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.