The great unspoken fact of the 1930s was that the world was drifting to war, a trend that nobody knew how to stop.
The great unspoken fact of the 2020s is that the global economy is in the process of inflecting from growth into contraction, and, again, this is a process that no-one can halt, still less put into reverse.
Logically, countries, groups and individuals must strive to work out how to fare best in an economy that has become a less-than-zero-sum game. Their relative success or failure in this endeavour will be a function of how much they know about it, and how early they are in gaining that knowledge.
What do they know?
This leads to a question that often arises here, which is that of how far ‘the powers that be’ are aware of this.
It seems logical to assume that somebody, somewhere, must have figured this out. Getting to the facts of the situation isn’t exactly rocket-science. All that’s really required is the kind of cool objectivity that rejects consensus wishful-thinking, and repudiates, as unrealistic, the orthodox notion that we can be assured of ‘infinite economic growth on a finite planet’.
With global economic inflexion understood, the issue becomes one of competitive advantage.
Seen strategically, America is in the midst of a gigantic economic gambit, the bet being that extreme fiscal stimulus can re-shore and expand important industries to a point of critical mass before the burden of soaring public debt either cripples the dollar or, more probably, calls time on super-gigantic stimulus.
Nobody can imagine that the current trajectory of US government borrowing is sustainable. But an important strategic advantage can be seized if lenders – and overseas lenders in particular – are willing to fund what is, essentially, a competitive, national-advantage economic agenda
There is, by the way, nothing wrong with pursuing national economic advantage – it’s what governments do.
The counter-gambit is that the BRICS+ countries are trying to build a competing economic bloc strong enough to defend its member countries from the aggressive economic strategy of the United States.
These are examples of move and counter-move in the wholly new context of involuntary economic de-growth.
To a significant extent, countries outside these completing blocs have to decide where their own best interests lie.
The energy key
It should be beyond obvious that energy is critical to these issues. Our reliance on fossil fuels has created two juxtaposed vulnerabilities.
The first is that we may inflict irreparable climatic and ecological damage to the Earth’s environment, and this will have economic as well as human consequences.
The second is that the diminishing economic value of oil, natural gas and coal is putting economic growth into reverse.
Anyone clever enough to figure out the realities of economic inflexion must also be smart enough to realise that renewable energy sources can’t provide a complete, like-for-like replacement for the energy value hitherto sourced from oil, natural gas and coal. Renewables expansion is simply too materials-intensive for this to happen, and the requisite raw materials can only be obtained through the agency of legacy fossil fuel energy.
To anyone who has reached this conclusion, the deceleration of energy transition – and the corresponding slowing of the move from ICE to battery-powered vehicles – will have come as no surprise at all.
This isn’t to say that renewables (and their transport ancillaries) don’t have important roles to play in the economic future. The manufacture of wind turbines, solar panels, grids, power-storage systems and EVs are important industries, certainly in terms of employment, though improbably in terms of profit. If we’re going to build these things anyway, it’s better that the building of them takes place at home rather than overseas.
But it’s one thing to try to corner as much energy-transition activity as you can, and quite another to believe that renewables are capable of taking over from fossil fuels in an economy that carries on growing.
Crisis management, or the art of pretend-and-extend
To a significant extent, politics is a matter of crisis management, something in which participants are successful if the eventuation of crisis can be pushed out far enough into the future that it doesn’t happen on their watch.
This explains much of the apparent madness now visible in global economic and financial affairs.
Various instances illustrate these processes.
In the United Kingdom, a large and rising proportion of home-buyers are now taking out mortgages whose terms extend beyond the borrowers’ dates of retirement. This may seem both irrational and dangerous, but it’s part of a financial mechanism dictated by political choice. There’s no divine diktat which says that a country must push the prices of homes out of the reach of most of its own citizens, but policies which would deflate the property price bubble haven’t attracted sufficient political support to become feasible.
It seems safe to conclude that somebody in the corridors of power must know that Britain has become a post-growth, credit-dependent economy. Over the past twenty years, and with everything stated at constant 2023 values, the government has borrowed £2.1tn, roughly half of which has been backstopped by the net-of-QT money-creation of the central bank. Private borrowers have been more cautious, but have nevertheless increased their debts by close to £800bn. All of this is reinforced by rapid credit expansion in the NBFI or “shadow banking” sector.
The result of all this credit-bingeing and money-creation is an economy that’s only £625bn, or 30%, bigger now than it was in 2003, and most of that “growth” is itself the cosmetic effect of spending borrowed money.
The immediate need is to walk a tight-rope between interest rates that are high enough to prop up the currency, but low enough not to burst the real estate bubble. Assurances of ‘growth’ are pure PR-exercises in an economy that can’t, nowadays, house its population, bring down colossal health-care waiting lists, or stop polluting its rivers and seas with untreated sewage.
In short, the British authorities are playing extend-and-pretend.
But they shouldn’t be taken too hardly to task for that, for two main reasons. First, many other countries, arguably most of them, are doing exactly the same thing.
Second, there are no good alternatives to ‘extend-and-pretend’.
Likewise, the United States reported real-terms growth of $675bn last year, but the government had to run a $2.4tn fiscal deficit to enable this to happen, and is now adding public debt at the rate of $1tn every hundred days. Nobody in his or her right mind could contend that this is sustainable, but America has the advantage of a currency that’s the least-dirty shirt in the global laundry-basket.
China, meanwhile, is trying to manage the implosion of a gigantic real-estate Ponzi scheme, but nobody could imagine that this event came unexpectedly, out-of-the-blue. Like Britain, China’s total borrowing over the past twenty years has far exceeded reported growth, in this instance in the ratio of 4.4:1, with the difference that private entities, rather than the state itself, have undertaken most (almost four-fifths) of this borrowing.
Japan is persisting with monetary policies which have halved the dollar value of the yen since the inception of “Abenomics” back in 2012.
In short, much of what looks like madness – British mortgages, US Federal debt, Chinese real-estate, and the monetary policies of the Bank of Japan – turns out to be exercises in ‘extend and pretend’.
Getting to the real
Those of us who want to work out how things are really unfolding are perfectly capable of doing so. Stripping out credit-effect distortion from reported GDP brings us to a calculation of underlying or ‘clean’ economic output (C-GDP) which correlates remarkably closely to the quantities of primary energy used in the economy.
The further deduction of surging ECoEs – the Energy Costs of Energy – provides a calculation of prosperity which is a pretty good fit with what’s been experienced in recent times.
On the latter calculation, the World was 28% more prosperous in 2023 than it was in 2003, but population numbers increased by 26% between those same years.
