#72. End-game


With their resigned but widening acceptance of “secular stagnation”, the powers-that-be are inching ever closer to a recognition that growth, at least as we have known it, isn’t going to return to previously-experienced levels. It seems a short step from “low growth” to “no growth at all” (which would not, of course, come as any great to surprise to the author of Life After Growth).

Indeed, when we factor-in the depressing effect of population expansion on per-capita GDP, even “secular stagnation” takes us into a new era.

Let’s reflect on what this means. Individuals can no longer assume that they are going to get better off over time, or that each generation will be more prosperous than its forebears. People and businesses can no longer take decisions on the assumption that wealth, or real asset values, or the size of the market, are going to keep getting bigger. Governments cannot plan on the basis of an expanding economy, or tax revenues that increase from year to year.

These are profound changes, not just in financial terms, but also in how we think about government and the economy.

That, and the importance of the subject, is why this discussion is longer than usual.

My aims here are as follows. The first is to look at the implications of a “low growth” (or even a “no growth”) economy. The second is to relate a slowing economy to a debt mountain that keeps getting bigger, and to ask what we are going to do about our debt burden now that we can no longer expect to “grow out of it”.

The latter question is the easier of the two to answer. I am more convinced than ever that a financial crash is inevitable. Moreover, I think we can begin to see, not only where it is likeliest to happen, but the form that it’s likeliest to take. As outlined later, we can now identify four directions from which the next crash is most likely to come.

As for the near-disappearance of growth, resulting changes are likely to include the ditching of the doctrine of economic “neoliberalism” and, as the price of failure, a further weakening of incumbent elites which already facing a popular backlash.

Low growth – the three causal factors

To start with, though, we need to examine why it is that growth has become so feeble. Once we are clear about the causes of weak growth, we can understand the role of theory and policy, and then move on to look at consequences.

Opinion is divided about why growth is so low. Some, even amongst the opinion-formers and decision-makers, are starting to question the efficacy of “neoliberal” economics. Sometimes known as “the Washington consensus” or “the Anglo-American model”, this doctrine has ruled the roost since it supplanted Keynesian economics in the 1970s. Of course, doubters in the upper echelons are few in number – so far, anyway – and most of them assert that neoliberal economics is solid and robust.

Well, to paraphrase Mandy Rice-Davies, “they would say that, wouldn’t they?”

The first cause of low growth is an escalating uptrend in the cost of energy. The key parameter here is the “energy cost of energy” (ECoE). As readers will know, energy is never “free”, but has a cost in terms of the amount of energy that is consumed for each unit of energy accessed.

Though market prices oscillate widely – largely in response to cyclical patterns – underlying trend ECoEs have been rising relentlessly for several decades, and have been acting as an increasingly heavy drag on growth since about 2000. In that year, according to SEEDS (the Surplus Energy Economics Data System), trend ECoE reduced GDP by about 4.2%, up from 2.8% a decade earlier but still small enough not to be noticed within normal margins of error when calculating economic output.

Today, however, SEEDS puts trend ECoE at over 8% of GDP, which is more than enough to explain the virtual disappearance of growth.

Still, nothing is ever so bad that policy mistakes cannot make it worse. The second and most obvious brake on growth has been escalating debt, which can, in large part, be traced to the mishandling of globalisation.

Because Western businesses chose to export skilled, highly-paid jobs without accepting a corresponding reduction in consumption, debt was driven upwards by the need to bridge the gap between weakening real incomes and rising consumer spending. The banking system made this resort to borrowing possible, aided and abetted by government and central bank preferences for impaired surveillance (under buzz-phrases such as “light-touch regulation”) and unduly loose monetary policies.

In addition to rising resource costs (measured as energy inputs), and the choice of policies geared to increasing debt, a third factor contributing to weak economic performance has been a loss of interest in growth. That governments and societies have chosen growth-reducing policies may seem such an outlandish idea that a brief explanation is required. Once explained, it becomes apparent that policy has sabotaged growth, to a very striking extent.

Essentially, there are two broad ways in the individual can pursue wealth. One is to invest effort and capital developing a business, pioneering new products and services. This is hard work, and is subject to considerable risk and uncertainty, but it is a major driver of economic expansion. It can be called the “entrepreneurial” route to betterment.

The alternative is the “speculative” route, which involves investing money in assets and profiting from a rise in their value. Whilst it can make individuals wealthier, speculation does not contribute to growth in the economy.

Obviously, therefore, the role of policy should be to ensure that the entrepreneurial route, rather than the speculative one, is followed as extensively as possible. This means ensuring that incentives favour innovation rather than speculation.

In short, policy can sabotage growth if it incentivises the speculative and deters the entrepreneurial, and this is exactly what all too many Western governments have done. Both regulation and taxation have made the entrepreneurial route unattractive, whilst fiscal and monetary policy has favoured the speculative. Governments have not only operated loose monetary policy, but have, through deregulation, made it easier to borrow. Additionally, capital gains tend to be taxed at lower rates than income, whilst states have demonstrated their preparedness to backstop property markets, reducing speculative risk to levels far below entrepreneurial risk.

In this way, Western governments have steered their populations towards speculation and away from entrepreneurship. No government which does this has much right to complain – though they still do – when innovation and productivity deteriorate, because incentives and risks have been skewed in favour of speculation and against entrepreneurship. To this extent at least, Westerners, at the instigation of their governments, have actively chosen a path of low growth.

Culpability? “Secular stagnation” and neoliberal economics

Given these three causal factors in the deterioration in growth, to what extent are neoliberal doctrines to blame?

It needs to be understood that, though avowedly a philosophy of market economics, neoliberalism actually differs a great deal from anything that Adam Smith would have put his name to.

For a start, neoliberalism puts much less emphasis on free and fair competition, and lacks Smith’s absolute loathing of monopoly and excessive concentration (which, famously, he called “a conspiracy to defraud the public”). It lacks, too, the logic implicit in Smith, which is that the state has a crucial role to play in saving capitalism from its own excesses. Neoliberalism is far more supportive of corporatism than Smith could ever have been, and, where Smith emphasised the benefits of competition to society as a whole, neoliberalism is a worshipper at the altar of unrestricted private profit.

Therefore, it is perfectly consistent for followers of Smith to castigate neoliberalism as a self-serving variant.

This is just as well, because it is pretty clear that neoliberalism has played an active part in driving growth downwards. This is not the only reason why the neoliberal consensus is heading for the shredder, but it suggests that populist opposition to neoliberal doctrines has a solid basis in logic.

Though neoliberalism cannot be blamed directly for the escalating trend cost of energy, even here there is some culpability. Countries most addicted to neoliberalism – amongst them, Britain and America – have all but abandoned the direction of their energy futures.

Shales have not conferred energy self-sufficiency on the United States and, even before the recent falls in prices and the near-collapse of investment, shale output was always expected by the authorities to reach peak output shortly after 2020. In Britain, where energy production has already halved over ten years, successive governments have dithered over nuclear power, finally selecting the costliest, least reliable technology on the table, and relying on overseas investors to fund its development. Softening regulation, and announcing “life extensions” for the existing nuclear fleet, may be safe enough – though I’m glad I don’t live anywhere a “life-extended” plant – but do not address the fundamental issue.

Where soaring debt is concerned, neoliberal doctrines are “guilty as charged”. Western governments have supported a form of globalisation geared almost entirely to the furtherance of corporate profitability, and have been complicit in the expansion of debt necessary to bridge the widening chasm between domestic production and consumption.

It is over the third growth-destroying trend – the loss of interest in growth – that neoliberalism is most culpable. Governments, citing neoliberal logic, have pursued policies which skew incentives in favour of speculation and against entrepreneurship.

On the entrepreneurial side, states have pursued ever-increasing regulation, sometimes for good reasons of safety and quality, but in other instances in pursuit of social policies dear to the hearts of the self-styled “liberal elites”. Taxation often bears much too heavily on small and medium enterprises (SMEs). This is typified by the British system of Business Rates, a tax which, being wholly unrelated to turnover, let alone profitability, is the small-business equivalent of a dose of strychnine.

In contrast to this, governments have favoured and incentivised speculation. They have made borrowing both cheap and easy-to-access, and have exacerbated this trend since the banking crisis, the logic seemingly being that economies can “borrow their way out of a debt problem”. In many countries, capital gains are taxed at rates lower than median incomes, and gains made on property are often exempt from taxation altogether.

Policies designed to boost asset prices – most notably the infusion of newly-created money through quantitative easing (QE) – should, at the very least, have been accompanied by the taxation of policy-created gains. Almost unforgivably, they were not. Governments have made no secret of their willingness to backstop property prices, thereby lending powerful support to the speculative route to wealth.

Nemesis #1 – the coming crash

So much for the causes of low (or no) growth, and the complicity of neoliberalism. What happens next?

Though few in authority seem to have made the connection – or, more likely, have decided not to talk about it “in front of the children” – “secular stagnation” further increases the already-strong probability of a coming crash. Put simply, the burden imposed by debt becomes much heavier if growth is much lower than had previously been assumed.

Such a crash is, of course, implicit anyway in the transformation of the global economy into a giant Ponzi scheme, where each dollar of reported “growth” comes at a cost of almost $3 in net new borrowing, and where most of the “growth” itself is phoney, since it amounts to nothing more than the spending of borrowed money.

Those entrusted with global economic and monetary policy seem wholly incapable of learning from past experience. The 2008 banking crisis came about because “real economy” debt (which excludes the purely inter-bank sector) increased by $38 trillion over a seven-year period in which nominal GDP rose by $17 trillion.

In the seven years after the crisis, when nominal GDP again increased by $17 trillion, borrowing rose to $49 trillion, from $38 trillion in the earlier period. In response to the crash, governments slashed both policy and market interest rates to prevent the burden of debt service from overwhelming the system. In so doing, they made borrowing far cheaper than at any point in financial history, which necessarily created huge asset bubbles whilst accelerating the rate at which we are mortgaging the future.

This has to end with an implosion, since this outcome is hard-wired into all Ponzi schemes.

Of course, “secular stagnation” ups the ante where a crash is concerned. Since the only circumstance in which a debt burden can become less onerous is where the income of the borrower increases, a deterioration in growth (to levels below prior planning assumptions) has the effect of making debt harder to service, and bringing the looming crash even nearer.

We can now identify four areas where the next crisis is likeliest to start. And, of course, if any one of these risks eventuates, it further increases the likelihood of sympathetic detonations elsewhere.

Risk 1 – China

The first area of exposure is China, where it is necessary to look behind the obvious. The “obvious”, of course, means faltering growth and escalating debt. Though the government claims that GDP is still growing at around 7%, it is very hard to reconcile this with volumetric and other data, the implication being that the real figure may in fact lie somewhere between 2% and 4%. That debt has escalated is beyond dispute, having increased from $7 trillion in 2007 to over $31 trillion today. Together, soaring debt and faltering growth are a nasty combination, and suggest that China may now be borrowing upwards of $4 for each dollar of growth. But the really worrying indicators are more nuanced.

For a start, and as we know from Western experience in 2007 (the “credit crunch”) and 2008 (the “banking crisis”), excessive debt tends to result in a credit crisis well ahead of a solvency one. In China, there is unmistakable evidence of “creditor drag”. Chinese businesses are finding it increasingly difficult to get paid by creditors, and average payment times are increasing markedly. Creditors tend to pay late, when they do so at all, and often pay with credit notes or post-dated cheques rather than immediate money. This inevitably stresses the system, because even a sound business can struggle to pay its staff or its own suppliers or, for that matter, service its debts, if its creditors do not pay on time. In short, expanding payment times are an early (but serious) harbinger of deepening problems.

Creditor drag” is just one of the warning signs that are starting to flash amber-to-red in China. Another of these, mentioned above, is falling debt efficiency, where more debt is needed for each incremental unit of GDP. This ratio seems to have risen to greater than 4:1, meaning that 4 units of new borrowing are required for each unit of growth. This is simply not sustainable.

A third warning sign is debt recycling, indicated by a rising proportion of new debt that is taken on simply to repay existing borrowings. A fourth lies in successive failed attempts to convert debt into equity. Meanwhile, Chinese banks’ bad debts appear to be rising rapidly, which in turn raises questions about capital adequacy, meaning that the ability of banks’ reserves to absorb bad debt losses is being undermined.

Another crisis-marker lies in capital flows, which have turned adverse in a very short time. Over the last year, in a drastic break with previous trends, the long-established flow of investment capital into China has reversed, with close to $600bn flowing out of the country during 2015, most of it in the second half of the year.

Unlike the West, where borrowing has tended to be channelled into boosting consumption and inflating the notional “value” of the housing stock, China’s folly-of-choice has been the use of debt to create capacity far in excess of realistically likely demand. The immediate effect of such behaviour is to drive down returns on investment, often to levels which are lower than interest rates on borrowed capital. This helps explain why China has tried to convert debt into equity – and also explains why it hasn’t succeeded.

