money can be controled by morale, politics, religion or whatever but it has been shown as false on the long run.
      For most people, money is just a static neutral tool : it is good or bad depending on what his user is doing with it. But that’s also false… Fiat is just the offspring of monetary metals when social and economic structures cannot bear the girdle of a metallic (gold) standard. And there were some reasons that they have to as the system required to increase debts dramatically, it was so just a matter of time before gold would be “removed”. BRICS will never go back to any metallic standard, they will just issue a number of fiat depending on a quantity of gold held in the central bank. But at the first crisis they will decrease the ratio and lie, like the fed, withy the true amount of the reserves held at the central bank. They will act as all the power always did by cheating and stealing.

  7. Hey Steve not putting down your stuff. You do great work and research. Your articles are very easy to digest. I just think our biggest problem is corrupt fiat money which I don’t think we’re that far apart on.

    • B.

      As I mentioned in the previous comment, ENERGY IS THE KEY. The corrupt Fiat Monetary System was only able to have power due to a rising OIL SUPPLY. Again, look for our upcoming interview on the THERMODYNAMIC COLLAPSE OF THE OIL INDUSTRY.

      steve

      • Cant wait

      • I’m trying to get my head around what the petrodollar is in this context. Energy being the SOV – store of value – instead of gold, that mens that with falling EROI, the USD tanks?

        • The petrodollar is an infinite currency which is backed by exponential growing debt (and military) that is being used to buy finite resources; oil. As soon as surplus revenue out of cheap oil declines due to the falling eroei, the debt cannot be repaid. That’s why debt rises exponentially since 1970 and that’s why we now see CB buying of debt and negative rates on gov debt. This WILL blow up trillions in iou’s, and together with that, some other things. Imho, like SRS said; Degrowth or barbarism.

      • Steve,

        I read your work with interest. I want to make sure I understand it and its repercussions. So, please check my summary of it below:

        1. It costs more to produce the oil form of energy (in terms of either oil or is it in terms of energy?) than ever before. (World govts have so far masked this negative phenom with increased debt loads and fiat currency systems necessary to generate more debt.)

        2. Oil is the paramount form of energy. It trumps all other forms to such a degree that they are each, and in combination, largely irrelevant.

        3. In the near future, it will cost dramatically more to get the globe’s remaining oil out of the ground.

        4. The current global over-supply of oil matters not b/c the key measure is the cost in oil (or energy) terms to produce that supply.

        5. Oil demand reductions (via slowing global growth and various efficiency measures) are so small to also be meaningless.

        6. When extraction costs reach a certain drastically higher point, there won’t be enough oil to go around, at least not at any affordable price.

        7. The price of oil will go so high that an oil-based, oil-dependent capitalistic economic system will cost too much to operate. Conversion to other energy sources will be too little and/or too late.

        8. Transportation (of people and goods) will become so expensive that it will be severely curtailed.

        9. The world economy will rapidly morph from the current price deflation to cost-push hyper-inflation. Any good not locally sourced will probably cost more than the bottom 95% can afford.

        Please correct any mistaken assumptions I’ve made so far. I’m serious when I say I wish to fully understand your argument.

        HR Ellis II
        BA (Econ & Poly Sci), JD (Business & Tax Law), MBA (Finance & Real Estate)

        • HR ELLIS,

          You are spot on for numbers 1-6. However, 7-8-9 I would like to clarify. I don’t believe we are going to see sky high oil prices. We could in a hyperinflationary bout, but that won’t last long. New work by Louis Arnoux and the Hills Group suggest the price of oil will continue lower. While this is not a guaranteed theory, I think they may be on to something.

          The only reason we had high oil prices from 2011-2013 was due to zero interest rates and trillions of monetary liquidity. This has caused the debt to shoot even higher forcing countries to go to zero or negative interest rates because they can’t service the debt a normal rate of say 4-5%.

          At some point, the massive debt will become unmanageable. Thus, the collapse of debt will cause THE MOTHER OF ALL DEFLATIONS. That is except for gold and silver. The price of oil will continue to decline causing oil production to decline.

