#68. The Ponzi economy, part 4


What we are witnessing now is the unravelling of a global economic system that has been turned into a giant Ponzi scheme. Collapse is the only way in which such schemes can ever end.

Current turmoil in the financial markets might presage this event. To be sure, more time might yet be bought, albeit at huge and futile expense.

This, however, is simply a matter of when. The if of collapse is not in doubt.

Technically, this is a financial system disaster rather than an economic one, though this distinction will do nothing to shield the real economy from the consequences.

This unfolding disaster can be traced to many causes. Economies have been undermined by structural weaknesses, some of them traceable to globalisation, others to capitalism debased into corporatism. The financial tail has been allowed to wag the economic dog. Political leadership has been clueless and cowardly – the same political ideologues who trumpeted the virtues of “deregulation” have abdicated responsibility, dropping a problem of their own making into the laps of hapless central bankers, with the result that a failure to fix a debt problem has simply compounded it with a monetary one.

Surreal ideas like negative interest rates, permanent QE and the banning of cash serve only to confirm that the policy cupboard is devoid of anything practical. Passing off the spending of borrowed money as “growth” has ceased to persuade. The idea that “debt doesn’t matter” has been exposed as one of the Big Lies of our era, ranking alongside “globalisation benefits everyone” and “inequality isn’t harmful”.

The intellectual and political leadership cadre is scrabbling around for solutions to a problem that it cannot understand, let alone fix.

But what is the real heart of this problem? There are two answers to this.

The first answer lies in a system which has no reverse gear, dodgy steering, and very little in the way of brakes. Our system is so predicated on growth that it is being overwhelmed by a stagnation that could yet turn into something even worse.

But why, then, is the economy failing to deliver growth? The answer to this second question is simplicity itself. Money is the token of the economy, not its substance. The substance itself is energy, and our (and our leaders’) ignorance of this simple fact denies us the only sane transition to a post-Ponzi world.

Fixing a pot-plant with a spanner

As most readers will know, my approach to economic and financial issues is rooted in a very clear (and unashamedly radical) way of looking at the economy. I call this Surplus Energy Economics, or ‘SEE’.

This states that the economy is, always has been, and always will be an energy system.

For anyone unfamiliar with this, I’ll start with a brief introduction to SEE. But my main aim in this discussion is to relate SEE to the issues that (a) are bewildering policymakers and economists, and (b) are prodding them down to the road towards policy disaster.

Unless you grasp the energy basis of the real economy, you cannot understand why a lethal gap has opened up between the “financial economy” and the real one.

If I’m right about the energy basis of the economy, then it follows that those who make the big decisions from a completely different perspective are grappling to cope with something that they simply do not understand.

Imagine that you were trying to fix some piece of machinery, believing – quite wrongly – that you understood how it worked.

That false understanding would frame how you went about trying to fix it. Your solutions would not work, because they could not work.

It would like trying to fix an ailing pot-plant with a spanner, or to repair a stuttering engine with fertiliser.

Each failure would prompt you into trying more and more radical solutions, all of them still based in the same misunderstanding. You would draw false lessons from each successive failure. Ultimately, your piece of machinery, only slightly malfunctioning when you started, would turn into a pile of junk.

With no apology for repetition, let me make my conclusion quite clear.

What I call “the global economic Ponzi” is moving ever nearer to the precipice because the powers that be are trying, with increasing desperation, to fix something that they simply do not understand.

The energy dimension

My thesis was encapsulated in Life After Growth, a book whose title tells you where I think we are. Economic growth has resulted from a supply of energy which has been readily-accessible, abundant and (in a rather special sense) “cheap”. For some years now, though, that essential precondition for growth has been ceasing to apply.

The word “energy” does not just mean fuels like oil, gas and renewables. Human labour is energy, as is the nutrition that makes labour possible. For all but two hundred years of our history, nutrition and labour accounted for the overwhelming majority of the energy in the economy.

The Industrial Revolution changed this fundamentally, giving us access to vast reserves of accumulated energy, but this pool has been depleted, not quantitatively but qualitatively.

No-one should rule out the possibility that new technologies will give the energy economy a new lease of life, but the limiting factor here may lie not in a failure of ingenuity, but rather in limits imposed by the laws of physics.

Energy has never been “free”. In the agrarian age, there was no “free lunch” – you had to you to hunt or farm to get nutritional energy. Today, you have to drill wells, build refineries and pipelines, or manufacture solar panels. All of this has a cost, but it is fundamentally an energy cost rather than a financial cost.

This really means that, however we access energy, we consume some of that energy in the process. From this come the concepts of “net energy” and “energy returns on energy invested” (EROEI). My preferred measure is ECoE (the Energy Cost of Energy).

So what matters isn’t the total amount of energy that you have, but the free-to-use surplus energy that you can unlock. 100 units of energy have no value if you have to use up all 100 to get at it. Here, ECoE is 100%, and surplus energy is nil. On the other hand, if you can get 100 units of energy by consuming only 5 units in the process, your ECoE is 5%. The sheer abundance of fossil fuels has given us more than two centuries of energy that has had an even cheaper ECoE than that.

As we all know, it would be absurdly cumbersome to run any economy on barter alone, so we created the concept of money to make things more practical. In doing this, we created a parallel or proxy system and, until recently, this has served us pretty well.

But this must prompt two observations of which our decision-makers are dangerously ignorant. First, there are “two economies”, which I call the “real” economy and the “financial” one. The real economy is the substance, and the financial economy is the proxy.

Second, money has no intrinsic worth. Its only value lies in what it can be exchanged for.

Therefore, the “financial economy” is an accumulation of “claims” on the real economy. If we misjudge the relationship between the two economies, the result is that we create “excess claims”.

The real hole at the heart of the Ponzi – excess claims

“Excess claims” are not the same as “debt”. Someone may take on a debt that he is perfectly capable of repaying in due course. There is nothing wrong with that. An “excess claim” arises when debts are created that cannot be repaid by the real (energy) economy.

An excess claim, since by definition it cannot be met, must be destroyed, in one form or another. Reneging on it, or “going bust”, is one way of doing this, but “debasing” the debt (perhaps through inflation) can accomplish the same thing.

Though debt is a handy indicator, the overhang that is really going to take down the system is “excess claims”. Over fifteen years or so, the accumulated stock of “excess claims” has grown from a minor and manageable drawback into a mountain. Worse still, our system has become addicted to adding to this mountain, at ever-increasing rates.

The creation of a money and credit in a “financial” economy proxying the real one introduced a new factor which “hand-to-mouth” and barter could not supply. This is the “anticipatory” element which can enable us to plan ahead. This has been extremely useful, but its viability depends upon using forecasts for the future which are realistic.

That essential realism has broken down in a system which assumes perpetual growth without ever really understanding where growth actually comes from.

The energy explanation – a harder sell?