There are, in short, increasingly persuasive reasons for anticipating a credit squeeze in China, with the likelihood being that this will segue, pretty quickly, into a full-blown solvency crisis.

Risk 2 – equity market exposure

It may, perhaps, not seem surprising that equity markets have risen strongly since the banking crisis, reflecting ultra-low interest rates and the injection of huge amounts of QE into the financial system. But I am indebted to Damon Verial  for flagging-up a potentially very dangerous downside risk, one which has gone largely unnoticed by market-watchers.

This risk lies in debt-funded stock buy-backs by quoted companies. This activity has been a huge contributor to market strength, particularly in the United States. The point that Damon Verial has noted, however, is that stock repurchasing correlates remarkably closely with borrowing. In other words, companies are taking on debt to fund buy-backs. He has likened this to the mechanism which created recessions in the US in the 1930s and Japan in the 1990s.

The overall funding pattern is unlikely to be noticed either by equity investors or lenders, both of whom focus on individual corporate leverage, not on overall trends in borrowing and buy-backs. But the combination of weak earnings and cash flows, and downwards trends in both borrowing and repurchasing, suggest that US equities could be heading for a huge (“meaning recession-huge”) hit to the market.

If equity markets do tumble, the effect on the broader economy is likely to be serious, particularly in a context of “secular stagnation”. The Wall Street Crash of 1929 triggered the Great Depression and, six decades later, a slump in over-valued stocks marked Japan’s plunge into a deep recession which continues to this day.

Risk 3 – capital flows and the $7 trillion gamble

Alongside China’s looming debt crisis and dangerous downside risk in American equities, the third crash-risk that can be identified with a high degree of confidence is the likelihood of disruptive currency flows.

This problem began in the aftermath of the banking crisis, when investors believed that there were two near-certainties on the medium-term horizon. The first was that interest rates in the United States were likely to remain low for an extended period, implying that the dollar itself would weaken. The second was that emerging market economies (EMEs), most notably China, would continue to grow more rapidly than the developed economies of the West. After all, they had been doing so already for an extended period, and were not, at that time, hobbled by the kind of debt burden that was weighing so heavily on the Western economies.

This suggested a straightforward strategy, which has come to be known as “the dollar carry trade”. The principle was simple – an investor who borrowed cheaply in dollars to invest in EME markets could anticipate that the secular advantage of higher growth rates would be leveraged by dollar weakness, ramping up the gains that would be made when the time came to move back into dollars and pay off the debt.

This logic seemed seductive at a time when it was fashionable to wax lyrical about the “BRIC” economies (Brazil, Russia, India and China). Since then, three of the four bricks have fallen from a great height. Brazil has suffered from a combination of weak commodity prices, economic deterioration, and corruption on a gargantuan scale. Oil prices and politics have likewise undermined Russia. Though growth apparently continues in China, it is not reflected in corporate performance, largely because the borrowing binge has been invested in so much surplus capacity that profitability and returns on assets have cratered.

Just as the EMEs have fallen from grace, the dollar has strengthened, not weakened. Investors in the dollar carry, in rushing for the exit, have rediscovered the old adage that “when everyone rushes for the door, the door gets smaller”. The unwinding of the carry trade probably has a lot to do with the unparalleled outflow of capital from the EMEs that gathered pace throughout 2015.

No-one knows with any precision the scale of dollar carry exposure, but the best estimate, which is of the order of $7 trillion, suggests that less than 10% of exposed capital has so far been reversed out.

This “gamble gone wrong” is, like the US equities risk, “recession-huge”.

Risk 4 – the failure of “kamikaze economics”

One of the most glaringly misleading terms in international economics is the “lost decade”, since Japan’s recession has now lasted for 25 years. In a desperate attempt to break out of the cycle of near-zero growth, escalating debt and widespread deflation, the Abe government has adopted a strategy of massive stimulus, including QE on a vast scale and rapid increases in government indebtedness. When we include household and business debt as well, Japan is one of the world’s most indebted countries, with a debt-to-GDP ratio in excess of 400%. Indeed, and compared to Japan, even Eurozone debt worries pale into comparative insignificance.

By deferring a planned increase in sales taxes out to 2019, Mr Abe has essentially conceded that “Abenomics” has failed. Deferring the tax was something that Mr Abe had previously insisted would not happen unless Japan was hit by a Lehman-type catastrophe or a serious earthquake. The country’s current predicament bears the hallmarks of both.

Once again, we need to examine nuances within the broader picture, which in this instance involves trends in Japanese government bonds (JGBs). Large fiscal deficits have resulted in the very substantial issuance of JGBs – but who is buying these new tranches of government debt?

The answer, rather shockingly, is that nobody is. Investors are not lending to the Japanese state. Instead, debt is being “monetised” – meaning printed – by the authorities. A country which reaches this situation is in the last-chance saloon where its credibility and creditworthiness are concerned.

Without burdening you with too many numbers, let me explain what’s been happening with JGBs. The central bank (the Bank of Japan or BoJ), as we know, has been engaging in QE on a huge scale, buying JGBs with money newly created for the purpose. This has resulted in an expanding BoJ balance sheet, and increasing BoJ ownership of JGBs.

None of this is surprising – but the actual numbers are.

Back in 2008, the BoJ owned less than 7% of all JGBs outstanding. But this number has since risen at an alarming rate. By the end of 2013, the BoJ owned 18% of JGBs. Today, this proportion exceeds 33%. By the end of next year, almost half of all JGBs are likely to be owned by the central bank.

These numbers are frightening in their implications. First, the BoJ is buying – meaning “monetising” – enough debt to far more than cover the annual budget deficit. Second, it is also monetising existing debt as it falls due for redemption. No one is lending to the Japanese government, and investors are big net sellers of government debt. Japan is moving rapidly into a situation in which it is simply printing its borrowing needs, be they for on-going public spending, debt redemption or the payment of interest.

If this continues – or as and when investors work out what is going on – both the yen itself, and yen-denominated markets, will collapse.

Nemesis #2 – the populist backlash

Just as crash risk rises everywhere – from Chinese liquidity to American equities, via a Japanese end-game and a Sword of Damocles hovering over capital flows – the powers that be in the global economy now recognise that the economy is trapped in “secular stagnation”.

None of this is surprising in itself. Even the most rudimentary knowledge of economics will tell you that, under normal circumstances, the vast stimulus injected into the system since 2008 should have caused growth to soar to the point of overheating, with inflation rising rapidly.

Instead, we have stagnant growth, and price indices hovering between zero and deflation.

If an animal that has been injected with huge quantities of stimulants fails even to twitch, the implication is that the animal is dead.

A fascinating side-effect of economic stagnation is a populist backlash against incumbent elites. This explains the popularity of Donald Trump, and also explains the rise of Marine Le Pen in France, Geert Wilders in the Netherlands, AfD in Germany, Eurosceptics in Britain, Podemos in Spain, right-wing nationalists in Austria, Syriza in Greece, and populist movements right across Europe. Even the Chinese authorities seem to have been rendered powerless to tackle the country’s debt problems by the fear of labour unrest.

Though the immediate flashpoints often concern migration, history shows that economic hardship generally does provoke social unrest, particularly when coupled with perceived unfairness. The migration issue itself has an economic dimension, because workers fear that an inflow of migrants depresses wages. Young people are trapped in a mesh of high rents, out-of-reach property prices, job insecurity and a dearth of well-paid employment. The deterioration in the real incomes of the majority contrasts sharply with the soaring wealth of those at the very top. At least one self-made American billionaire has warned of “pitchforks” unless glaring inequalities are addressed.

Whilst this may be – and probably is – unduly alarmist, the scale of the popular backlash in the context simply of “secular stagnation” must make one wonder about what the public response will be if, as seems increasingly likely, the financial system suffers a major shock.

= = = = =

Here are some charts on secular stagnation, from SEEDS

United States

SEEDS 2016 US F & R


SEEDS 2016 JP F & R


SEEDS 2016 CHN F & R

United Kingdom

SEEDS 2016 UK F & R




170 thoughts on “#72. End-game

  1. I think that the roll out of Universal Credit (In the UK) – especially the application of ‘Conditionality’ for in work claimants will, to say the least be interesting.

    Then what if we do vote for Brexit?

    I am starting to wonder if The Conservative Party has been infiltrated by Trotskyites wanting to start a revolution.

    • I have absolutely no idea what someone like Teresa May is doing in a party that she herself described as “nasty”. The people I rate don’t seem to get to the top – I’m thinking particularly of David Davis and Eric Pickles.

      The Brexit scare campaign is getting too silly for words. I’d like to quote to you an incisive comment posted by a reader on the FT website:

      “Wonder what this guy [Philip Stevens] would be saying if he were 22 and looking down the barrel of working forever and renting forever.

      “That’s what’s tearing the UK apart. I don’t think Brexit will fix this but it has been alluded to by proxy of immigration in the campaigns. And of course “Remain” have disgustingly tried to coax the boomers via threats of house price falls.”

  2. Tim, another superb and incisive article. Very refreshing to read some original thinking. Thank you. I read your book ‘The End of Growth’ and it made a very deep impression on me, and last year I read Russ Roberts’ book ‘How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness’ which revisited some of Smith’s ideas contained in ‘The Theory of Moral Sentiments’. There is no doubt in my mind that a small part of Smith’s writing – the invisible hand – has been hijacked to promote and bolster corporatism and greed. I find your articles and the comments of posters measured, thoughtful, interesting and invariably courteous. I am saddened that the mainstream media has so little to say about our national plight, other than by fostering falsehood and discussion of matters of little relevance. Earlier this year a writer in a leading ‘quality’ newspaper claimed that anyone using the term ‘mainstream media’ without irony was an idiot. I am guilty as charged, although in my defence I would make the plea that anyone using the term MSM may have been an idiot who has come to their senses and realises the extent to which the national press is part of the problem. With every good wish.

    • Thank you Kevin. I particularly appreciate your comments, because this article was hard work.

      You are quite right about the hijacking of Adam Smith – corporatism and naked greed are hiding behind free market clothes. Karl Marx said in later life that “the one thing I know is I’m not a Marxist”. Likewise, Smith wasn’t a neoliberal!

      The media has nothing much to boast about – some journalists are very good, but all too often they are cheerleaders for the establishment, notably so over Brexit.

    • I really like your analysis here:

      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

      But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

      Click to access Perfect-Storm-LR.pdf

    • There are plenty of analysts who are good at explaining the symptoms…. but as far as I can see only you can Gail Tverberg have identified the disease (Stockman is probably the best of the bunch)

      It amazes me that so many smart people spend their time ranting at Bernanke and now Yellen ….

      They refuse to ask the obvious question — why in the hell are the central bankers throwing a nuclear bomb into the economy to keep it going?

      What is it they fear?

      And if someone were to suggest that the problem is related to the end of cheap to extract oil — they’d dismiss that as nonsense.

      As expected — nobody wants to go to that dark corner… because to do so can only result in despair… perhaps clinical depression.

      7.3 billion people who eat only because we have petro chemical fertilizers that allow us to grow food in soil that is otherwise dead. When the economy busts up – the oil stops – and we starve.

      Then you have 4000+ spent fuel ponds that MUST remain managed — that means spare parts and electricity.

      Nope – nobody wants to go there. Everyone wants a Hollywood ending

      Well – they will get one — it looks like The Road crossed with Apocalpse Now and The Titanic.

  3. Hi Dr Tim,

    no.. I don’t think you’re being unduly alarmist, I think you’re being very level headed!

    the fact you acknowledge that the cult of neo-liberalism is in the process of being ‘outed’ as a scam reassures me greatly,

    I assume this is in part connected with the IMF economist’s report recently in the news,

    it’s a shame the establishment should awaken from their ideological trance barely moments before we hit the wall but at least they will understand why they deserve to loose their shirts as all their corporate valuations, stocks, assets and stashed offshore currency accounts shrivel in value as the mother of all bubble bursts,

    I wonder if the crash will be so spectacular that governments will end up taking previously privatised utilities back into public ownership at effectively pence on the pound?

    I’d love to hear your take on UBI, universal basic income, we’ll need something when the majority are unemployed and the real economy needs rebuilding from the bottom up!

    I find it hilarious that neo-liberalism has gone so far and boxed the whole global economy into such a corner that ideas of a somewhat left wing and libertarian nature seem the only way out of a right wing and corporatist disaster,

    I was amused recently to hear Noam Chomsky interviewed and say,

    “the one thing you can say about neo-liberalism is that it is neither new or liberal”

    at least the end of growth may be slowing the acceleration of anthropomorphic climate change, it’s an ill wind that blows no good!