          Oil production will decline, it will do so on falling prices rather than skyrocketing prices. The massive debt allowed high oil prices, and the collapse of debt will force the price lower.

          steve

          • Well, and, in a “hyper-deflation” environment, I think we know what the central govts and central banks will do: They’ll print money and just give it away. The calls for increased “infrastructure spending” by both parties are the first hint of this. Much of it will be “make-work jobs”, or just another way to get cash into the hands of people now on unemployment and disability b/c the jobs just aren’t there.

          • HR ELLIS,

            Yes, hyperinflation is a possible outcome. However, a hyperinflationary bout will not last long.. maybe a year or so at the most. Then we have the MOTHER OF ALL DEFLATIONS.

            Please check out our upcoming Thermodynamic Oil Collapse interview in the next few weeks.

            steve

  8. Steve,

    Something I’ve never managed to get my mind around is how crude oil prices are determined by the market. The mainstream narrative of ‘reduced demand’ and ‘glut’ are the cause of the price crash from 110usd to 30usd, which if my math is correct is approx. a 70% decline.
    Firstly, when we talk about reduced global demand, the reduction is marginal compared to the price drop and secondly the so-called ‘glut’ is an increase maybe 100-200 million barrels in world inventories,which really speaking is only a few days consumption. Therefore I cannot for the life me. see how the price could plunge so dramatically unless the market is completely rigged.
    Would appreciate your thoughts.

    • Craig,

      The oil glut starting at the end of 2013 was more severe than you think. Sure, maybe it was over supplied by a few million barrels a day… but this went on for nearly 5-6 quarters. Then it started to decline to a lower surplus. However, traders don’t care if there is only a 2-3% supply gut, if there is less demand from refineries and etc… the PRICE FALLS… and fall it did.

      This is the problem with oil. When demand falls by just a small percentage, it can overwhelm the market due to the JUST IN TIME INVENTORY SYSTEM we have today. Yes, it does sound strange that oil can fall nearly 70% on just a 2-3% glut, but the price volatility is more indicative of a situation that is in CONDITION RED.

      Back in the 1960’s the price of oil remained at $1.81 a barrel for 10 YEARS!!!! No volatility at all. We need to look at the current volatility as a SIGN that the ENERGY SITUATION is dire straights and will only get worse going forward.

      steve

    • I’m not Steve, but I’d like to take a stab at this: It’s about the REDUCED GROWTH of global demand. The market can only plunge and stay there if supply excedes demand. They’re trying to jawbone the price to 60 USD or whatever, but that just brings more oil into a rapidly slowing world economy. Already oil tankers are used for storage, ’nuff said!

  9. Sorry. I should have said, either the markets are rigged or completely irrational.

    • The markets are taking the same type of hopium that the central banksters are feeding us. However, reality always wins, and this time probably sooner than later.

  10. Thank you SRSRocco and commenters for sharing your very interesting thoughts.

    Thinking about this, one thing that deserves much greater attention is the importance of affordable energy supply as the primary driver of contemporary foreign policy. Specifically, I refer to recoverable reserves in a handful of countries around the Middle East and thereabouts, as well as key strategic pipeline geography (TurkStream, Golden Dragon, Power of Siberia) and the hardly-coincidental appearance of artificial proxy groups like “Al Qaeda” and “ISIS” that seem to pop up conveniently in locales wherever the debt-trafficking western PTB (Powers That Be) would like to drastically increase and consolidate their influence. Literally, the fate of the debt-saturated energy-dependent western world hangs in the balance. Everyone reading this should be hoping and praying that rational and compassionate forward-thinking forces come out on top, because if the people who end up in control of these areas are deranged psychopaths or ideologues or monopolist-partisan in their thinking, it’s a given that the stakes are high enough that nuclear war seems practically inevitable. We live in very dangerous times.

    • Lore,

      You are correct. By the Western Colonial Powers destabilzing oil producing countries and inserting ISIS and other assorted terrorist groups in the Middle East or North Africa, it does two important things.