Paradoxically – since we live in an energy-based economy – few topics are more misunderstood and misrepresented than energy. At the moment, energy prices are very low, with the price of oil in particular having fallen by more than 75% over less than eighteen months. The oil market is characterised by excess supply and burgeoning inventories.

Even those who really ought to know better assure us that the threat of scarcity has gone away for good, even supposing that it ever existed in the first place.

This is idiocy of the highest order. Propelled by a combination of brisk demand growth and the time-lag necessarily involved in responding to it, energy prices soared between 2000 and 2007, then remained high for a further seven years despite the economic hiatus that followed the banking crisis. Sustained high prices funded huge investment in capacity, much of which was of dubious economic viability in anything other than boom conditions.

Now that demand growth has slackened, capacity substantially exceeds the requirements of the consumer. This situation could continue for another year, or maybe two, possibly even three,

But to proclaim it as the start of a new era of abundance is fatuous in the extreme.

The biggest component of the supply increase over a decade has been the arrival of shale oil and gas in the United States. But, and even before the slump in prices, the US authorities themselves expected shale oil output to peak and then start to decline within a decade. The output from shale wells deteriorates very rapidly indeed – decline rates of 70% in the first year of production are not untypical. This means that output in the aggregate can only grow, or even be maintained, by continuous activity which has been dubbed “the drilling treadmill”.

The industry can fall off this treadmill if it runs out of capital investment or exhausts its highest-potential locations. The first has already happened, and the second is inevitable, the only question being “when?”

In the rest of the non-OPEC world, output from existing oil fields declines, such that output would deteriorate by about 8% annually in the absence of new investment. The collapse in prices – from an artificial high to an equally unsustainable low – has killed off at least $400bn of new investment, making the prospect of falling output very real indeed. Whole mature provinces – such as the UK North Sea – have been dealt a blow from which they may never recover.

The lifting of sanctions on Iran should enable OPEC to deliver more supplies, but not even Saudi Arabia has limitless supplies of low-cost oil. There is abundant evidence to show that the ECoE (surplus-to-cost) ratio of new developments has been deteriorating relentlessly for decades. Huge reserves of oil do indeed remain in the ground, but their value – on a net-of-ECoE basis – has been declining rapidly. The big growth areas of recent years have been capital-intensive US shales and even costlier bitumen sources.

Much progress has been made by renewables, and their share of the global energy market is likely to go on increasing despite the body-blow to their economics dealt by the collapse in hydrocarbon prices. But they may not be a transformative technology and, even if they are, it would be a transformation to be measured in decades. If, as BP has suggested, supplies of renewables grow at a compound rate of 6.6% annually, they will still account for just 9% of all energy consumed in 2035.

Technology has made huge strides in renewables, but to extrapolate this indefinitely is to ignore the envelope imposed by the laws of physics. The idea of a 747-sized aircraft being powered by electricity is a pipedream.

Renewables may give us a safe and sustainable supply of energy. They may well do so at a lower ECoE cost than today’s replacement sources of fossil fuels.

But they are not going to take us back to the high-surplus, ultra-cheap energy on which today’s economy was built.

From here to the Ponzi

Before we turn to the financial, let me pause here to ensure that the fundamental economic issues are clear.

1. The economy is an energy system, propelled by the surplus energy which exists after the access cost of energy has been deducted.

2. That cost element – EcoE – has been on a rising trend for decades, and is indeed rising exponentially.

3. We do not have a shortage of energy in the absolute, but we do have a shortage of high-margin, input-cheap energy.

To deny this, on the basis of a temporary glut, would be like saying that “because it’s raining this morning, I don’t believe in climate change”.

Not measured, not managed

Our methods of measuring the economy do not incorporate ECoE. They embrace the saleable value of gross energy, and they also incorporate the costs that we incur, but they exclude the “economic rent” component imposed by the resource set.

Until relatively recently, this didn’t seem to matter. My estimates are that, in the halcyon days of the 1950s and 1960s, ECoE was well below 2% anyway, which is easily within the general margin of error implicit in any GDP computation. If I’m right about the ECoE trend, it had still only reached just over 4% in 2000. By ignoring it, then, we were inflating our estimate of global economic output to $46.7trn (at 2015 values) from an underlying $44.7trn.

As the exponential rise in underlying ECoE continued, however, two nasty things started happening, neither of them captured in figures which ignore economic rent.

First, the gap between the financial and the real economies widened, from less than $2trn in 2000 (at 2015 values), to $3.8trn in 2007 and $5.9trn in 2014.

That’s pretty bad, but what is far worse is that the accumulated stock of excess claims had soared from $24trn (51% of GDP) in 2000 to $78trn (99% of GDP) by the end of 2014.

An updated “excess claims” figure for end-2015, by the way, is likely about 115% of GDP. From this rate of accumulation, you will appreciate why I do not believe that the global economic Ponzi can last much longer.

“Excess claims” are not the same as debt. Global debt, excluding the inter-bank sector, currently stands at about $160trn, but much of this could, at least under normal circumstances, be repaid when it falls due. “Excess claims”, on the other hand, cannot be repaid, because they are based on the accumulated fiction that our economy, now and in the future, is and will be far bigger than it really is.

Beyond the global debt mountain there are quasi-debt welfare promises made by governments. Many governments – the US and the UK most obviously – have entered into enormous such commitments, and it is already becoming clear that these cannot be delivered. Quasi-debts do not count as debt in the strictest sense, because a state could, for instance, reduce future payment levels on public sector pensions, or raise the age at which entitlements begin.

The bottom line

Many factors have come together to turn the global economy into a giant Ponzi scheme. But my concern here is that we may be missing the biggest one of the lot, simply because we are failing to notice, let alone to account for, the “economic rent” implicit in any finite resource set.

Contrary to purely temporary tales of glut and abundance – and irrespective of purely quantitative estimates of remaining “reserves” – the qualitative value of the resource set, on a net-of-ECoE basis, is continuing to erode.

It is doing so in ways that are completely unrelated either to investment patterns or to assumptions that technology can repeal the laws of physics.

My hope is that, when we sift through what remains after the global Ponzi has detonated, the very searching nature of the post-mortem will enable us to find the real cause of the disaster.

If we can do that, we can rebuild in ways that are sustainable.

71 thoughts on “#68. The Ponzi economy, part 4

  1. Another excellent article (if slightly repetitive when compared to your other posts if I’m honest. Although this is good for me because it takes a few reads to get something to stick in my head).

    I must remember that our whole society is based on energy and the cost it takes to get it out of the ground compared to price etc. Not many people mention/realise that but it makes absolute sense when prompted to think about it.

    We would clearly be in a less wealthy/advanced society without energy/cheap energy. We’d hardy be able to do anything we do today! Any chance you might do a post about what that would would look like, maybe compared to today?

    Have you ever thought about doing a video too? Maybe a chat with someone like Mish Shedlock?

    Thanks Tim.

    • Thanks Sam. Being repetitive can be a vice of mine, especially when I think something is extraordinarily important, as applies in spades to this article.

