Image Source: Pixabay

Summary:

• Today’s financial system allows many promises of future goods and services. These include debts, pensions, and even prices of shares of stock.
• However, the quantity of actual physical goods and services that can be produced appears likely to be shrinking in future years because of resource depletion.
• This mismatch means that many/most of these promises likely cannot be paid as promised. The economy will somehow change to match what is actually available. We should not be surprised if, one way or another, we receive much less than has supposedly been promised. Even if a high currency amount is provided, it likely will not buy very much. Or a new government may be in power, with virtually no promises of benefits.
• Today’s economic system requires both increasing energy supplies and increasing debt to function properly. We are now encountering limits with respect to both world energy supplies and US government debt. The parts of the world economy that are most affected by limits will likely begin to contract soon.
• We don’t know precisely how this contraction will take place, but we can examine a list of countries whose GDP has already been contracting to see how they are faring.
• Perhaps we need to be relying more on our families and/or on “villages” made up of extended relatives or friends for our long-term support, rather than on government programs.

Introduction

The world is filled with financial promises, including loans, pensions, and even the market value of stocks. So far, the system seems to be working, but in a finite world, it is hard to believe that the system will work indefinitely. Governments can create money simply by adding more promises, but they cannot create goods and services in a similar fashion.

We know that actual physical materials are needed to make the goods and services that people depend upon. Energy supplies are particularly important in making goods and services because, according to the laws of physics, energy is required to produce physical goods and services. Forecasts that support current financial promises ignore the fact that we live in a finite world. Eventually, we will run short of easy-to-extract essential materials, including fossil fuels, uranium, lithium, and copper. Economic growth will need to be replaced by economic contraction.

In this post, I will try to explain the situation in more detail, together with some charts showing what is going wrong now, such as Figure 1. In some ways, we already seem to be reaching limits to growth.

Figure 1. Per capita energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute, with trend line and note.

[1] At first, added debt is helpful to an economy.

In some sense, added debt pulls an economy forward.

Figure 2. The author’s view of the analogy of a speeding upright bicycle and a speeding economy.

As long as there are plenty of inexpensively available resources and not too much interest to pay, added debt seems to make sense. It pulls the economy forward, in the direction that those resources are to be used. It “feels good” to the recipients of the goods and services made possible by the debt. People like the homes and cars that added debt makes possible.

Ordinary citizens have clear limits on their credit card debt. The limits on government promises seem to be hidden until they are actually reached.

As long as an economy is growing, that growth seems to hide many problems. Carmen Reinhart and Kenneth Rogoff are two well-known US economists. In a 2008 working paper (p.15) examining 800 years of government debt defaults, they remarked, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.” Without “hugely successful economic growth,” it is impossible to keep adding debt and repaying it with interest. The growth allows debt to be paid back with interest. It allows the fiction that an economy will continue to grow, and this growth will provide the margin needed to repay the debt with interest.

While the world economy has been an amazingly successful growth story since the industrial revolution, we now seem to be running short of the inexpensively available fossil fuels that have made economic growth so far possible. With this change, the economy is likely to start a major shift from economic growth to economic contraction.

We don’t know exactly how this shift from economic growth to economic contraction will take place, but we can hypothesize that the economies that have recently been growing fastest might be farthest from contraction, and the economies that are already struggling with low growth might be the ones most likely to slip into contraction. The countries slipping into contraction can be expected to have special difficulty repaying debt with interest and meeting other financial promises. Some governments may even collapse, perhaps in the way the government of the Soviet Union collapsed in 1991.

[2] Not too surprisingly, given the physics connection stated in the introduction, total world GDP and world energy consumption are highly correlated.

Figure 3. Energy based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP in constant 2015 US$ is as published by the World Bank.

In fact, the growth rate of energy consumption and the growth rate of GDP are also correlated, as can be seen from the similar patterns on Figure 4.

Figure 4. Three-year average growth rates are used for stability. Energy growth rates are based on energy data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP growth rates are based on GDP in constant 2015 US$ as published by the World Bank.