      1) It destroys the economy of the country, thus lowering oil consumption. This leaves more oil to be exported to those who think they deserve it more.

      2) Using ISIS and other groups to control the oil fields, allows this oil to be moved to the market. Sure, they may make some profit for doing this task, but it is a hell of a lot cheaper and better for the COLONIAL POWERS to have more oil for them, then consumed by the citizens of the country.

      This is a horrible arrangement if you ask me.

      steve

      • I didn’t see it from that angle before, but that’s 100% correct of course. Another factor is both Russia and the Mideast wanting to sell natgas to Europe. Pipelines from the south would go through, guess where, Syria! The Russians are great chess players, and winning…

  11. Steve,

    Based on what I said above, it seems to me that we could go from a supply ‘glut’ to a ‘deficit in a matter of days.
    It would be interesting to see when ‘tight oil’ production falls off a cliff whether conventional producers are able to pick up the slack!
    I guess that is when we will see whether Matt Simmons’s predictions about Saudi’s Ghawar field being close to exhaustion or not.

    • Craig Moodie,

      I talk with the President of his own oil company in Texas, and I will tell you this, he will not start drilling for oil until it reaches $60-$65 a barrel. This is conventional oil, not shale. Furthermore, even though he can still find a million barrels here or there, it is still a drop in the bucket compared to what we need. There just isn’t enough good conventional deposits available to meet U.S. consumption needs.

      I really believe these Louis Arnoux and the Hills Group are on to something that most don’t realize. I will be having them on as guest on an interview here in the next few weeks.

      steve

    • Based on the economy weakening,, the glut will cause a cascade of bankruptcies, hurting banks, and the chain reaction happens.

  12. Great article Steve ! Yes, for now the bulk of the monetary inflation has gone into debt (to lower the interest burden) and financial assets in general. And yes, this will end badly, and it might just start with people starting to hoard (fizzical) cash as seen in Japan, Germany and Switzerland, where interest rates are the lowest / negative. One way to visually think of this is the inverted Exter pyramid, where the bottom apex (gold) remained roughly the same (only doubled), while the whole rest of the pyramid has been extended by a factor of +100 times over the past few decades… at some point the pyramid will break under its own weight and either collapse completely (while the solid apex remains the same) or “pour” into the apex making the apex so much bigger (in fiat terms) to rebalance the pyramid.

    Our status quo literally lives off energy and money (credit) borrowed from the future; these resources will be direly missed at some point since long-term sustainability cannot be cheated. What a mess.

  13. Hi Steve,

    Perhaps this is a stupid question but let me ask it anyway..

    Seeing the Fed created money out of thin air and lent it out, why does it actually need to be paid back, its only a book entry… a number?

    It can continue do this indefinitely or to a point when no one cares .. or everyone stops playing or participating in the game, in which case the USD loses value (but many other currencies are in the same boat so relative to each other they are on a par).

    The government will never have the ability to pay the money back and everyone knows this. Its structured to continually over spend … each time the spending limit is reached, the number is increased, so when will it actually matter.

    The money was created from nothing and nothing will be repaid??

    Where people, entities/companies/institutions have lent money I understand, its entirely another issue.

    • PJ,

      Never a stupid question. I ask what I believe to be stupid questions all the time… but that is how I learn.

      Regardless, the PRINTING OF MONEY towards the heavens has a nasty side-effect. And that is, rising DEBT SERVICING. When the Fed prints money, they are actually controlling the interest rate. A normal functioning economy needs a positive interest rate of say 3-5% to be sustainable.

      With the massive printing of money, it has increased the DEBT. Now, the servicing of this debt is becoming unmanageable… thus we now have zero or negative interest rates. Why? Because, the governments can’t afford to service the massive debt they have on the system.

      Even though every country can continue printing money… that VALUE of that money is derived from burning energy which creates economic activity. Once U.S. and Global oil production falls precipitously, the money printing will no longer work.

      Basically, falling oil production destroys the printing presses… and the value of Fiat Currencies.

      steve

      • I think we’re back to the petrodollar and energy being the SOV now.

