Gail Tverberg
Gail Tverberg is a writer and speaker about energy issues. She is especially known for her work with financial issues associated with peak oil. Prior…
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By Gail Tverberg – Aug 23, 2024, 6:00 PM CDT
- The current economic landscape shares striking similarities with the late 1920s, marked by high debt, wealth inequality, and low energy consumption growth.
- Historical data suggests a strong correlation between energy supply growth, economic growth, and income equality.
- The world economy may be transitioning from growth to shrinkage due to declining energy resources, potentially leading to financial instability and political conflict.
Today, there is great wage and wealth disparity, just as there was in the late 1920s. Recent energy consumption growth has been low, just as it was in the 1920s. A significant difference today is that the debt level of the US government is already at an extraordinarily high level. Adding more debt now is fraught with peril.
Figure 1. US Gross Federal Debt as a percentage of GDP, based on data of the Federal Reserve of St. Louis. Unsafe level above 90% of GDP is based on an analysis by Reinhart and Rogoff.
Where could the economy go from here? In this post, I look at some historical relationships to understand better where the economy has been and where it could be headed. While debt levels and interest rates are important to the economy, a growing supply of suitable inexpensive energy products is just as important.
At the end, I speculate a little regarding where the US, Canada, and Europe could be headed. Division of current economies into parts could be ahead. While the problems of the late 1920s eventually led to World War II, it may be possible for the parts that are better supplied with energy resources to avoid getting into another major war, at least for a while.
[1] Government regulators have been using interest rates and debt availability for a very long time to try to regulate how the economy operates.
I have chosen to analyze US data because the US is the world’s largest economy. The US is also the holder of the world’s “reserve currency,” allowing demand for the US dollar (really US debt) to stay high because of its demand for use in international trade.
Figure 2. Secondary market interest rates on 3-month US Treasury Bills and 10-year US Treasury Securities, based on data accessed through the Federal Reserve of St. Louis. Amounts for 1940 through 2023 are annual averages. Amount for 2024 YTD is average of January to July 2024 amounts.
Comparing Figure 1 and Figure 2, it is clear that there is a close relationship between the charts. In particular, the highest interest rate in 1981 on Figure 2 corresponds to the lowest ratio of US government debt to GDP on Figure 1.