#46. The economy – dangerous disequilibrium

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.

Double bubble…..

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.

….triple trouble

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.

20 thoughts on “#46. The economy – dangerous disequilibrium

  1. But I paid for my triple-lock-unfunded-pension. SO UNFAIR.

    Good summary nice to see it all put together 🙂

  2. A very interesting summary. Zooming out, I can’t help but wonder whether democracy is going to last in its current form. If you peg universal suffrage back to 1792 and the French Revolution, it is a system that has been making generally consistent inroads across the globe over precisely the same time period as the industrial revolution and beyond, carried by the surplus energy you mention in your blog. Tocqueville said American democracy would be flawed when the people realized they could be bought off. Surely this is collectively happening with unsustainable debt levels tolerated, with the aim of papering over the promised growth which does not arrive.

    In a sans-growth world, is a broad consensus-based political system going to solve problems / predicaments that are generational in nature, and can’t be fixed in a one or two term electoral cycle? I hope so (as, to paraphrase Churchill, the alternatives are probably worse), but denial of the issues will not get us to a sustainable, and tolerable place where our children can build for a bright future.

    • Thank you. There certainly seems to be an historical overlap between economic growth and representative government (a term which covers pseudo- as well as real democracies – I hope you have read my mini-series on how corporatism can take control over democracies).

      And yes, I think people are bought off – traditionally with their own money (which is bad enough), and now with borrowed money, which is even worse.

      Looking at the US and the UK (which I regard as quasi- rather than full democracies), growth in GDP has been exceeded by additional borrowings in virtually every year since 2000, and in neither case is state spending affordable. I think the Romans called this “beer and circuses”.

      Your point is reinforced powerfully by recent events – the cessation of growth and coincided almost exactly with loss of faith in incumbent governments.

      Finally, though I’ve not yet worked it out fully, I think there is a bridge between politics and business, that bridge being a society’s ethics. Good government seems hardest to achieve in countries where it is accenpted that businesses cheat, engage in miss-selling and shelter behind one-sided “terms and conditions”. Where business ethics are stronger, government seems to have greater integrity as well.

  3. It is good to see this put clearly and needs to be said loudly to our politicians – although I wonder whether privately they are aware of these problems but see this as a no go area where there is no political gain. Certainly the idea of the “end of growth” or secular stagnation seems to have had good coverage especially the other side of the Atlantic (Larry Summers, for example) and via the Heinberg/Martensen and other websites which seem to be widely read.

    But maybe this is too pessimistic – I’ve just returned from three weeks working in Ethiopia where I have been going for some years and have been amazed by the apparent economic growth in Addis Ababa – in less than a decade a transformation from grubby third world city to modern metropolis, mainly due to Chinese roads and infrastructure and now with businesses moving in in significant numbers. So while constrained by the energy problems you so well describe, surely growth will continue at least in some areas of the world.

    • Thank you. On Ethiopia, obviously such progress is heartening, but clearly outside investment is critical, presumably attracted by resources. Part of the thesis is that prosperity will drain from resource-poor to resource-rich nations.

      US acceptance of the thesis is necessarily patchy. Charles Hall, Heinberg and Chris M are clearly pioneers, and their interpretations are impressively and rigorously academic. I have enormous respect for these people, especially for Charles and Chris.

      This does not, unfortunately, mean that politicians are going to take this onboard anytime soon. This said, America does have high-level think-tanks, which are prepared to look at blue-sky thinking, and which do not by any means always disclose their research. I know that the US military seem concerned about the longer-term outlook for shale, and it could be argued that Admiral Rickover, back in the 1950s, addressed exactly these issues in a seminal speech.

      Quite differently, though, the US also has the other end of the spectrum, those for whom self-sufficiency is an ideology in itself.

      In Britain, a Parliamentary question which cited my work got very little official response.

  4. Tim,

    I know it’s not quite your area of interest, but another problem feeding back into all this is the increasing damage that humanity is doing to the biosphere through our massive energy use, disrupting things like notrogen and phosphorous cycles and probably causing an ongoing mass extinction. There have been quite a few papers appearing on this recently (http://www.sciencemag.org/content/347/6223/1259855.abstract). We’re also running into diminshing returns in how quickly we can produce renewable resources such as food, with the rates appearing now to decelerate (http://www.ecologyandsociety.org/vol19/iss4/art50/). So we’re entering a time when we would really need more energy than ever, to try and ameliorate these problems (if that’s even possible, I doubt we’d use the energy sensibly), when exactly the opposite is happening. As far as I can tell it’s a race between ecological destruction or declining EROI as to which is the first to kick civilisation square in the unmentionables.

    • Sam

      Climate change is something I leave to others, but food is dealt with in the book. Both food and labour are forms of energy and fall within “commonality of energy”. Food production has become increasingly enegy-intensive, through both direct and indirect inputs.

      By roughly 1960, all of the world’s potential agricultural land was already under cultivation, so the only way we’ve managed to feed the growing population since then has been to increase yields, which has been achieved using increased energy inputs. The ongoing increase in population suggests we need to do more of this, yet we may not have enough energy even to stand still.