    • Thank you. Neoliberalism is, as you rightly say, a cult. Had Britain or the US (for example) been practising genuine market economics, the banks would have been allowed to fail, and the bankers would have been wiped out. A free-market state wouldn’t backstop property markets with cheap loans. “Miss-selling” would be treated as fraud. And so on. It is a form of hypocrisy rather than a real economic paradigm – and why invent a tacky version of something already defined, brilliantly, by Adam Smith?

      I never quite know whether the establishment is blind to what is happening, or knows but keeps quiet about it. I think, if I had to guess, that the Americans know what is happening, but the British do not.

      Some of the ideas being bounced around earlier this year looked like signs of desperation – negative interest rates and banning cash, for example. These idiocies seem to have slipped down the agenda just as “secular stagnation” has gained recognition – perhaps panic is giving way to resignation?

      The late great Bob Monkhouse famously said “I’d rather die in my sleep, like my father – than screaming in terror, like his passengers”

      And yes, the left has an opportunity here – I really never thought I’d see a self-proclaimed socialist get any votes at all in the US, and Bernie Sanders is the real shocker. Socialists elsewhere, though, are burdened by earlier sell-outs – for instance, Jeremy Corbyn doesn’t have to prove he’s different from Cameron, but he does have to prove that he’s different from Blair.

      UBI is something that I’ll think through – putting this article together has been a daunting undertaking, but it needed to be done before moving on to future issues.

  4. Very clear article Dr.Morgan. You have laid out our stark predicament. Given the situation, why is the federal reserve making noises about two rate increases this year? It would only force China to devalue its US $ peg and risk further capital outflows which would likely strengthen the dollar even more.

    • Thank you.

      Unless Janet Y is being very subtle – create an expectation of a rise, then shock the markets by backing down – then the likelihood is that she really believes that ZIRP is crazy (as indeed it is).

      The USD is seen, rightly or wrongly, as a safe haven, so is likely to remain strong even if she doesn’t raise rates. Also, buying pressure from those trying to escape from the “dollar carry trade” is likely to keep the dollar high anyway.

      Likewise, I think capital outflows from China are a fixture – the Chinese credit-stretch problem that I describe is sure to be noticed by investors, even if it hasn’t been spotted already, and they know that the carry trade has to be closed out.

  5. Many thanks for another very perceptive article.

    I’ve just finished reading Robert Gordon’ s book: The Rise and Fall of American Growth. In the book Gordon says that growth has been on a downward path for the last forty five years (since 1970). The expectation that we will grow at a constant rate over time is in fact quite contrary to common sense. One of the core elements in Gordon’s case is that innovation has tailed off in the last forty years, despite what we may think, and has never matched the inventions of the internal combustion engine, electricity etc that drove growth in the late 19th century and early 20th. Innovation does not come along at regular intervals.

    The various policies implemented by the central banks and governments are trying to target a state of normalcy that does not exist.

    If you add to the arguments by Gordon the now present issues of demography and the added (neo liberal inspired) continuance of globalisation and the labour arbitrage this implies you have a pretty potent mix which, taken together with the increasing and enormous debt burden, gives us the sort of cocktail you suggest.

    Like you I think there is no way out of this and the crash is inevitable. The conspiracy theorist in me might suggest that this is precisely what TPTB want because, when it does crash, the people are more willing to make sacrifices, albeit to those that are actually to blame.

    • Thank you Bob. I’ve not read Gordon yet – I must – but Kevin Phillips has been saying much the same for a long time.

      I cannot see how some kind of crash can be avoided – though doubtless someone will try to find a nicer name for it, like “the great correction”.

      I do wonder about post-crash resilience. Earlier generations had it – I still marvel at how my grandmother struggled on, with four children, first through the Great Depression, then during the war, after her street had been flattened by a 1000kg bomb in 1941. I just don’t know how her modern successors will cope with an economic slump of the size that I fear is coming.

  6. another deeply incisive article Tim.
    I must confess to using your stuff as a bit of a reference bible since your stint with Tullet Prebon

  7. Thanks for another great blog!! I particularly appreciated your comments about Adam Smith, who is widely misunderstood on both the right and the left. But you thoughts on the development of policy in support of speculators (value harvesters) rather than entrepreneurs (value creators) provide an especially powerful insight into the economic problems faced today!

    • Thanks – I’m not so sure that Smith is misunderstood (on the right, anyway) so much as misrepresented!

      Policy favouring speculators rather than entrepreneurs is hard to get one’s head round at first, I find, but then it all slots together neatly.

  8. Yes, A hugely incisive analysis. Can you not get this out to a wider audience? It needs saying loudly (and if necessary stuffed up politicians noses!).

  9. Thanks Tim. Very interesting. You must sometimes feel like a voice crying in the wilderness!

    I know there are many bloggers forecasting doom, but I wondered if you ever read Richard Duncan at http://www.richardduncaneconomics.com. I find him to be an incisive analyst about macro economics.

    There is also Chris Martenson at http://www.peakprosperity.com who whilst not an economist, seems to have a good awareness of what is likely to come in the not-too-distant-future.

    • Thanks – I do indeed feel like the boy and the Emperor’s new clothes! I’m familiar with Chris Martenson’s work, indeed we have corresponded about these things.

      My situation is that I think I’m right in my analysis, but my conclusions wouldn’t be touched with a ten-foot pole by anyone with influence!

    • Thanks. I admire Charles Hugh Smith, who brings admirable clarity to things that most of us find complicated.

      It’s a moot point as to whether economic slumps bring down governments or the failure of regimes causes debt crises.

      If you collect quotations, here was my alternative title choice for this article:

      “A fresh wind blows against the Empire”
      (Paul Kantner, 1941-2016)

    • Hi Tim and commentators above, any idea what we as individuals can do to insulate ourselves from the worst of the financial crash that Tim is talking about, please? Presumably the powers that be wiill ramp up the printing presses and create even more massive distortions until the inevitable implosion?

      Any thoughts?

  10. Insulation – please comment

    Dan asks about insulating ourselves from the crisis that I believe is impending. Any suggestions will be most gratefully received.

    My own first thought is that, as Dan says, the authorities will ramp up the printing presses, meaning high inflation and a loss of value of money.

    My second is that governments will act without principle in defending a “national interest” which, as much as anything, is really their own interests. As you may know, in 1933 the US made the private ownership of gold illegal, punishable by a heavy fine and a stiff prison term. Owners were paid $21/oz in compensation, and were later allowed to buy their gold back – but at $28/oz.

    I suspect there are long-standing plans for a “bail-in” if banks crash again, i.e. taking money from customers to offset bad debt losses.

    So any form of insulation needs to be considered with this in mind……

    • Hi Tim

      The obvious answer is physical gold, with a stress on the “physical”. You need to see it.

      Second I would guess anything that is a potential store of value with a long term scarcity element; real estate ( try and find a bargain!); paintings; vintage cars; agricultural land.

      I would think one should avoid anything with a “paper” value only: bonds; stocks and shares and any derivatives and bank deposits.

      I think you’re right about the bail ins Tim but if this reaches down to ordinary depositors then I suspect it will be “pitchfork” time and real trouble will ensue; even the sheeple have a breaking point at which the truth dawns. I also suspect that in the case of a systemic crisis the bank deposit insurance limit might well slip for the simple reason it cannot be afforded; then things really will get sticky.

    • I can see the appeal of gold, and it would certainly have to be physical, as paper gold would be paper, not gold. But you’d need a safe to keep it in, and there’s always the danger of nationalisation (meaning, in this context, theft).

      Scarcity value (and practical value) makes sense. It is possible to find good value real estate, if you know where to look, indeed I have ventured into this myself in a small way. Agricultural land is a good idea, but can be expensive, and surprisingly hard to find. Clearly paper assets are best avoided beyond what is required for immediate needs.

      Bail-ins have been implemented – Cyprus comes to mind – but I agree that this would create anger. Of course, a political system that has ruled the roost long enough to become complacent might not concern itself with that risk.

      One that concerns me is the banning of cash. The total value of bonds now trading at negative yields has just passed the $10 trillion mark, and some “experts” favour negative rates (“NIRP”). This sounds inoperable as things stand – why would a bank give you a mortgage if it had to pay you interest? People would obviously want the bigggest mortgages they could get, which sounds insane. Equally, why would you put money in a bank if they were deducting interest from you? So NIRP implies banning cash, but there would necessarily be some medium of exchange arise in its place, probably something physical rather than, say, Bitcoin. In the past, everything from cowrie shells to cigarettes have been used as currency…….

    • there are two aspects of buying paintings–vintage cars–rare stamps—and suchlike

      1….is that they are beautiful to look at, and you get a kick out of owning them, which is fair enough

      and 2… that at some point in the future someone else will want to take over their custody for a few years, with the same motivatiion of course, in exchange for large amounts of money.

      but as is made clear, our future society is going to be one run on energy availability, to the exclusion of money in the sense that we know it.
      If you own a food sourcein the inevitable future food crisis, (1 acres of land say) and somebody offers you a ferrari in exchange for it, what will your response be? Ask yourself the same question about a Michelangelo painting worth (in today’s terms) £100m. I suspect the answer might be the same.

      and yes, beautiful objects have always been sought after and treasured since ancient times. But then the objects resided in the hands of wealthy patrons who commanded the energy sources. Kings wore gold crowns paid for by peasants like you and me.
      Paintings and gold ornaments did not exist in thatched hovels..
      We all have cars, because surplus energy allows us to.
      Beautiful objects are a product of our “surplus energy” society. If you don’t have surplus energy, you can’t afford works of art in any sense.

    • Norman Pagett

      Good points Norman. I admit to confessing to the belief in the “greater fools” argument where there is always someone out there who will pay more.

    • Thanks Tim, Bob, Norman and Nigel for your thoughts

      For city dwellers, growing food isn’t an option. I’m aware that if society breaks down completely then we’re looking at things like weaponry etc, but then all bets are off, and presumably Martial Law will be enforced and anyone not behaving exactly as the military want will be quickly dealt with by trained soldiers.

      Assuming the financial collapse happens without complete societal (is that possible? I’m guessing it is) what happens then? As Tim says, gold could be confiscated, and bank deposits will be used for bail-ins.
      My gf has just sold her London flat so is sitting on cash (GBP).
      Is that good timing? They say London property will crash, but won’t they devalue the pound and print money so CPI inflation hits 10%, and property prices could r50%+ pa? Isn’t the best thing to borrow as much as possible and wait for £100k to be worth the value of a mars bar?
      Also, anyone have any ideas for funds to invest in?
      For real assets, ‘m thinking also agricultural land, as you suggest, and also good quality machinery, home generators, solar power etc.
      Great to hear others’ views.

  11. Thanks Tim for another excellent article.

    As to insulation, I would recommend getting as free from debt as possible. Personally, I don’t have gold – in a real world situation I can’t see many advantages in holding something I can’t eat or wear. I grow food and I wouldn’t trade food for gold – a bale of haylage maybe or muscle. My investments have been in myself, gaining as many practical skills as possible. I built my own house and I have some land, I keep bees, have a couple of housecows and we live entirely off grid but I know that when my big tank of diesel finally runs out and all the propane is gone my life will be a struggle without other people to share the burden. I can achieve a comfortable self-sufficiency but only while some semblance of normality exists because cutting wood for the Rayburn or hand milking the cow takes a lot of time.

    • Thank you Nigel. I admire what you have done.

      I assume you acquired the land before prices soared, which was very far-sighted. Re your propane, I think we do have to assume that some kind of normality continues, though obviously the greater the flexibility (in this instance, fuel sources), the better.

      More broadly, few people have the skills that you have acquired, so I’m not sure what others can do…………

    • you have done the ”right thing” Nigel, but ultimately the uk problem is 64 m people living in a country that can feed only 40 million—maybe not even that many. The food we do grow depends on hydrocarbon energy inputs, very few food producers know how to do it otherwise, in quantity. We expect food to be on supermarket shelves. When it isn’t all hell is going to break loose.

      the last time we were self sufficient in food was in the 1800s i believe.

      Come the crunch, numbers will reduce in some way, exactly how and by what method is impossible to guess at without going into very unpleasant thinking—so, like everyone else I prefer not to think about it….at least for most of the time.
      That we are going to “downsize” is not in doubt, unfortunately the thinking on that would appear to be that it is going to be matter of minor inconvenience, and somehow our “wheeled society” will continue as usual. (Electric cars are one of the biggest jokes in that respect)….we will still be able to drive to work etc.

      Maybe we should indulge in the Swiss insanity—and pay each other E2500 a month whether we work or not.

  12. I have been, and continue be, a most grateful fan of your thoughts expressed in your writings. I can only begin to imagine the effort and sacrifice, thank journey very much.
    I have been over the years an investor, lately a speculator. My question to you is how you envision any capital gains tax to adjust the gain for loss of value of the currency. The same issue with interest and dividends, as the after tax return has been for some time negative.