We can, if we so wish, make corresponding calculations about the future. As ECoEs carry on rising, and as renewables prove incapable of providing a complete replacement for the energy value hitherto sourced from fossil fuels, aggregate material prosperity will fall, gradually in the balance of the 2020s but much more rapidly in the 2030s.
In comparison with 2023, the world’s average person is likely to be only about 7% poorer by 2030, but fully 25% worse off by 2040.
At the same time, the real costs of energy-intensive necessities will carry on rising, applying leveraged compression to the affordability of discretionary (non-essential) products and services.
Where the financial corollaries of these material economic trends are concerned, we can assume that ‘extend-and-pretend’ will remain the only game in town, meaning that debt and quasi-debt will carry on rising – and the spending of this credit will carry on being presented as “growth” – until the credibility of money has been destroyed.
The strategic aim isn’t to side-step this process, but to ensure that your currency doesn’t win this ‘race to the bottom’.
The rate at which credit will rise will force the authorities back onto the path of QE, ZIRP and NIRP, because there’s no other way of maintaining the fiction that the economy is capable of servicing these soaring debts.
We can, on these same lines, work out which sectors will face the most severe compression, and figure out which countries and which currencies are leading the race to the bottom.
We can do all of these things and, if we so wish, we can share our findings.
But we can’t expect any of this to make us popular.
Until quite recently, the idea that the global economy might reverse – my preferred term is inflect – from growth into contraction lived in the realm of radical and unwelcome theory.
But this has been the year in which theory has been borne out by experience.
Much as astronomers deduce the existence of invisible objects through their gravitational effects on other bodies, we can see the effects of economic inflexion in everything from social discontent and the “cost of living crisis” to deteriorating international relations and worsening financial fragility.
The causes of the ending and reversal of growth can be summed up in the single word depletion.
Fossil fuel energy has been depleted to a point where its material costs, measured here as the Energy Costs of Energy (ECoEs), are becoming unaffordable.
Non-energy natural resources, too, such as minerals, agricultural land and accessible water, have been depleted, as has the finite ability of the environment to absorb the effects of human economic activity.
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It has turned out to be perfectly possible to measure, interpret and anticipate these economic processes, and that’s been the aim of the Surplus Energy Economics project from the outset.
But two centuries of industrial expansion have been quite enough to render economic reversal very nearly incomprehensible to most people, and almost entirely unacceptable.
Our first collective responses have involved simple denial, based on the ‘infinite growth’ promises of an economics orthodoxy firmly rooted in pre-industrial conditions, when none of today’s resource challenges were even conceivable.
Our second resort has been to hubris, manifested in the idea that human ingenuity, implemented as technology, can resolve all of our energetic, material and environmental problems. This can, supposedly, offer a seamless, with-growth transition to alternative energy sources, and perhaps even “de-couple” the economy from the use of energy.
The snag here is that the potential scope of technology is bounded by limits set by the laws of physics. The looming failure of technology is going to come as a gigantic shock to the system.
We’ll look at this impending failure shortly.
Reality, meanwhile, is breaking through, as it always does. Few voters now believe that their economic conditions have been improving in recent times, that the current extent of inequality is justifiable, or that soaring living costs are either fully reported or are traceable to one-off bits of simple bad luck. They’re increasingly attracted to scapegoating foreigners, who might be immigrants, or dishonest trading partners.
The authorities, meanwhile, have been drawn towards the ‘extend and pretend’ of reckless credit expansion, to ‘getting their retaliation in first’ against rising popular discontent, and to trying to skew the patterns of international trade to their own national advantage.
Before we judge them too harshly, though, we should remember – in this season of goodwill – that the process of inflexion itself is entirely outside their control, and that, one by one, all of the supposed “levers” of economic management have broken in their hands.
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The formal commencement of the industrial economy can be dated to 1776, when James Watt completed the first truly efficient device for converting heat into work.
But this was to be no sudden revolution. Even in Britain, where this process began, battleships were still made of wood, and powered by wind, into and beyond the 1850s. Industrialization began quite slowly in Europe and North America before extending, again gradually, into all corners of the world.
This said, and with a tiny scattering of exceptions, even the last countries in which industrialization took hold have been living with assumed economic growth for well over a century.
The ending and reversal of growth is, therefore, a profound culture-shock, up-ending generations of almost unchallenged expectation.
It’s a revolution far more sweeping in its implications even than the removal of absolute monarchy, or the arrival and subsequent failure of communism in the USSR and its satellites.
This means that we need to start looking for the practices, systems and institutions that will be swept aside by this revolution – and, conversely, at what might replace them.
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It helps us to know that two assumptions, above all, will be overturned by the ending and reversal of growth.
One of these is that each generation will be more materially prosperous than the one before.
The second is the notion that economic expansion is coterminous with progress. If somebody opposes the bulldozing of farmland or the destruction of historic artefacts for the building of a retail mall, motorway or factory, he or she is portrayed as an obstacle to progress. The word Luddite entered the English language as a term describing futile, unreasoning opposition to the unstoppable march of modernity.
The ever-perceptive Charles Hugh Smith has explained that a lot of what we continue to think of as ‘progress’ has in fact become Anti-Progress, a concept which he has connected to the collapse of quality. Your new domestic appliance, for example, might be wi-fi connected (”progress”), but won’t work as well, or last as long, as the old one (“anti-progress”).
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We can look at this, quite reasonably, as the product of misaligned incentives, where it’s more profitable to sell the customer a new and inferior product every five years than a higher-quality, more repairable one every twenty-five.
But there are structural factors involved as well.
In pre-industrial times, raw materials were costly, in the sense that their supply required large amounts of human labour. In these conditions, it made far more sense to use hard-won, costly timber to make furniture or buildings that would last for generations than to construct shoddier alternatives that would require replacement in a small number of years.
The advent of cheap and abundant energy changed all that, making possible a profit-incentivized shift to an accelerated cycle of creation, disposal and replacement. This is how the energy-dissipative economic model of the past became the dissipative-landfill commercial system of today.
This system will unravel, not as a matter of commercial practice or social preference, but because of changes in the productive-replacement equation itself.
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Contrary to the quaint notions of orthodox economics, the central processes of the economy are material, not monetary.
The defining purpose of the economy is to supply physical products and services to society.
Services are no less material than goods – we can’t run an e-commerce business without vehicles and warehouses, or supply on-line services without cables and computers.
Since a society without a history is as disconnected as a person without a memory, we can safely assume that history will continue to be taught and studied, long after economics has been subsumed into the sciences of thermodynamics and the characteristics of materials.
