Having dealt with the subject of money at some length, and having also set out my “corporatism” thesis, I feel that we’re now in a position to pull various themes together into an “early 2015 wrap”. I hope that a summary at this point will be an interesting area for discussion.
What I aim to do here, then, is to summarise the economic and political situation.
The real and the financial
These pages are based on an interpretation of the economy which differs radically from the conventional. My fundamental belief is that the economy is an energy equation, and that the amount of prosperity generated in the “real” economy of goods, services, labour and resources is determined by the quantity of surplus energy available.
By “surplus”, I mean the energy that remains for us to use after deducting the energy consumed in the process of accessing energy. Since there is no point whatever in producing 100 units of energy if the same amount, or more, is consumed in the production process, clearly it is the surplus that matters.
This relationship can be measured either as a ratio (the “energy return on energy invested”, or EROEI), or as a percentage (the “energy cost of energy”, or ECoE). Using the latter measure, I estimate that the amount of energy consumed in the process of energy production has risen from 2.6% in 1990, and 3.9% in 2000, to 6.1% in 2010 and 7.4% today. The clear implication is that the real (energy) cost of energy more than doubled between 1990 and 2010, and has continued to increase markedly since then.
Clearly, then, the “real” economy is hitting the barrier of rising energy costs. Alongside the real economy, meanwhile, is the “financial” economy. Existing in the form of money and credit, the “financial” economy is a tradable and convenient proxy for the real one (it cannot be anything other than this, since money has value only in the things that you can exchange it for).
Put simply, our stock of money and credit is a pile of “claims” on the goods and services produced by the real economy, either today or in the future. If the quantity of these goods and services is smaller than the quantity of claims that exist, then those claims – meaning money, together with its ‘derivatives’ such as debt – must be devalued or destroyed, in one way or another.
The stalled economy
My assessment, then, is that the potential prosperity of the real economy is being undermined by the rising real cost of energy. Up to a point, this can be mitigated by producing larger gross amounts of energy, and/or by using the available net energy more frugally. Both strategies are being used, but both have hard limitations. The biggest problem, though, isn’t the practical limit on maximum production, or the physical limit on potential efficiency, but the exponential rate at which the real cost of energy (the ECoE) is rising.
The Energy Cost of Energy – which we can think of as a “tax” levied on human activities by the resource environment – seems to be rising relentlessly, and it is this rate of increase that led me to contend, in Life After Growth, that a two-century era of growth might be over.
Put very simply, growth since the Industrial Revolution has been the product of vast amounts of cheap energy available to us, but, from here on in, meeting our energy needs gets tougher – and costlier. As a result, growth can no longer be assumed in the same way that it has been for more than two hundred years.
The new environment, then, is one in which growth, if it can be achieved at all, is likely to be much smaller, and much harder to find, than it used to be. Many remain in denial over this, but the paucity of growth since the 2008 crash is casting an increasingly long shadow over most politicians’ confident expectations.
It must surely, by now, be dawning on governments, and their advisors, that the recovery so confidently predicted in the immediate aftermath of the crisis simply hasn’t turned up. Far from growth accelerating in the developed world, the opposite seems to be happening, with growth slowing – and worrying bubbles emerging – in the developing economies.
This would be bad enough even if the global economy had been managed in ways that are efficient and sustainable. The reality is that neither applies. For three decades or so before the crisis, policymakers had been allowing debt to grow much more rapidly than economic output. Various factors played into this, including ill-considered globalisation (in which the developed economies thought they could outsource production without reducing consumption), reckless deregulation, and the triumph of an economic model which glorified immediate consumption over policies of prudence.
Seven years on from the crisis, and far from seeing the much-vaunted process of deleveraging taking hold, we are witnessing a continuing rapid growth in debt. Worse still, the debt bubble is now being compounded by a money bubble, as the global authorities seek to create growth (or, at least, the semblance of growth) through the manipulation of the monetary system.
In the first instance, such manipulation was the only option on the table. After 2008, with economic output stunted, the world simply couldn’t afford to service its debts unless central banks pursued a strategy known as ZIRP (Zero Interest Rate Policies). It soon transpired that even reducing policy rates to zero wasn’t enough, so quantitative easing (QE) was used to inflate capital values and thereby depress market yields.
Even that, of course, hasn’t reignited growth.
In short, then, what we have now is something of a triple-witching-hour.
– Growth in the real economy is proving elusive, for reasons which most governments and their advisors still seem incapable of comprehending.
– Far from shrinking, global debt has continued to grow, and servicing it is proving a struggle even with interest rates set at virtually zero.
– Efforts to apply further stimulus through the manipulation of capital markets hasn’t delivered growth, but may have created a fissure in the monetary system, where the hijacking of money for policy reasons undermines its role as a store of value. Bond market buoyancy seems to be based on the “greater fool” theory, whereby buying at excessive prices makes sense on the assumption that someone will in turn buy from you at even more inflated prices.
Millions of people around the world have ceased to trust the banking system, but things will become very much worse if they lose faith in the monetary system as well.
The people are restless
As trust in the banking system has eroded, so, too, has faith in government. In part, this is happening because people who had come to believe in ongoing material improvement are now feeling severe disillusionment. In part, though, it has been happening because the public is coming to realise that established politicians, and, for that matter, institutions as well, are simply not up to the job.
No one would claim that the practice of politics is an easy one, but at least – until comparatively recently – the economic challenge has been pretty straightforward. Given the assumption of growth (and, for decades, the actuality of growth as well), the task of government has been the equitable or popular sharing out of this growth. The promises that most politicians continue to make to disillusioned voters show how this “sharing out of growth” task definition still grips a generation of policymakers who seem to have learned nothing from recent events.
With a general election looming, Britain is an example of this, with each of the three major parties continuing to outline policies that are predicated on the assumption of growth. No senior politician, it seems, is prepared to face economic realities which include not just excessive debt but, in addition: unaffordable forward commitments; a looming energy crunch; an addictive dependency on borrowing; and a steadily worsening inability to balance the current account.
Even the painful austerity introduced, commendably, by the current government has done little to stem the continuing escalation in debt. No politician of any party has addressed the fundamental issue of Britain’s slumping Net International Investment Position (NIIP), which is being reflected in accelerating outflows of dividends and interest on the assets now owned by foreign investors.
In short, the combination of asset sales and borrowing, which has thus far kept the wolf from the door, is now beginning to bite back in an ominous way, and Britain’s political institutions seem to be simply incapable of producing the kind of leadership which can avert the implications of this trend.
In one sense, of course, Britain is just one of many countries where disillusionment with existing parties is the new political dynamic. In the Eurozone, the logic of democracy is creating its own strains, with Germany’s Angela Merkel taking a tough line because voters will tolerate nothing less, whilst Syriza rides a wave of popular anger over the pains of austerity. Similar strains are showing across Europe, whilst we simply do not know what is really happening at the interface between governing and governed in countries which lack continental Europe’s democratic safety-valve.
Having set out the situation as I see it, I’m not even going to attempt to predict near-term outcomes, because too much simply isn’t known as yet.
Four factors, though, are clear.
First, the slowing in the real economy is a fact about which most global leaders remain determinedly in denial.
Second, efforts to use the financial economy to inject juice into the real economy are poised to backfire spectacularly.
Third, the public are in no mood to accept the blandishments of entrenched political leaders, many of whom seem to be adopting a policy of “let them eat brioche” from within the ramparts of the corporatist system.
Finally, the shifting of the economic plates is creating geopolitical tensions, particularly around Europe, where neither weakened defences nor undermined resolve have gone unnoticed.