      • Europe, Japan, the US and now China have massive debt and much of it is at very low interest. Suppose their CBs buy much of it, then strike a deal with their treasuries to convert it to 1,000 year zero coupon bonds and label it “Disappeared Debt?” It won’t help EROI but it would reduce debt and if simultaneous, not rock FX rates. I am firmly in your camp but am playing devil’s advocate here because I KNOW FOR CERTAIN that when things get bad they will do whatever they can to perpetuate the status quo. Japan, the fed and ECB have already done more than any sane person would have suspected 10 years ago.

        • BTW, John Mauldin himself brought up the idea of Japan doing that to their debt and that could be the guinea pig like Cyprus on bail-ins.

    • One important point rearding this is that while the banksters can get free money, we can’t, but we have to pay them plenty of interest, which we can’t as productivity sinks. In other words, banksterdom is committing SSIF, sohooting self in foot.

  14. Increasing the monetary base (debt), lowers the marginal time preferance for money as interest rates fall, uneconomic enterprise become economic, energy use is increased. Society becomes a higher energy consumer. The lower the interest rates, the more currency is invested in non viable (long term) businesses. Capital is withdrawn from skilled, less energy intensive work, which is less productive in terms of fiat, into less highly skilled, high output high energy consumptive industries. Moving power and choice from the individule to large corporate entities.
    When the crunch comes, its goodbye amazon, ups, most of macdonalds and many high enegy consumers industries. not to mention most of the motor industries, travel agencies and a major retionalisation of construction etc. What do you think?.

  15. These public debt levels are nothing compared to Total credit market debt levels that come in around 370% of GDP. You should chart that growth!

    In fact total credit market debt globally is well into the 200% range of global GDP.

  16. So 1971 was an incredibly important Year! The financialization of the economy started which is now bringing reality as we know it to an end, nothing less!

  17. Understanding the “Exponential Function”

    Steve, I believe most people do not understand, or fully understand how the exponential function works.
    I use the old story of ‘one grain of rice on day one’ to more simply explain it. Having the students discover for themselves the function is invaluable. Just hand them the proper tools.

    A wealthy farmer went to the emperor to pay his land rent, but pleaded poverty and wanting relief from his rent price.. The emperor suspected his duplicity and therefore told him that his rent for that day would be one grain of rice. The farmer was ecstatic! However the emperor told him that his rent would be double for tomorrow at two grains of rice. Again the farmer was amazed at his good luck. The emperor then told him that on the third day his land rent would be double what he paid on the previous day. So for day three his rent would be four grains of rice. For day four, eight grains of rice and so on.

    Work this out for yourself. Substitute dollar bills for grains of rice. What would be your land rent for one year? How about for one month? This is the exponential function.

    • And how many people still think capitalism can work until the end of time here ?

      • RD,

        Capitalism is the ONLY system that works across all markets.. Sure, you may have small agrarian collectives such as large farm families but they will still have to trade outside the collective.

        Capitalism is the only system that matches man’s inherent greed characteristics. The altruism required by the other system just doesn’t work outside the family. It is that desire to better your circumstance through hard work, creativity and ingenuity that fuels the capitalist system.

        It is here to stay.

        SteveW

        • “inherent greed characteristics” : sorry that is completely false, you did not research about this subject.

          ” It is that desire to better your circumstance through hard work, creativity and ingenuity that fuels the capitalist system.” : so you have exactly what you whished for !

          It is always strange how people have swallowed completely the “little bourgeois” mentality…

          You should really research and think about a system based on comptetition AND profitability on the very long run. What is funny is that on this website the are countless articles about impossibility of continue the trend of the 20th century (exponential trend) on debt, energy, and so on but it is just because there are bad/nasty/stupid managers !

          • Rd,

            You need to get a grip on reality.

            I have degree in that subject from the University of Michigan and a lifetime of experience on the subject.

            Capitalism is the innate, instinctual, inherent mechanism of trade for survival in man absent a grossly imbalanced trading power positions i.e. at the point of a gun.

