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Advanced Economies Are Being Pushed Toward Financial Collapse

Monday, March 31, 2025 15:03

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I have said in recent posts that the world economy is hitting resource limits of many kinds. These limits include oil, coal, and other sources of energy, including uranium, used as a fuel for nuclear power generation. Because of these limits, the world economy is being forced to shrink back. In my opinion, the direction it is headed in is toward smaller, mostly less-advanced, more independent, economies. This change is also likely to lead to various types of financial collapse for many of today’s Advanced Economies.

Per-capita consumption of these early used energy sources has shrunk since peaking in 2007.

Figure 1. World per-capita consumption of oil, coal, electricity from nuclear power plants, based on data from the *2024 Statistical Review of World Energy*, published by the Energy Institute.

Most of us remember the Great Recession of 2007 to 2009. With a declining supply of what used to be inexpensive energy resources, many economies have done poorly. Many of the wealthier countries have papered over their problems with an increasing amount of debt, but the limits to this added-debt approach are now being hit. It is the debt problem that leads to financial collapse.

In this post, I will elaborate on these ideas.

[1] Countries that are today’s Advanced Economies (members of the Organization for Economic Cooperation and Development (OECD)) are likely to fare poorly in this coming contraction.

The Advanced Economies include the US, most of Europe, Japan, Australia, and a few other countries. Their per-capita consumption of oil, coal and nuclear electricity resources has been shrinking significantly since about 2005. The year 2005 was approximately the peak of “conventional” oil supplies. More oil has become available since this date, but this oil is generally more expensive to extract.

Figure 2. Energy consumption per capita for the combination of oil, coal, and electricity from uranium, separately for the Advanced Economies and the Other than Advanced Economies, based on data from the *2024 Statistical Review of World Energy*, published by the Energy Institute.

[2] Energy consumption for the Other than Advanced Economies is hitting limits, too.

The Other than Advanced Economies were able to grow in their per-capita use of these three types of fuels between 2001 and about 2013, but since then, their per-capita quantity of these fuels has leveled off. The big impetus for growth was China joining the World Trade Organization in 2001. World demand for inexpensive finished goods empowered China to start extracting coal and other minerals in quantity. But coal mines deplete, just as oil fields deplete, leading to the flat per-capita availability of energy supply for the Other than Advanced Economies since about 2013.

[3] With these changing patterns for the two groups, one potential problem is conflict.

The Other than Advanced Economies have figured out that they are creating a huge share of the world’s goods, but their per-capita use of energy is much lower than that of the Advanced Economies. Why should the Advanced Economies get so much of the finished products available from the world’s resources, when most of the work (and the pollution) has taken place in the Other than Advanced Economies? I would expect this type of thinking to take place in China, Russia, India, Iran and other countries in this group. These countries believe that they could get along perfectly well without the Advanced Economies and their high usage of energy.

[4] With these changing patterns, a second potential problem is financial collapse, especially for the Advanced Economies.

Each economy can be encouraged to grow in two different ways: (1) Through more debt, indirectly adding to more “demand” for finished goods, or (2) Through added supply of inexpensive energy products. Adding debt to pull the economy forward seems to work well if there is not a problem with hitting resource extraction limits. Once an economy starts hitting resource extraction limits, however, the added debt partly adds inflation, rather than finished goods and services, to the output mix. Thus, the debt approach no longer works well.

The world as a whole is now hitting resource extraction limits. Not only do individual citizens become unhappy with the higher inflation level, but investors demand higher interest rates for lending. This higher interest cost becomes a huge problem for the Advanced Economies that already have very high debt levels.

A recently issued report by the US Congressional Budget Office (CBO) shows what is happening in the US.

Figure 3. Figure from page 10 of *The Long-Term Budget Outlook 2025 to 2055*, published in March 2025 by the CBO.

In a sense, the reports that the CBO publishes are “Best Case” scenarios. The reports are optimistic in two different ways: (1) They assume that no more added-debt bail-out programs will be needed, as were used several times in recent years, and (2) They assume that inflation will quickly fall to 2%, so that interest rates can fall quickly and stay lower from now on.