A scatter diagram of the X-Y data used in Figure 4 gives the result shown in Figure 5:

Figure 5. Three-year average growth rates are used for stability. Energy growth rates are based on energy data from the 2025 Statistical Review of World Energy, published by the Energy Institute; GDP growth rates are based on GDP in constant 2015 US$ as published by the World Bank.

[3] A major issue is the fact that that the growth rate of world energy consumption is trending downward.

Figure 6. Energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute.

Figure 6 shows a big upward bump starting not long after the year 2000, driven by the addition of China’s inexpensive coal resources to the global energy supply. The low-cost portion of China’s coal resources is now mostly depleted. In addition, we don’t seem to have any other energy sources that will be available in large quantity in the near future. We have been adding wind and solar, but their impact has been small. Their impact is reflected in the total energy increases shown in Figure 6, and in the other charts above.

[4] Even worse, the rate of growth of world energy consumption per capita is trending downward. In fact, if the trend line were extended to 2025, it would seem to indicate contraction in per capita energy supplies.

Figure 7. Per capita energy growth rates are based on data from the 2025 Statistical Review of World Energy, published by the Energy Institute with trend line and note by Gail Tverberg. (Same as Figure 1.)

We know that it takes energy to make physical goods. Even services require some level of physical goods and energy, such as a building to perform these services, electricity to operate tools, and the materials needed to make any tools, such as computers or scissors.

On Figure 7, note that the trend line is dropping below 0% in 2024, and even farther below 0% in 2025. This means that a smaller energy supply is available, relative to the population. If less energy supply is available, fewer physical goods relative to the population are likely to be available, as well. No one announces this, but we see the impact in many ways. For example, we discover that our daily newspaper is no longer being delivered. Or we discover that the products we see in stores are becoming increasingly flimsy. Meanwhile, young people are becoming less able to afford cars, homes, and almost everything else.

Furthermore, with limited total energy supply, international fighting about physical goods becomes more of a problem. The place we see this first is with respect to minerals. With limited energy supply and ores that are increasingly less concentrated, it is becoming difficult to extract enough materials such as uranium, rare earths, and platinum to meet the needs of all countries. Prices may temporarily spike, but they do not rise high enough, for long enough, to allow production to rise to the overall needed level.

[5] Falling interest rates push the economy along; rising interest rates act like putting brakes on the economy.

Figure 8. Interest rates on 10-year Treasuries (red) and on 3-month Treasuries (blue), based on data of the Federal Reserve of St. Louis.

Interest rates play a far greater role in the economy, and in economic growth, than many people would expect. Falling interest rates between 1981 and 2022 greatly supported the economy (Figure 8). Since 2022, higher interest rates have acted like a headwind to the economy. This is a concern when it comes to the possibility that the economy is heading into economic contraction because of an inadequate supply of low-cost energy.

Another piece of the picture is the effect of the “yen carry trade.” It allows international investors to borrow money at low rates in Japan, and invest this money in the United States and other countries at higher rates. The yen carry trade has been supporting international borrowing, but it now seems to be at the edge of unwinding because Japanese interest rates are now higher. With this change, it is more difficult to borrow yen at a low rate and invest the proceeds elsewhere at a higher rate. The unwinding of the yen carry trade could push US interest rates up, regardless of what the Federal Reserve tries to do.

[6] Interest payments on US government debt are already getting to be a problem.

US government debt is now close to $38 trillion, and total interest payments have recently risen because interest rates are no longer near zero. Total payments now exceed $1 trillion per year.

Figure 9. US federal government interest payments through June 30, 2025.

The US Congressional Budget Office (CBO) is now concerned about the high level of interest payments. When interest rates were very low in the 2008 to 2020 period (Figure 8), it was possible to add debt without substantially raising the amount of interest to be paid. But now, with higher interest rates and the debt balance increasing, interest payments have become very high, to the point where they even exceed defense spending. It becomes difficult to raise taxes enough to cover both interest outlays and other funding shortfalls.

Figure 10. Chart by CBO showing annual deficit in two pieces–(a) the amount simply from spending more than available income, and (b) interest on outstanding debt. Source.

I talk more about some of these issues in post called “Energy limits are forcing the economy to contract.” Clearly, if the US economy is being forced to contract, it is very difficult for it to be a hugely successful growth story.