    • Thank you very much, Robert. After leaving the City, I started the blog (and wrote the book) to “keep my hand in”, but I find this stuff fascinating.

      On capital gains tax (CGT), my point is that QE handed huge gains to the minority who already owned assets, so I feel that governments should have found some way of clawing this back in order to avoid the accusation of “enriching their friends”.

      Please note that my article doesn’t criticise speculators, but does castigate governments who have made speculation more attractive and less risky than entrepreneurship. As individuals or as investors, we obviously respond to the incentives managed by government.

      In Britain (for example), CGT is lower than taxes on income, which seems bizarre. One’s “family home” is exempt from CGT, and I accept that, but wonder if gains on property should not qualify for exemption until the house has been owned for a minimum of, say, 5 years. I’ve known people flip their “home” every year or two, pocketing tax-exempt gains each time, and don’t think that’s what the exemption was designed to promote. I’ve also long thought that interest income should only be taxed where it exceeds RPI, because otherwise the saver is being taxed on inflation, not “profit” or “income” in any meaningful sense.

      As things stand, companies can offset interest expense against tax, but cannot similarly offset dividends. This tilts the playing field in favour of debt capital and against equity. Governments do seem – at long last – to be looking at this.

  13. I’ve only now seen your blog, Tim. Like the others I commend you for it. Gail Tverberg looks with the same cold eye at the situation as do you, and a few others. Too many, like even Nate Hagens prefer to sugar coat the reality.

    I have a few observations. I think the private debt burden will be “jubilee-d” or wiped off the books. It is strictly for a national emergency, not just for a few. It is only numbers in accounts, basically, so a reset would calm down the overheatedness we see today. It obviously will have plenty of complexities in actual operation. Chief among them will be how to compensate savers from the compensation debtors will get. Steve Keen has commented on that and he says the government would pay compensation commensurate with the debt reduction.
    I can go on, but you get the idea. Banks would not be bankrupted as they would only lose the value of loans made out from thin air money, or nothing, in other words. We need solvent banks as government money is all fiat and can never be money until deposited in private accounts. Only banks have the accounts.
    I understand banks cannot touch depositors money. So it is illegal for a bail-in without changing the law. Banks don’t need it as their loans have no components of their deposits involved. It’s called the Credit Creation Theory. Not sure why Cyprus occurred however.

    This sort of possibility is one reason I believe it will not be debts, as such, that will create the crash, it will be because debts are using tomorrow’s real resources today. As we all should know, growth at 3.5% means a doubling of the economy every 20 years, and a doubling means ALL previous growth is doubled, since BC. This has to stop. Since growth is essential in today’s economies a stop will be unprecedented and is not planned for by anyone so far as I know.

    On other issues, I’m not so sure Japan has a problem. I have been there and the government debt burden is invisible. Remember government debt is not a debt for the non government economy. It is a debt instrument whereby the government sells bonds to investors and stores them on accounts in their Fed reserve. For you and me such an account is a Savings Account, a sign of our wealth!!! So it is for investors in Government bonds. From the government’s point of view these bonds are debts, the same way a bank looks at your savings account. The government never spends these bonds, as being monetary sovereign, there is no use for them. So at maturity the bond is resigned back to the investor. No money changes hands, apart from interest earned.

    Similar inappropriate language occurs with government budgets. A budget surplus, universally regarded as a good, is no such thing. It means simply that government spending fell short of the tax take. This “surplus” is a shortfall in money, and not any sort of real surplus. It is in fact a deficit that the non government sector has to make up, as the sectoral balances must add to zero.

    These misconceptions bedevil the understanding of macroeconomics. So it’s easy to be wrong about how to address the deluge of credit available today. Real resources are the key to our future.

    • Thank you – I try to tell it is I see it.

      You make a lot of good points here, so I’ll take some of them one by one. Wiping out private debt, thus letting borrowers off the hook, doesn’t explain the outcome of the lenders – if one side’s liability is erased, does the other side lose his asset at the same time?

      If you are letting someone with a big debt, say $1m, off the hook, what about the prudent man – is he disadvantaged, i.e. he gets nothing whilst the reckless man gets his $1m debt erased? Then – if the reckless man used his $1m loan to buy, say, a yacht, does he get to keep it? If so, this sounds like big “moral hazard” to me – what is to stop people, in the future, borrowing to buy assets, in the knowledge that in extreme circumstances the debt will get written off whilst they get to keep the assets bought with it?

      On bail-ins, laws can obviously be changed. In fact, I think they already have been in the EU, or maybe the attempt failed – I need to check. In any case, this was what happened with Cyprus. I remember the FT’s Martin Wolf saying at the time that it was naiive to think that depositing money at a bank was wholly risk-free, implying that the depositor was therefore an investor, potentially subject to loss. I find that thought rather scary, but I don’t doubt that governments, all-too-often “principle-free zones”, will let depositors be skinned in a crisis.

      Opinions are divided about Japan – one leading commentator calls it “a bug in search of a windshield”. Rather than basing my case on the sheer scale of Japanese debt, you’ll notice I focused on JGBs. As things stand, there is no market in JGBs, or, to put it another way, the BoJ is the only buyer. It seems to me that monetising debt is disastrous, because the ability to create money at will to meet any spending the government feels like doing surely strips the currency of credibility – if that’s not how you see it, please explain.

      The key point, as you indicate, is the impossibility of infinite growth within a finite resource set. Economics has never addressed this, as in economic theory resources are simply “assumed” to turn up provided the price is high enough. Economists are going to get a shock, I suspect, when theory collides with concrete reality.

      In the words of the late great Yogi Berra: “In theory, practice and theory are the same thing. In practice, they’re not”.

    • That’s an excellent insight into why there can be no debt jubilee Tim.

      Expanding on that…. if governments were to wave a wand and wipe out all debts it would literally turn the entire system on its head removing all the rules of the game….

      And as we know — consistent rules are crucial to ensuring participants in the game.

      If the players see that governments are willing to wipe out debt in a massive (or even minor) jubilee nobody would loan out a single dime — and the system would cease to function.

    • Thanks Thomas.. I must admit I can’t see how it would work.

      As I see it, governments are trying to overturn the rules of the game – the system they’ve created can’t survive under the existing rules, but none of their new rules (negative rates, banning cash) look feasible.

    • Without a doubt governments are playing a dangerous game.

      In China short-sellers are threatened with jail time. Failing corporations the world over a being propped up with massive loans allowing them to buy back shares to prop up their share prices. Central banks have plunge protection teams stepping when the markets get spooked (or try to adjust to reality).

      Hedge funds are getting killed because they are confused by the new ‘rules’ of the game — i,e. there are no rules beyond doing ‘whatever it takes’

      I’ve got an idea for a new fund.

      Identify large companies that are not carry heavy debt loads… that are also providing weak earnings guidance….

      Now by the rules of the game one would think such a company would be a short target.

      But if you operate off the ‘whatever it takes rule’ you know that said company has a lot of room to borrow and buy back shares…. so if you are long and they step in with buy backs you win!

      Essentially this strategy involves doing the complete opposite of what makes sense. Or what used to make sense.

      Oh boy — we are really in deep deep trouble 🙂

    • Hi Tim

      Your penultimate paragraph in reply above makes the point about finite growth. In a way this is the point that Robert Gordon is making.

      The fact is that most economies didn’t grow at all for many hundreds of years and it is only quite recently that we have experienced “regular” growth. We expect the economy to grow at 2.5% year in and year out but this is quite contrary to common sense. GDP is largely based on population growth and productivity and, in the western developed economies at least, both of these are sharply lower than in the recent past.

      Population growth does not get reversed quickly, even with contentious immigration, and productivity depends not so much on investment but on the far more elusive concept of innovation and, as Gordon says, that has been in decline for the last forty or fifty years.

      As you say we are living in a fool’s paradise.

    • The Chinese are not alone in vilifying short-sellers, but actually these people are the canary in the coal-mine.

      More broadly, governments have a vested interest in ensuring that neither equity nor property markets slump. Of course, King Canute (or Knut) had an interest in ensuring that the tide didn’t come in!

      Stock buy-backs are discussed in my article – do look at the linked article by Damian Verial, it certainly convinces me.

    • Yes I did see that article. There has been plenty of coverage of this activity on Wolfstreet and of course Zero Hedge. All of these policies of course will end in tears… only question is when.

      In the meantime — the best policy is to enjoy that dying days of BAU while we can…. because what comes next is probably not survivable. Or if it is – I suspect survivors will wish they were dead.

      We are about to be unplugged. Forever

    • Indeed so. This situation reminds me of two rock tracks – “After The Deluge” (by Jackson Browne) and “Won’t Get Fooled Again” (the Who).

    • Bob

      Indeed so. Unfortunately, the fools like their paradise, and governments want the fools’ votes. History suggests, though, that the public will discover reality long before governments do. Indeed, I think that’s already happening.

    • Tim, I did say my comment was partial, but that the debt jubilee is floated not by me but by Steve Keen, among others. He answers your concerns, particularly your comment on the prudent man. The debt jubilee is a one off, no second bites of the cherry, so to speak. The biblical one was every 49 years, but we only need one.
      After that the collapse will come before we get to another suitable occasion. The best it can do is buy time, another story.

      How about some reading? Cleanse the concept of it’s falsities:

      David Graeber also writes about a jubilee in his book; “Debt, the first 5000 years”
      as a last resort. And it is. Until then it’s just bankruptcies, but this is no solution to a nation wide mass crash. That requires a Jubilee.

      I don’t get there’s a problem why the japanese government is buying government bonds when that is what any government does. It’s a safer place to save money for the investor, as the government guarantees it. Banks don’t. If investors want out its only because returns are better elsewhere, no? It is always the only buyer, by definition. Government debt is NOT a problem. Private debts are the problem.

      The credibility of a [federal] government lies with spending only up to the limits of productivity at full employment, a Zero relationship with tax. It can never go bankrupt, except deliberately, and within the limit mentioned above can always buy its debts. We are basically in deflation today so how many $Trillions are there for the spending this side of runaway inflation?

    • The devil is in the detail…

      For instance — there are hundreds of millions of people who rely on pensions — which are debts — so you wipe them out? What do they do for food if they have no income?

      Wiping out debt means all banks are immediately out of business. How do they get back into business?

      What about wealthy people who have much of their wealth tied up in bonds and equities (both are forms of debt) — what would they eat?

      I trust you have seen Korowicz Trade Off paper on systemic collapse – if you pulled the plug on debt the entire global supply chain would collapse – very quickly. And like Humpty – you cannot put something so complex back together again. You break it – it disappears.

      The complications and implications of enacting such a plan are beyond comprehension.

      This is not 1397. Or BC209. This is 2016 – it’s an entirely different ball game.

      Oh and if the central banks did this — and stated it was a one off – let’s say you had a 100 gold coins — would you be buying government bonds with them after the jubilee?

      Only a fool would believe this was a one off.

      Anyway – the debt jubilee is impossible — Steve Keen should surely know that.

    • Bloody hell! Why don’t you read my posts? I said only loans from thin air get wiped- in my earlier first post. Where did I say pensions? Your comment on Steve Keen says you are assuming what he said without bothering to listen. We certainly have to keep banks solvent. otherwise no money can get through to customers, no matter what the source. But I said that already. I’m not going to keep repeating the message, just re-read the posts before sounding off.

    • Like I said the devil is in the detail…

      So pensions don’t get wiped out. What else doesn’t get wiped out?

      What about bond holders? Do they get wiped out?

      You are aware that pensions are big holders of bonds.

      Banks must remain solvent. Ok

      How do banks remain solvent if all loans on their books are wiped out? In case you are unclear when loans are wiped out that is the same as every single debtor of every bank defaulting on every loan on the planet — personal, auto, mortgage etc…

      This would result in the collapse of the banking system. No?

      I am quite confused by what you are advocating.

      If you are not wiping the slate clean in terms of loans extended by banks. If you are not wiping the slate clean on corporate and sovereign bonds because that would wipe out pensions.

      Then what loans are you wiping out?

      Detail please.

      My understanding of a debt jubilee is that all debts get erased.

      Is this is a debt jubilee lite that you are suggesting? Again which debt gets wiped and which remains on the books?

      And you have failed to address my concern that a proper debt jubliee would collapse the global supply chain.

      I really like that axiom about the devil and the detail. When you start to think things through properly you find that they are often unworkable.

      The problem we are facing is that we have run out of cheap oil. Feel free to explain how wiping out all debt would deliver cheap oil.