These historians of the future will be amused, as well as baffled, by contemporary notions that we could build an immaterial economy based on services, or somehow “de-couple” the energy economy from the use of energy. They’re likely to laugh out loud at the notion of ‘infinite, exponential economic expansion on a finite planet’.
The material economy works by using energy to convert non-energy resources into products. These then wear out, and are abandoned and replaced. Critically, the speed at which this cyclical process operates is determined by the relative costs of the necessary inputs.
These inputs are human labour, energy and raw materials.
When each of these inputs was costly, the lifespans of products were extended as far as possible. Cheap and abundant energy made each of these inputs less expensive – production required less human labour, the cost-efficiency of resource extraction rose sharply, and the cost of energy itself was low.
In consequence, life-spans of products became ever less important, and the relinquishment-replacement cycle was accelerated. The creation of the dissipative-landfill system has been a product, not of fashion, or even of incentive, but of evolving material circumstances.
Because this process has been material in its characteristics, nobody has been able to call a halt to it, any more than the advocates of a more human-scale approach could halt the takeover of England by “dark satanic mills”.
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The lesson to be learned from this is that prevalent commercial practice, far from being driven by the latest vogue in business-speak or the most recent pronouncements of management text-books, is determined by material conditions.
And these, as we know, are now changing rapidly. Raw materials, like energy itself, are fast ceasing to be cheap. The balance of cost and scarcity between human labour and exogenous energy is tilting rapidly from the latter to the former.
The ultimate exponents of the rapid-replacement model aren’t manufacturers, or suppliers of services broadly understood, but the behemoths of the “tech” sector. Their business models are tied, to a quite remarkable degree, to the already-failing presumption of ‘infinite economic growth on a finite planet’.
These business models are, to a greater or lesser extent, based on the assumptions of ever-cheaper raw materials, ever more abundant energy, and ever-expanding consumer discretionary affordability.
Yet these assumptions are already becoming twentieth-century notions, preserved in aspic.
The context, looking ahead, is set out in the following charts. In America, as elsewhere, top-line economic output – adjusted to exclude credit distortions, and known here as underlying or “clean” output (C-GDP) – has long been decelerating towards contraction. Meanwhile, the first call made on output by ECoE has been widening the gap between output and material prosperity (Fig. 1A).
Fig. 1
At the same time, the real costs of energy-intensive necessities have been rising, such that the affordability of discretionary (non-essential) products and services, shown in blue in Fig. 1B, is subject to relentless compression.
The United States has been chosen to illustrate these trends because of the differences between Figs. 1C and 1D.
Over a very long period, as the rate of discretionary expansion has fallen below the rate of increase in the population, the average American has experienced a continuing, but gradual, reduction in the affordability of discretionaries (Fig. 1C).
But aggregate discretionary affordability has carried on creeping upwards even as its per capita equivalent has drifted downwards.
This seems to have left many businesses wholly unprepared for the impending rapid decline of discretionary affordability.
The acid-test of vulnerability to these effects is the extent of exposure to discretionary compression. On-line retailing can continue pretty solidly, though it will tilt away from discretionaries and towards staples. EVs have a future, but only as niche products, since the replacement of all (or even most) of the World’s 2bn cars and commercial vehicles is a material impossibility.
On the other hand, anything dependent on advertising or subscription revenues, or on the mass sale of non-essential gadgets to the public, is heading over the Niagara of contracting discretionary purchasing.
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The way in which energy-hungry behemoths turn into dinosaurs will have a critical bearing on how society and the financial system adapt to the ending and reversal of material economic growth.
Embodying a law of diminishing returns, each new iteration of “tech” is more energy-intensive, and seems to add less material value, than the one before, and the sector is already starting to feel the headwinds of a decelerating replacement cycle.
This is typified by smart-phones, where annual units sold peaked back in 2015. The first cell-phone was a major breakthrough, as were the first smart-phones, but subsequent developments have added ever less valuable capabilities at ever increasing costs.
AI, the latest passing vogue in “tech” circles, exemplifies the pursuit of energy-intensive innovation for the sake of innovation itself, and for some very short-lived financial gains. Everybody seems to accept that AI will make enormous demands on energy, but nobody seems to be really clear about how it will add value.
The general (though rather vague) notion seems to be that AI will make profits by replacing human labour. In fact, though, human labour will be increasingly abundant as the economy contracts, whilst ever-higher thresholds will be set for the prioritization of energy use.
Some suppliers of energy-intensive tech services are already giving thought to investing in their own energy sources, typically small modular reactors, which might enable them to cool as well as power their sprawling data-centres.
What this idea overlooks, however, is the impossibility of re-energizing the economy in which their customers reside.
With no such capability possible, a combination of decreasing prosperity and ever-costlier necessities has already started to exert an ever-tightening stranglehold on the affordability of discretionary (non-essential) products and services.
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What, though, will be the wider implications of technological disillusionment for the broader human endeavour?
The word “technology” has two distinct meanings in contemporary parlance. To scientists and engineers, it means the implementation of human ingenuity in the material world. To investors and business bosses, it means a hugely successful sector that rose, phoenix-like, from the ashes of the dot-com bust.
To the general public, it probably denotes a combination of the two, a phenomenon which is both enabling and threatening, and something whose unstoppable advance only a card-carrying Luddite would seek to halt.
Humanity, and perhaps every sentient creature, seeks to alter its environment to conditions most favourable to itself. The human project has coined the word “technology” to describe our efforts in this regard.
Hitherto, we’ve been able to look back at the history of technology as an ascending march of progress. Noteworthy names in this progression include Watt, George and Robert Stephenson, Michael Faraday, Thomas Edison, the Wright Brothers, Karl Benz, John Logie Baird, Frank Whittle and Robert Watson-Watt.
We’ve learned, too, from our failures, as when Capt. Cowper Coles’ inherently unstable turret-ship HMS Captain capsized off Finisterre, and when John Blenkinsop invested in spiked wheels on the grounds that railway locomotives with smooth wheels wouldn’t be able to move.
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The critical point about technology, though, is that it has to work within the envelope of material and energetic possibility. Orville and Wilbur Wright, for instance, didn’t invent the aeroplane and then sit around waiting for somebody to discover petroleum. Rather, they found a novel and worthwhile application for a source of energy that was already available.
Modern technology has delivered marvels, and we seem, in any case, to have an instinctive attraction to the new and shiny. Technology has been elevated to the status of a secular deity, capable of resolving our each and every problem.
And this is why our disillusionment with technology, as it arrives, will be such a shock. Because of their inferior material characteristics, renewables can’t restore growth to the economy, or even keep it at its current size. Engineering can’t resolve our environmental problems in ways that allow excess consumption, and super-rapid resource depletion, to continue.