[7] Which countries of the world seem likely to be most resilient against energy limits?

If we believe Reinhart and Rogoff, the countries that would be most resistant to collapse would be the countries that have been growing most rapidly, in recent years. Figure 11 shows a listing of the most rapidly growing countries during the 2019 – 2024 period, based on World Bank GDP data.

Figure 11. Listing based on World Bank GDP data (in 2015 US$) for the years 2019 to 2024. The average growth rate of these countries was 4.9% per year or higher.

The only country on Figure 11 that is an “Advanced Economy” (member of the OECD) is Ireland. Ireland is known for its pharmaceutical exports and for its unusually low taxes on corporations. Many companies choose to domicile in Ireland to take advantage of the country’s low tax rates.

All the other countries are, in some sense, “less advanced economies.” Wages are likely lower, giving them an edge in extracting resources and in manufacturing, and then selling the goods to more advanced countries. Some of these countries may have been given loans by the IMF or China to help them develop their resources.

China and India are both known for their coal use; historically, coal has been an inexpensive energy product, allowing countries to make goods inexpensively, for export. The only country listed whose growing GDP is based on oil extraction seems to be Guyana in South America. Its oil extraction started very recently.

Figure 12. Listing based on World Bank GDP data (in 2015 US$) for the years 2019 to 2024. Average growth rates were strictly less than 0% for shrinking economies, and between 0% and 0.5% (inclusive) for slowly growing economies.

On Figure 12, the list of shrinking economies reads like a list of sad situations that we have read about in the news, way too many times. Many of the countries have recently been in wars to similar situations. None of the countries are Advanced Economies. A few of the countries (Iraq, Libya, Trinidad and Tobago, South Sudan, Venezuela) are oil producing countries.

With respect to the list of slowly growing countries, shown on the right side of Figure 12:

• Austria, Czechia, Estonia, Finland, Germany, and Japan are all Advanced Economies with inadequate energy supplies of their own.
• Puerto Rico is an island territory that has recently had debt problems.
• Thailand is, in some sense, a dropout from the rapidly growing nations of Southeast Asia. My impression when I visited Thailand earlier this year was that a great deal of overbuilding had taken place. Excuses for more debt had mostly stopped.
• Argentina is an oil-producing country with difficulties.
• China tightened its grip on Hong Kong in 2019, leading to much slower economic growth. Presumably, there were underlying issues that caused this tightened grip.
• South Africa has both coal supply problems and inadequate water supplies.

[8] What lies ahead?

I think that we are already in a world of “not enough to go around,” because resource limits are leading to an inadequate supply of finished goods and services for the world economy as a whole. Some countries are already being squeezed out, particularly the countries listed as having “shrinking GDP” in Figure 12. I expect that, over time, an increasing number of countries will be added to the shrinking GDP list. The outcomes may be as bad as seem to be happening to the economies that are shrinking today.

History shows that governments of shrinking countries tend to be overturned by their citizens, or they may collapse on their own. If collapse happens in either of these ways, governmental promises of pensions, and of guarantees on bank accounts, are likely to disappear. Even if the current governments can be maintained, countries will be forced to cut back greatly on the programs they are providing. Pensions may be cut, or they may be inflated away by hyperinflation.

Some governments today talk about possibly introducing Central Bank Digital Currencies (CBDCs). If these currencies are implemented, I would expect that they will be used to ration the increasingly limited supplies of goods and services that are available among their populations.

I do not expect that there will be a formal World War III. Instead, I think the United States is already in a cold war against practically every other country because there cannot be enough goods and services to go around. The US can’t go into a formal war against China because it provides parts of the supply chains for many essential goods the US uses today. Even Europe is a competitor for essential goods. For example, the less oil Europe uses, the more oil will be available for other countries.

While new technologies such as artificial intelligence and energy recovery may eventually alleviate our energy problems, it is unlikely that such approaches will solve our problem in the near term. As a result, governments are likely to be less able to keep their promises. Historically, families or “villages” of extended kin that have provided safety nets, rather than government programs. Perhaps now is a good time to be thinking about how we can move is this direction, as well.

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