Even with these assumptions, the results are disturbing. Note that on Figure 3 (in both charts shown), the especially significant increase in debt starts around 2008. This is when the US, and likely most of the other Advanced Economies, started to hide their energy problems by using more debt stimulus.

Even when the most optimistic possible estimate of the future “primary deficit” is made, and when the most optimistic possible forecast of future “net interest” outlays is made, there is still a huge build-up of debt. The implication is that very large tax increases will be needed to maintain current programs. Even with these huge tax increases, the problem will get worse and worse, year after year. There is a need to cut back on existing government programs to avoid adding the need to pay even more interest on debt in the future.

[5] If an economy is forced to shrink back, debts of all kinds become more difficult to repay with interest.

Any economy needs to grow, in order to repay debt with interest. A growing economy has a surplus with which to pay interest.

Figure 4. Repaying debt is easy in a growing economy because the promises that are made can be repaid later, when the economy is larger in terms of goods and services produced. Obviously, repaying a loan in a shrinking economy becomes a problem. Chart made by Gail Tverberg in 2012.

On the other hand, a shrinking economy tends to lead to major debt defaults. Leveraged debt is especially likely to cause problems.

The CBO is now forecasting that the US government could run into debt limit problems as soon as July 2025. Perhaps the US government will find ways around the current apparent shortfall, but the issue of the government not being able to meet its debt obligations without major tax increases or reductions in programs still looms in the background.

I expect that within the next three months, we will start to see loan defaults of some type, such as defaults by hedge funds. Governments will want to step in, but they will be limited by their own financial problems. Defaults on many other kinds of debts are likely to start taking place, as well. If inflation rates rise, and interest rates rise with them, defaults on many kinds of debt could start taking place.

[6] It seems likely that nearly all the Advanced Economies will have similar problems.

The Advanced Economies have tended to offer their citizens many benefits, including pensions for the elderly and some type of healthcare coverage. Many of them have financially supported what they are hoping will be energy types that will take the place of the energy types they seem to be losing.

If an economic system is not growing as fast as it has in the past (because of low energy consumption growth, and lack of debt stimulus), or is actually shrinking, these economies are likely to face a choice between either cutting back on promised programs or raising taxes. Governments will find themselves needing to cut back on programs that they have promised to their citizens, or, alternatively, they will need to default on their debt.

[7] Adding to the problems of the Advanced Economies will be the issue of goods and services needing to be made closer to home.

Without enough oil for all purposes, a logical way to cut back is to use less oil for international shipping. This would tend to reverse the trend toward globalization that started many years ago.

Figure 4 shows that the US started shifting heavy industry to other countries with better supplies of oil as early as 1974. The Kyoto Protocol of 1997 gave another reason (or excuse?) for shifting heavy industry to countries with less expensive, more abundant, energy supplies.

Figure 4. US industrial energy consumption per capita through 2023, based on data of the EIA.

I expect that in the next few years, the Advanced Economies are likely to need to move industrial production back closer to home, to save on limited world oil supplies. This will be difficult to do, especially in a timeframe of less than 20 to 30 years. New mines will be needed for minerals, but the lead times on these are very long, typically 13 years or more. New processing plants for these minerals will likely be needed as well, potentially adding to the lead time. Whole new, short supply chains will be required. Finally, goods and services manufactured closer to home will need to be transported to citizens, sometimes in new ways.

Many of today’s manufactured goods require imports of minerals from China or Russia. To the extent that specific minerals from these countries can no longer be imported, additional closer sources will be needed. This will further add to manufacturing difficulties.

[8] It will not be surprising if governments, or parts of governments, collapse.

History indicates that when civilizations reach resource limits, governments tend to fail. A recent example of this was the collapse of the central government of the Soviet Union in 1991, after an extended period of low oil prices. The Soviet Union was a major exporter of oil, and the low oil prices (plus other internal problems) led to the inability to repay promised debt. The separate republics within the Soviet Union remained, so the people were not left completely without a government. I expect something similar may happen elsewhere in the future.