If, at this festive time, you’ll allow me a single cliché, ‘as one door closes, another opens’. There are alternatives to our current arrangements, and perhaps we’ll discuss these in the future.
THE THREAD OF RATIONAL INTERPRETATION
According to Greek mythology, Theseus, having killed the Minotaur, found his way back from the heart of the Labyrinth by following a thread given to him by Ariadne.
There are two lessons – in an earlier idiom, morals – to be taken from this story. The obvious one is the wisdom of taking a thread into the maze and using it to find the way back out. The less obvious lesson is that the thread Theseus followed was reliable, a guide which, like real gold, would pass an ‘assay’ of veracity.
Our current economic and broader circumstances merit comparison with the Labyrinth – we’re in a maze which has many complex blind-alleys, routes to nowhere which tempt the unwary. If we’re to fashion a reliable thread that can be followed through it, we need to apply the assays of logic and observation.
The thread followed here starts with the purposes of saving and investment, purposes which pass the assay of logic, but fail the test of observation. This points to dysfunction based on anomaly, the anomaly being that the practice only conforms to the principle in the presence of growth.
Postulating that the economy is an energy system rather than a financial one also passes the assays of logic and observation, and confirms we have a thread that can be followed to meaningful explanations and expectations.
An assay of logic
Capital theory is as a good a place to start as any. This theory is that, in addition to meeting current needs and wants, a sensible person puts aside a part of his or her income for the purposes both of having a reserve (“for a rainy day”) and of accumulating wealth. The flip-side of this process is that saving – as ‘economic output not consumed’ – provides capital for investment. This theory would apply, incidentally, even if some form of barter were substituted for money.
For this to work, the saver or investor must receive a real return on investment that is positive (that is, it exceeds inflation), and this return must be calibrated in proportion to any risk to which his or her investment is exposed. The user of this capital must earn a return on invested capital which exceeds the return paid to the investor. Any business unable to do this must fail, freeing up capital and market share for more efficient competitors.
This thesis rings true when measured on the ‘assay of logic’ – indeed, it describes the only rational set of conditions which can govern productive and sustainable relationships between saving, investment, returns and enterprise.
But it’s equally obvious that this does not describe current financial conditions. Returns to investors are not positive. These returns are not calibrated in proportion to risk. Businesses do not need to earn returns which exceed appropriate returns being paid to investors. Businesses unable to meet this requirement do not fail.
When logic points so emphatically towards one set of conditions, whilst observation leaves us in no doubt that contrary conditions prevail, we don’t need to venture further into investment theory in order to confirm the definite existence of an anomaly.
To discover the nature of this anomaly, let’s look again at capital theory to discover the predicates shared by all participants.
The investor needs returns which increase the value of his or her capital.
The entrepreneur needs returns which are higher again than those required by the investor.
The shared predicate here is that the sum of money X must be turned into X+.
For the system to function, then, the shared predicate is growth.
Logic therefore tells us two things. The first is that a functioning capital system absolutely depends on growth. The second, inferred-by-logic conclusion is that, if the system has become dysfunctional, the absence of growth is likely to be the cause of the dysfunction.
Observed anomaly is thus defined as a property of dysfunction, whilst dysfunction itself is a property of the absence of growth.
You don’t need a doctorate in philosophy to reach this conclusion. All you need do is follow a logical sequence which (a) defines anomaly as intervening between theory and current practice, and (b) identifies this anomaly as the absence of growth.
We can confirm this finding by hypothesis. If we postulate the return of real, solid, indisputable growth into this situation, we can follow a sequential chain which goes on to eliminate the anomaly and restore the alignment of theory and practice.
Testing the thread
The deductions that (a) dysfunction exists, and (b) that this is a product of the lack of growth, take us on to familiar territory. If you’re a regular visitor to this site, you’ll know that the basic proposition is that the economy, far from being ‘a function of money, and unlimited’, is in fact a function of energy, and is limited by resource and environmental boundaries.
Using logic and observation, we can similarly apply the ‘assay of rationality’ to the propositions informing the surplus energy interpretation. There are three of these propositions or principles, previously described here as “the trilogy of the blindingly obvious”.
The first principle is that all of the goods and services which constitute economic output are products of the use of energy. If it were false, this proposition would be easy to disprove. All we’d have to do is to (a) name anything of economic utility that can be produced without the use of energy at any stage of the production process, and/or (b) explain how an economy could function in the absence of energy supply.
The second principle, applied here as ECoE (the Energy Cost of Energy), is that whenever energy is accessed for our use, some of that energy is always consumed in the access process. Again, if this proposition were false, its fallacy could be demonstrated, simply by citing any example where energy can be accessed without the use of any energy at any stage in the access process.
The third proposition – that money has no intrinsic worth, and commands value only as a ‘claim’ on the output of the energy economy – ought, if false, to be the easiest one to disprove. We would need to do no more, as a thought-exercise, than cast ourselves adrift in a lifeboat, equipped with very large quantities of any form of money, but with nothing for which this money could be exchanged. If this experiment succeeded, the ‘claim only’ hypothesis would be disproved.
The inability to disprove these propositions means that the theory of the economy as a surplus energy system passes the assay of rationality. Application is a much more complex matter, of course, but the next test is to see how theory fits observation.
The assay of observation
From the mid-1990s, and as the following charts show, global debt started to expand far more rapidly than continuing growth in reported GDP. Available data for twenty-three economies – accounting for three-quarters of GDP – shows a corresponding trend in the broader measure of ‘financial assets’, which are, of course, liabilities of the non-financial economy of governments, households and private non-financial corporations (PNFCs).
There is reliable data showing yet another correspondence, this time between the GDPs and the unfunded pension obligations (“gaps”) of a group of eight economies which include global giants such as the United States, China, Japan and India.
Let’s be clear about where this takes us. We’ve already identified the absence of growth as the source of financial dysfunction. We’ve now seen parallel anomalies in the relationships between GDP and liabilities.
These divergent patterns can be explained – indeed, can really only be explained – in terms of exploding financial commitments distorting reported GDP. Put another way, there are compounding trends whose effect is to ‘juice’ and to mispresent reported economic output.
This observation accords with the logical conclusion, discussed earlier, that the relationships between saving, investment, returns and enterprise have been distorted into a dysfunctional, anomalous condition by the absence of growth. The only complication is that we have to look behind reported “growth” numbers to make this connection.
What, though, explains the absence – in practice, the deceleration, ending and impending reversal – of growth itself? The right-hand chart indicates that what was happening at the start-point of observed economic distortion was a rise in ECoEs.