            FYI, it is Le petite bourgeoisie that identifies the socio-economic stratum of the bourgeoisie that comprised small-scale capitalists such as shop-keepers and workers who manage the production, distribution, and/or exchange of commodities and/or services (Wikipedia). Which we will all be relegated to after the crash.

            You need to understand what the world will be after the end or cheap oil. A world of small, local agrarian communities interdependent on each other for survival.

            Le Petite Bourgeoisie.

            Sois sage mon enfant

            SteveW

        • Capitalism works when goods are exchanged for capital. Currently goods are exchanged for IOUs and thats hardly capitalism.

          • robertsinclair,

            Capitalism is an economic system based on private ownership of the means of production and their operation for profit. (https://en.wikipedia.org/wiki/Capitalism}

            It is not what is traded, sold or transferred for whatever, it is the environment and the conditions under which the system can operate. Although with our power grabbing, keynesian, krazies running our FED Central Kommittee, there is very little that resembles a free market in the credit system.

            And, In Japan, where central bankers are buying up all major corporations it is clearly the end of capitalism. Eurozone is not far behind.

            SteveW

  18. This is kinda messy. When I want to answer, I don’t even get back to where the comment is. Also putting the newest comment last and the order of responses are kinda strange.

  19. I’m scared…

  20. Other sites handle this much better. Even Disqus has a much better system than thisd one.

  21. Barbary as a futuristic vision, now I’ve had it! I challenge Steve himself and everyone else here: Do you want that dystopic vision or my sci-fi one where science and ever-evolving tech give us a future without limitations. Extract heads from backsides and look ahead at the possibilities ahead.
    Sure, we can discuss how the economy needs to work, but be sure about one thing, money and everything financial will have to be adapted to the future, not the other around.

    • It doesn’t matter what you or anyone else wants if we don’t have the cheap abundant high
      “Sure, we can discuss how the economy needs to work, but be sure about one thing, money and everything financial will have to be adapted to the future, not the other around.”

      The future including the economy will be adapted to the energy picture, not the other way around.

      High EROEI energy is required to make a rosy futuristic vision possible.

      It doesn’t matter how much technology or science is there if their isn’t energy to power it.

      It isn’t just an understanding that EROEI is key; it requires a consciouness shift to really understand the implications of where we are heading AND TECHNOLOGY AND SCIENCE WON’T SAVE US….not unless there is energy from something THAT ISN’T EVEN BEING TALKED ABOUT YET and still…as Steve has pointed out, a lot of our infrastructure runs on LIQUID forms of energy…cars, trucks, aircraft, mining equipment, generators, ships [that also harvest seafood], etc.

  22. RD, you are so right! Future genertions will have a Star-Trekonomy that just works, so that we humans can focus on fun stuff like space exploration. We’re still so primitive that we have attitudes and in many ways live like we did millennia ago.
    Toil and more toil, and if you’re lucky you’ll be one of a few happy rich dawgs. That’s no vision, playing a lottery where almost everybody loses!

    • You can have a fantasy futuristic vision; that doesn’t require much energy.

      The real future requires energy. For every unit of energy [calorie, BTU, therm, joule, or other] expended to get energy, you have to get 10+ BACK, or the system starts to implode.

      That is called a 10+:1 Energy Returned On Energy Invested [EROEI]. That is what is happeneing to our world RIGHT NOW yngso, and without a high EROEI above 10:1 your Sci-Fi future will remain a fantasy.

      The author is primarily referring to EROEI [or just EROI] here, with the economic reality a function of that very basic priciple about energy.

      From your comments you have no concept of that.

    • yngso,

      You are a dreamer, you probably regularly draw to inside straights. And, frankly, I WISH you were right but it just ain’t so.

      The credit crash that is coming as a result of the Keynesian Kraziness of the worlds central banks will unleash a Pandora’s box of chaos, famine, plague, riots and death. For once the credit system collapses all world trade will cease – just stop. When that happens, in our “just on time” delivery systems will JUST STOP. Grocery stores and gas stations will be EMPTY in 36-72 hours and you better have CASH because your credit cards won’t work. In a matter of days big cities will be in chaos, rioting then National Guard, marshal Law, FEMA camps and food handouts but they too will run out of food. Famine is always followed by plague because when food delivery systems fail, public health systems are next.

