The modern financial system was developed to support the rapid economic growth that took off about 200 years ago with the phenomenal amounts of cheap energy made available through the exploitation of fossil fuels. As a result, its viability is completely dependent upon the continuation of that growth. Unfortunately, the more recent fossil fuel discoveries, especially for oil, have tended to have lower production levels than earlier ones. In addition, greater amounts of energy are required to extract the fossil fuels leading to less net energy available for society. The Energy Return On Investment (EROI) for oil has fallen from 30:1 in the 1970's to 10:1 today. Thus, newer energy finds produce lower extraction rates and more of the energy provided is offset by the energy used in the extraction processes. The result has been economic stagnation or even contraction, with growth in China and India etc. only possible due to the extensive use of local coal reserves, and recession-induced drops in OECD country energy use. Renewable sources of energy will not be able to expand fast enough to replace the 87% of energy supplies provided by fossil fuels, and apart from hydro and wind, tend to have very low EROI rates. They are also critically dependent upon the cheap energy infrastructure provided by fossil fuels. The phenomenal amounts of path-dependent energy infrastructure will also greatly inhibit any move away from fossil fuels. Without continued economic growth there will not be the extra output to fund loan interest payments, nor the revenue and profit growth to support share price/earnings multiples. The financial system acts as a time machine, creating asset prices based upon perceptions of the future. As an increasing percentage of investors come to accept the future reality of at best, financial asset prices will fall to reflect a realistic future. The resulting crash will remove the underpinnings of the banking, brokerage, mutual fund, pension fund, and insurance industries. The comfortable futures of many will be shown to have been based upon a mirage of future growth that will not take place. With the financial system acting as the critical coordination system of the global economy, its crash will also intensify economic problems. Written by a retired financial industry executive with over 25 years of experience, this book describes how the crisis will affect different regions and industries to help identify the career and investment choices which may provide a relative safe harbour.
Chapter 1. The Nature of the Problem Chapter 2. It takes Energy to get Energy 2.1. A very short history of Humanity and Energy Return on Investment 2.2. The Fossil Fuels: 86.6% of human society's usage 2.2.1. Oil: EROI 18:1 and rapidly declining; 32.6% of energy usage 2.2.2. Coal: EROI 20-80:1 and slowly declining; 30.3% of energy usage 2.2.3.Natural Gas: EROI 10:1 and declining; 237% of energy usage 2.3. Hydro & Nuclear: 11.3% of global energy usage 2.3.1. Hydroelectricity: EROI 12:1 to 267:1 and stable; 6.4% of energy usage 2.3.2. Nuclear: EROI about 5:1 with large uncertainties; 4.9% of energy usage 2.4. Non-Hydro Modern Renewable Energy : 2.1% of global energy usage 2.4.1. Wind: EROI Averaging 18:1; approximately 1% of energy usage 2.4.2. Bio-Fuels: EROI 1:1 to 18:1; approximately 0.5% of energy usage 2.4.3. Solar: EROI between 2:1 and 12:1; less than 0.5% of energy usage 2.4.4. Wave: EROI not available; negligible % of energy usage 2.4.5. Geo-Thermal: EROI not available; negligible % of energy usage 2.5. Summary Chapter 3. It's the flow stupid! 3.1. Introduction 3.2. Oil: Probably Already Peaked 3.3. Natural Gas: More flow possible, and some substitution for oil as a transport fuel 3.4. Coal: The Old Workhorse Still Has Something Left3.5. Hydroelectricity: Small Increases Possible 3.6. Nuclear: New Capacity significantly offset with retirements 3.7. Wind: Could provide a useful percentage of energy needs 3.8. Bio-Fuels: From Really Small to Small 3.9. Solar: From Tiny to Really Small 3.10. Wave: Really Tiny to perhaps Tiny 3.11. Geo-Thermal: Tiny, unless you live in Iceland 3.12. Summary Chapter 4. A Financial System Addicted to Exponential Growth 4.1. Introduction 4.1.1. Limits on Energy Availability 4.2.2. The Financial System as a Time Machine 4.2. Share Prices 4.3. Bond Prices 4.4. Mutual Funds 4.5 Pension Funds and Annuities 4.6 Insurance Companies 4.7. Bank Lending 4.8. Investment Decisions 4.9. Summary Chapter 5. So What Can I Do? 5.1. Introduction 5.2. Reducing Exposure to Fictitious Assets 5.3. Location, location, location 5.4. Outlook for Change: Cognitive Dissonance, Vested Interests, and Inertia 5.5 Nature of Collapse 5.6. Summary Index
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