The assay that we’ve undertaken has shown the validity of the concepts of output as a function of energy, ECoE as a characteristic of the output equation, and money in the role of ‘claim’. This in turn validates the linkage identified here.
Fig. 1
Once again, let’s apply the test of hypothesis. Assume that a new source of low-cost (low ECoE) energy is discovered. Prosperity would increase, and real growth would return to the system. The observed anomalies in capital relationships would disappear.
This, remember, is purely hypothesis, because the discovery of a new source of low-cost energy is at the far end of the scale of improbability. We can thus conclude that dysfunction and anomaly will continue, to the climacteric at which the monetary system described by capital theory reaches a point of failure.
The clarity of defined anomaly
For anyone who isn’t a mythical hero, venturing into the Labyrinth, confronting the Minotaur and finding our way out again sounds like a terrifying experience. There are clear analogies to the present, in terms of the uncertainty of the maze, and the fear induced by the unknown. We may not have Ariadne’s thread, but we can fashion a good alternative by opting for rationality, applied through logic and observation.
The results of this process do seem to have the merit of clarity. Comparing capital theory with observed conditions identifies a dysfunction or anomaly that can be defined as the absence of growth. This in turn can be explained in terms of a faltering energy economy. Take away the predicate – growth – and the financial system becomes dysfunctional.
This interpretation helps to clarify the roles of the various players in the situation. Taking the ‘elites’, for example, we know that the defined aim of all elites is to maintain and, wherever possible, to enhance their wealth and influence. We can infer that, if we can identify the dysfunctionality of capital theory and observed conditions, so can they.
Likewise, we know that the defined aim of governments is the maintenance of the status quo, and we can again infer that they, like we, recognize the essential dysfunction as ‘the failure of the predicate’.
To this extent, we can demystify the behaviour of elites and governments. We can also make informed judgements on their probabilities of success. (These probabilities are low, for reasons which lie outside the scope of this discussion).
A similar application of logic and observation tells us that anomaly cannot continue in perpetuity. We can hypothesize the resolution of the energy-ECoE problem, but examination of the factors involved suggests that any such resolution, even if attainable, is unlikely to happen in time to restore equilibrium to the financial system. There are equations which relate the investment of legacy energy (from fossil fuels) into a new energy system (presumably renewables), and these equations give few grounds for optimism where current systems are concerned.
If rationality can take us this far, it surely makes sense to adhere to it. The probabilities are that global prosperity will contract, meaning that systems predicated on growth will cease to function. The logic of the situation seems to be that, when old predicates change, we need to fashion new systems based on their successors.
One of the things that used to puzzle me, as a very small boy, was why the day after Christmas was called “Boxing Day”.
Did people in the classic “Dickensian Christmas” – in the era evoked by traditional festive icons like snow, holly and robins – really set aside a day for pugilism? It seemed even less likely that a day of fist-fighting contests formed any part of the first Christmas.
All became clear, of course, when it was explained to the very young me that this was the day on which Christmas “boxes” (gifts) were exchanged. In those times, people drew a distinction between the Christian celebration, on 25th December, and the giving and receiving of presents, on the following day.
This distinction is even more pronounced here in Spain, where the exchange of gifts is deferred to the “Night of the Kings”, two weeks after Christmas itself. The festive season is thus more protracted here than in, say, Britain or America, but it’s also markedly less frenetic, and culminates, in most towns and cities, with a thoroughly enjoyable Night of the Kings carnival.
Depending on where you are and how you look at it, the Christmas holidays end, and something like “normality” resumes, at some point between the 2nd and the 7th of January. My view is that the word “normal”, whose definition has, in economic and broader terms, already been stretched a very long way indeed, might soon lose any realistic meaning. A situation in which the Fed is in the process of injecting at least $1 trillion of newly-created money into the system typifies the extent to which abnormality has already become the norm.
In these circumstances, my immediate aim is to produce a guide, comprehensive but succinct, to the surplus energy interpretation of the economy.
This will cover the energy basis of all economic activity, the critical role played by ECoE (the Energy Cost of Energy), and the true nature of money and credit as an aggregate claim on the output of the ‘real’ (energy) economy.
It will move on to discuss how SEEDS models, interprets and anticipates economic trends, and to set out an overview of where we are in energy-interpreted terms. It might also – if space permits – touch on what this tells us about the false dichotomy between environmental challenges and the customarily-misstated concept of “growth”.
What I aim to do here is to close out the year with some observations about where we are as we head into the 2020s.
The best place to start is with the deterioration in prosperity, and the simultaneous increase in debt, that have already destroyed the credibility of any ‘business as usual’ narrative in the Advanced Economies (AEs).
Starting with Japan back in 1997, and finally reaching Germany in 2018, the prosperity of the average Western person has hit a peak and turned downwards, not in a temporary way, but as part of a secular process which conventional economics cannot recognise, much less explain.
This process is now spreading to the emerging market (EM) economies, most of which can expect to see prior growth in prosperity per person go into reverse within the next three years. The signs of deceleration are already becoming apparent in big EM countries such as China and India.
Thus far, global average prosperity has been on a long plateau, with continuing progress in the EM economies largely offsetting deterioration in the West. Once decline starts in the EM group, though, the pace at which the average person Worldwide becomes poorer can be expected to accelerate.
If deteriorating prosperity is the first point worthy of emphasis, the second is that a relentlessly increasing Energy Cost of Energy (ECoE) is the fundamental cause of this impoverishment process. ECoE reflects that fact that, within any given quantity of energy accessed for use, a proportion is always consumed in the access process.
ECoE is a direct deduction from the aggregate quantity of energy available, which means that surplus (ex-ECoE) energy is the source of all economic activity other than the supply of energy itself.
In other words, prosperity is a function of surplus energy.
In the past, widening geographic reach, economies of scale and technological advance drove ECoEs downwards, to a low-point (of between 1% and 2%) in the immediate post-1945 decades. The subsequent rise in trend ECoEs has been driven by the fact that, with the benefits of reach and scale exhausted, depletion has now become the primary driver of ECoEs in the mature fossil fuels industries which continue to provide four-fifths of global energy supply. The role of technology has been re-cast as a process which can do no more than blunt the rate at which ECoEs are rising.
By 2000, when World trend ECoE had reached 4.5%, Advanced Economies were already starting to face an insurmountable obstacle to further growth. Prosperity turned down in Japan from 1997 (when ECoE there was 4.4%), and has been declining in America since 2000 (4.5%).