    • You are expecting an answer to this issue in a couple of paragraphs? It’s not possible. Better minds than mine are working up a scheme that may work out, details sorted etc. Your questions still don’t reflect digesting what I have already written, incomplete though it be.
      There are various options in any Jubilee. None would suggest we trash the banks, so no need to go there. Steve Keen said, in the linked video, that the central bank would pay the commercial banks to wipe or pay off the outstanding mortgages, and the good guys get a cash injection in lieu. That would compensate them for any loss of housing values a jubilee might cause. My own version would be to do a book operation to zero out at least the mortgages [in 4 operations, aka double entry accounting] and the asset. The cash injection would still be paid to the good guys as compensation for the reduced value of their property. Banks can survive this, but not being in banking I can’t say anything about derivatives, wagers, etc. Someone else has to think this through. The banking system would not collapse, but it might be prudent to forbid derivatives and other financial wagers etc.

      You can’t wipe out debt. No debt no money. Debt comes first!

    • as i see it–that problem with any form of debt jubilee is that someone–somewhere has got to implement it.

      debt seems to be internationally enmeshed –in ways i certainly don’t pretend to understand—nevertheless if that is the case then there has to be some form of multilateral agreement on the process.

      The Uk certainly couldn’t do it unilaterally.

      so you have to visualise some benevolently minded individual /committee taking on this onerous task of dictating to everyone else as to what is ”good debt”—ie my mortgage—or ”bad debt”—your hedge fund. And then separating all the debt shades in between.

      i have a very modest amount stashed in ”investments” spread world wide. I will not be best pleased if that comes under bad debt by the definition of some international committee.

      as we exist in an energy economy, not a money economy, the ”debt” problem will sort itself out as our energy sources go into decline. Our money is worth only the energy that is in the system to back it up. When that goes, our money goes with it.

    • Obviously someone has to implement it. Possibly an emergency government, depending on the state of affairs when the SHTF moment arrives, will be forced to act. It will be part of a world wide chain reaction, not for just one nation i would think. Before that there’s bankruptcy.

      Eventually when the grid fails we will all be impotent financially.

    • i do realise that this is a ”hole in my bucket” discussion

      but when the shtf–we must bear in mind that those in any form of governmental control will–and must–behave like ordinary mortals….indulge in self preservation.
      the niceties of international finance will not figure in their thinking…survival will.

      therefore any implementation of control will inevitably be for the benefit of those with the physical ability to enforce that control to give them and their particular group the maximum benefit, at the expense of those less fortunate.

      I’d go so far as to say the shtf crash will appear first in the USA, because their loonytoon politics seems entirely delusional, they are in a state of permanent energy deficit, while at the same time they wear the crown of ”most powerful nation”—for the moment.

      when it happens, the house of cards will crash.

    • I fail to see how a debt jubilee would extend BAU.

      Can you explain how it would help?

      My take is that if a debt jubilee were to be announced — BAU would end — in less than a second.

      Because that is the time it would take for billions of sell orders to be transmitted through the digital exchanges.

      You cannot just blow up the entire system — and expect to save it. This is a massively complex interconnected piece of machinery — it cannot just be put back together once you smash it into pieces.

    • You may get your wish. The end of BAU. The planet mandates it and there is no escape either.
      The extension of BAU is the objective of a Jubilee. A resetting of the clock. I can’t say what will or will not work. Considering this alternative a Jubilee will be a popular option, as long as the punters understand the alternatives.

    • I don’t see it that way. In fact I see just the opposite.

      Remember the Lehman collapse? That was a mini Debt Jubilee.

      Do you recall that the global economy seized up?

      And you think that doing the same thing x 1,000,000,000,000,000 etc… is not going to implode the global economy?

    • The alternative was a massive debt jubilee – like the one you are proposing now.

      Because if – when Lehman was let go — the central banks would have stood by and done nothing — all debt would have been wiped out in short order — global supply chains would have collapsed — and civilization would have ended.

      We had a peak at what a debt jubilee looked like in 2008 — and we did not like it. So we did not go there.

      It would be no different if we went there now. It would solve nothing. It would hasten the apocalypse

    • Maybe I’m not explaining well enough? You keep showing you do not understand what a debt jubilee is, or should be.
      In simple terms, debts are created by banks, like 97% of it all, without using a cent of reserves or deposits. Like game scores, there is no box where the numbers are stored for a game, they are just keystrokes in accounts conjured out of thin air. The sums created when paid back return to thin air. In the meantime the banks live off fees and interest due on the loan. A debt jubilee short circuits this and brings forward the end date, so the bank loses some of its fees and interest, but little else is affected. The solvency is not affected. IMO,The bankruptcy option is much more drastic. Obviously the banks become smaller, but that’s what we need. House values go down and we definitely need that to happen. Compensation has been discussed before.

    • Unfortunately … the real world is not the same as a game of Monopoly or any other game…

      When you wipe out numbers as you suggest….. you collapse a very sophisticated, interconnected, fragile system.

      And when you do that – it cannot be put back together again.

      See Joseph Tainter – Collapse of Complex Societies https://en.wikipedia.org/wiki/Joseph_Tainter

      If it were so simple as resetting things by wiping out debt — why didn’t the central banks simply do that in 2008? Just toss kick the board over — pick it up — and start again.

    • They didn’t do so because they are ignorant or had another agenda [most likely]
      You sound like you are not willing to learn. So what would be your solution to the debt overhang Tim keeps saying must be drastically reduced???

    • There is no solution.

      And as we can see — the central banks have reached the same conclusion — more of the same is the only option.

      I see that China added over a trillion dollars in Q1…. there is a story on Zero Hedge today about how the US has added enormous amounts of debt this year — and for each $1 of GDP it is now taking $10 of debt.

      I fail to see how wiping out debt would kick the can – details are required yet not forthcoming.

      On the other hand… I have seen what a pip of a debt default looked like (a pip as compared to what you are suggesting) when Lehman defaulted….

      We were staring into the abyss… the only way we did not enter the vortex was — you got it Pontiac — the central banks backstopped all debts returning trust to the system —- and immediately allowed trillions of more debt to be piled on.

      You are suggesting we do a Lehman on steroids, heroin, HGH, crack, and blow.

      I don’t see that helping.

    • It’s your misconception that Lehman is comparable to a Jubilee. Lehman was destroyed, a Debt Jubilee would NOT destroy the banks. So the whole of your argument is nonsense.

    • Actually Lehman was not destroyed… Lehman was insolvent … and the Fed decided not to bail the bank out…. so Lehman declared bankruptcy …

      ‘In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis’ — https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers

      Bankruptcy resembles a debt jubilee…. the only difference would be one of scale… with a debt jubilee inferring all or most debts are wiped clean i.e. a comprehensive global bankruptcy.

      This would not only destroy banks — but more importantly it would destroy the global supply chain.

      As we saw in 2008 when the flea on the elephant was not bailed out — the world stopped — trade stopped…

      The only thing that restarted it was the central banks announcing that they would limit the damage to the Lehman fiasco (or experiment?) …. they stated emphatically that they would guarantee every debt on the planet… that brought trust back into the system … trade restarted … the financial system unfroze… and we got back to BAU….

      2008 provided the perfect opportunity to wipe the slate clean — instead of guaranteeing all debt the central banks could have stood back and just allowed every financial institution on the planet to collapse… they could have allowed trade to remain seized up which would have quickly resulted in the collapse of every company on the planet…

      Millions of layoffs would have turned into billions… food would have stopped arriving at the shops… petrol stations would have emptied…. spare parts would have quickly not been available thanks to the JIT supply system… and we would have very quickly had total chaos … and complete collapse.

      Thankfully the central banks did not try some sort of debt jubilee – we’d not be alive right now.

      It would not have worked then – and it would not work now.

      Plan B is the same as Plan A — as Japan has demonstrated — more of the same. Until at some point you push on a string …

    • An argument is something that is backed with facts.

      What you have done is stated an opinion. You have nothing to support your position.

      On the other hand I have dropped a deluge of facts that support my assertion that a debt jubilee would immediately end BAU … literally within seconds of it being announced… well… in the time it would take a thousand traders to pound his fists onto the sell keys over and over again …

      You insist on insisting I am wrong — but that’s all you do is insist.

      Insisting does not make you right. No matter how vociferously you insist. You can even pound your shoe on your desk and insist. Your eyes can bulge out of your head in great frustration. You can turn purple. You can hurl profanities and insults.

      But still — that would make no difference

      You have demonstrate that I am wrong. You have not even tried to do that.

    • You are laughably deluded. You have presented NO facts, only your opinions. I have support from what Tim has written here in this blog, not to mention David Graeber, Steve Keen et al. Your deluge is just snow. You have not a shred of evidence to back yourself up, just conjecture. It’s time wasted. We’ll just have to agree to disagree. We can’t know until the time comes who has an answer. I don’t doubt others think like you, but I am not Robinson Crusoe with my opinion.

    • How about we start with Lehman.

      Do you still assert that Lehman was destroyed? If so who destroyed Lehman – and why?

      Or do you agree with me that Lehman was caught out on massive wrong bets on the housing market — which ultimately bankrupted the company?

    • Where is Lehman? It is in the bankruptcy graveyard. RIP. It is gone. Kaput. Dead. Done.

      So I take it now understand that Lehman was not destroyed — which would assume there was malicious intent..

      Rather it went bankrupt:

      adjective: bankrupt

      1. (of a person or organization) declared in law as unable to pay their debts.

      We can see what happens when organizations fail to pay their debts.

      Now imagine what would happen if all entities – individuals, governments, corporations… were permitted to simply walk away on their debts.

      Imagine the utter chaos that would result?

    • Once again, same old. same old. House owners in the US ARE permitted to walk away from their
      mortgages. Only the poor idiots with scruples believe you should honour your debts. The elite certainly don’t.

    • You do understand that a Debt Jubilee is much different than some home owners tossing their keys in the ditch as they walk on underway properties….

      Now imagine what would happen if every home owner in America stopped making mortgage payments.

      Now imagine if every property owner across the world did this … every business that owed money … every country … every person walked on credit card debt and personal loans… all stocks were voided…

      Think it through…..

    • Many good points Norman.

      “in ways i certainly don’t pretend to understand” – too big – too complex for anyone to understand.

    • Again. The problem is not one of debt or of money.

      We are out of cheap energy. The global economy must have cheap energy.

      Wiping out debt does not solve the core problem. It solves nothing actually.

      Feel free to explain it is otherwise.

    • unfortunately you can’t tell that to the politicos who keep promising infinite growth
      (though some undoubtedly know it, but dare not say it of course)

      and the screaming masses who believe them

    • Thanks for the great article, Tim. Late economist Nicholas Georgescu-roegen addressed the impossibility of infinite growth back in the 70’s. Please refer to “Energy and Economic Myths” published in 1975.

      Best regards,


    • ‘On other issues, I’m not so sure Japan has a problem. I have been there and the government debt burden is invisible’

      I’ve been to Japan and seen the endless freeways — devoid of traffic…

      Unless you think Abe has what amounts to a perpetual economic motion machine — then Japan most definitely collapse.

      The QE rounds are getting bigger — gargantuan — and closer together — because they are having less and less impact — GDP dropped rapidly after the last round — and deflation kicked in very quickly as well.

      Abe has admitted his plan is failing.

      What are his options? If he stands back Japan will enter a deflationary death spiral – that is a certainty.

      There is only one option once you get on the treadmill of death — QE — you need to print more and more and more. QE is not a viable economic model – it WILL fail.

      Japan is facing a Weimar moment….. expect the mother of the mother of the mother (great grandmother?) of all QE to be announced at some point.

      Stock Tip: go long Japanese wheelbarrow importers

    • I do incline to the view that Japan is in big trouble. Please bear in mind that there are issues other than purely financial. One is demographics – what used to be a population saving for retirement has become an ageing society drawing down on those savings – this is reflected in a savings ratio falling markedly from historic high levels. Then there is energy, which has been Japan’s vulnerability for decades.

      I’ve never believed that “Abenomics” could work, and from the beginning I’ve called it “kamikaze economics”. I see it as a policy born out of desperation – we must do something! – rather than rationality. Abe did say that, barring a Lehman-style event or a big earthquake, this summer’s sales tax hike would not be deferred – but now it has been, to 2019.

      But ultimately I come back to this – when the central bank becomes the only market for government debt, this is proof that debt is being monetised, and I cannot think of a single case of that turning out well.

      I reach this conclusion with sadness – in my own experience, the Japanese are great people, especially in business, where their ethics put the UK/US system to shame.

    • I concur. This time is not different – it never is. Japan will go down.