[9] History suggests that even in a financial collapse, the entire economy will not fall apart, all at once.

Incremental changes are likely to take place. Governments are likely to try to make cutbacks. Financial investments are likely to do especially poorly in the next several years, and high-paying jobs seem likely to disproportionately disappear. The economy will no longer be able support as many specialists as are working today, in many industries.

The electricity supply likely won’t fall off all at once; instead, electricity will become increasingly intermittent, with some areas having more outages than others. Diesel and gasoline will perhaps be available, at least part of the time.

New car sales in the Advanced Economies are likely to fall very soon, leaving citizens mostly dealing with used cars, and the difficulty of finding appropriate replacement parts for used cars. The problem of “empty shelves” in stores is likely to return and get worse.

There will likely be an increasing divide between the relative handful of citizens who are doing well, and the many others. In fact, we are already seeing a trend in this direction in the US. But many of today’s big spenders are likely to be knocked down in any coming economic contraction.

Figure 5. Chart showing spending by income bracket in Bloomberg article, *The Richest Americans Kept the Economy Booming. What Happens When They Stop Spending?*

[10] Perhaps the good news in this contraction is that major international wars may not be a problem.

Instead, civil wars and local skirmishes may be the order of the day. There may not be resources available to fight long-distance wars, even if many citizens might favor this approach. Wars give an excuse for more debt and more income for soldiers, so they are always popular in troubled economic times. But a lack of materials for making military supplies (including insufficient sources of antimony) and the inability to raise debt financing may impede efforts.

[11] What should we expect in the future?

The US and many other Advanced Economies are likely heading into a worse and longer lasting financial crisis than the 2008 crisis, starting as soon as this summer. The problem will likely not start out as a full financial collapse. Instead, various leveraged borrowers will encounter difficulties. Gradually, the finances and very structures of many government organizations are likely to be threatened. Some government structures that we currently depend upon may disappear.

How the long term will unfold is unclear. We know that ecosystems often operate in wide cycles, and that economic systems are a kind of ecosystem. This relationship suggests the possibility of a later renewal.

Furthermore, Eric Chaisson, in Cosmic Evolution: The Rise of Complexity in Nature, points out that there is a very long term trend in the universe toward more complex and more energy-dense structures. His analysis seems to suggest the possibility of evolution toward a different kind of more complex, energy-dense economy ahead.

In this ever-changing world, there may very well be opportunities for personal success. It will likely be a time of major readjustment, however. Perhaps quite a few people will be able to do well if they can keep their eyes open for opportunities to prosper, making the best possible use (or reuse) of resources that are available.

Appendix: Background on Oil, Coal and Electricity from Uranium

Appendix: Figure 1. Energy consumption per capita, separately, for oil, coal, and nuclear based on data of the *2024 Statistical Review of World Energy*, published by the Energy Institute.

Oil Background

Oil was at one time a very inexpensive fuel, even when adjusted for inflation to 2023’s price level.

Appendix: Figure 2. Brent equivalent world oil prices, adjusted to 2023 price level, based on data from the *2024 Statistical Review of World Energy*, published by the Energy Institute.

With the low prices that were available before 1970, oil could be used widely. It could be used to create electricity, and roads could be paved. Many people could afford cars who could not afford them previously.

In 1973, oil prices soared (Appendix: Exhibit 2). Appendix: Figure 3 shows that between 1981 and 2021, falling interest rates helped to make higher oil prices more tolerable. More debt could be added, and with lower interest rates, monthly payments could stay low.

Appendix: Figure 3. Three-month and ten-year US Treasury interest rates, in chart by the Federal Reserve of St. Louis.

Appendix: Exhibit 2 also shows that a big part of the problem since 2021 is that while debt levels are now high, interest rates will not stay down. This means that the cost of drilling new wells is now higher, and the general cost of investment in the economy is higher.

Appendix: Exhibit 1, indicates that, since 1991, the greatest per-capita quantity of oil that customers were able to afford occurred in the 2004 to 2007 period. This was a time in which home mortgage debt stimulus was used to keep the US economy growing; it was the time of Alan Greenspan and the NINJA (No Income, No Jobs, No Assets) home loans. The resulting sub-prime US housing bubble is reported to have lasted from 2003 to 2007. This sub-prime debt bubble is at least part of what led to the 2008 financial crisis.