      When you think of it, energy trends like ECoE run on momentum of decades. Even if we found, tomorrow, the world’s biggest-ever oil field, say under the Arctic, it wouldn’t be cheap enough to change things…..

      A “what if?” is an interesting idea, though “what do we do after this?” is top of my work list at present.

      As for a video, can’t say that’s crossed my mind, though I’ve contributed some stuff (which probably won’t be used) to a feature film that is still being made.

      I was also asked a couple of years ago – this will amuse you, I hope! – for a scenario idea for a Hollywood “disaster USA” movie. I suggested a three-way political split – the north becoming part of CanAmerica, the West joining Americhina, and the south becoming Jesusland. Oh well….

    • Globally, excess claims in a given year are the difference between GDP (“the financial economy”) and the real economy net of ECoE. So they are the ECoE that we leave out of the GDP measures.

      Critically, though, they are “ECoE at underlying trend”.

      In a sense, it’s like a deduction that we should make for the resources we use.

      Why do this? Well, it’s an economic rent – if you like, depreciation on the asset base represented by resources. Statisticians do not “cost the earth” in the way that, say, a business would depreciate its plant and equipment. It is treated as an indefinite freebie.

      Actually extracting and oil, gas, coal, renewables has costs, obviously, which are counted. But as we measure GDP, each such cost to one person is an income to another. So we are really measuring energy transactions, not energy costs.

      Make sense?

  2. Thanks Tim, this is exceptional stuff! You write this piece with a passion that can only come from conviction.

    There are a few moments from the last year or two that caused me first to wonder. The first was during a flare up of problems in the Middle East that would ordinarily have sent the price of crude soaring but it didn’t, it fell, I thought then something else really big must be influencing the price. The prevailing explanations seemed at odds with the facts and demand destruction wasn’t even mentioned in the mainstream media. The second was when a friend of my wife remarked on face-book that she was struck by the number of empty ships in port when she flew over, she works for an airline. That was about the time when the Baltic dry index fell dramatically. The third were all those exploding ‘crude oil’ tanker trains. If you were silly enough to drop a match onto petrol it would explode but do the same to engine oil and it would go out. As I understand it crude just isn’t that volatile but more can be done with it.

    As to the financial side of the same coin – I’m angry that the decision makers have got it all so badly wrong and have squandered this amazing opportunity that can never, ever come again.

    I am very fortunate in that my wife is ‘on-board’ with this. We do all, and I mean all, of the prepper things. With the exceptions of hoarding precious metals and illegal firearms.

    I hope we’re ready but very few others are.

    • Thank you as ever, Nigel. Yes, it matters a lot to me because it simply isn’t understood.

      The reason why dropping a match into crude probably won’t ignite it is that it’s vapour that ignites first, followed by the liquid as it vapourises. Higher fractions (i.e. gasoline) have more vapour so are progressively more flammable.

      When you think of it, politicians screwed this up, then handed it over to central bankers (who are civil servants really, not policy-makers) and said “can you fix this, please?”


  3. Another very enlightening piece Dr Morgan; thank you.

    I was recently watching a video with Nomi Prins and she described the financial sector as an inverted pyramid with a small amount of “real” stuff at the bottom and then a far greater superstructure on top of purely paper trading. As an example the paper “gold” market is I understand 100 times the physical market and that the vast majority of sell contracts couldn’t be fulfilled as the price of gold would rocket. This to my mind is pure speculation and has no economic function; it is simply a method of creaming off the top. HFT in the stock market is another example.

    This is a large, arguably dominant, purely parasitic economic structure and, to my mind, cannot continue.

    In the longer run you are of course right in that it such “real” things as the energy equations which will determine our prosperity, together with the challenges of automation and demographics and climate change. I cannot see that any of these challenges can be met by the current system and that, therefore, sooner or later it will have to change. However, like you I am not optimistic that this will be achieved voluntarily. One could pose the question: is it time to start a war?

    • I’ve seen the inverted pyramid in Orlov’s book about social collapse and why it happens. I’m convinced beyond a doubt.

      Oil trading in paper vastly exceeds the physical (“wet”) barrels. These things originally had a legitimate purpose – you can see why a farmer might want to sell his crop forward, so he knows his income before he spends on planting or buys a new tractor.

      But turning it into a paper-chase is dangerous. When wars begin, soldiers are usually well prepared to fight the previous war, but not the new one. Likewise with economics – in 2008, we were probably well equipped to handle 1929. This time, we might – possibly – know how to tackle a re-run of 2008. But the next crash is going to be quite different, I believe.

      A famous oil-man was asked during the first Gulf War if there was a case for shutting down the market in paper barrels – he said that “there is always a good case for shutting the paper market, and there is never a good case for reopening it either”

      Dmitri Orlov says that we are quite wrong to count financial services activity as a positive component of the economy – instead we should deduct it as a cost. An interesting argument, I think?

      Starting a war? Well, it might distract people I suppose. A big re-armament programme would certainly help, though so in fairness would a mass programme of building social houses for rent (“council houses” in UK terms).

      Seriously, though, I can’t think of a single economic crash that has ended in a peaceful pow-wow. Even Rome – really brought down by ECoE, by the way – was militarily overthrown.

      But I think revolution is likelier than war – Robespierre rather than Bonaparte.

    • Here’s a straight lift from Wikipedia to get you started:

      “Thomas Homer-Dixon argues that a falling EROEI in the Later Roman Empire was one of the reasons for the collapse of the Western Empire in the fifth century CE. In “The Upside of Down” he suggests that EROEI analysis provides a basis for the analysis of the rise and fall of civilisations.

      Looking at the maximum extent of the Roman Empire, (60 million) and its technological base the agrarian base of Rome was about 1:12 per hectare for wheat and 1:27 for alfalfa (giving a 1:2.7 production for oxen).

      One can then use this to calculate the population of the Roman Empire required at its height, on the basis of about 2,500–3,000 calories per day per person. It comes out roughly equal to the area of food production at its height. But ecological damage (deforestation, soil fertility loss particularly in southern Spain, southern Italy, Sicily and especially north Africa) saw a collapse in the system beginning in the 2nd century, as EROEI began to fall.

      It bottomed in 1084 when Rome’s population, which had peaked under Trajan at 1.5 million, was only 15,000. Evidence also fits the cycle of Mayan and Cambodian collapse too. Joseph Tainter suggests that diminishing returns of the EROEI is a chief cause of the collapse of complex societies, this has been suggested as caused by peak wood in early societies. Falling EROEI due to depletion of high quality fossil fuel resources also poses a difficult challenge for industrial economies.”

    • Bob,

      Where you say “I cannot see that any of these challenges can be met by the current system and that, therefore, sooner or later it will have to change.” I recommend to you this essay by Dominic Cummings, which I’ve previously mentioned here:

      Pages 94-133 are those of particular interest in terms of ‘what to do’ (instead of starting a war!). It’s summarised here:

      He has many other interesting blog pieces and links and I couldn’t agree more with him where he says:
      “Technological changes such as genetic engineering and machine intelligence are bringing revolution. It would be better to undertake it than undergo it.”