    • i always try to simplify things, and there seems to be a universal law in all this

      that if a nation doesn’t possess sufficient indigenous energy resources to satisfy the aspirations of its inhabitants, then that nation must beg borrow or steal them from somewhere else, or collapse back to a level of natural sustainability. (The driving force of all expansionism and warfare)

      This of course is unacceptable, people refuse to slide backwards. Hence the Japanese tried the stealing option 80 years ago—that worked for a time, but they found their resource supplies were cut off.
      Then they were reduced to begging, until borrowing kicked in, disguised as brilliant business acumen and dedication to survival. At all three stages, their problem was a lack of indigenous resources, which had to be obtained from other nations.
      All three options have now been exhausted, and as Kunstler has pointed out on numerous occasions, they are the first major industrial nation to be headed back to a Medeival level of function. Abe has run out of options.

      The UK followed the same expansionist routine. We used our resources (iron and steel) to build our empire. Our resources are now gone, and we too will shrink back to our pre-industrial level of sustainability. We grabbed a temporary lifebelt from North Sea oil—that too has gone.

      The USA is the same, they have become the supreme denialists—–proclaiming that they are now the world’s biggest oil producer–with an oil production level of 10 mbd, while ignoring a consumption level of 18mbd. USA oil peaked in the 70s, and has been declining ever since. Their politicians deny the obvious, but have no other options–they need votes (to make America great again?) The reality of the American crisis is revealed by the fact that they didn’t get involved in oilwars until their own oil went into decline. Just like the Japanese in the 30s/40s, they had to secure supplies from elsewhere, or go into severe decline. In a fully armed society–that would not be pleasant. As Noam Chomsky pointed out, the rise of a Donald Trump was inevitable.

      Already in the USA 50m are on food supplement programs–that in itself should scare us all. The USA is insolvent, just as Japan is insolvent. Their struggle for survival is going to take everyone down.

    • Japan has enormous wealth tied up in its government bonds. Not government wealth, private wealth. QE is utterly unnecessary. It’s just asset swapping and useless. In the US it helps the banks get rid of poor performing loans but the banks are still not spending as the deflation is not showing many good options, and as well the loan margins are so weak, government bonds offer a good enough return at zero risk! Maybe Japan has the same problem? Too much money for the economy to absorb in the usual ways, but there are ways to use it, what with failing infrastructure and switching to renewables and full pensions, free education etc. The problem is political.

  14. So, we’re agreed then. We’ll wait until interest rates go negative then borrow a vast amount of money to buy gold plated Ferraris then, as soon as the debt jubilee kicks in we swap the cars for land – sweet! What could possibly go wrong!

  15. Yesterday, the World Bank cuts its current-year growth forecast to 2.4%, from a 2.9% forecast issued in January. The acceptance of “secular stagnation” seems to be gathering pace.

    • Indeed Tim but at what point does “secular stagnation” become the “new normal”. Secular stagnation could be considered an oxymoron: secular implies long term whereas stagnation implies a short term deviation from a trend.

      I think we’re quite probably in the new normal but no one can see this or can but doesn’t like what it implies.

    • I think we’re on the same page, Bob.

      I take “secular” to mean “ignoring noise and one-off events”. In other words, then, “the underlying trend is stagnation”. “Stagnation”, to me, means “an absence of change”, in this context meaning no growth, or at least no growth on a per capita basis.

      That, of course, has been my position for a long time – essentially, that growth is over.

      So yes, it’s the “new normal”. But economics, like many other things, isn’t stable-state, and there is always change, in the nature of things.

      My SEEDS model shows roughly flat global real GDP for a number of years (though with some countries growing and others contracting), followed by economic retreat.

      So we are either in a “new normal” of little or no growth, or on the cusp of a “new normal” of negative growth.

    • Stagnation cannot be the new normal for very long. We either grow – or we collapse.

      So we best enjoy the new normal while it lasts.

  16. You will see that I have added, at the end of the text, four charts from SEEDS illustrating “secular stagnation” from a Surplus Energy Economics perspective.

    • Tim, Is it a coincidence the $18Trillion in your graph matches the -so called – federal [government] debt?
      As you know “government debt” is the sum of all the bonds held at the Federal Reserve. They are not debts from the investor’s point of view and from the governments side the funds are simple to pay back. Simply reverse the entries in the accounts.

    • Coincidence. It simply implies US government debt is about 100% of GDP. Official data shows it at 97.8% at the June 2015 ($17.3 trn).

      There is a lengthy section in my book about the real debts and quasi-debts of the US and other governments.

    • It’s called “Life After Growth”, and is a much-expanded version of “Perfect Storm”. It is available in physical form from Amazon. An e-book version is available as well.

  17. Simply brilliant, if only more of our policy makers shared your insight we might have been able to turn this ship around before it runs aground. Many thanks for the effort in writing this fantastic article.

    I had one question regarding Japan. Since they are now without doubt running banana republic monetary policy, why do you think the yen has not crashed and inflation (in consumer prices at least) not hit Venezuela levels yet? What is keeping the Japanese economy afloat?

    • There is no turning the ship around – and never was.

      Unless of course we were to have made the decision thousands of years ago to remain living in very primitive conditions as hunter gatherers.

      Of course nobody wants that – we always strive for comfort – for more.

      And that lead us to start farming – the biggest disaster in the history of the world because we produced surpluses which resulted in a population explosion. It also lead to ‘progress’ as we diverted from searching for food to inventing.

      And of course we then had the misfortune to find fossil fuels and that lead to the industrial revolution

      And now we are on the brink of possible extinction.

      Not only is virtually our entire food supply reliant on petro chemical fertilizers and pesticides (the soil is dead without them) but we also have thousands of spent fuel ponds that will spew massive amounts of radiation for decades (centuries?) when the power goes off and we are unable to manage those high tech facilities

      This is what happens if a single pond is compromised:

      Assuming a 50-100% Cs137 release during a spent fuel fire, [8] the consequence of the Cs-137 exceed those of the Chernobyl accident 8-17 times (2MCi release from Chernobyl). Based on the wedge model, the contaminated land areas can be estimated. [9]

      For example, for a scenario of a 50% Cs-137 release from a 400 t SNF pool, about 95,000 km² (as far as 1,350 km) would be contaminated above 15 Ci/km² (as compared to 10,000 km² contaminated area above 15 Ci/km² at Chernobyl).

      Containing radiation equivalent to 14,000 times the amount released in the atomic bomb attack on Hiroshima 68 years ago, more than 1,300 used fuel rod assemblies packed tightly together need to be removed from a building that is vulnerable to collapse, should another large earthquake hit the area. http://www.reuters.com/article/2013/08/14/us-japan-fukushima-insight-idUSBRE97D00M20130814

      Actually — this is not a bad thing — we will be begging to be put out of our misery when BAU ends.

      Enjoy the little time that is left

    • Thank you, Rich.

      The point you raise about Japan intrigues me, too. The answers I tend to get are (a) “debt’s not that important”, and (b) “monestised debt is irrelevant”.

      I sort of understand the first point, whilst disagreeing. The logic is that if you don’t have to pay interest, does it matter how much you owe?

      I don’t really get the second point. There is no reason why the degradation of the currency doesn’t matter, even if – at the moment – there isn’t an inflation problem.

      This reminds me of a quotation from 2008 – “the banks were absolutely fine – until the day when they weren’t”.

    • Did you hear the one about the pilot who believed the plane would still fly even if the wings fell off…

      Then there’s the one about the guy who thought that printing massive amounts of a currency would not have implications…

      And another guy who believed that wiping all debt would return us to utopia…

      Then there’s the one who believes that when he dies a man in the clouds will beckon him to the gate and welcome him into paradise — or send him to a place filled with fire….

      Amazing what absurdities men can believe…

    • So what I think you’re getting at is basically, there is still confidence in the “market” that debts don’t matter (likely due to prevailing faith in central bank intervention), and as such currencies don’t need to reflect the economic fundamentals of their respective governments.

      If that is true, then the moment faith in central banks collapses there will be the mother of all runs for the exits as suddenly debts matter again, and any currency from an over-indebted or insolvent government will be crushed by the market. In that situation it seems logical that fiat currency will be dumped and everyone will run to gold, the only money whose purchasing power is not derived by faith in insolvent governments.

      Faith, or confidence, is the last pillar in a world where fundamentals don’t matter, and that pillar is shaking violently now. What strange (interesting) times these are!

    • Yes, Rich, that’s very well-put. For many, there is nothing to be gained by “rocking the boat”, and the lack of any need to pay significant sums in interest enables a more “relaxed” view. Running for the exits means selling, but this in turn means switching into something else – but what?

      Confidence is indeed critical, and holds up at the moment perhaps because of inertia. Also, the practice of monetising debt should result in inflation, once money starts to lose value very rapidly, but the economy is so depressed that there are no inflationary pressures at the moment.

      I face this question very frequently at the moment – am I missing something (and I don’t think I am), but if I’m not, what is holding back the floodgates?

      It’s interesting that banks are rebelling against NIRP – Commerzbank is reportedly considering put bank notes in vaults rather than putting money on deposit at the ECB and paying negative rates (which is said to have cost German banks alone EUR 248m last year). There are signs of revolt in Japan, too. Janet Yellen deserves credit for realising quite how abnormal the whole situation is – though the danger, of course, is that the medicine could kill the patient….

    • What is holding back the floodgates? Good question Tim! I can’t say that I’m any kind of expert, but if I think about it logically, my thought process goes like this:

      1. Prices are a relative measure
      1. Japan is fundamentally devaluing it’s currency (by printing Yen to buy financial assets)
      2. This “inflation” should be detectable as a general increase in prices measured in Yen
      3. The price of something in Yen is an arbitrary numeric amount, but we see changes to the Yen price of something relative to the price measured in another currency
      4. Therefore, if the price in Yen is not going up relative to the price in other currencies, it must mean that all the other currencies are being devalued at a similar rate

      Amount of debt shouldn’t fundamentally affect the above logic as the money that is printed to buy the financial assets are still spent into the economy which increases the supply of money, which should (due to supply/demand) lead to a change in prices. The only reason why we wouldn’t see that change is if the thing we are measuring the price change with (i.e. other currencies) are being inflated to a similar amount.

      Anecdotally, this also helps to explain why the world’s central banks work so closely together.

      The exception to that is gold which is the only money that cannot be printed, if the above is true then we should be seeing an extremely fast rising price of gold (and silver). But on closer inspection, the price of gold is set in the futures market, not in the physical market. As we have seen recently, the ratio of paper contracts to physical in the futures markets are at record high levels, not counting the amount of shares in GLD and other “physical linked” ETFs. So in effect, gold is being “printed” which is having the effect of hiding the true amount of inflation going on in the world’s fiat currencies.

      So, when do the flood gates break? Logically, that will be when:

      1. The price of gold is once again set in the physical market
      2. Central banks fail to manage their currency declines relative to each other
      3. One of the world’s governments stops devaluing their currency revealing the huge relative inflation of other currencies. This could be brought on by the election of an individual not part of the political establishment

      Bit of a mid-afternoon brain dump on my part, apologies if it’s not coherent!

    • Just one amendment to my previous post:

      “The exception to that is gold which is the only money that cannot be printed. If the above is true, then we should be seeing an extremely fast rising price of gold (and silver) *measured in all fiat currencies*”

  18. Returning to my recommendation for a debt jubilee, I can add now [with thanks to the “Life after Growth” book link from Thomas] that Tim does, indirectly at least, agree with some remedy like a debt jubilee.
    I quote from Chapter 2; “… the financial and real economies can be reconciled only if financial claims [meaning both debt and money] are destroyed on a truly enormous scale”

    • My way of looking at economic issues is to observe that there are two economies. The first is the “real” economy of goods and services, labour and resources, and I further believe that this is in reality an energy system.

      The second economy is the “financial” one. It was invented originally for convenience, not least to improve on barter, but it has brought some very real positives to the party – so long as we never forget the primacy of the real economy.

      Money has no intrinsic value – its value resides in being able to exchange it for “real” economic items such as goods and services. Therefore, money is a structure of “claims”, a term that I use a lot. Debt, as “a claim on future money”, is a claim on future economic output.

      The danger lies in creating an aggregate of claims that exceeds the aggregate of real economic goods – I term this “excess claims”.

      Now, by definition, “excess claims” cannot be met, so have to be destroyed. This can happen through default, or through the devaluation of money. The authorities have been trying to “cheat” this equation through monetary manipulation. That ought to create inflation, and remains likely to do so – but the fact that monetary manipulation has not, thus far anyway, created inflation is testimony to one thing, which is how very weak the economic fundamentals have become.

      Finally, why have we created these “excess claims”? Greed comes into this, and so does a faulty financial system, but there are two main factors, related to each other.

      First, our management of the economy is influenced by “futurity” – our expectation of growth leads us to create “claims” which, though they cannot be met now, can be met in the future, by an economy of tomorrow that we assume will always be bigger than the economy of today. Today we are paying the price for over-optimism, essentially the belief that we can extrapolate past growth rates indefinitely into the future.