The high US demand for oil as a result of the home mortgage debt bubble of 2003 to 2007 helped world oil prices to rise and consumption to rise. More recently, per-capita world oil consumption has been down, especially in 2020. Oil supply has not regained the 2004 to 2007 level, or even the 2018 level, in the most recent estimates.

Oil extraction has traditionally been a huge source of tax dollars, especially for oil exporters, even when oil was sold at relatively low prices. Anything that replaces oil needs to fill this role as well, because the economy needs energy (and taxes from energy) to operate. This tax revenue is a way to share what is sometimes called the “surplus energy” of the oil with the government of a country. At currently high extraction costs, this surplus energy benefit is largely disappearing.

Coal Background

Appendix: Figure 1 shows that the fuel in second largest supply has been coal. Its supply grew greatly after 2001, when China joined the World Trade Organization. This growth in coal supply did not last long because coal that was cheapest-to-extract and closest-to-markets quickly depleted. Appendix: Figure 1 shows the peak in per capita coal supply was hit in 2011.

Coal helped start the industrial revolution. By 1700, it grew to be the dominant fuel in England. Coal gradually replaced firewood and was used in many new ways.

Appendix: Figure 4. Annual energy consumption per person (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Wrigley

Appendix: Figure 5 shows the ways coal has recently been used. It is used directly in industry, besides being burned for electricity.

Appendix: Figure 5. Chart showing “first users” of coal, based on an IEA analysis.

Nuclear Background

Appendix: Figure 1 shows that the peak in per-capita nuclear energy production occurred in 2001. But at one time there had been great hope for nuclear power.

It was known as early as the 1950s that fossil fuel supplies were likely to face depletion issues as soon as 2050. Physicist M. King Hubbert was of the belief that electricity from uranium would be too cheap to meter. He also believed that the quantity of electricity produced could be very high. Neither of these things has come to pass.

Appendix: Figure 6. Figure by M. King Hubbert in his paper, *Nuclear Energy and the Fossil Fuels*

Early nuclear reactors were built to avoid problems that engineers could see needed to be avoided. This approach led to accidents: Three Mile Island (1979), Chernobyl (1986), and Fukushima (2011). It became clear that design upgrades were needed, raising costs and lengthening timelines for building reactors.

In theory, there is quite a bit of uranium to be extracted, but getting the price up high enough, for long enough, has been a problem. The World Nuclear Association shows this chart of production through 2022. Production in recent years has been lower than consumption.

Appendix: Figure 7. World uranium production and reactor requirements (metric tons of uranium) in a chart by the World Nuclear Association.

Fortunately, there has been a supply of nuclear warheads which could be down blended to provide uranium for nuclear reactors. This supply of nuclear warheads is now close to being exhausted. If nuclear power is to be expanded, more uranium will be needed.

Appendix: Figure 8. Chart from ArmsControl.org showing estimated global nuclear warhead inventories, 1945 to 2023.

Other details have proven problematic as well. In theory, the spent fuel can be reprocessed and used as fuel for reactors, but in practice, this process seems to be costly and time-consuming to set up.

Another issue is the high cost of building new nuclear reactors, and the need for debt to fund this cost. Clearly, the higher the interest rate, the higher the cost. Not many organizations can fund these high costs, in advance of actually getting electricity out and delivered to customers.

In general, to keep costs low for customers, the sale of electricity is priced at the margin. In many places, electricity from wind turbines and solar panels is given “priority.” As a result, wholesale electricity prices tend to be too low for electricity from nuclear power plants, driving them out of business. The price level is certainly not high enough to pay high taxes to governments. Such a margin would be needed if nuclear were to have a chance of truly replacing the benefits we have had in the past from inexpensive-to-produce oil.

Source: https://ourfiniteworld.com/2025/03/31/advanced-economies-are-being-pushed-toward-financial-collapse/

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