    • Bob,

      Where you say “I cannot see that any of these challenges can be met by the current system” I recommend to you this essay by Dominic Cummings:

      Pages 94-133 are of particular interest in terms of ‘what to do’ (instead of starting a war!). He has many other interesting pieces on his blog, for example this one goes into more detail about the other challenges we’ll face:

      I agreed strongly when he wrote in one piece:
      “Technological changes such as genetic engineering and machine intelligence are bringing revolution. It would be better to undertake it than undergo it.”

    • Thanks John – he is a prime source, so thanks for prodding me into a long-overdue visit. By the way, do you read Chris Balding on China?

      As per my reply above, what hits us this time will differ from what did the damage in 2008 – I mean, who had ever heard of “monolines” pre-08? – and Wolf is as likely as anyone to flag it for us – so thanks again.

    • Tim, I posted this article, the part 4 bit on Gail Tverberg’s “Our Finite World”
      One respondent wanted to know if your final line about the future was just done to stop the readers from taking away the message it’s hopeless and we have no option but to collapse into oblivion? There will be no sustainable rebuilding]
      Is that your motive?

  4. This blog should be required reading for the masses here in the States instead of the blather that purports to be the “news” that’s disseminated daily. That folly brings about the incessant focus on an election that’s still ten months away with all incumbent megalomaniacs spouting their anti-climate change mantra that’s wholly funded by the fossil fuel corporate lobby.
    It would be funny until you realize that the entirety of the American people are misguided, gullible victims of said media and corporate influences……….so sad.

    • Don’t worry Brian, The Donald will be president soon to make America great again…!

      I hope that Bloomberg does put his hat in the ring for the world’s sake. Not that I know that much about him having said that!

    • I’m sure any thinking person could write an A-star essay on this exam question:

      “Why is Donald Trump is not fit to be President?”

      The media produce these essays by the day, the hour, even the minute. We all know the script.

      But here’s the exam question that I think matters more:

      “Can the incumbent political and corporate elite be trusted to govern on behalf the people?”

    • Brian

      One great advantage of the internet is that you do have the opportunity for heterodox opinions, something that would have been far more difficult for the masses even 25 years ago.

      Also, if you look at the comments sections these days in the MSM you find an absolute avalanche of scorn for the “conventional wisdom”.

      However, I suspect this means that there will be a concerted effort to control the internet at some point a la China.

    • Alternatively Tim, in today’s age of technology can the political and corporate elite be made to govern on behalf of the people even if they’re incentivised not to in some other way.

      This reminds me of an interesting article I read about how Uber drivers are regulated by a user star based system rather than any government regulation. Could technology be used in a similar (although clearly not identical) way?

  5. I might have missed or forgotten this Tim, but can you talk a bit about how you would stop the excess claims/assumption that things are always going to go up/ignore the bigger picture and carry on with what we’re doing and take fees problem please?

    • Tough question! (And probably for a future discussion). That we do things this way isn’t just a bad habit, or ignorance. Vested interests like it this way. So there is no apolotical answer.

      For starters, I don’t think that what’s unfolding now can be stopped. Ponzis can only collapse. So we’re talking “world post-Ponzi”.

      We’re going to have to redesign how we do economics, and government. We might need to take the measurement and forecasting of the economy out of political hands.

      I don’t know what the post-Ponzi scene is going to be, but history and logic suggest that a mega-crash takes out political and economic structures.

      We don’t know what comes next in this area. A sobered but still-in-situ elite? Chaos, Robespierre and Napoleon?

      I’m not ducking your question, but I certainly need to think about it a whole lot before I can even begin to frame a useful reply!

  6. Do you think there is, can you quantify, a ‘Security Return on Security’?
    Going right back to the middle ages, I read that in a horse-powered economy the ERoE was 25% – the horse ate a quarter of the crop. But that was the age of castle-building, which must have absorbed another chunk of output.

    So, taking advantage of your repetition vice, can you clarify. As I understand you..
    1. ERoE is falling. The shortfall is 8% or so today.
    2. You’re taking the series of yearly global GDP, and diminishing each year by the corresponding shortfall.
    3. The difference between the 2 sums, of diminished & undiminished, is your excess claims.
    4. Say over 50 years, GDP is a steady 100, and ERoE falls 100% to 92%. The end totals are nominal 5000 & diminished 2886, which gives the 100% overvaluation you give for the excess in 2014.
    In R:
    econ <- rep(100,50); e <- sum(econ)
    eroe <- seq(1, 0.92, len=50)
    for(i in 1:50){ a <- econ[i]; for(j in 1:i){ a <- a*eroe[j] }; econ[i] <- a }

    I must be misunderstanding. I can see that the economy is all about using up energy, and the size of the economy must have something to do with the energy surplus, the efficiency of its use, the number of transactions made as it gets used up. But what about non-productive (ie non-tradeable) uses, like bombs and security guards, or purchased experiences like tourism (is there an increasing Knowledge Return on Knowledge?) How is ERoE ruling them all?

    Also, please do try to get your thoughts on video. Get interviewed by someone. One of the major forces for change are the many youtuber channels – there are some great libertarian/rational ones dealing with faith or politics, trying to break down ideology and received opinion; but not in economics. As you and another poster said, it's repetition that deepens understanding.

  7. Do you think there is, can you quantify, a ‘Security Return on Security’?
    Going right back to the middle ages, I read that in a horse-powered economy the ERoE was 25% – the horse ate a quarter of the crop. But that was the age of castle-building, which must have absorbed another chunk of output.

    As I understand you..
    1. ERoE is falling. The shortfall is 8% or so today.
    2. If you take the series of yearly global GDP, and diminish each year by the corresponding shortfall, the difference between the 2 sums, of diminished & undiminished, is your excess claims.
    3. Say over 50 years, GDP is a steady 100, and ERoE falls 100% to 92%. The end difference is nominal 5000 to diminished 2886, which is about the 100% overvalued you say for the excess in 2014.

    I must be misunderstanding. I can see that the economy is all about using up energy, and the size of the economy must have something to do with the energy surplus, the efficiency of its use, the number of transactions made as it gets used up. But what about non-productive (ie non-tradeable) uses, like security guards or bombs, or purchased experiences like tourism (is there an increasing Knowledge Return on Knowledge?)

    Also, please do try to get your thoughts on video. Get interviewed by someone. One of the major forces for change are the many youtuber channels – there are some great libertarian/rational ones dealing with faith or politics, trying to break down ideology and received opinion; but not in economics. As you and another poster said, it’s repetition that deepens understanding.

    • This is a tricky one, but I have every intention of trying to answer it.

      In pre-industrial times, maybe 19 in every 20 people produced food. The 20th did other things – soldiers, jesters, kings, monks, you name it – but investing was critical, like building ploughs, barns and bridges. We’d never have got to the Industrial Revolution without them.