      The second is energy and other resources. We measure their cash cost, as this is a closed circuit – for instance, an oil company’s cost is a contractor’s revenue, so to that extent it’s zero-sum.

      BUT, we do not account for opportunity cost (money spent on an energy project could instead be spent on something else). More critically, we do not account for “economic frent”, or “the cost of scarcity”. This omission means that we over-measure the economy – and, as the energy cost of energy increases, this shortfall gets bigger.

      Hope that helps clarify?

    • Thanks for that – do you think that a debt jubilee would act to extend BAU — or would it be more likely to collapse BAU?

    • Need to get back to you on that one. This adds to a list of things I have to answer – so my next article might be in the area of state of the economy and scale of risk.

    • It’s a difficult ask of one person.

      I am certain that there are Think Tanks filled with PHD economists and mathematicians tasked with formulating policy aimed at keeping BAU operating — they would be armed with the best super computers on the planet allowing them to model the consequences of their ideas.

      Without a doubt one of the ideas they would have floated would be the debt jubilee. I suspect they have determined this is a no go

      I base this on the fact that we all saw what happened when Lehman was let go – I suspect that was an experiment aimed at seeing what might happen if debt was wiped out….

      It was akin to hearing a roaring beast who is chained behind a curtain … wondering if the beast is really as bad as he sounds… taking a peak and seeing an absolute helion with dripping, flashing fangs…. enormous claws…. straining at a chain — that is near its breaking point…

      We quickly closed the curtain …. and we most definitely do not want to take another peak – never mind flinging back the curtain completely to expose the beast in all its fury….

    • What you say Tim is good. I agree with the Two Economies reality. But how do we address the troubles they are causing? Apart from my quoting you above you also mention it further along, [I am going through your book now] under “The Madness of Crowds” where you say “there is no escape short of value destruction on an epic scale”.

      PS I laughed at your note of property described as a ladder and seldom a snake. Worth remembering!

  19. Hello Tim
    I think a big part of the cause of stagnation in the West is globalisation. It has come back to bite its creators, a la Frankenstein’s monster. Even in the seventies and eighties western economies were relatively closed. If a government borrowed and spent, or lowered interest rates to encourage consumer borrowing and business investment most of the money would get spent into the domestic economy. This would drive up demand for labour, pushing up wages and prices. At some point the inflation would be considered too high and the brakes of higher interest rates would be applied. This would cool the economy, bankrupt weak businesses, reign in house prices and expose bad debts that had to be written off by the banks. The overall effect was to moderate the growth in debt levels through a process of inflating there value away and writing down the bad debts. This went wrong with the entry of China into global trade in the 1990’s and its joining of the WTO after 2001. After that a lot of the money spent into the economy by Government borrowing and Bank lending in the West went to the Far East, boosting labour demand there, pushing up wages and prices i.e. debt generated in the West was creating inflation in the East! The old tool of using interest rate increases to reign in excessive monetary creation, and thereby moderating debt levels no longer worked because doing so would crush the domestic real economy of goods and services where there was little to no inflation due to low priced goods from the Far East i.e. no whittling away of debts by inflation and no regular writing down of bad debts exposed by interest rate increases. A lot of senior economists at this time went around congratulating themselves on creating the great “moderation”. What they had really done was sabotage the ability of their countries to control debt! The only answer they have had since is to expand debt further (ZIRP), or QE (print money) in the hope they will generate some inflation in the real economy to whittle down the debt (but has consistently created asset bubbles), or generate growth to pay the debt down. Neither has been notably successful. The pile of un-payable debt is now so large that it would be extremely dangerous to the financial system to raise interest rates to force bad debts out of the shadows to be written down, coupled with a fall in asset prices that under pin the value of a lot of the rest of the debt if debt does not continue to expand in asset markets. As for inflating the debt away, not while you have globalisation. Money printing in the West will only generate Inflation in the East. At some point the pile of debt will implode, it nearly did in 2008. The Western financial system is now a Ponzi scheme kept alive by central banks pumping money in to pay the interest on the existing debt, hence QE, ZIRP, and now NIRP. At some point murphy’s law will kick in and it will collapse. The option of re-localising Western economies will trigger trade wars which have a high chance of initiating the financial collapse, so not a short term option. Best option, prepare to live in a country that is going to look like Greece in the next decade or two. Murphy’s law may be kind to you!

    Sorry for the writing style, I am just in a mood, irritated by the idiocy that I am hearing re the Brexit vote! (from both sides!)

    I have emphasised globalisation as a significant factor in sabotaging the West’s ability to control debt, it has made our situation a lot worse than it would otherwise be due to the increasing cost of energy, resource depletion, and environmental damage, as well as the self inflicted wound of increasing inequality (Capitalism is mass production, and if the masses cannot buy the production? Capitalism goes bankrupt as it cannot sell enough to cover its costs).

    Last word, do you remember the Barber Boom? Named after the chancellor under Ted Heath.
    You could sum up the British economy since the early 1970’s under the Tory’s or New Labour, as the inflation of a series of asset bubbles, with the hope that enough of the windfall wealth would trickle down to keep the consumer economy going and the plebs happy. It is no different today, except the debts are nearly due.

    Many Thanks for writing your blog, and for the commenters contributions.

    Philip Hardy

    • Agreed – globalisation gets a chapter to itself in my book. I’m not against extending the benefits of developoment to emerging economies, but it was the way globalisation was done which was the problem.

      For the West, globalisation meant reducing production, reflected (through the loss of skilled jobs) in impaired earnings. But the same people who wanted Westerners to produce less also wanted them to consume more. The only way of bridging this gap was cheap and easy credit. Helped enormously by deregulation, the bankers obliged.

    • I quite agree Tim, and it was largely done for the short term gain of a narrow segment of the West, for political as well as economic reasons. I will have to get your book. But we are where we are, and there are no tools in the monetary or fiscal boxes left to fix it. I hope the Greeks will have a little sympathy for us so that they will give us good advice on getting by.

      Regards Philip

    • Or perhaps it was done to keep the hamster running on the wheel a little longer…

      Expensive ‘stuff’ means we buy less of it — which means layoffs — which means we buy less – and more layoffs —- setting off a deflationary death spiral.

      Case in point – I was in BC Canada a few years ago — a small town in the Kootenays — there was a locally made corn broom for sale — real nice — $55. A similar broom was for sale at Home Hardware — made in China no doubt — for $15.

      I bought the $15 one – and I bought some other ‘stuff’ with the $30 I saved.

      Run hamster run. Because when you stop – we won’t even be able to buy a toothbrush.

    • Yes Philip, a remarkable instance of greed and politics to the detriment of the majority. The game is almost up, I think, but that may be no comfort to people i n general.

      It would be nice to think that someone has a plan – but I see no evidence for it.

      My other thought is that, where it’s been at its most extreme, the cult of greed has had a thoroughly nasty effect on society.

  20. What will the trigger be?

    Since the central banks will do ‘whatever it takes’ I suspect the trigger will be something that they are unable to control.

    We see corporate profits falling quarter after quarter — if the central banks are unable to reverse this then there must be layoffs …. which will accelerate the collapse in profits… and we get our deflationary death spiral.

    Lots of data points indicate the layoffs are dramatically increasing…. what will/can the central banks do to staunch the bleeding? Do they have another trick up their sleeves?

    If so – we better see it soon – because once the snowball starts picking up speed — it can be difficult to stop….

    Bernanke said that deflation was his biggest fear…

    I do not want to see the end of BAU — however I am curious to see how this all ends.

    What will be the event that brings down civilization?

  21. On US mortgages, you can walk away from them in some States, not all.

    In passing, I like vigorous argument, but please be polite – courtesy is not inconsistent with views being strongly-held and strongly-expressed. There is no absolute standard of truth or fact in what we are discussing here – so different opinions are exactly that.

    On the jubilee idea, I can see that in a way it looks inevitable – debts that cannot be paid won’t be paid. But an agreed framework of debt cancellation would be hard to arrange, and defaults are possible, and becoming more so.

    • It’s a pity we didn’t explore more how to prepare for the financial storm ahead. There are some who plan to repay their interest only mortgages by winning the lottery. I hope no-one thinks waiting for a debt jubilee to be a sensible strategy.

    • For those who are adamant that a debt jubilee is imminent …. might I suggest walking the walk and running up the credit card to the limit…. financing a piece of property (a farm? remote location?) etc….

    • Tim

      I agree with you here about the almost inevitability of a debt jubilee but, as you have said, it may well drive a coach and horses through the concept of moral hazard.

      Steve Keen’s idea is that the central bank injects money directly into bank accounts with the condition that those who are in debt have to use this to pay down their debts whilst those who do not have debts can use it as a cash bonus.

      It seems to me that this could only take place on such a scale as would make no significant difference to most debtors so would not solve the problem. If you forgive say £40,000 ( which is only around a quarter of present mortgage debt I believe – and I stand to be corrected here) that may make a difference to a mortgage holder but it would have huge implications for inflation for the two thirds who do not have mortgages as well as being unaffordable.

      A debt jubilee of £5,000? Would that make any difference to the indebted? Frankly I can’t see it.

      He may be right in principle but I can’t see his scheme working.

    • Yes, I agree. To do this on a meaningful scale, without causing massive inflation and/or a slump in confidence in the currency, looks very, very difficult.

      I don’t think governments are that concerned with moral hazard, so they might try to skew the process in favour of those with debts.

    • A debt jubilee is inevitable.

      It will come when the central banks efforts to stop a debt jubilee from happening fall short.

      Every minute of every day the central banks are working to somehow keep the system solvent. They are doing ‘whatever it takes’

      If they thought a ‘Mega Lehman’ were the answer – why bother with bail outs, QE, ZIRP, NIRP etc etc etc…

      Just shove the diseased carcass into the furnace and start afresh….

      The debt jubilee – when it happens – will signal the end of civilization. And it will not be a chosen outcome – it will be forced upon us — and it will be referred to as a Deflationary Death Spiral

  22. LSE stock market Final returns shows a 44% fall in profit before tax; currently running this year @ 4.24%. Previous year’s in the region of 7.5%. The exact figures are T/O £1744829, PBT £74017 up until the end of May 2016. The interim figures for the year 2016 are in negative territory. Trouble ahead.

  23. Dr Tim,
    Your writing is clear, concise and delivers an excellent way to understand our current global predicaments.

    I would like to recommend to the editor of http://tasmaniantimes.com/ that he publish excerpts of your blogs with a link back to your site.

    Are you ok with that?

    Cheers, and thanks for the education


  24. Tim – I note this from the site of your previous employer:

    “Tullett Prebon is one of the world’s leading interdealer brokers. Primarily operating as an intermediary in the wholesale financial and energy sectors, Tullett Prebon facilitates the trading activities of its clients, in particular commercial and investment banks. Product areas include: Fixed Income Securities and their derivatives, Interest Rate Derivatives, Treasury products, Equities and Energy and Commodities.”

    What I am wondering is — did you present ‘The Perfect Storm’ to your investment and commercial banking clients?

    I can imagine, given the grim conclusions of The Perfect Storm, that you might have been hesitant to present this to them. Essentially it says that the world is about to end.

    If you did — I am curious — what was their reaction?

    Another question: I am certain that the high priests at the central banks understand the nature of the breast we are facing and are furiously trying to work out how to keep BAU going for as long as possible doing ‘whatever it takes’ – would you agree that they know and that they have the best minds working on policy to kick the can?

    • IDBs differ from investment banks in not providing investment advice, so I did not interact with clients, and didn’t present my ideas to them. I had nothing to do with the operational side at all, a unique experience for me as an analyst.

      I did, though, get informal feedback from contacts in the City, some people in government, and academics, as well as the media, of course. Some said – I quote one – “this is very important, and we need to know about it”. Others disliked it, perhaps finding it uncomfortable. I received invitations to some pretty important fora.

      Re. central bank understanding, it depends what we mean by understanding. I believe that the abnormality of the situation, and the weakness of the economy, are well understood. I’m far less sure that the reasons for it are understood, and I see little evidence of a plan for getting back to normality.

      One thing that strikes me increasingly – and might well be the subject for a future article – is how “old economy” our system still is. Even in areas considered “high tech”, we’re still following old economic ideas. “Stuck in a rut” might be a good way to put it………..

    • Thanks Tim.

      With respect to the central banks and getting back to normal…. would you not agree that there is no getting back to normal no matter what we do?

      We are out of low hanging fruit on the oil tree — we are clearly going to collapse — the only question I see is when — how long can we hold this off.

      Is the only course of action one of doing ‘whatever it takes’ to keep the boat afloat for as long as possible — knowing it must sink?

      Surely if the central banks thought there was a way out they would not be enacting policies guaranteed to sink the boat. Not sink — blow the boat to pieces.

      Did you see that subprime mortgages are being rolled out again by Wells Fargo?