SEEDS studies demonstrate that prosperity in advanced Western countries turns down once ECoE enters a band between 3.5% and 5%. EM economies, by virtue of their lesser complexity, are less ECoE-sensitive, with prosperity going into reverse once ECoEs enter a range between 8% and 10%. Ominously, ECoE has now reached 8.2% in China, 10.0% in India and 8.1% in the EM countries as a group.
The key point about rising ECoEs is that there is nothing we can do about it. This in turn means that global prosperity has entered de-growth. The idea that we can somehow “decouple” economic activity from the use of energy is utter wishful thinking – not surprisingly, because the economy, after all, is an energy system.
This presents us with a clear choice between obfuscation and denial, on the one hand, and acceptance and accommodation, on the other. Our present position is one of ‘denial by default’, in that the decision-making process continues to be based on the false paradigm that ‘the economy is money’, and that energy is “just another input”.
This leads us to the third salient point, which is financial unsustainability.
Properly understood, money functions as a claim on the output of the ‘real’, energy-driven economy. Creating more monetary claims, without a corresponding increase in the goods and services against which these claims can be exercised, creates a gap which, in SEEDS terminology, is called “excess claims”.
Since these “excess” claims cannot, by definition, be honoured, then they must be destroyed. There are various ways in which this “claims destruction” can happen, but these mechanisms can loosely be divided into “hard” default (the repudiation of claims) or “soft” default (where claims are met, but in greatly devalued money).
These processes mean that “value destruction” has become an inevitability. This may involve waves of asset market crashes and defaults, or the creation (through reckless monetary behaviour) of hyperinflation.
The likelihood is that it’s going to involve a combination of both.
These issues take us to the fourth critical point, which is the threat to the environment. Let’s be clear that this threat extends far beyond the issue of climate change, into many other areas, which range from pollution and ecological damage to the dwindling availability of essentials such as water and food.
Conversion to renewable energy (RE) isn’t the solution to these problems, if by “solution” we mean “an alternative which can sustain our current level of prosperity”. RE, despite its many merits, isn’t going to replace the surplus energy that we’ve derived hitherto from fossil fuels. RE might well be part of the solution, but only if we take on board the inevitability of degrowth.
This brings me to my final point, which is choice. For well over two centuries we’ve been accustomed to an energy context which has been so favourable that it has given us the ability both to improve personal prosperity and to extend those benefits across a rapidly increasing population.
With this favourable context fading into the past, we have to find answers to questions that we’ve never had to ask ourselves until now.
The faculty of choice requires knowledge of the options, and this we cannot have whilst we persist in the delusion that “the economy is a financial system”. It isn’t, it never has been, and it never can be – but our ignorance about this fundamental point has been one of the many luxuries afforded to us by the largesse of fossil fuels.
This seems pretty depressing fare to put before readers at the start of the festive season. The compensating thought has to be that the connection between prosperity and happiness has always been a falsehood.
A lack of sufficiency can, and does, cause misery – but an excess of it has never been a guarantee of contentment.
In the coming days, Christians will recall with renewed force that Jesus was born in a humble stable. He went on to throw the money-changers out of the Temple, and to instruct people to lay up their treasure, not on Earth, but in Heaven. I hope it will be taken in the right spirit if I add that He never earned an MBA, or ran a hedge fund.
The single most important challenge that we face isn’t deteriorating prosperity, or the looming probability of a financial catastrophe. Rather, the great challenge is that of how to jettison the false notion that material wealth and happiness are coterminous.
‘Value’ may indeed be heading for mass destruction.
But values are indestructible.
ECONOMICS, THE ENVIRONMENT AND THE PROBABILITY OF ‘DE-GROWTH’
One of the clichés much loved by business leaders and others is “blue sky thinking”. An implication of this term, it seems to me, is that there’s an infinity of possibility. Although the mainstream press has, in the past, dubbed me “Dr Gloom” and “Terrifying Tim”, I don’t discount the concept of infinite possibility. I’m an incurable optimist – when I’m not looking at the economic outlook, anyway.
However positive you are, though, if you set out on a lengthy expedition, it’s as well to take some wet weather clothing with you, because blue skies can turn dark grey pretty quickly. ‘Hoping for the best but preparing for the worst’ seems a pretty prudent way to think.
Before we address some of the financial, economic and broader issues which might darken our skies, I’d like to draw your attention to an important distinction, which is that ‘situations’ and ‘outcomes’ are different things. ‘Situations’ are circumstances calling for decisions, but, in themselves, they generally contain a multiplicity of possible results. ‘Outcomes’ are determined by the responses made to any particular set of ‘situations’.
This is important, because a lot of what I’m going to discuss here concerns ‘situations’. Many of these look pretty daunting, but the point about a multiplicity of possible ‘outcomes’ remains critical. Bad decisions turn difficult situations into malign outcomes, but wise choices can, at the very least, preclude the worst, and can even produce good outcomes from unpromising situations.
The gloomy non-science
Economics has been called “the gloomy science”. In fact, economics – as currently practised – may or may not be “gloomy”, but it isn’t a “science”. The fundamental flaw with conventional economics is that it assumes that the economy is a financial system, to be measured in dollars, pounds, euros and yen.
This, in reality, is a huge misconception. Throughout history, systems of money have come and gone. A collector might well buy a Roman coin from you, but you couldn’t use it in a café or a shop. Money is simply a human artefact, often of temporary duration, which we can create or destroy at will.
The purpose of money is the facilitation of exchange, something more convenient than barter. Its other often-claimed functions (as “a store of value” and a “unit of account”) are flawed at best. The “store of value” concept is particularly unconvincing. If somebody in a Western country dug up some banknotes buried in the garden by his or her great-grandmother, their purchasing power would be dramatically lower than when the biscuit-tin containing them was interred between the cabbages and the carrots. Measured using the broad-basis GDP deflator, the US dollar has lost 62% of its purchasing power since 1980 alone, and the pound has shed 71% of its value. Moreover, many countries change their notes and coins at frequent intervals, invalidating older versions.
Money does have important characteristics – which we’ll come to – but it’s not in any sense coterminous with a ‘real’ economy that consists of goods and services. All of these are products of the use of energy. Once you grasp this fundamental point, a ‘science’ of economics becomes a possibility, but as a branch of the laws of thermodynamics, and not, as now, as ‘the study of money’.
The energy fundamentals
As regular readers will know, whenever energy is accessed, some of that energy is always consumed in the access process. This divides the totality of energy supply into two streams – the consumed component is known here as ECoE (the Energy Cost of Energy), and the remainder is surplus energy. Because this surplus energy powers all forms of economic activity other than the supply of energy itself, it is the determinant of prosperity.