      The same principle applies now. If we extrapolate, it’s over. Just left to go to the way it has been, ECoE kills the economy stone dead, and sooner than you might imagine. But that’s not what happens.

      We transition to a different world, with an ECoE that probably never gets back down to our “age of energy affluence” level, but even so can be sustainable. Renewables cannot give us a new ultra-low-ECoE answer like finding another gigantic Al Ghawar oil field. Technology will improve, but it cannot change the laws of thermodynamics. So we cease to draw on past energy as from a reservoir or a battery – we’ve had that, and we’ve spent it. We need to find balance.

      To do that, we need to invest. Though rising, ECoE today still gives us a surplus, therefore some time in which to prepare. Can we invest that capacity now in the future-state that we need? With old technology, you need to use energy to make steel to drill an oil well – but you also need to use energy to make the steel-mill in the first place. We need to plan ahead for the capacity to sustain renewable energy. We have to “make renewable equipment in a way that is itself renewable”, if that makes sense.

      This is daunting. Our food supply is delivered by energy, most of it input rather than recycled. So is water. Mining is a function of energy. Can we extract 0.2% copper ore from rock without huge energy inputs? Obviously not. Is our present or projected population sustainable? I don’t know.

      A huge proportion of our population is young, old, or employed in non-subsistence activities. Those ratios may need to change.

      Are we going to be fewer in number, poorer, both? That doesn’t necessarily make us less happy. We need to re-tool our economy – even without the ECoE problem, the environment is telling us that. I can name whole big industrial sectors that have the life-expectancy of the dodo. But we need to start redeploying.

      And here’s the biggest challenge. If our economy has to change, so do we.

    • Do you have any favourite Sci-fi books or films? I can see Logan’s Run in your reply. Do you lean towards Mad Max, Cloud Atlas, or Star Trek as the future? I found Cloud Atlas pretty convincing (ie techno-dystopia tailing off into a new Stone Age). We can’t retire to the 18th century because all the surface deposits of coal and metal are gone. So is it fusion power or bust?

    • I’m not a sci-fi fan, but would go way back to John Wyndham, if pushed. First of all, beautifully-written books. More importantly by far, he was interested in how people and societies responded to the shock of the new. Everyone knows Triffids, but it’s not my favourite – that is The Kraken Wakes. By the sound of it I should try Cloud Atlas.

  8. Great article Tim; again very disturbing and also very hard to dismiss. Have you seen the FT article today headlined “Oil majors’ business model under increasing pressure”? – Seems like your thesis gives a coherent perspective on a lot of this sort of news….could it be that the oil majors’ decline is due not only to a short-term fall in oil price, but also to a longer-term increase in the cost of energy extraction (all the more easily accessible oil has already been accessed, etc)?

    • It’s on my list to read later. My thesis points to the economic rent (i.e. the resource ownership, in this context) becoming ever more important, which weakens the negotiating position of the outside (oil major) partner.

    • Yes. I believe very strongly that it is a matter under serious consideration.

      I understand that, as mentioned in your link, Andy Haldane has talked about it. I have also heard it said that Christine Lagarde was talking it up in Davos.

      Banning cash has a sort of twisted logic to it, if NIRP (negative interest rate policy) is adopted as “son of ZIRP”.

      I don’t know how much you and other readers want to discuss this. But you might reflect that the US banned the private ownership of gold during 1933. “Special times demand special measures”………

    • Tim,
      On the subject of a new cashless age, I believe this will come to pass and sold to the great public as an anti terror and anti tax evasion measure. Both subjects that the public have been primed for.
      The control this will have over us all if it happens is too terrible to contemplate, but could include ongoing bail ins where banks have almost complete control and access to everyone’s deposits, to say fines fo minor offences, parking or speed violations for example being taken without redress or appeal. It is clear as you say that special times mean extra special measures and what could have been laughed off as fantasy may become reality.

    • Mark

      I fear this will be tried, along the lines that you say. When it comes to enhanced security powers, one of the most fatuous remarks that I keep hearing is “what have you got to be afraid of, if you’ve done nothing wrong?”

      “Wrong” in whose opinion?

      The economic logic would be that it could be difficult to operate negative interest rates if you could simply keep cash in a safe (or physical gold, for that matter).

      Another aspect is bail-ins. If the authorities really want to take money from depositor accounts to pay for for other customers’ bad debts – think Cyprus here access to cash would enable the depositor to escape.

    • Yes please Tim I would like to hear views on a cashless UK. How do the alternative currencies such as the Lewes and Totnes Pounds fit in? And the black economy?? What on earth do we do with our savings?

    • Barry

      Your question raises two issues that I cannot answer here, but are very definitely on my “to-do” list.

      The first, the banning of cash – and negative interest rates! – concern me because it has all the hallmarks of blind panic. Globally, where we are now reflects – among many other things – a horrendous failure of leadership. In fact, dropping responsibility for the economy into the laps of central bankers (who are really civil servants, not political leaders) smacks of abdication.

      I think this comes back to my long-standing view that we can no longer just “assume” growth, but no-one in authority wants to admit it, or perhaps they simply don’t understand it.

      Second, I must admit that Britain today baffles me. Economically, there are obvious things that we are doing, but shouldn’t be, and obvious things that we aren’t doing, but should be. Let me stress that I’m not particularly blaming George Osborne, or the government, for this, as governments play the hand they are dealt.

    • Obviously I hope you are right. But please consider how daft some measures already in use, or being considered, would have seemed only ten years ago. A decade ago, QE would have been considered barking made. So would zero interest rates in a capitalist system which requires a return on capital. Negative interest rates, considered mad until quite recently, have been enacted. Helicopter money seemed like – indeed, was – a joke, when first mentioned. Bail-ins, as in Cyprus, are taken seriously nowadays.

      Banning cash would amount to nationalisation – but in times of emergency, I wouldn’t rule it out.

      So whilst I hope you’re right, I can’t rule it out – we have tried to tackle a debt bubble by manipulating asset markets, thus creating a monetary bubble. So is anything really mad enough, or for that matter authoritarian enough, for us to really say “they wouldn’t dare”?

  9. Tim – in your reply above, you quote the old hogwash of “what have you got to be afraid of, if you’ve done nothing wrong?”. Unfortunately, this is one step from “If you disagree, you must be intending to do something wrong”. Creeping fascism.. Yes, I think we will have a banking crisis quite soon – e.g. Barclays, HSBC, RBS or someone having to close their doors causing a domino effect. The knee-jerk reaction will be a combination of NIRP, bail-ins and a helicopter drop.

    The fact that Haldane, Lagarde and others have openly talked about these untried policies is a clear indication that QE etc. have failed. These are desperate measures that again none of the MSM have latched onto. Disagree and you risk being branded as a criminal, or worse a terrorist. In times of emergency our dear leaders will go to all lengths to maintain their innocence.