      I estimate that 75% of people living in big cities will die in the first month, that could amount to 5- billion people world wide.

      If you are not prepared, you need to start NOW or you can keep drawing to those inside straights.

      SteveW

      • You are right Steve, still you can lead a horse to water but you can’t make him drink.

        The worlds population was stable at roughly 2 billion inhabitants of space ship earth for thousands of years. Since this was the amount of humans that the bio-mass of the planet could support.
        Then along came the industrial revolution. First with coal, then with oil. The worlds population in the past 250-300 years has tripled. Since one farmer utilizing oil energy can support many more people. When this source of energy disappears – then so does civilized civilization.
        People who are starving to death and looking for something to eat are not very civil.
        The future will be regional and localized. Barring any “unicorn energy” discovery, the world will go back to supporting 2 billion people with it’s bio-mass. 5 billions will be gone.

  23. Sure David, there will be lots of energy in the future, because we’ll be able to produce it in ways that we’re not even dreaming about yet! We humans may still be a primitive mess in many ways, but we consrantly learn and progress.

  24. If anyone in here does not fully understand “MONEY AS DEBT” here is the web site

    http://moneyasdebt.net/

    Here is well said quote:

    “Anyone who believes exponential growth
    can go on forever in a finite world
    is either a madman or an economist”
    – Kenneth Boulding

    https://en.wikipedia.org/wiki/Kenneth_E._Boulding

    Good article Steve and good response.

    The more people understand this the more they will realise our MONETARY system is faulty and we are being had….

    I notice the word “DEGROWTH” is starting to appear in the odd article of late. Interesting times eh?

    Time to buy a few more coins I think… 🙂 Silver of-course !!!

  25. RT tells me to question more - so I do. | September 8, 2016 at 8:59 pm | Reply

    okay… question… how does the pumping of oil around the rest of the world from non shale oil sources affect the 5/1 EROI ratio in the above article? surely those are much much higher than 5/1 and would have a sizeable impact on the end result.

    i guess that although the end result is the same in the longer term, this higher overall EROI would buy a fair bit more time.

    thoughts anyone?

  26. “The Value Of Gold & Silver Will Explode As U.S. Public Debt Implodes”

    I think “Nominal Value” would be more accurate than “Value”. You’ve got to ask yourself the question: Value measured in what? If the answer is FRNs,–!
    Maybe the value measured in real goods and services WILL explode. That would mean massive asset deflation.

  27. More power and $ placed into hands of fewer people. Gettin’ scary out there.

  28. Y’see guys, Adam Smith didn’t foresee that Capitalism would kill itself with the financalized cancer that’s ending it now. We’re in unchartered waters, and we’re going to have to come up with something better when the NWO has been found wanting.

  29. One problem. What makes you think that the debt growth cannot go straight up for another 20 years? Look at India, 60 rupiyes to the dollar. How is India doing? Financially, is it anywhere near collapse? I think that I’m going to have to cash out of my silver position, as I already cashed in 10 ounces a month to pay bills for two months now.

  30. This is a point worthy of further discussion. World central banks have shown they can ratchet monetary madness to levels heretorfor unseen. How much further can they take it? Where’s the point of “Peak Insanity”? 😉 What factor will cause or signal a blow up, a breaking point?

    Best answer I’ve heard so far? Inflation. If their version of “Creative Monetary Policy” ever yields serious inflation, then the party may be over for the private economy. The whole world becomes Zimbabwe or Weimar Germany, where hyperinflation brings domestic commerce to a halt (except for the inefficient barter economy that will no doubt arise).

    Even under this environment, however, the central “banksters” can continue to buy all the globe’s notes and bonds and thus keep yields low. There’s no limit to how much “digital money” they can create and no limit to what they can buy with it. So, with yields still at zero (or lower), govts can “borrow” all they want and suffer virtually no market consequence. The “bond vigilantes” of the 1970s will be swamped by the ultimate “bond market boss”, the central banks. The low rates won’t help the private sector much b/c no one will borrow, but they’ll be a great boon to big govt–just as low/negative already are now.