The SEEDS model calculates that, over the last twenty years, global trend ECoE has more than doubled, from 3.6% in 1998 to 7.9% last year. That’s already taken a huge bite out of our ability to grow our prosperity, and there’s no likelihood of ECoE levelling out in the foreseeable future, let alone turning back downwards.
The ECoEs of renewables are falling, just as those of fossil fuels are rising exponentially. This is a topic that we’ve discussed before, and will undoubtedly return to in the future, but it seems unlikely that a full transition to renewables, utterly vital though it is, is going to stabilise overall ECoE at much below about 10%. For context, back in the 1960s, when real economic growth was robust (and when petroleum consumption was growing by as much as 8% annually, whilst car ownership was expanding rapidly), world trend ECoE was less than 2%.
There are two reasons – one obvious, one perhaps less so – why an understanding of ECoE is critical to the environmental debate.
Obviously, if we continue to tie our economic fortunes to fossil fuels, the relentless rise in their ECoEs is going to carry on making us poorer, so there’s a compelling economic (as well as environmental) case for transition to renewables.
Less obviously, whilst prosperity is a function of surplus (aggregate less-ECoE) energy, climate-harming emissions are tied to total (surplus plus ECoE) energy. Essentially, we need to reduce our emissions from fossil fuels at a rate which at least matches the rate at which their ECoEs are rising if we’re to stand any chance at all of overcoming climate risk.
It’s a dispiriting thought that, whilst energy-based economics could make a powerful contribution to the case for environmental action, conventional, money-fixated economics can only interact negatively, by telling us how much it’s going to “cost”. Unfortunately, mainstream economics can’t really tell us the cost of not transitioning.
These “costs”, to be sure, are dauntingly large numbers. IRENA – the International Renewable Energy Agency – has costed transition at between $95 trillion and $110tn. These equate to between 619 and 721 Apollo programmes at the current-equivalent cost ($153bn) of putting a man on the Moon.
Moreover, the Americans of the 1960s had a choice about whether or not to fund a space programme. In economic as well as in environmental terms, there is no choice at all about our imperative need to transition.
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This is a long and very worthwhile article explaining why politics as it is practised is unable to understand and effectively cope with the current world circumstances. Read the comments too.
As regular readers will know, this site is driven by the understanding that the economy is an energy system, and not (as conventional thinking assumes) a financial one. Though we explore a wide range of related issues (such as the conclusion that energy supply is going to need monetary subsidy), it’s important that we never lose sight of the central thesis. So I hope you’ll understand the need for a periodic restatement of the essentials.
If you’re new to Surplus Energy Economics, what this site offers is a coherent interpretation of economic and financial trends from a radically different standpoint. This enables us to understand issues that increasingly baffle conventional explanations.
This perspective is a practical one – nobody conversant with the energy-based interpretation was much surprised, for instance, when Donald Trump was elected to the White House, when British voters opted for “Brexit”, or when a coalition of insurgents (aka “populists”) took power in Rome. The SEE interpretation of prosperity trends also goes a long way towards explaining the gilets jaunes protests in France, protests than can be expected in due course to be replicated in countries such as the Netherlands. We’re also unpersuaded by the exuberant consensus narrative of the Chinese economy. The proprietary SEEDS model has proved a powerful tool for the interpretation of critical trends in economics, finance and government.
The aim here, though, isn’t simply to restate the core interpretation. Rather, there are three trends to be considered, each of which is absolutely critical, and each of which is gathering momentum. The aim here is to explore these trends, and share and discuss the interpretations of them made possible by surplus energy economics.
The first such trend is the growing inevitability of a second financial crisis (GFC II), which will dwarf the 2008 global financial crisis (GFC), whilst differing radically from it in nature.
The second is the progressive undermining of political incumbencies and systems, a process resulting from the widening divergence between policy assumption and economic reality.
The third is the clear danger that the current, gradual deterioration in global prosperity could accelerate into something far more damaging, disruptive and dangerous.
The vital insight
The centrality of the economy is the delivery of goods and services, literally none of which can be supplied without energy. It follows that the economy is an energy system (and not a financial one), with money acting simply as a claim on output which is itself made possible only by the availability of energy. Money has no intrinsic worth, and commands ‘value’ only in relation to the things for which it can be exchanged – and all of those things rely entirely on energy.
Critically, all economic output (other than the supply of energy itself) is the product of surplus energy – whenever energy is accessed, some energy is always consumed in the access process, and surplus energy is what remains after the energy cost of energy (ECoE) has been deducted from the total (or ‘gross’) amount that is accessed.
This makes ECoE a critical determinant of prosperity. The distinguishing feature of the world economy over the last two decades has been the relentless rise in ECoE. This process necessarily undermines prosperity, because it erodes the available quantity of surplus energy. We’re already seeing this happen – Western prosperity growth has gone into reverse, and progress in emerging market (EM) economies is petering out. Global average prosperity has already turned down.
The trend in ECoE is determined by four main factors. Historically, ECoE has been pushed downwards by broadening geographical reach and increasing economies of scale. Where oil, natural gas and coal are concerned, these positive factors have been exhausted, so the dominating driver of ECoE now is depletion, a process which occurs because we have, quite naturally, accessed the most profitable (lowest ECoE) resources first, leaving costlier alternatives for later.
The fourth driver of ECoE is technology, which accelerates downwards tendencies in ECoE, and mitigates upwards movements. Technology, though, operates within the physical properties of the resource envelope, and cannot ‘overrule’ the laws of physics. This needs to be understood as a counter to some of the more glib and misleading extrapolatory assumptions about our energy future.
The nature of the factors driving ECoE indicates that this critical factor should be interpreted as a trend. According to SEEDS – the Surplus Energy Economics Data System – the trend ECoE of fossil fuels has risen exponentially, from 2.6% in 1990 to 4.1% in 2000, 6.7% in 2010 and 9.9% today. Since fossil fuels continue to account for four-fifths of energy supply, the trend in overall world ECoE has followed a similarly exponential path, and has now reached 8.0%, compared with 5.9% in 2010 and 3.9% in 2000.
For fossil fuels alone, trend ECoE is projected to reach 11.8% by 2025, and 13.5% by 2030. SEEDS interpretation demonstrates that an ECoE of 5% has been enough to put prosperity growth into reverse in highly complex Western economies, whilst less complex emerging market (EM) economies hit a similar climacteric at ECoEs of about 10%. A world economy dependent on fossil fuels thus faces deteriorating prosperity and diminishing complexity, both of which pose grave managerial challenges because they lie wholly outside our prior experience.
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The comments are worth reading too.