  10. Another possible trick up the slippery central bank sleeve would be to reissue paper currency. I’ve seen this done in Africa – typically you have two days to hand in your old currency and exchange them for the new – the old notes are them deemed useless. Hugely unfair of course for rural people who when they get to the banks find them closed or have run out of new notes. But in the current context this sort of thing coujld be used to firk out currency stored in matresses and the like if currency were refunded by electronic deposits rather than new notes.

    • Very probably, and I certainly rule nothing out in a mess of this magnitude. Even the United States made the private ownership of gold illegal in 1933.

  11. Of course, 45 years ago they did ban real cash and gave us this decimal nonsense! Now, try to figure out the significance of 6/8d !

  12. [Third attempt to post this – didn’t seem to work above!]

    @ Bob J

    Where you say “I cannot see that any of these challenges can be met by the current system” I recommend to you this essay by Dominic Cummings:

    Pages 94-133 are of particular interest in terms of ‘what to do’ (instead of starting a war!). He has many other interesting pieces on his blog, for example this one goes into more detail about the other challenges we’ll face:

    I agreed strongly when he wrote in one piece:
    “Technological changes such as genetic engineering and machine intelligence are bringing revolution. It would be better to undertake it than undergo it.”

  13. Hello, Tim,
    I’m not an economist, but I find that the analyses you post here are very inspiring and accurate and I thank you for that.
    My question concerns your sentence “Technically, this is a financial system disaster rather than an economic one”.
    As you know, some specialists say that in capitalism there’s a structural trend to economic growth rate reduction and that this trend is only interrupted by technology revolutions that originate a steep rise in productivity. Do you agree that in the last decades, inspite of the ITC revolution (Internet and mobile phones included), the growth rate was kept (relatively) high mainly because of the boom of a speculative and surrealistic financial system that created artificial growth, and that this “aid” is coming to an end? If this is true, than the crisis deep roots lie in the economy, not in the financial system. I would like to have your point of view on this.
    Thank you in advance (I’m sorry for my poor English).
    Carlos Matos

    • Hello Carlos

      You are very welcome, and your English is very good.

      The distinction between the “real” and “financial” economies is a very useful way of understanding things. Money has no value in itself – it is a token, which has value only as a “claim” for “real” things.

      Of course, the financial economy can help us to improve how we manage the real economy. As a very simple example, it can be helpful for a farmer to hedge his crop prices forwards, enabling him to plan and invest. But if the speculative trading in crop futures distorts the real market in the crop, then damage may result. Debt serves a useful purpose, but can be immensely damaging if it “out grows” the real economy.

      Of course, productivity is a complex issue. In a competitive market, technological innovation should give an individual business an advantage, but this advantage should erode as others enter the market place. This should drive prices down, and reduce profit margins back down towards a “normal” level.

      Company “A” invents a new technology. To start with, only A controls the product, and can charge a high price. This will change as others compete with A. How quickly this happens depends on “barriers to entry”. If A has a new process, and B wants to enter the market and compete, how easy, or difficult, is that? How much knowledge or capital does B need if he is to compete?

      A market economy should reward innovation, but that reward should taper off gradually, which spreads the benefits to the economy but dilutes the profits of the inventor. So the returns on innovation or technology fall as the innovation spreads. Originally, radio communication belonged to a single company, and was hugely profitable. Now, everyone has radio, and profit margins have fallen to a “normal” level.

      ITC is an example of this. Originally, mobile phones were very expensive, and user costs were high. Now, though, mobiles are commonplace, and cheap to buy and use. That is as it should be.

      Now my own view is that growth has slowed because energy, though still abundant, has become much more expensive to access. Energy has an “economic rent”, a levy that reflects the value of the earth’s resources. That value has always been there, it has never been zero. But traditionally we have never accounted for it in this way – we have treated resources as “free”, which cannot really be true. The climate has now entered the “economic rent” arena, meaning we can no longer ignore the fact that is not “free”.

      These are “head-winds” which make growth more difficult. I am sure that these have reduced the capability for growth. But we don’t like to accept that fact, so we try to manipulate the financial system to sustain growth. We make optimistic assumptions about the future, then borrow against those assumptions. When we find that we have been over-optimistic about future growth, we find that we have created more credit than we can afford to repay. So we try to make it easier by making debt cheaper – pushing interest rates lower and lower. But that, of course, just makes it easier and cheaper to borrow even more, and that is what we have been doing. Globally, we borrowed $38 trillion during 2000-07, then $49 trillion during 2007-14.

      I would have preferred more “reality” after the banking crisis, which would have been painful at the time, but would have put us in a better place now. But then, I am not a politician needing to please the voters!

      A long answer, but I hope it helps?

    • Good explanation, Tim. I hadn’t connected the concept “economic rent” to natural resources, but now I do.
      I think that we cannot again do what happened after 2008 and bail out the banking system with a free ride for bankers. The alternative is the debt jubilee idea, which seems to be getting traction with people like Steve Keen and David Graeber. In my version when another major crisis erupts, reminiscent of 2008, then there will be space for a debt jubilee to be applied across the board and across all nations involved.

      The jubilee would apply just to all loans and transactions which were or are based on fiat currency, loans that were created in the banking system from thin air. These would be wiped out and the lenders unable to foreclose on any of them. This would reset the economy back to a time before the GFC took its toll. So property values would be revised back to that level. Steve Keen says the “good Guys” would get an injection of cash to compensate for the loss of their property’s value.

      So the banks would take a haircut but not be bankrupted as their assets are still on the books.
      Just their interest stream would be hit. And the derivative market. We need the banking industry as it’s vital for channelling government money to the citizenry.

    • Hi

      Steve Keens idea of a debt jubilee has some shortcomings. As I understand it it is a version of “helicopter money” but with the stipulation that those who have debts must pay them down and not spend; those who don’t can spend.

      As I see it it could be hugely expensive and destabilizing. The amounts involved would have to be sufficient to relieve the over indebted at the margin and this is likely to be considerable. If the amounts are smaller they would still leave these people with large debts so the exercise seems self defeating. Those who are not indebted would probably save most which would not benefit the economy anyway and, in the meantime public debt would soar.

      It seems to me there is no easy way out of this which leaves us with a functioning principle of moral hazard.

    • It seems to me that moral hazard was thrown away a long time ago in search of votes Bill.

      I would like a discussion about the debt jubilee idea if anyone knows the pros and cons. Tim?

      Surely all it does is effectively reset the system back to a lower debt level/ratio? Surely that would just then allow the indebted to go out and get more debt again? As well as cause renewed asset inflation?

      I can’t believe that a debt jubilee would allow us to side step the huge debt bomb with no ill effects? Isn’t it just the final effort of can kicking that will fail eventually when we have to have another, bigger, debt jubilee in a decade or so?

      Surely what we need is to change the system so people don’t want to or aren’t aloud to get so far into debt? Which presumably, from what I’ve read over the years, comes from not allowing the banks to create money from nowhere?