    Altogether, it begins to resemble a painful, stealthy, sleazy way to impose worldwide “hyper-socialism”, a state where the govts control most EVERYTHING. Govt is already a huge player in the US auto, finance, education, housing, and healthcare sectors. (In Japan, the BoJ already own large percentages of almost all the major corporations.) Eventually, via “monetary hocus-pocus” the govts, via the central banks, may try to take it ALL.

    The question then become: WHO gets what the govt controlled entities produce? Given increased unemployment and low global wages caused by robotics and a massive global labor pool, how can anyone who owns only their labor purchase much of anything?

    Asked differently, in the ugly, unpromising future that knocketh at our doors, how will society allocate resources? It’s a worrisome world in which we live.

  31. BELOW IS AN EDITED VERSION OF THE ABOVE POST. PLEASE IGNORE MY INITIAL POST, embarrassing typos and all. 😉

    Stephanie’s question above about how much more govts can borrow (and thus how much more “money” central banks can create) is one worthy of further discussion. World central banks have shown they can ratchet monetary madness to levels heretofor unseen. How much further can they take it? Where’s the point of “Peak Insanity”? 😉 What factor will cause or signal a blow up, a breaking point?

    Best answer I’ve heard so far? Inflation. If the current version of “Creative Monetary Policy” ever yields serious inflation, then the party may be over for the private economy. The whole world becomes Zimbabwe or Weimar Germany, where hyperinflation brings domestic commerce to a halt (except for the inefficient barter economy that will no doubt arise).

    Even under this environment, however, the central “banksters” can continue to buy all the globe’s notes and bonds and thus keep yields low. There’s no limit to how much “digital money” they can create and no limit to what they can buy with it. So, with yields still at zero (or lower), govts can “borrow” all they want and suffer virtually no market consequence. The “bond vigilantes” of the 1970s will be swamped by the ultimate “bond market boss”, the central banks. The low rates won’t help the private sector much b/c no one will borrow, but they’ll be a great boon to big govt–just as low/negative already are now.

    Altogether, it begins to resemble a painful, stealthy, sleazy way to impose worldwide “hyper-socialism”, a state where the govts control most EVERYTHING. Govt is already a huge player in the US auto, finance, education, housing, and healthcare sectors. (In Japan, the BoJ already owns large percentages of almost all the major corporations.) Eventually, via “monetary hocus-pocus”, the govts, via the central banks, may try to take it ALL.

    The question then becomes: WHO gets what the govt controlled entities produce? Given increased unemployment and low global wages caused by robotics and a massive global labor pool, how can anyone who owns only their now worthless labor purchase much of anything?

    Asked differently, in the ugly, unpromising future that knock’eth at our doors, how will society allocate resources? After all, in the future, the big govt-central bank nexus may own and control not only all the “money”, but also anything and everything one can buy with it.

    It’s a worrisome world in which we live.

  32. HR Ellis, there’s good news too. Mainstream company Ford has understood that the sharing economy isn’t just a fad.
    If we look beyond the system that’s ending now, we already see the contours of a future where resources and energy get used much more efficiently than ever before. The Capitalist ownership system is fast becoming a dodo like feudalism and bartering.

    • Yes, efficiency is normally a good thing. Who, on the other hand, will hire all the out of work taxi drivers? . . . and truck drivers? . . . limo drivers? . . . bus drivers? Now, driving is the last resort of the “Phd without a cause”. I see this first hand in the Ukraine, from which I write this post. Without driving jobs, to what will all the over and under-educated unemployed turn?

      The biggest expense at almost every business is people, and, with the encouragement of big govt policy, business is getting rid of them as fast as possible. People could “go back to the farm”, but, eventually, big govt and the big corps will own all the farms too. To make it worse, all the farming will be mechanized. No need for people there either. Good luck to us all!

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