      There are three related issues here:

      – Water supply is increasingly energy-intensive
      – Monoculture has weakend the quality of arable land
      – Climate change seems to be eroding farmland through “desertification”.

      Taken together, this suggests that we have a problem – and also that conversion of farmland to biofuels is madness.

    • I think food production may be our greatest weakness. A man on a present day tractor does the work of maybe a thousand but when he climbs down you’ll notice that he’s approaching his seventies and his hips are gone. Farming crises aren’t just debt and future fuel spikes, farming isn’t attracting many new entrants.

    • Food IS our greatest weakness (along with water). Virtually all farmable land is already under cultivation, and we may even be losing some – to climate change, to degradation through monoculture, and to top-soil loss. The population continues to increase, and the urban population is growing by 1.5 million per week. The only way to meet these needs is through inputs, all of which are energy either directly or indirectly (for example, phosphates couldn’t possibly be extracted or delivered without energy). Water, likewise, is a problem we could solve using desalination – except that that is very energy-intensive.

  5. It was the scientist Professor Alfred Bartlett that said ‘The greatest failing of mankind is it’s inability to understand the exponential growth function’. Reading Dr Morgan’s article today reaffirms my belief that he was 100% correct. Both point to the problem as being too many people… and we all know what happens to a population that grows to big to be sustained by the resources available…..

    The Uk’s population is increasing at 0.7% per year which doesn’t sound much but sets us on course for a doubling of the population in just over a typical lifetime. Politicians that only think forward a maximum of 4 years just don’t get exponential growth….
    Improvements in energy efficiency just get swallowed up by population increase.

    The problem seems to be that it is a bit taboo and non PC to suggest to people they need to stop having so many kids….
    Each new birth is a future ‘claim’ on future food, plastic , concrete, water, OIL, productive jobs etc….that we are going to find progressively harder to fulfil. My fear is that in the race for increasingly scarce resources, we will become dangerously exposed to being outbid by better managed economies in the far east. For now Mr Osborne’s smoke and mirrors act is keeping the wolf from the door….but for how long ?.

  6. I was shocked whilst reading a classic car magazine recently, the humble Morris Minor:

    “A 1,098 cc-engined tourer tested by the British magazine The Motor in 1950 had a top speed of 58.7 mph (94.5 km/h) and could accelerate from 0–50 mph (80 km/h) in 29.2 seconds. However, the 918 cc engine did 0–60 mph in 50+ seconds.[6] A fuel consumption of 42 miles per imperial gallon (6.7 L/100 km; 35 mpg-US) was recorded.”

    The relevant bits were: 0-60 in almost a minute and 42 mpg. The priorities of modern life are there, in over 60 years of research and development mpg more or less unchanged but huge improvements in acceleration and maximum speed.

  7. Tim,

    Your work is definitely thought provoking to me and this is yet another good piece. You state the ECoE has more than doubled in the last 20 years which is scary enough, but looking at the numbers it’s nearly trebled in 25 years and in my non-qualified eyes it is hard to see how this trend will improve. How likely is it that in the next 25 years it could treble again?
    Apart from your website, book and your previous publications with Tullet Prebon, your work seems to be kept quiet. What do you think stops governments from taking your work as serious as they should? What could they do with it?
    Would solar panels on top of every commercial building in the UK help the real and money economy? Or would this have a minor impact?

    • Spencer

      Thank you. You have hit on the key point there, which is that the trend in ECoE is relentlessly upwards. If it were to treble in the next 25 years, though, it would have gone far beyond levels at which our current type of economy is viable.

      On your second point, I was very fortunate, at Tullet, to work for a company which gave me the freedom to “tell it like it is”. Conventional economists and governments do not like this sort of analysis, probably because it challenges the assumption of perpetual growth, without which the financial system, and government as we know it, cannot function. Some politicians have shown an interest, but the broader problem is that most policymakers do not have an open mind.

      Since leaving Tullet, I have written the book and started this website. My next aim is to build a much improved “SEEDS” data system, and a sequel to the book has been suggested. I recognise that I am an analyst, not an activist. My role as I see it is to develop this line of knowledge, and communicate it. This isn’t to say that I take no interest in politics – but I think that few practitioners of politics have any idea of the scale of change that is coming. Just a few years of poor economic performance have seen the public across Europe turn against established politicians and parties – and this may be just a taste of what is to come….

    • Thanks. I hadn’t, but I’m reading it now. I’m all in favour of shareholder involvement, but the big shareholders are often acting on behalf of small savders and investors, and we need to see these small stakeholders more active (and more empowered) as well.

    • The conclusion, which noted the separate needs of the financial and real economies (in this case through the lens of corporate and shareholder responsibilities) I think dovetails nicely with your research.

    • Indeed so. Kevin Phillips is particularly good on this, and his book “American Theocracy” is a brilliant analysis of the interplay of financialization, energy and fundamentalism in the US. “Financialization” means changing an economy from a basis of producing goods and services to an economy which just moves money around. If you look at the evolution of the proportions of US GDP (value added basis) and corporate profits attributable to FIRE (Finance, Insurance and Real Estate) it is very striking.

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