      I have no idea who should be in charge of money creation but I do have sympathy with the idea that if it’s given to any one group (banks, politicians) all they’ll do in time is use that power to their advantage whether that be to lend money out to profit from the interest or stave off an economic crisis and buy votes. When the incentives are strong enough someone will abuse the right to create money.

      It also bemuses me how the fact that banks create money isn’t a bigger story in our general media or even shows like question time etc.

    • A debt jubilee has some logic behind it, and I don’t think moral hazard (or frankly moral anything) plays much role in decision-making these days (I have a hunch that we’ll pay for that neglect later).

      So, the pros and cons. Historically, we used fiscal and/or monetary stimulus to counter recessions by increasing demand. This time (though Keynesians seem loathe to admit this), it hasn’t worked, despite being tried on a huge scale.

      The reason, I believe, is that this recession is different. Normally, demand weakens when people get cautious, suppliers de-stock, and activity and incomes weaken. This time, though, people have run scared of debt. So instead of spending stimulus money, as normally, they use it to pay down their debt instead, or at any rate to moderate their borrowing.

      This limits our options, and also tells us something useful. The limits are that, unless handled carefully, helicopter money (etc) would go the same way as earlier stimulus, meaning it won’t boost demand. The useful point is the reminder that debt acts as a drag on growth – umpteen studies have shown this, were proof required of something so obvious.

      So debt needs to be reduced. If you do that selectively, though, you reward the feckless at the expense of the prudent. I don’t think that this would go down well. The public may not realise that QE has enriched billionaires, but would notice if their neighbour got handed £100k to pay off his debt while they got nothing. “Pass go and DO collect £200”, so to speak. Giving the same to everyone, though fairer, might limit how much debt actually gets paid off. The prudent would bank their piece (though it could later be stolen through “bail-ins”, conceivably).

      I come back to asset values. These are, to a large extent, a function of debt. Make mortgage funding cheaper and more accessible, and house prices rise, and vice versa. So do we somehow need to get asset prices down as well as reducing debt? Managing house prices downwards is ultra-tricky. The good (maybe) news is that the house price cycle may be about to turn down anyway – ratios to earnings are way too high already, and confidence in the future is weakening, and these two factors, together, imply a reversal.

      If this causes distress, governments could counter it in ways which, de facto, reduce debt. Part write-offs of mortgages could be a cushion, but would create bank losses, impairing reserve ratios. Instead, in-the-red mortgages could be converted into rentals, in whole or in part. The banks don’t take a hit to their books here, because the transaction can recorded as the bank “buying” the house at the value of the mortgage, then renting it back to the current owner. (We might need to moderate “mark-to-market” accounting rules to facilitate this). (Bear in mind that reposession is pointless, and just causes prices to fall further). We just need to hope and pray that governments don’t try to support property prices with more cheap money!

      Equity markets are falling, which doesn’t worry me too much, but doesn’t help all that much either, as they are pretty small in the scheme of things, and the economic confidence “wealth-effect” of falling equities tends to be over-estimated.

      Bond markets are the big one, where safe-haven considerations are critical at the moment. The flow out of China (etc) and into US bonds shows no sign of moderating, not surprising given increasing worries over Chinese debt. My hunch is that things are on a bit of a knife-edge in China, where bad debts could soar (and very quickly) unless Beijing can do something (but what?) reassuring.

      The other possibility, of course, is that we use helicopter money that recipients are required to spend, not bank – almost like handing out gift-vouchers instead of actual cash.

      Any thoughts welcome. I really need to explore this. The next article is likely to look at another (and I think fascinating) aspect of the Ponzi, unless I do something on “Brexit”. After that, though, a debt jubilee needs considering….

    • Hi Tim,
      I mentioned earlier my version of a debt jubilee. Sam’s reply touched on some issues which are immediately positive, the revaluing down of assets funded by the debt system. By reducing the asset values of the debts, there will be more wealth available to productively enter the economy.
      Taxes can restrict the economies spending power, which it is designed to do. But it’s counterproductive in a deflation or recession, because a stimulus is the way forward in these circumstances. So taxation is no answer.
      It is like helicopter money except its only done by the reserve bank crediting bank accounts in commercial reserve accounts at the Fed Reserve. By crediting property owners who are NOT in debt, the payment will compensate them for the loss in asset value of the property.
      The government can afford it. It is a no contest choice. The government can pay, out of “thin air”and with no risk of bankruptcy, every dollar that matters. Since the debt jubilee is not responding to a normal event, inflation will not matter one bit by this time. The aim will be to stop the chaos spreading.

    • Hi Tim

      It’s interesting you talk about Brexit because this may result in a conjunction of issues.

      I think there will be political convulsions – in or out; the Tories will be warring (not squabbling) whatever happens. I think Cameron is finished – in or out.

      If we take this with, to my mind, the very real possibility of a bust later this year, or a geopolitical incident, and we could be in very serious difficulties at which juncture the government might do something really stupid in desperation like HTB with 80% taxpayer loans at 0% interest and with a 30 year repayment period- or something equally stupid! Frankly I wouldn’t put it past them.

    • At times I could despair about how Britain is governed.

      Over Brexit, has the PM forgotten that said that he quite prepared to support leaving if he didn’t get a good deal from EU leaders? I’m doing something on Brexit for publication elsewhere, leaving the politics to others but stressing the economic case for leaving. Incidentally, I’m not a “little Englander” – I am European, and proud of it – but the EU just doesn’t work.

      To come your point obliquely, what worries me is an “Operation Fear” scare campaign so unscrupulous that it causes damage.

      – “Leaving will undermine our defence” is absurd – our defence has nothing to do with the EU, but depends on NATO, global alliances and our conventional armed forces ( I don’t count Trident, incidentally).

      – “Our economy will shrink sharply if we leave” is more nonsense – any change would be minor, whether good or bad, and probably temporary.

      – “The EU will cut us out of trade if we leave” – when EU countries export so much to Britain?

      – “Our negotiating position would be no stronger than Norway’s” – now I like our Norwegian friends, but this comparison is idiotic.

      ……and so on.

      But two things do worry me.

      The first is that if the referendum looks in any way iffy or rigged. Hopefully this is very, very unlikely.

      Second, the scare campaign itself is what really worries me – economic confidence is a fragile plant, and never more so than now. So I do wish we could replace most of our politicians with adults!

      George O has said that the economy is weaker than previously thought – well this is true, and I’ve been saying that for years with stats to prove it, but why say it now? I hope this isn’t being lined up as another scare.

      Sterling weakness is probably temporary – markets operate on “news” and “stories”, so when anything interesting happens, markets react.

      The property market risk is significant (though please don’t tell the scaremongers!) Money is flowing out of the London top-end, and at least one fund is shorting that market, stamp duty increases come in a few weeks from now, and price/earnings multiples look way too high to me. Nothing goes up or down forever, and turnings happen, usually taking almost everyone by surprise.