After more than a decade of worsening economic and financial folly, it can come as no surprise that we’re living with extraordinarily elevated levels of risk.
But what form does that risk take, and where is it most acute?
According to SEEDS – the Surplus Energy Economics Data System – the riskiest countries on the planet are Ireland, France, the Netherlands, China, Canada and the United Kingdom.
The risks vary between economies. Some simply have debts which are excessive. Some have become dangerously addicted to continuing infusions of cheap credit. Some have financial systems vastly out of proportion to the host economy. Some have infuriated the general public to the point where a repetition of the 2008 “rescue” would inflame huge anger. Many have combinations of all four sorts of risk.
Here’s the “top six” from the SEEDS Risk Matrix. Of course, the global risk represented by each country depends on proportionate size, so China (ranked #4 in the Matrix) is far more of a threat to the world economy and financial system than Ireland, the riskiest individual economy. It’s noteworthy, though, that the three highest-risk countries are all members of the Euro Area. It’s also noteworthy that, amongst the emerging market (EM) economies, only China and South Korea (ranked #9) make the top ten.
Risk and irresponsibility
Before we get into methodologies and detailed numbers, it’s worth reflecting on why risk is quite so elevated. As regular readers will know, the narrative of recent years is that prosperity has been coming under increasing pressure ever since the late 1990s, mainly because trend ECoE (the energy cost of energy) has been rising, squeezing the surplus energy which is the source of all economic output and prosperity.
This is a trend which the authorities haven’t understood, recognizing only a vague “secular stagnation” whose actual root causes elude them.
Even “secular stagnation” has been unacceptable to economic and financial systems wholly predicated on “growth”. Simply put, there‘s been too much at stake for any form of stagnation, let alone deterioration, to be acceptable. The very idea that growth might be anything less than perpetual, despite the finite nature of the planet, has been treated as anathema.
If there isn’t any genuine growth to be enjoyed, the logic goes, then we’d better fake it. Essentially, nobody in authority has been willing to allow a little thing like reality to spoil the party, even if enjoyment of the party is now confined to quite a small minority.
Accordingly, increasingly futile (and dangerous) financial expedients, known here as adventurism, have been tried as “solutions” to the problem of low “growth”. In essence, these have had in common a characteristic of financial manipulation, most obvious in the fields of credit expansion and monetary dilution.
These process are the causes of the risk that we are measuring here, but risk comes in more than one guise. Accordingly, each of the four components of the SEEDS Risk Matrix addresses a different type of exposure.
These categories are:
- Debt risk
- Credit dependency risk
- Systemic financial risk
- Acquiescence risk
One final point – before we get into the detail – is that no attempt is made here to measure political risk in its broader sense. Through acquiescence risk, we can work out which populations have most to complain about in terms of worsening prosperity. But no purely economic calculation can determine exactly when and why a population decides to eject the governing incumbency, or when governments might be tempted into the time-dishonoured diversionary tactic of overseas belligerence. We can but hope that international affairs remain orderly, and that democracy is the preferred form of regime-change.
Is 2019 the year when everything starts falling apart? It certainly feels that way. The analogy I’m going to use in this and subsequent discussions is ‘fire and ice’.
Ice, in the potent form of glaciers, grinds slowly, but completely, crushing everything in its path. Whole landscapes have been shaped by these icy juggernauts.
Fire, on the other hand, can cause almost instantaneous devastation, most obviously when volcanoes erupt. Back in 1815, the explosion of Mount Tambora in the Dutch East Indies (now Indonesia) poured into the atmosphere quantities of volcanic ash on such a vast scale that, in much of the world, the sun literally ceased to shine. As a result, 1816 became known as “the year without a summer”. As low temperatures and heavy rain destroyed harvests and killed livestock, famine gripped much of Europe, Asia and North America, bringing with it soaring food prices, looting, riots, rebellions, disease and high mortality. Even art and literature seem to have been influenced by the lack of a summer.
The economic themes we’ll be exploring here have characteristics both of fire and of ice. The decline in prosperity is glacial, both in its gradual pace and its ability to grind assumptions, and systems, into the ground. Other events are likelier to behave like wild-fires or volcanoes, given to rapid and devastating outbursts, with little or no prior warning.
Fiscal issues, examined in this first instalment of ‘fire and ice’, have the characteristics of both. The scope for taxing the public is going to be subjected to gradual but crushing force, whilst the hard choices made inevitable by this process are highly likely to provoke extremely heated debate and resistance.
Let’s state the fiscal issue in the starkest terms:
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Massive credit and monetary adventurism have inflated GDP to the point where it bears little or no resemblance to the prosperity experienced by the public.
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But governments continue to set taxation as a percentage of GDP.
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As GDP and prosperity diverge, this results in taxation exacting a relentlessly rising share of prosperity.
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Governments then fail to understand the ensuing popular anger.
France illustrates this process to dramatic effect. Taxation is still at 54% of GDP, roughly where it’s been for many years. This no doubt persuades the authorities that they’ve not increased the burden of taxation. But tax now absorbs 70% of French prosperity, leading to the results that we’ve witnessed on the streets of Paris and other French towns and cities.
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According to conventional interpretation, the world economy faces no problems more serious than sluggish growth and rising tensions over trade. Though debt is high and asset prices are inflated, these issues are manageable within a monetary context that remains “accommodative” (meaning cheap).
Surplus Energy Economics offers a radically different and far more disturbing interpretation. Fundamentally, it states that global prosperity per person is now declining. This is a game-changer in terms not just of economics and finance but of politics and government, too. Deteriorating prosperity means that current debt levels are wholly unsustainable, and makes an asset market crash inescapable, even if the authorities persist with policies of ultra-cheap money.
This take on the economy could hardly be more starkly at odds with the consensus position. With due apologies to those regular readers for whom much of this is familiar fare, what follows is a synopsis of how the economic system is understood here. In stark contrast to conventional interpretations which portray the economy as a financial system, this article explains how, in reality, all economic activity is a function of energy.
As you will see, this simple observation turns the key in the door to an understanding of how the economy has evolved in recent times, and where it is likely to go next.
Ever since the millennium, we have been engaged in trying to apply futile financial fixes to a deteriorating secular trend in energy-based prosperity. That’s akin to trying to fix an ailing pot-plant with a spanner. These efforts have bought us some time, but have caused serious economic, political and social harm without in any way changing the economic fundamentals.
Where planning and policy are concerned, we are in a truly peculiar situation. Those of us who understand prosperity know that the ongoing downturn is going to have profound consequences – but, as societies, we cannot even start crafting responses whilst consensus interpretation remains in a state of profound denial.