      They know how that ends – yet here we go again…. that is not a plan for recovery — that looks like utter desperation to keep growth from collapsing. ‘Whatever it takes’

      The way I see it they must understand the nature of the problem based on the policies they are using to fight back.

      Here is another reason I believe they know – this report was commissioned by the high priests of finance — clearly they understand high priced oil destroys growth — and they have done what is expected — they have rolled out monumental stimulus….

      According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

      Click to access high_oil04sum.pdf

      That report identifies the disease — and the medicine we are seeing fights the symptoms.

      But the disease is fatal — the central banks surely know this — that is why they are poisoning the patient with medicines…. the patient is going to die no matter what — if poisoning him keeps him alive longer —- then that is the correct course of treatment

    • Tim

      You say “how old economy our system still is”.

      Recently I have become bored by the submissions to your blog. Bored because the discussion has drifted away from Surplus Energy Economics.

      I am not an economist and don’t understand most of what is being written here. As an “outsider” these discussions seem to me to be putting views forward which are based on the old model of economics. There is an implicit denial that Surplus Energy Economics has to be brought into the discussions.

      The thing that appeals to me about Surplus Energy Economics is that it can be seen as a basis for a new way of thinking about how things are. Maybe it will come to be seen as a kind of system thinking which is fundamentally different from the top-down concept of economics. Does it need a new name?

      Maybe I am misguided in expecting folk much younger than I, with vested interests in their own futures, to step away from their prejudices.

      Your potential “stuck in a rut” article, would be most welcome. It applies to much of the discussion in this blog.


      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

      Click to access Perfect-Storm-LR.pdf

      Civilization exists because of fossil fuels — more specifically because of the nett energy we get from fossil fuels. If that ratio were say 1:1 (one unit of energy in for one out) then we would not be here typing.

      The ratio does not need to be 1:1 to destroy civilization — it probably needs to be around 1:10… because in order to function we need at least 9 free units of energy.

      So it does not matter how we rearrange the chairs. The fact is we have picked most of the low hanging fruit. We are scraping the bottom of the barrel (shale) and that bottom end of the operational ratio is being breached.

      That means growth stops (expensive oil kills growth) — that causes the price of oil to plunge — which bankrupts producers.

      There is no way out — there is no better system — we are up against the physics of the situation — and as a ball thrown in the air will fall to the ground — so too will civilization collapse … in the very near term

    • Barry, I too am not an economist. In a way it’s an advantage as I don’t have to “unlearn” mainstream economics. You are in error in your assessment of the bloggers here. Most of them are well aware of the choices we have set ourselves and choices we ignore or refuse to believe. We who know are NOT using outmoded economics. Since you say you don’t understand economics it’s a bit rich to say they are outmoded. Surplus energy equations are outside the scope of economics and it cannot count for them, in the same way bank lending is outside government economics. Even though 97% of the money supply is commercial bank money it is not included because it adds to zero. Government money for a monetary sovereign state does not add to zero. So government spending does show up the state of the economy. According to whether it spends less or more than is withdrawn in taxes and charges, the economy is growing or contracting.
      Surplus energy equations are a different calculation requiring another line of inquiry, but a useful one, except we can’t know with any precision just what our resources are. There are heaps of false leads and conclusions, starting with Malthus in 1797. He was not wrong but his forecast is off by 250 years. This sort of problem will continue to bedevil any work we do in that direction, except for the mathematical certainties embodied in our finite world.

    • Barry

      Point taken, and I expect to put a lot more surplus energy economics into the next piece.

      As you know, I draw a distinction between two economies – the energy-based real economy, and the “financial” economy of money and credit. There’s been a lot of focus lately on the latter, because it has become so distorted – but fear not, the focus will shift back……………

  25. Economics and surplus energy

    I think it might help if I remind everyone that economics is not a science, in the way that physics and biology are. An economist cannot conduct controlled experiments, and neither can he free himself from the influence of his stand-point in order to be as objective as, say, a physicist.

    At best, economics is a “social science”, concerned with human choices and behaviour. So were are talking about interpretations, not “laws” as a physicist thinks of them.

    What we can do, though, is judge by results. Does our understanding explain what is happening? And does our understanding shape our choices effectively?

    At present, the answers, where “established” economics are concerned, are “no”, to both questions. Events are not panning out as conventional interpretations say they should. Established policy responses do not seem to be working.

    This means that something is missing.

    Some look for this “missing ingredient” in the study of money.

    Others argue that money is simply an artefact – a token, if you like – and look for the answer in the “real” economy. By “the real economy”, I mean using labour, resources and knowledge to produce the goods and services that we need.

    I belong to the latter group, looking for explanations in the “real” economy. The insight that I use is by no means new, but has never (yet) been accepted by the economics “mainstream”. It is that the economy is an energy system.

    I think we need to revisit this – in my next article I’ll try to do that.

    One last thought – debate and disagreement are healthy. Don’t be afraid to chip-in. And don’t, please, be dismissive of the opinions of others. Nobody has all the answers!

    • Bond yields are at an all-time low while stock prices remain at an all time high…. something is not right in the system. One of these two markets has to be telling the truth.

      I found this chart from a recent article in the WSJ fascinating: http://www.wsj.com/articles/pension-funds-pile-on-the-risk-just-to-get-a-reasonable-return-1464713013

      In 1995, to generate 7.5% returns a portfolio only needed to be 100% invested in bonds. Nowadays, a portfolio wanting to hit similar returns could only afford to focus about 12% of funds in the bond market. How long until the rush for yields by pension funds leads to disaster?

    • As a fund manager you either beat the index — or you are out of business.

      It has been very difficult to beat the index since 2008 because the market is not driven by fundamentals. It is driven by central planners (central banks) who are pumping it up with stimulus, plunge protection teams and other policies.

      How do you play that when you are a manager — you are basically guessing what the next move the central banks will be.

      And to top it off – in a ZIRP NIRP world — the returns just are not there…

      I struggle to find anywhere to invest these days — everything is a bubble predicated on the largesse of the central banks — which means everything is overvalued and will crash at some point. So I don’t bother to invest — it is futile — it will end badly — I use extra cash on wine, travel and song and fast cars…. then I waste the rest on stupid stuff.

      Fund managers have the same problem – but they cannot waste client money without going to jail — so they need to find anything that will beat the index… and that means mega risk…

      See the recent over-subscription to bonds out of Argentina — this is a serial defaulter — and funds are lined up around the block to load up on risk…

      Doing this allows them to announce to their clients that they are generating solid returns…

      Of course they know how this all ends — in tears – then starvation – then death.

      So as a manager you can either avoid the high risk opportunities — and your clients ask for their money back and you have no job — or you pile into anything and everything that kicks back a 5% return

      You hold your nose and you dance while the music plays… even though the music is a loop of Air Supply’s Greatest Hits.

  26. i was given sharp lesson recently in what might be expressed as the “general outlook on our situation”

    trying to express my concern about the economy and its link to energy, to my cousin, who runs a £multi-million local authority , controlling transport, housing, waste disposal—everything that makes things tick for the rest of us

    He is highly intelligent, does his job very well and successfully, no slouch in what he does.

    When I broached the subject that energy in its basic form is critical to our very existence, particularly in the context of what he does and the services he controls—I got a blank look, and the question “what’s energy got to do with it?”

    At that I admit I gave up—there just didn’t seem and point in pursuing the discussion—if someone like that doesn’t get it, what hope for Joe average?

    • This chimes with my own experience. On the one hand, you have the general public who, even when very intelligent, don’t understand (or sometimes don’t care) about how things really work – so long as they do.

      On the other, you have the “experts”, who have too much at stake, or are too wedded to their preconceptions, to open their minds to this new idea.

      Eventually, of course, events will open their minds. I draw some comfort from the observation that my interpretation – which is that tightening energy will undermine real growth, and drive us into dangerous experiments – is being borne out by events.

    • “On the other, you have the “experts”, who have too much at stake.”

      Spot on, Tim.

      What I wonder, is how these people reconcile their image of themselves with the misery they cause.

      I doubt they come home in the evening and proudly tell their kids “today, I made sure kids just the same age as you will have no clean water for many years to come” or “today I made sure that whole communities will be beset by social problems so that I can have more money for nothing from my house”, or even “today I helped to ensure that you, my wonderful kids, will almost certainly have respiratory illnesses and allergies due to pollution – now eat your greens.”

  27. Falling EROEI is a threat if our technical capabilities in terms of doing less with more do not improve-no improvements in Moore’s law of processing capacity or stochastic learning tools-however many of the energy consumption problems are cultural-long commutes, extending the waking/working day in winter.

    thermodynamic work extracted from hydrocarbons does have ‘hard limits’ of efficiency of around 40% however the chief threat is the denominator in the wealth equation – people – specifically in poor countries which consistently score poorly in PISA tests (poor human capital means less wealth). And in young/old and male/female ratios in more sophisticated countries which score more highly (population pyramid inversion is not compatible with either capital accumulation, democracy or sustainable birth rates).

    Finally the Agricultural yield improvement which have allowed us to support more people force us to maintain a high intensity of farming which requires delicate infrastructure and social stability- we are more than 10 times above the maximum subsistence population density of the UK without the aid of modern fertilisers.

    How this is solved while still allowing humans a credible alternative proxy for status signalling when looking for a mate (sexual market competition is zero sum) and the yawning gap in life opportunities between generations without war is an open question.

  28. I am, somewhat perversely in view of the import, heartened by the whole discussion. Concerned, rational and realistic. How refreshing. How rare.
    I think that at least one further factor of major importance requires consideration. The return and efficiencies of production from periods past has been overstated to the extent that uncosted and unmeasured externalities have been hitherto dumped as waste into the wider environment, and there “hidden”. The consequences of such actions are now increasingly being identified and recognised as causing unacceptable widespread threats to the biosphere.
    Future production from the real economy will surely be required to not only absorb and nullify such wastes as they occur, but also mitigate and remediate as best it can the effects of all that which has already been released into the wider environment.
    Much of this problem is attributed to past utilisation of fossil fuel stocks. To expect that the continued use of the remainider, at ever reducing efficiencies, to power the solution is surely implausible?

    • Thank you. When investors are prepared to pay the German government to look after their money for thirty years, it is clear that something is wrong. We need to discuss this, calmly and analytically, and contributors here do this.

      You are right to highlight externalities. There are two big ones, it seems to me. The first is our failure to incorporate the economic rent of resources (and especially energy) in how we measure economic output. The second is the economic cost of environmental degradation. Ignoring these has resulted in overstating past prosperity. Both are now acting as formidable head-winds to the economy.

      I’m not sure we have the answers – but I am convinced that we are asking the right questions.

    • I see lately that neo-liberal policies are getting the thumbs down from even mainstream economists. The IMF said something about it recently. Hopefully this movement will grow, because if it does then politicians will have lost their cover. They will have to stop pretending they can do little to help the less well of sections of society. Neo-liberal ism is actually working out badly for the wealthy as well, according to Noam Chomsky.

    • Neo-liberalism was always a bit of a con-trick – a re-invention of Smith-style market economics to suit the interests of a minority. It has done considerable damage to everyone else.

    • What I find surprising is that almost everyone agrees that unfettered capitalism tends to produce instability and that it is the unstated background checks that we take for granted that provide the levening that actually makes the system work.

      It’s also interesting that you quote Adam Smith. One of his terms, the “invisible hand”, is quoted in the context of squaring the circle of self and communal interest but this is not how he uses it in The Wealth of Nations.

      He says that moving production abroad is often cheaper than producing at home but entrepreneurs tend not to do this because of a “home bias” and it is this that is the “invisible hand”. In this Smith was implicitly recognising that unfettered capitalism needs to be restrained and is not played out according to some abstract theory.

    • BBC iPlayer only works in the UK
      Sorry, it’s due to rights issues.
      In the UK? Here’s some advice.


  29. hi Tim. very interesting post as usual. about SEEDS from where came the data? you have a graph for Italy? i suspect is very close to japan…..
    maybe that if we make a analysys of europe from 1872 to 1896 when the coal based economy starting to struggle to be replaced with oil economy we found a very close situation.. But i don’t think we have the same luck today

    and can i make a translation for a not profit blog?

    • Hi Paolo

      You can certainly make a translation for a not-for-profit blog.

      I do have a chart for Italy – it is similar to Japan but not as bad.

      SEEDS is constructed from a very big range of sources, not easily explained as it took a very long time to make.

    • can you put chart for Italy at the end of post?

      there is a work from demografy, (i try to find for you). He put the start of growing debts around the same date when the discrepancy between real and financial start. he found that the loss on birth and the aging of population in advanced country is pretty at the same date: so maybe this is another consumption constraint that push pressure on the sistem,

  30. Pingback: #73. The faltering economy | Surplus Energy Economics

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