    • Hi Tim

      Well, let’s face it the polls are not encouraging to the “stay” campaign and I do think that “Operation Fear” is a distinct possibility. The truth is that, by the time the referendum comes it may not be “Operation Fear” that’s the problem but reality.

      I also think that if the “In” campaign wins the Tories may split, or at the very least, we will get substantial and lingering bitterness which will paralyze politics a la John Major but in fact far worse. The referendum will be, in my view, not the the end but the beginning.

    • I’m sure you’re right, and here’s my worry – “operation fear”, designed to talk down the “leave” campaign, might instead succeed in talking-down Britain. Economies run on confidence, a fragile plant at the best of times, but never more so than now, when global economic risk is heughtened.

      Taling down Britain for political ends would be contemptible – but it is all too plausible.

    • John

      Something that worries me here is what I might call a “snap cycle”. Demand is weak, and we worry about deflation. So we tinker with the monetary system, faith in it is undermined, and quite suddenly the system “snaps”, or “flips”, from deflation into hyper-inflation.

      Logically, fiat money always makes an inflationary bang look ultimately more likely than a deflationary drift.

    • That, Tim, is new to me. I guess it’s probably impossible to see beforehand what exactly will eventuate.
      My hope is that the PTB [supposedly! our governments] do some modelling and planning beforehand to be “shovel ready” when the inevitable Seneca Cliff or whatever breaks. The Debt Jubilee just buys time,IMO, by resetting the assets back to say what they were before the GFC and QE interfered. It will slow the drain on resources.

      I don’t know if you are a believer in some super clique that tells governments what direction to take, but it’s hard to think they are so venal that they want to destroy the civilization supporting them, and the rest of us just so as to make more money and be ever more powerful. But it looks like they are.

      The human sense of optimism towards the future is a serious drawback when planning for a crash.
      We all hope for good news and that our grandchildren will not suffer a ruined world. But we don’t plan to mitigate any of it, in spite of all the warning signs, from the Arctic 7degree! temperature rise, to the depletion of the food chain and financial signals. Politicians certainly won’t connect the dots.

      The rest of us just have to go along for the ride.

  14. John

    I’ve always favoured the “cock-up theory of history” over the “conspiracy theory” version. Self-interest tends to explain more than scheming does.

    So I don’t put this mess down to a clique as such (but please see below). I just think that self-interest – in corporates, banks and politicians – triumphed over common sense. Globalisation – spreading development to emerging countries – was a worthy idea, but corporates saw it as cheap out-sourcing. They lacked the wisdom to see (as Henry Ford did) that you cannot be low-paid and a big-spending consumer at the same time. Banking filled the gap with cheap credit. Politicians let them do it.

    If there was no clique which created this mess, it is likelier that there is a clique (or more likely a class) intent on preserving the status quo. That is quite a normal phenomenon. Our tragedy is that it won’t work.

    As for expectations, this is what I’m writing about next. Our economic forecasts, all around the world, have been too optimistic, and for too long. Acting on them has led to huge mistakes, most obviously on debt. If this had been temporary, or confined to a few countries, well, so be it. But there is clearly something wrong with our understanding of the economy. I don’t think we understand where growth comes from.

    • I have no trouble agreeing with you on this, Tim. But the Rothschilds have had their fingers at the knobs since 1700. They are understood to have been very influential in the conduct of wars etc, to their own advantage[I can give you lots of links]. So I wouldn’t put it all down to just self interest etc.
      No, keeping the status quo will not work. More likely it is an accelerant.

  15. You are so right Tim – self-interest is the driving force in public sector bureaucracies – for 20 years I grew transport planning bureaucracies – a kind of growth which is unstoppable because those involved don’t understand what they are participating in. It is impossible to stop “technically” – only the collapse of the funding sources will stop it. There are so many unaware “professionals” whose lives are dependent on this kind of growth.

    • Thanks Barry. I was thinking private sector (big corporates), but of course it is equally true of a public sector which, in Britain certainly, has become increasingly corporatist. I was particularly shocked by revelations of “gagging contracts” in the NHS.

      Transport seems an example, too, of momentum being hard if not impossible to reverse. Britain seems determined to build HS2 – “an expensive railway to Wigan” – even though investment elsewhere in transport (no to mention investment in nuclear capacity) seems far more urgent. The Trident decision, too, now seems unstoppable.

  16. Thank you Dr Tim Morgan for this article, for the whole “Ponzi economy” series and for your work in general. Very interesting and enlightening. Your concept of “excess claims” in particular is very useful to understand the growing disconnect between the financial economy and the real (energy-based) economy. I agree with you that most economists and policy makers are unable to address this problem because they simply don’t understand it. They tend to stick to their views that we are just one stimulus or austerity package away from a return to “growth”. It has become a defining feature of Western elites to keep believing in failed economic theories and policies no matter what amount of evidence of their failure is in plain sight.
    As you point out, politicians were unable to ‘fix’ anything after the financial crisis and handed it over to central bankers, who resorted to “unconventional” monetary policies that would have considered insane not so long ago. These unconventional policies are not designed, as some still want to believe, to fire up the growth engine through boosting aggregate demand. They are designed to provide a backstop for the world’s debt-based monetary and economic system – and for the economic and political power structures that are reliant on its permanence. This system imploded in 2008-2009 and is since then being maintained on life support by the massive liquidity injections made by the world’s major central banks, as well as by the blowing of massive and compounding asset bubbles that they have generated in developed as well as emerging economies. As you rightly point out, this system structurally produces more claims on wealth than what genuine wealth can be generated by the real economy. As the gap grows ever wider between the quantity and valuation of claims created by the financial system and the genuine wealth that can be created by the productive system, the world navigates from one financial crisis to another, building up in the process an ever growing debt burden that itself acts as a drag on genuine wealth creation.
    This, obviously, is not an something that can be sustained forever, or even for much longer. At some point something will have to give. One way or another, the world economy, or the stock of claims on wealth that we have come to account for as the world economy, will have to be ‘deflated’. And one way or another, deflated it will be (not necessarily through monetary deflation, by the way, as there are other ways to value destruction).
    I have written a piece here about the ECB’s latest decisions in the light of all this – would be glad to have your views on this.
    All the best.

    • Thank you and, as I think this is your first comment here, welcome.

      You make some very good points here, as also in your blog article.

      At the moment I am watching Japan very closely. It seems that negative rates have already been something of a disaster, confounding all those (at the FT and elsewhere) who are banging the drum for more of the same. Negative rates in Japan look like a desperate throw of the dice now that Abenomics (which I have always called “kamikaze economics”) has failed. I have read a lot of well-informed material which suggests that, with these two failures, Japan has entered “end-game”.

      It certainly looks that way – which, globally, means that those who are watching China and Italy at the moment are not watching the right ball…… Japan’s economy (and its huge debts) make it quite capable of taking down the system.

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